UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
Or
¨¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 001-33624
Amedica Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
84-1375299
(IRS Employer
Identification No.)
1885 West 2100 South, Salt Lake City, UT 84119
(Address of principal executive offices and Zip Code)
(801) 839-3500
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered under Section 12(b) of the Act: Common Stock, Par Value $0.01
Securities registered under Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to the this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large Accelerated Filer
Non-Accelerated Filer
¨
¨ [Do not check if a smaller reporting company]
Accelerated Filer
Smaller reporting company
¨
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter was $48,738,000.
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of March 6, 2015 was 26,756,808.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Item Number and Caption
Page
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
4
26
46
46
46
46
47
48
48
62
63
63
63
64
65
65
65
65
65
66
70
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are forward-looking statements. We have
tried to identify forward-looking statements by using words such as “believe,” “may,” “might,” “could,” “will,” “aim,” “estimate,”
“continue,” “anticipate,” “intend,” “expect,” “plan” and similar words. These forward-looking statements are based on our current
assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictions and are subject to
many risks, uncertainties and other factors that may affect our businesses and operations and could cause actual results to differ materially
from those predicted. These risks and uncertainties include, but are not limited to, factors affecting our quarterly and annual results, our
ability to manage our growth, our ability to sustain our profitability, demand for our products, our ability to compete successfully
(including, without limitation, our ability to convince surgeons to use our products and our ability to attract and retain sales and other
personnel), our ability to rapidly develop and introduce new products, our ability to develop and execute on successful business strategies,
our ability to comply with changes and applicable laws and regulations that are applicable to our businesses, our ability to safeguard our
intellectual property, our success in defending legal proceedings brought against us, trends in the medical device industry, and general
economic conditions, and other risks set forth throughout this Annual Report, including under “Item 1, Business,” “Item 1A, Risk
Factors,” and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those
discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). Moreover, we operate in an evolving
environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and
uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking
statements contained in this Annual Report speak only as of the date of this Annual Report. We undertake no obligation to update any
forward-looking statements as a result of new information, events or circumstances or other factors arising or coming to our attention after
the date hereof.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act. Accordingly, we file periodic reports and other information with the
SEC. We will make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports available through our Internet site, http://www.amedica.com/investors/sec_filings/as soon as reasonably practicable after
electronically filing such materials with the SEC. They may also be obtained free of charge by writing to Amedica Corporation, Attn:
Investor Relations, 1885 West 2100 South, Salt Lake City, UT 84119. In addition, copies of these reports may be obtained through the
SEC’s website at www.sec.gov or by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling
the SEC at 800-SEC-0330. Our common stock trades on The NASDAQ Capital Market under the symbol “AMDA.”
Unless otherwise indicated, all information contained in this Annual Report reflects a 1-for-25.7746 reverse split of our common stock
which was effected on February 11, 2014.
3
ITEM 1.
BUSINESS
PART I
Overview
We are a commercial biomaterial company focused on using our silicon nitride technology platform to develop, manufacture and sell a
broad range of medical devices. We currently market spinal fusion products and are developing products for use in total hip and knee joint
replacements. We believe our silicon nitride technology platform enables us to offer new and transformative products in the orthopedic and
other medical device markets. We believe we are the first and only company to use silicon nitride in medical applications. Over 20,000 of
our silicon nitride spine products have been implanted in patients.
Biomaterials come in a variety of synthetic or natural materials available in a variety of forms that are used in virtually every medical
specialty. We believe our silicon nitride biomaterial has superior characteristics compared to commonly used biomaterials in the markets
we are targeting, including polyetheretherketone, or PEEK, which is the most common biomaterial used for interbody spinal fusion
products. Specifically, we believe our silicon nitride has the following key attributes: promotion of bone growth; hardness, strength and
resistance to fracture; resistance to wear; non-corrosive; anti-infective properties; biocompatibility; and superior diagnostic imaging
compatibility.
We currently market our Valeo® family of silicon nitride interbody spinal fusion devices in the United States and Europe for use in the
cervical and thoracolumbar areas of the spine. We believe our Valeo devices have a number of advantages over existing products due to
silicon nitride’s key characteristics, resulting in faster and more effective fusion and reduced risk of infection.
In addition to our silicon nitride-based spinal fusion products, we market a line of non-silicon nitride spinal fusion products which allows us
to provide surgeons and hospitals with a broader range of products. These additional products are complementary to our fusion products
and are designed for the treatment of deformity and degenerative spinal procedures. Although our non-silicon nitride products have
accounted for approximately 52% and 66% of our product revenues for the years ended December 31, 2014 and 2013, respectively, we
believe the continued promotion and potential for adoption of our silicon nitride products and product candidates, if approved, provides us
the greatest opportunity to grow our business in new and existing markets and achieve our goal to become a leading biomaterial company.
In addition to the markets into which we directly sell our products, we are utilizing our silicon nitride technology platform to expand our
current penetration in the spinal fusion market through original equipment manufacturer (“OEM”) and private label partnerships. We also
expect to do the same in other markets such as total hip and knee joint replacements, dental and sports medicine. We believe our
biomaterial expertise, strong intellectual property and formulaic manufacturing process will allow us to transition currently available
medical device products made of inferior biomaterials and manufacture them using silicon nitride and our technology platform to improve
their characteristics.
We are also incorporating our silicon nitride technology into components for use in total hip and knee replacement product candidates that
we plan on developing in collaboration with a strategic partner. We believe that our silicon nitride total hip and knee product candidates
will provide competitive advantages over current products made with traditional biomaterials. We also believe our silicon nitride
technology platform can be used for developing products in other markets and have developed prototypes for use in the dental, sports
medicine and trauma markets. As a result of some of the key characteristics of our silicon nitride, we also believe our coating technology
may be used to enhance our metal products as well as commercially available metal spinal fusion, joint replacement and other medical
products.
We operate a 30,000 square foot manufacturing facility located at our corporate headquarters in Salt Lake City, Utah, and we are the only
vertically integrated silicon nitride medical device manufacturer in the world. We market and sell our products to surgeons and hospitals in
the United States and select markets in Europe and South America through our established network of more than 50 independent sales
distributors who are managed by our experienced in-house sales and marketing management team. We have also started entering into OEM
and private label relationships with third parties to further the commercialization of our silicon nitride technology platform beyond our own
direct marketing and selling efforts.
Biomaterials
Biomaterials are synthetic or natural biocompatible materials that are used in virtually every medical specialty to improve or preserve body
functionality. Various types of biomaterials are used as essential components in medical devices, drug delivery systems, replacement and
tissue repair technologies, prostheses and diagnostic technologies.
4
There are four general categories of biomaterials:
• Metals. Metals commonly used as biomaterials include titanium, stainless steel, cobalt, chrome, gold, silver and platinum,
and alloys of these metals. Examples of medical uses of metals include the repair or stabilization of fractured bones, stents,
surgical instruments, bone and joint replacements, spinal fusion devices, dental implants and restorations and heart valves.
According to MarketsandMarkets, a global market research firm, metals represented approximately 31% of the worldwide
sales of all biomaterials in 2012.
•
•
•
Polymers. Polymers are synthetic compounds consisting of similar molecules linked together that can be created to have
specific properties. Polymers commonly used as biomaterials include nylon, silicon rubber, polyester, polyethylene, cross-
linked polyethylene (a stronger version), polymethylmethacrylate, polyvinyl chloride and polyetheretherketone, which is
commonly referred to as PEEK. Examples of medical uses of polymers include soft-tissue replacement, sutures, drug delivery
systems, joint replacements, spinal fusion devices and dental restorations. Polymers represented approximately 29% of the
worldwide sales of all biomaterials in 2012.
Ceramics. Ceramics are hard, non-metallic, non-corrosive, heat-resistant materials made by shaping and then applying high
temperatures. Traditional ceramics commonly used as biomaterials include carbon, oxides of aluminum, zirconium and
titanium, calcium phosphate and zirconia-toughened alumina. Examples of medical uses of ceramics include repair,
augmentation or stabilization of fractured bones, bone and joint replacements, spinal fusion devices, dental implants and
restorations, heart valves and surgical instruments. Ceramics represented approximately 26% of the worldwide sales of all
biomaterials in 2012.
Natural biomaterials. Natural biomaterials are derived from human donors, animal or plant sources and include human bone,
collagen, gelatin, cellulose, chitin, alginate and hyaluronic acid. Examples of medical uses of natural biomaterials include the
addition or substitution of hard and soft tissue, cornea protectors, vascular grafts, repair and replacement of tendons and
ligaments, bone and joint replacements, spinal fusion devices, dental restorations and heart valves. Natural biomaterials
represented approximately 14% of the worldwide sales of all biomaterials in 2012.
According to MarketsandMarkets, orthopedics accounted for approximately $15.0 billion, or 34%, of the $44.0 billion total biomaterials
market in 2012. Within orthopedics, biomaterials are extensively used in spinal fusion procedures, hip and knee replacements and the repair
or stabilization of fractured bones.
Market Opportunity
Overview
We believe our silicon nitride technology platform provides us with numerous competitive advantages in the orthopedic biomaterials
market. We market interbody spinal fusion devices and related products and are developing products for use as components in total hip and
knee joint replacements. We believe we can also utilize our silicon nitride technology platform to develop future products in additional
markets, such as the dental, sports medicine and trauma markets.
According to iData, in 2012, the markets for spinal implants in the United States and in combined major European markets were $5.3
billion and $1.0 billion, respectively. Interbody spinal fusion products accounted for over $1.2 billion and $172.2 million of these markets,
respectively. In 2012, there were approximately 300,000 interbody spinal fusion procedures conducted in the United States, of which the
significant majority utilized interbody devices comprised of PEEK and bone, with occasional use of metals and other materials including
ceramics. The market for interbody spinal fusion devices has shifted over time as new biomaterials with superior characteristics have been
incorporated into these devices and have launched into the market. For example, in the 1990s, metals quickly penetrated the interbody
spinal fusion market because of the limitations of devices available at that time made from allograft bone and, more recently, products
made of PEEK rapidly penetrated the market because of the limitations of devices available at that time made from metal or allograft bone.
Similarly, we believe our silicon nitride interbody spinal fusion products address the key limitations of other biomaterials currently used in
interbody spinal fusion devices and demonstrate superior characteristics needed to improve clinical outcomes.
Additionally, Orthopedic Network News reported that the U.S. markets for total hip and knee replacements in 2012 were $2.7 billion and
$4.0 billion, respectively. According to Orthopedic Network News, in 2012, there were more than 470,000 total hip replacement procedures
and 734,000 total knee replacement procedures conducted in the United States. Orthopedic Network News also reported that in 2012, the
U.S. markets for the components of total hip and knee replacement product candidates that we are initially developing were $455.0 million
and $1.5 billion, respectively. The combinations of biomaterials most commonly used in joint replacement implants are metal-on-cross-
linked polyethylene and traditional ceramic-on-cross-linked polyethylene.
5
We believe that the main drivers for the growth of the orthopedic biomaterials market, and, in particular, the spinal fusion and joint
replacement markets, are the following:
•
•
Favorable and Changing Demographics. With the growing number of elderly people, age-related ailments are expected to
rise sharply, which we believe will increase the demand and need for biomaterials and devices with improved performance
capabilities. Also, middle-aged and older patients increasingly expect to enjoy active lifestyles, and consequently demand
effective treatments for painful spine and joint conditions, including better performing and longer-lasting interbody spinal
fusion devices and joint replacements.
Introduction of New Technologies. Better performing and longer-lasting biomaterials, improved diagnostics, and advances in
surgical procedures allow for surgical intervention earlier in the continuum of care and better outcomes for patients. We
believe surgical options using better performing and longer-lasting biomaterials will gain acceptance among surgeons and
younger patients and drive accelerated growth and increase the size of the spinal fusion and joint replacement markets.
• Market Expansion into New Geographic Areas. MarketsandMarkets anticipates that demand for biomaterials and the
associated medical devices will increase as the applications in which biomaterials are used are introduced to and become
more widely accepted in underserved countries, such as China.
The Interbody Spinal Fusion Market
The human spinal canal is made up of 33 interlocking bones, referred to as vertebrae, separated by 23 intervertebral discs comprised of a
hard outer ring made of collagen with a soft inner core, that act as shock absorbers between vertebrae. Disorders of the spine can result
from degenerative conditions, deformities and trauma or tumor-related damage. Spinal fusion is the standard of care used to treat most
spinal disorders and typically involves the placement of an interbody device between vertebrae to reestablish spacing between vertebrae
and alignment of the spine. Generally, the interbody device is stabilized by screws and, in some procedures, plates or rods. To enhance bone
attachment, surgeons often pack the interbody device with a biomaterial that induces bone growth. Following successful treatment, new
bone tissue grows in and around the interbody device over time, which helps fuse the vertebrae and create long-term stability of the
interbody device, leading to the alleviation of pain and increase in mobility. We selected this market as the first application for our silicon
nitride technology because of its size, the limitations of currently available products and the key characteristics silicon nitride possesses,
which are critical for a superior interbody spinal fusion device.
•
•
•
•
Promotion of Bone Growth. The biomaterial should be both osteoconductive and create an osteoinductive environment to
promote bone growth in and around the interbody device to further support fusion and stability. Osteoconduction occurs when
material serves as a scaffold to support the growth of new bone in and around the material. Osteoinduction involves the
stimulation of osteoprogenitor cells to develop, or differentiate, into osteoblasts, which are cells that are needed for bone
growth.
Strength and Resistance to Fracture. The biomaterial should be strong and resistant to fracture during implantation of the
device and to successfully restore intervertebral disc space and spinal alignment during the fusion process. The biomaterial
should have high flexural strength, which is the ability to resist breakage during bending, and high compressive strength,
which is the ability to resist compression under pressure, to withstand the static and dynamic forces exerted on the spine
during daily activities over the long term.
Anti-Infective. Spinal fusion devices can become colonized with bacteria, which may limit fusion to adjacent vertebrae or
cause serious infection. Treating device-related infection is costly and generally requires repeat surgery, including surgery to
replace the device, referred to as revision surgery, which may extend hospital stays, suffering and disability for patients. A
biomaterial that has anti-infective properties can reduce the incidence of bacteria colonization in and around the interbody
device that can lead to infection, revision surgery and associated increased costs.
Imaging Compatibility. The biomaterial should be visible through, and not inhibit the effective use of, common surgical and
diagnostic imaging techniques, such as X-ray, CT and MRI. These imaging techniques are used by surgeons during and after
spinal fusion procedures to assist in the proper placement of interbody devices and to assess the quality of post-operative
bone fusion.
Limitations of Biomaterials used in Interbody Spinal Fusion Devices
The three biomaterials most commonly used in interbody spinal fusion devices are PEEK, human cadaver bone, also referred to as allograft
bone, and metals. We believe these materials do not possess the key characteristics required to form the optimal interbody spinal fusion
device and are susceptible to potential fracture, implant-related infection, pain, limited fusion and instability, which have resulted in
revision surgeries.
6
PEEK (polyetheretherketone)
PEEK is the most frequently used biomaterial for interbody spinal devices and accounted for approximately 70% of the interbody spinal
devices implanted in the United States in 2013. We believe PEEK has the following limitations:
•
•
•
•
Restricts Bone Growth. Due to PEEK’s hydrophobic nature, the human body may recognize PEEK as a foreign substance
and, therefore, may encapsulate the device with fibrous tissue. Although it is still possible for bone to grow through the
device, bone may not adhere to the surface of the device if this tissue develops.
Lacks Strength and Resistance to Fracture. PEEK lacks sufficient flexural strength, compressive strength and resistance to
fracture necessary to reduce the risk of deformity or fracture during the fusion process. In addition, PEEK devices may
fracture during implantation in certain interbody spinal fusion procedures. For example, in December 2012, Zimmer Spine
recalled its PEEK Ardis® Interbody System Inserter, a surgical instrument used to implant a PEEK interbody spinal fusion
device, because it resulted in the PEEK implants being susceptible to breakage when too much lateral force was applied to
the inserter during implantation.
Lacks Anti-Infective Properties. PEEK does not have any inherent anti-infective properties. In fact, a biofilm may form
around a PEEK device that allows the colonization of bacteria, which can lead to infection.
Lacks Imaging Compatibility. PEEK is invisible on X-rays. As a result, manufacturers of PEEK devices add metal markers to
their devices so surgeons can see the location of the devices by X-ray. These markers, however, do not show the full outline
of the device, which makes it difficult to assess the accuracy of the placement of the device. In addition, the metal markers
cause artifacts on CT and MRI that can compromise the quality of the image.
Allograft Bone
Allograft bone is the second most frequently used biomaterial in interbody spinal fusion devices and accounted for less than 15% of the
devices implanted in the United States in 2013. Allograft bone has the following limitations:
•
•
•
Limited Promotion of Bone Growth. Allograft bone has limited osteoinductive characteristics and therefore may not
effectively promote bone growth in and around the interbody device.
Lacks Strength and Resistance to Fracture. Generally, allograft bone is not as strong as live bone within the body or other
materials used in interbody devices. In addition, techniques used to sterilize allograft bone, like gamma irradiation, can cause
the allograft to become brittle and more likely to fracture.
Lacks Anti-Infective Properties and Risk of Disease Transmission. In addition to not having inherent anti-infective properties,
allograft bone exposes patients to a greater risk of disease transmission and auto-immune response.
In addition, allograft bone is subject to inconsistent quality and size, which may require surgeons to make compromises on the fit of the
device during surgery.
Metals
Metal interbody devices accounted for less than 10% of the devices implanted in the United States in 2013. Metals have the following
limitations:
•
•
•
Limited Promotion of Bone Growth. Metals have limited osteoinductive characteristics and therefore do not effectively
promote bone growth in and around the interbody device.
Lack Anti-Infective Properties. Metals do not have inherent anti-infective properties and do not suppress the colonization of
bacteria in and around the device which can lead to infection.
Lack Imaging Compatibility. Metals are opaque in X-rays and can cause significant imaging artifacts in CTs and MRIs. This
can make it difficult for surgeons to detect the extent and quality of bone growth in and around the device in post-operative
diagnostic imaging procedures.
The Hip and Knee Joint Replacement Market
Total joint replacement involves removing the diseased or damaged joint and replacing it with an artificial implant consisting of
components made from several different types of biomaterials. The key components of a total hip implant include an artificial femoral head,
consisting of a ball mounted on an artificial stem attached to the femur, and a liner, which is placed inside a cup affixed into the pelvic
bone. The femoral head and liner move against each other to replicate natural motion in what is known as an articulating implant. Total
knee replacement implants also use articulating components and are comprised of the following four main components:
7
a femoral condyle, which is a specially shaped bearing that is affixed to the lower end of the femur; a tibial tray that is affixed to the upper
end of the tibia; a tibial insert that is rigidly fixed to the tibial tray and serves as the surface against which the femoral condyle articulates;
and a patella, or knee cap, which also articulates against the femoral condyle.
Implants for total hip and knee replacements are primarily differentiated by the biomaterials used in the components that articulate against
one another. The combinations of biomaterials most commonly used in hip and knee replacement implants in the United States are metal-
on-cross-linked polyethylene and traditional ceramic-on-cross-linked polyethylene. The use of hip replacement implants incorporating
metal-on-metal and traditional ceramic-on-traditional ceramic biomaterials experienced a steep decline in the United States over the last
several years due to their significant limitations. We believe that the most common currently used biomaterials in joint replacement
implants also have limitations, and do not possess all of the following key characteristics required for optimal total joint replacement
implants:
•
•
•
•
Resistance to Wear. The biomaterials should have sufficient hardness and toughness, as well as extremely smooth surfaces, to
effectively resist wear. Because the articulating implants move against each other, they are subject to friction, which
frequently lead to abrasive wear and the release of small wear particles. This may cause an inflammatory response which
results in osteolysis, or bone loss. Surgeons have identified osteolysis as a leading cause of joint implant failure, resulting in
the need for revision surgery to replace the failed implant. One of the most commonly used combinations of biomaterials,
metal-on-cross-linked polyethylene, as well as metal-on-metal implants tend to generate a large number of metal wear
particles, which can cause osteolysis and a moderate to severe allergic reaction to the metal, referred to as metal sensitivity.
While less common, metal implants may also cause a serious condition called metallosis. Both metal sensitivity and
metallosis can result in revision surgery.
Non-Corrosive. The biomaterials should be non-corrosive and should not cause adverse patient reactions. Metal placed in the
human body corrodes over time and also results in the formation of metal ions, which leads to metal sensitivity in
approximately 10% to 15% of the population and, less commonly, metallosis. As a result, there are significant increased risks
from using metal-on-cross-linked polyethylene and metal-on-metal implants.
Hardness, Strength and Resistance to Fracture. The biomaterials should be hard, strong and resistant to fracture to adequately
bear the significant loads placed on joints like the hip and knee during daily activities. We believe there are strength
limitations associated with traditional ceramic-on-cross-linked polyethylene and traditional ceramic-on-traditional ceramic
implants.
Anti-Infective. The biomaterials should have anti-infective properties to reduce the risk of bacteria colonization in and around
the components that can lead to infection, revision surgeries and associated increased costs. Anti-infective properties reduce
the risk of bacteria colonization in and around the components and reduce the likelihood of infection, revision surgeries and
associated increased costs. None of the most commonly used biomaterials in joint replacement implants have anti-infective
properties.
Our Silicon Nitride Technology Platform
We believe we are the first and only company to use silicon nitride in medical applications. Silicon nitride is a chemical compound
comprised of the elements silicon and nitrogen, with the chemical formula Si3N4. Silicon nitride, an advanced ceramic, is lightweight,
resistant to fracture and strong, and is used in many demanding mechanical, thermal and wear applications, such as in space shuttle
bearings, jet engine components and body armor.
We believe our silicon nitride is ideally suited for use in many medical applications and has the following characteristics that make it
superior to other biomaterials, including PEEK, bone, metal and traditional ceramics, which do not possess all of these characteristics:
•
Promotes Bone Growth. Our silicon nitride is osteoconductive through its inherent surface topography that provides support
for new bone growth. We also believe our silicon nitride promotes an ideal environment for osteoinduction. As a hydrophilic
material, silicon nitride attracts protein cells and nutrients that stimulate osteoprogenitor cells to differentiate into osteoblasts,
which are needed for bone growth. Our silicon nitride also has an inherent surface chemistry that is more similar to bone than
PEEK and metals are. As a result, we believe our silicon nitride has superior osteoconductive and osteoinductive properties
when compared to other biomaterials, including those commonly used in interbody spinal fusion devices, such as PEEK,
allograft bone and metal. These properties are highlighted in an in vivo study, where we measured the force required to
separate devices from the spine after being implanted for three months, which indicates the level of osteointegration. In the
absence of bacteria, the force required to separate our silicon nitride from its surrounding bone was approximately three times
that of PEEK, and nearly two times that of titanium. In the presence of bacteria, the force required to separate our silicon
nitride from its surrounding bone was over five times that of titanium, while there was effectively no separation force
required for PEEK, indicating essentially no osteointegration.
8
•
•
•
•
•
Hard, Strong and Resistant to Fracture. Our silicon nitride is hard, strong and possesses superior resistance to fracture over
traditional ceramics and greater strength than polymers currently on the market. For example, our silicon nitride’s flexural
strength is more than five times that of PEEK and our silicon nitride’s compressive strength is over twenty times that of
PEEK. Unlike PEEK interbody spinal fusion devices, we believe our silicon nitride interbody spinal fusion devices can
withstand the forces exerted during implantation and daily activities over the long term.
Anti-Infective. We have demonstrated in in vitro and in vivo studies that silicon nitride has inherent anti-infective properties,
which reduce the risk of infection in and around a silicon nitride device. PEEK, traditional ceramics, metals and bone do not
have inherent anti-infective characteristics. These properties were highlighted in an in vitro study, where live bacteria counts
were between 8 and 30 times lower on our silicon nitride than PEEK and up to 8 times lower on our silicon nitride than
titanium. In addition to improving patient outcomes, we believe the anti-infective properties of our silicon nitride should
make it an attractive biomaterial to hospitals and surgeons who are not reimbursed by third-party payors for the treatment of
hospital-acquired infections. Additionally, silicon nitride is synthetic and, therefore, there is a lower risk of disease
transmission through cross-contamination or of an adverse auto-immune response, sometimes associated with the use of
allograft bone.
Imaging Compatible. Our silicon nitride interbody spinal fusion devices are semi-radiolucent and clearly visible in X-rays,
and produce no distortion under MRI and no scattering under CT. These characteristics enable an exact view of the device for
precise intra-operative placement and post-operative bone fusion assessment in spinal fusion procedures. We believe these
qualities provide surgeons with greater certainty of outcomes with our silicon nitride devices than with other biomaterials,
such as PEEK and metals.
Resistant to Wear. We believe our silicon nitride joint implant product candidates will have comparable or higher resistance
to wear than metal-on-cross-linked polyethylene and traditional ceramic-on-cross-linked polyethylene joint implants, the two
most commonly used total hip replacement implants. Also, debris associated with metal implants increases the risk of metal
sensitivity and metallosis. Wear debris is a primary reason for early failures of metal and polymer articulating joint
components.
Non-Corrosive. Our silicon nitride does not have the drawbacks associated with the corrosive nature of metal within the
body, including metal sensitivity and metallosis, nor does it result in the release of metal ions into the body. As a result, we
believe our silicon nitride products will have lower revision rates and fewer complications than comparable metal products.
Our Forms of Silicon Nitride
The chemical composition of our in-house formulation of silicon nitride, processing and manufacturing experience allow us to produce
silicon nitride in four distinct forms. This capability provides us with the ability to utilize our silicon nitride in a variety ways depending on
its intended application, which, together with our silicon nitride’s key characteristics, distinguishes us from manufacturers of products using
other biomaterials.
We currently produce silicon nitride for use in our commercial products and product candidates in the following forms:
•
Solid Silicon Nitride, or MC2. This form of silicon nitride is a fully dense, load-bearing solid, and is used for devices that
require high strength, toughness, fracture resistance and low wear, including for interbody spinal fusion devices, hip and knee
replacement implants and dental implants.
9
•
•
•
Porous Silicon Nitride, or CSC. While this form of silicon nitride has a chemical composition that is identical to that of MC2,
the CSC form of silicon nitride has a porous structure, which is engineered to mimic cancellous bone, the spongy like bone
tissue that typically makes up the interior of human bones. Our porous silicon nitride has interconnected pores ranging in size
between about 90 and 600 microns, which is similar to that of cancellous bone. This form of silicon nitride can be used for
the promotion of bone in-growth and attachment. Our porous silicon nitride is used as a substitute for the orthobiologics
currently used to fill interbody devices in an effort to stimulate fusion and as a bone void filler, and as a porous scaffold for
medical devices.
Composite Silicon Nitride. This form of silicon nitride is a combination, or composite, of MC2 and CS C forms of silicon
nitride. This composite may be used to manufacture devices and implants that mimic the structure of natural bone by
incorporating both a fully dense, load-bearing solid MC2 component on the outside and a porous CSC component intended to
promote bone in-growth on the inside. This composite form of silicon nitride is used in interbody spinal fusion devices and
can be used in components for total hip and knee replacement implants.
Silicon Nitride Coating. With a similar chemical composition as our other forms of silicon nitride, this form of silicon nitride
can be applied as an adherent coating to metallic substrates, including cobalt-chromium, titanium and steel alloys. We believe
applying silicon nitride as a coating may provide a highly wear-resistant articulation surface, such as on femoral heads, which
may reduce problems associated with metal or polymer wear debris. We also believe that the silicon nitride coating can be
applied to devices that require firm fixation and functional connections between the device or implant and the surrounding
tissue, such as hip stems and screws. The use of silicon nitride coating may also create an anti-infective barrier between the
device and the adjacent bone or tissue.
Our Competitive Strengths
We believe we can use our silicon nitride technology platform to become a leading biomaterial company and have the following principal
strengths:
•
•
Sole Provider of Silicon Nitride Medical Devices. We believe we are the only company that designs, develops, manufactures
and sells medical grade silicon nitride-based products. Due to its key characteristics, we believe our silicon nitride enables us
to offer new and transformative products across multiple medical specialties. In addition, with the FDA clearance of our
silicon nitride Valeo products, we are one of only three companies that have developed and manufacture a ceramic for use in
FDA cleared orthopedic medical devices in the United States.
In-House Manufacturing Capabilities. We operate a 30,000 square foot manufacturing facility located at our corporate
headquarters in Salt Lake City, Utah. This operation complies with the FDA’s quality system regulation, or QSR, and is
certified under the International Organization for Standardization’s, or ISO, standard 13485 for medical devices. This facility
allows us to rapidly design and produce silicon nitride products, while controlling the entire manufacturing process from raw
material to finished goods. We have also entered to a manufacturing, development and supply agreement with Kyocera
Industrial Ceramics Corporation, or Kyocera, under which Kyocera will become a second qualified manufacturer of our
silicon nitride-based spinal fusion products and product candidates.
10
•
•
•
Established Commercial Infrastructure. We market and sell our products to surgeons and hospitals in the United States, and
select markets in Europe and South America through our established network of more than 50 independent sales distributors
who are managed by our experienced in-house sales and marketing management team. As a result, our product revenue is
driven by end-user prices, unlike other biomaterial companies that sell their products at lower prices to OEMs who then sell
their products to the end user. Our control over the sales and marketing processes also allows us greater flexibility to
selectively collaborate with distributors when we believe their experience or geographic reach can be beneficial to us.
Portfolio of Non-Silicon Nitride Products. In addition to designing, developing, manufacturing and commercializing silicon
nitride interbody spinal fusion devices, we sell a complementary line of non-silicon nitride spinal fusion products. We offer a
full suite of spinal fusion products, which increases our access to surgeons and hospitals, and allows us to more effectively
market our silicon nitride spinal fusion products to our customers. Product revenue from the sale of these non-silicon nitride
products also supports further development of our silicon nitride products and product candidates.
Highly Experienced Management and Surgeon Advisory Team . Members of our management team have experience in
product development, launching of new products into the orthopedics market and selling to hospitals through direct sales
organizations, distributors, manufacturers and other orthopedic companies. We also collaborate with a network of leading
surgeon advisors in the design, development and use of our silicon nitride products and product candidates.
Our Strategy
Our goal is to become a leading biomaterial company focused on using our silicon nitride technology platform to develop, manufacture and
commercialize a broad range of medical devices. Key elements of our strategy to achieve this goal are the following:
•
•
•
•
•
•
Drive Further Adoption of our Silicon Nitride Interbody Spinal Fusion Devices. We believe that increasing the awareness of
our silicon nitride technology by educating surgeons about its key benefits, and the design improvements to our silicon nitride
products and related instruments, will accelerate the adoption of our products and ultimately help improve patient outcomes.
To drive further awareness of our products and the associated benefits offered by our silicon nitride technology, we will
continue to educate surgeons through multiple channels, including industry conferences and meetings, media outlets and
through our sales and marketing efforts.
Establish and Develop OEM Partnerships and Distribution Arrangements. Because we believe silicon nitride is a superior
platform and technology for application in the spine and total joint markets, we seek to establish partnerships with other
orthopedic companies to replace their inferior materials and products with silicon nitride. If successful, we will duplicate their
designs and characteristics and leverage their existing instrumentation by providing the market place with a superior solution
at a competitive price.
Continue to Implement our Design and Build Program. As our first foray into an OEM partnership strategy, we initiated a
commercialization strategy in 2013, referred to as our Design and Build Program. This program allows for close collaboration
with influential surgeons to develop customized silicon nitride spinal fusion products and instruments. We first sell these
products to the designing surgeons and a team of evaluating surgeons. After evaluation and acceptance by these surgeons, we
then introduce these products more broadly into the market. The first products designed under this program were sold for
initial evaluation in the third quarter of 2013.
Enhance our Commercial Infrastructure. We expect to increase the productivity of our sales and marketing team by
continuing to engage experienced independent sales distributors with strong orthopedic surgeon relationships. For example,
in September 2013, we entered into a new European sales agent agreement with K2M, Inc. We may also establish distribution
collaborations in the United States and abroad when access to large or well-established sales and marketing organizations
may help us gain access to new markets, increase sales in our existing markets or accelerate market penetration for selected
products.
Develop Silicon Nitride for Total Joint Components. We are incorporating our silicon nitride technology into silicon nitride-
coated metal components for use in total hip and knee replacement product candidates that we plan to develop in
collaboration with a strategic partner. We also have designs for solid silicon nitride components and are working with the
FDA to continue down the regulatory pathway required for development of these components.
Apply our Silicon Nitride Technology Platform to Other OEM Opportunities. Our silicon nitride technology platform is
adaptable and we believe it may be used to develop products to address other significant opportunities, such as in the dental,
sports medicine, cardiovascular and trauma markets. We have manufactured prototypes of dental implants, sports medicine
and trauma products, and we have developed a process to coat metals with our silicon nitride to enhance current medical
devices and instruments. We plan to collaborate with other companies to develop and commercialize any future products in
those areas or we may develop any one of them by ourselves should sufficient resources become available.
11
Our Products and Product Candidates
We currently market a family of silicon nitride interbody spinal fusion devices and other non-silicon nitride spinal fusion products for use in
cervical and lumbar spinal fusion surgical procedures to treat patients who suffer from degenerative, diseased and traumatic spine
conditions. We are also developing multiple silicon nitride components for use in our total hip and knee replacement product candidates.
Spinal Fusion Products and Product Candidates
Our Valeo Silicon Nitride Products and Product Candidates
Our first generation Valeo silicon nitride spinal fusion device received 510(k) regulatory clearance and a CE mark in 2008. Based on
surgeon feedback, we developed a second generation of Valeo products. In 2012, we received 510(k) clearance to market this second
generation family of Valeo interbody spinal fusion devices, and we launched them with a select number of surgeons in 2013. Our second
generation Valeo interbody spinal fusion devices offer distinct improvements over the first generation. The instrumentation of the second
generation devices allow for better control of the device during implantation. The device allows for improved stability and potentially
improved fusion after implantation and is offered in a broader selection of sizes. We completed the full launch of our second generation
AL, PL, OL and TL Valeo interbody spinal fusion devices in the United States in 2014. We expect to launch our second generation
Cervical Valeo interbody spinal fusion devices in the second half of 2015.
Our current products are:
Valeo Interbody Fusion Devices
AL: Anterior Lumbar
PL: Posterior Lumbar
OL: Oblique Lumbar
TL: Transforaminal Lumbar
C: Cervical
CORP: Corpectomy
Generation
1st and 2nd
1st and 2nd
1st and 2nd
1st and 2nd
1st and 2nd
1st
In 2009, we received a CE Mark to commercialize our Valeo interbody spinal fusion devices made from our composite silicon nitride. The
porous CSC center structure of these devices is designed to facilitate bone growth into the device, which we believe will allow surgeons to
reduce or eliminate the use of allograft bone and other osteoconductive biomaterials. We are currently marketing these devices in the
Netherlands, Spain and Germany. Additionally, we conducted a prospective clinical trial in Europe, named CASCADE, comparing our
Valeo composite silicon nitride interbody devices to PEEK interbody devices filled with autograft bone to obtain additional safety and
efficacy data to support the 510(k) clearance in the United States. The CASCADE study enrolled 104 patients in a prospective clinical trial
that independently scored fusion rates and clinical outcomes at 12 months follow-up. Neck Disability Index scores decreased similarly in
both patient groups, consistent with clinical improvements reported in the literature. Importantly, the incidence of cervical spine fusion was
statistically identical between study groups, and consistent with figures reported in other studies. We filed a 510(k) submission with the
FDA in January 2015.
Valeo Composite (MC2 + C2C)
12
Our Non-Silicon Nitride Spinal Fusion Products
We sell a line of complementary non-silicon nitride spinal fusion products to provide surgeons and hospitals with a broader range of
products. Product revenue from the sale of our non-silicon nitride spinal fusion products further supports development of our silicon nitride
products and product candidates. We plan to enhance our metal spinal fusion products with a silicon nitride coating. The following table
lists our marketed non-silicon nitride spinal products.
CATEGORY
Facet Fixation System
Lumbar Spine Fixation
Interbody Spinal Fusion Device
PRODUCT NAME
BIOMATERIAL
Facet Gun Max/Facet Bolt
Javelin: MIS Locking Facet System
Preference Classic Spine System
Preference 2 Spine System
Preference 2 Complex Spine System
Phantom Plus PLIF/TLIF IBFD
Phantom Plus Cervical Spacer
Metal
Metal
PEEK
Our Total Hip and Knee Joint Replacement Product Candidates
Our Total Hip Implant Product Candidates
We have developed a femoral head that is made from our solid MC2 silicon nitride and could be used for total hip replacement product
candidates. This femoral head is expected to articulate against a cross-linked polyethylene liner, fixed into a metal acetabular cup. Together
with a strategic partner, we intend to initiate biomechanical testing with our silicon nitride-coated femoral head for use in total hip
replacement procedures to support a 510(k) submission to the FDA. If clearance is obtained, we intend to commercially launch products for
use in total hip replacement in 2017.
Our Total Knee Implant Product Candidates
We have developed a femoral condyle design made from our solid MC2 silicon nitride. The femoral condyle component will attach to the
lower end of the femur. The femoral condyle is expected to articulate against a cross-linked polyethylene tibial insert that will attach to the
tibial tray at the upper end of the tibia, which we expect will be made from metal. We have successfully made prototypes of this design.
We intend to initiate biomechanical testing with our components for use in knee replacement procedures to support a 510(k) submission to
the FDA. If clearance is obtained we intend to commercialize our products for use in total knee replacement surgeries post-FDA clearance.
Other Product Opportunities
Our silicon nitride technology platform is adaptable and we believe it may be used to develop products to address other significant
opportunities, such as in the dental, sports medicine and trauma markets.
We also believe our coating technology may be used to enhance our marketed metal products as well as other commercially available metal
spinal fusion and joint replacement products. We have produced feasibility prototypes of dental implants, other components for use in total
hip implants in addition to our total hip and knee implant product candidates discussed above, a suture anchor for sports medicine and
prototypes of silicon nitride-coated plates for potential trauma applications. We have also developed a process to apply our silicon nitride as
a coating on other biomaterials.
The FDA has not evaluated any of these potential products and we are not currently advancing the development of any of these product
candidates. We plan to collaborate with medical device companies to complete the development of and commercialize any product
candidates we advance in these areas or develop any one of them ourselves if sufficient resources should become available.
Supporting Data
We and a number of independent third parties have conducted extensive biocompatibility, biomechanical, in vivo and in vitro testing on our
silicon nitride to establish its safety and efficacy in support of regulatory clearance of our biomaterial, products and product candidates. We
have also completed additional testing of our silicon nitride products and product candidates. The results of this testing have been published
in peer review publications. Additionally, we have initiated prospective randomized clinical trials in humans in vivo and in vitro to support
and expand our understanding of our silicon nitride’s performance relative to other biomaterials and medical devices. We believe our
product development strategy is consistent with the manner in which other biomaterials have been
13
successfully introduced into the market and adopted as the standard of care. Listed below is an overview of some of the key testing
completed on our silicon nitride biomaterial, products and product candidates to date, as well as other information about our silicon nitride
and other biomaterials.
Biocompatibility
Before our silicon nitride was first used in commercial products in 2008, we conducted a series of biocompatibility tests following the
guidelines of the FDA and ISO and submitted the results to the FDA as part of the regulatory clearance process. These tests confirmed that
our silicon nitride products meet required biocompatibility standards for human use.
Promotion of Bone Growth
In 2012, we conducted two separate studies at Brown University, the results of which suggest that the chemistry and inherent surface
topography of our solid MC2 silicon nitride provides an optimal environment for bone growth onto and around the device.
The first study was a series of in vitro analyses of protein adsorption, or presence on the surface of the biomaterial, onto silicon nitride,
PEEK and titanium. The results of this study indicated that adsorption of two key proteins necessary for bone growth (fibronectin and
vitronectin) were up to eight times greater on our silicon nitride than on PEEK, and up to four times greater than on titanium. A third
important protein (laminin) had up to two times greater adsorption on our silicon nitride than on PEEK, and up to two-and-one-half times
greater adsorption than on titanium.
The second study was an in vivo investigation of the osteointegration characteristics of these same three biomaterials after they had been
surgically implanted into the skulls of laboratory rats. This study included an examination of the effect of Staphylococcus epidermidis
bacteria on osteointegration. At time intervals of up to three months after implantation of the biomaterial, the amount of new bone growth
within the surgical site and in direct contact with the implanted biomaterial was evaluated. In the absence of bacteria, new bone formation
within the surgical site surrounding our silicon nitride was approximately 69%, compared with 36% and 24% for titanium and PEEK,
respectively. Similarly, bone in direct contact, or apposition, with our silicon nitride, titanium and PEEK was 59%, 19% and 8%,
respectively. As is common, in the presence of bacteria, new bone formation within the surgical site was suppressed, but still significantly
greater for our silicon nitride than for the other two biomaterials. Observed new bone growth within the surgical site surrounding our
silicon nitride was 41%, compared with 26% and 21% for titanium and PEEK, respectively. At the implant interface, the bone apposition
for our silicon nitride, titanium and PEEK was 23%, 9% and 5%, respectively. To further characterize the extent of osteointegration, the
force needed to separate each implant from its surrounding bone was measured. A larger force needed to separate the implant is an
indication of improved osteointegration. At three months after implantation, in the absence of bacteria, the force required to separate our
silicon nitride from its surrounding bone was approximately three times that of PEEK, and nearly two times that of titanium. In the presence
of bacteria, there was effectively no separation force required for PEEK, indicating essentially no osteointegration. Our silicon nitride
required over five times the force to separate it from its surrounding bone in the presence of bacteria in comparison to titanium.
In 2008, we conducted an animal study in which we evaluated the level of osteointegration of our porous CSC silicon nitride with a knee-
defect model in adult sheep. At three months after implantation, three out of five of the silicon nitride implants had extensive new bone
formation at and into the implant surface, showing that the bone had grown into our CS C silicon nitride to a depth of 3 millimeters, or mm.
This animal study demonstrated the rapid osteointegration potential of our CSC silicon nitride.
Hardness, Strength and Resistance to Fracture
Comparative Information
As shown in the table of comparative information publicly available about various biomaterials below:
•
•
•
the hardness, or a material’s resistance to deformity, of silicon nitride is comparable to traditional ceramics, but is
substantially higher than either polymers or metals;
the strength of silicon nitride is comparable or higher than metals and traditional ceramics, and is about sixteen to fifty-five
times stronger than highly-cross-linked polyethylene, and four to eight times stronger than PEEK; and
silicon nitride has the highest fracture resistance of any medical ceramic material and is three to eleven times more resistant to
fracture than PEEK or highly-cross-linked polyethylene. This is due to the interwoven microstructure of silicon nitride.
Metals have the highest fracture resistance.
14
Comparison of Mechanical Properties Among Orthopedic Biomaterials
Material
Silicon Nitride
Aluminum Oxide Ceramic
Zirconia-Toughened Alumina Ceramic
PEEK
Highly-Cross-Linked Polyethylene Polymer
Cobalt-Chromium Metal
Titanium Alloy Metal
Hardness
(GPa)(1)
13 – 16
14 – 19
12 – 19
0.09 – 0.28
0.03 – 0.07
3 – 4
3 – 4
Strength
(MPa)(1)
800 – 1200
300 – 500
700 – 1150
160 – 180
22 – 48
700 – 1000
920 – 980
Fracture
Resistance
(MPa.m 1/2)(1)
8 – 11
3 – 5
5 – 10
2 – 3
1 – 2
50 – 100
75
(1) GPa is a giga-pascal. MPa is a mega-pascal. Pascals are a measure of pressure. MPa .m1/2 is mega-pascal times a square root meter
and is a measure related to the energy required to initiate fracture of a material.
We believe that the combination of high hardness, strength and fracture resistance positions our silicon nitride as an ideal biomaterial for
many medical applications.
Burst Strength
In 2006, we conducted in-house comparative “burst strength” tests on femoral heads made from our silicon nitride produced by a contract
manufacturer to our specifications and femoral heads made from one of the strongest commercially available ceramics, BIOLOX® delta
(zirconia-toughened alumina). These tests were performed on three designs of 28 mm femoral heads using accepted testing protocols. The
tests involved applying a load to each femoral head while mounted on a cobalt-chromium simulated hip implant stem, until the head burst.
This enabled us to directly compare the strength of the femoral heads made of the two biomaterials. The results also provided an indication
of each biomaterial’s resistance to fracture. The results of these tests are shown in the chart below.
The average burst test strength for the silicon nitride femoral heads in these tests was 75 kilonewtons, or kNs, compared with 65 kN for
BIOLOX® delta, or about a 15% improvement. The burst strengths observed in our tests for BIOLOX® delta femoral heads are comparable
to those observed by an independent party testing the same design BIOLOX® delta femoral heads as we did. We also conducted burst
strength tests of 36 mm femoral heads made from our silicon nitride which showed those femoral heads had burst strengths that averaged
164 kN.
Resistance to Wear
In 2011, we commissioned an independent laboratory to conduct a wear study using our silicon nitride femoral heads. We tested our 28 mm
silicon nitride femoral heads articulated against cross-linked polyethylene acetabular liners and our 40 mm silicon nitride femoral heads
articulated against cross-linked polyethylene acetabular liners using well-established protocols in a hip simulator for their wear
performance over 5 million cycles. We then compared the results for our silicon nitride product candidates to the results for the cobalt
chrome femoral head and publicly available data from other commonly paired products. The results and comparison showed that:
•
•
our silicon nitride-on-cross-linked polyethylene had approximately half the wear rate of that publicly reported for cobalt
chrome-on-cross-linked polyethylene articulating hip components; and
our silicon nitride-on-cross-linked polyethylene had comparable wear to that publicly reported for traditional ceramic-on-
cross-linked polyethylene articulating hip components.
15
Anti-Infective Properties
The results of the two studies at Brown University in 2012, demonstrate that our solid MC2 silicon nitride has anti-infective properties. The
objective of the in vitro study was to determine how our silicon nitride, PEEK and titanium interact with bacteria, protein and bone cells
without the use of antibiotics and compared the growth of five different types of bacteria on silicon nitride, PEEK and titanium over time.
Live bacteria counts were between 8 to 30 times lower on silicon nitride than PEEK and up to 8 times lower on silicon nitride than titanium.
In the in vivo study, bacteria were applied to the biomaterials before implantation. Three months after implantation, no infection was
observed with silicon nitride, whereas both PEEK and titanium showed infection. The data demonstrate that our silicon nitride inhibits
biofilm formation and bacterial colonization around the biomaterial.
Imaging Compatibility
In 2007, we conducted a study to compare the imaging characteristics of test blanks made of PEEK, the metals titanium and tantalum, and
silicon nitride using a cadaver human vertebral body. Images of the vertebral body and the blanks were obtained using X-ray, CT and MRI
under identical conditions. We assessed the radiolucent characteristics of the blanks in X-ray images quantitatively, assessed the presence
of scatter in CT qualitatively and assessed distortion in MRI quantitatively. In X-ray, the metal blanks did not permit visualization of the
underlying bone of the vertebral body, while PEEK was transparent, rendering its location difficult to determine. The silicon nitride blank
had an intermediate radiolucency that rendered it visible and allowed a visual assessment of the underlying bone of the vertebral body. CT
and MRI of the metal blanks indicated the presence of distortion while silicon nitride and PEEK exhibited no scattering.
Sales and Marketing
We market and sell our products to surgeons and hospitals through our established network of more than 50 independent sales distributors
who are managed by our experienced in-house sales and marketing management team. Our sales efforts to date have been in the United
States and selected markets in Europe and South America. To supplement our independent sales distributors, in select international markets,
such as Europe, Japan, Australia and Canada, we may also seek to establish collaborations with leading orthopedic companies where we
believe that a large, well-established partner may provide better access to those markets. For example, in October 2013, we entered into a
European sales agent agreement with K2M, Inc. In addition, we may establish collaborations in the United States under circumstances
where access to a larger sales and marketing organization may help to expand the market or accelerate penetration for selected products.
In addition to leveraging the strong existing surgeon relationships of our distribution network, we market our products through a
combination of initiatives that are designed to establish and increase awareness of our silicon nitride products and their benefits over
alternative products. We attend and make presentations at major industry events, including society meetings sponsored by the North
American Spine Society, the America Academy of Orthopaedic Surgeons and the Congress of Neurological Surgeons, to educate surgeons
and distributors about our products and product candidates. We advertise in trade journals and publications, and offer unique pricing
strategies, including product bundling and incentivizing our distribution network to create and maintain long-term relationships with
surgeons and hospitals. We also use surgeon advisors to assist in product development and to help implement awareness campaigns aimed
at educating surgeons about our products. As part of these campaigns, we provide educational materials for hospitals and surgeons. We
also conduct regional training seminars where our product managers, trainers, engineers, sales and marketing staff members work together
with our surgeon advisors to educate surgeons and our distribution network in the use of our products.
Original Equipment Manufacturing and Private Label
In addition to the markets into which we directly sell our products, we are utilizing our silicon nitride technology platform to expand our
current penetration in the spinal fusion market through original equipment manufacturer (“OEM”) and private label partnerships. To that
effect, during 2014 we entered into both a private label agreement and a OEM agreement with Spinal Kinetics, a privately-held medical
device company focused on developing innovative and practical motion preservation systems for treating degenerative diseases of the
spine. Pursuant to the private label agreement Spinal Kinetics will sell our Valeo line of products under their own label. Pursuant to the
OEM agreement we are working together with Spinal Kinetics to develop their own proprietary spinal implants to be manufactured with
silicon nitride. We expect to enter into similar arrangements with other spine companies during 2015. We also expect to do the same in
other markets such as total hip and knee joint replacements, dental and sports medicine. We believe our biomaterial expertise, strong
intellectual property and formulaic manufacturing process will allow us to transition currently available medical device products made of
inferior biomaterials and manufacture them using silicon nitride and our technology platform to improve their characteristics.
16
Silicon Nitride Manufacturing
Manufacturing
To control the quality, cost and availability of our silicon nitride products and product candidates, we operate our own manufacturing
facility. Our 54,000 square foot corporate building includes a 30,000 square foot ISO 13485 certified medical device manufacturing space.
It is equipped with state-of-the-art powder processing, spray drying, pressing and computerized machining equipment, sintering furnaces,
and other testing equipment that enables us to control the entire manufacturing process for our silicon nitride products and product
candidates. To our knowledge, we are the only vertically integrated silicon nitride orthopedic medical device manufacturer in the world. All
operations with the exceptions of raw material production, cleaning, packaging and sterilization are performed in-house. We purchase raw
materials, consisting of silicon nitride ceramic powder and dopant chemical compounds, from several vendors which are ISO registered and
approved by us. These raw materials are characterized and tested in our facility in accordance with our specifications and then blended to
formulate our silicon nitride. We believe that there are multiple vendors that can supply us these raw materials and we continually monitor
the quality and pricing offered by our vendors to ensure high quality and cost-effective supply of these materials. A flowchart of the silicon
nitride manufacturing process is shown below.
In June 2014, we also entered to a manufacturing, development and supply agreement with Kyocera Industrial Ceramics Corporation, or
Kyocera, under which Kyocera will become a second qualified manufacturer of our silicon nitride-based spinal fusion products and product
candidates..
Non-Silicon Nitride and Instruments Manufacturing
We obtain our non-silicon nitride spinal fusion products and instruments from third-party manufacturers. We also plan to rely on third-
party manufacturers for the supply of the metal components of our silicon nitride hip and knee joint replacement product candidates. We
only use manufacturers that operate under QSR and are ISO 13485 certified. Our in-house quality control group examines subcontracted
components to ensure that they meet our required specifications. We believe that the use of third-party sources for non-silicon nitride spinal
fusion products and instruments will reduce our capital investment requirements and allow us to strategically focus our resources on the
manufacture of our silicon nitride products and product candidates.
Intellectual Property
We rely on a combination of patents, trademarks, trade secrets and other forms of intellectual property, nondisclosure agreements,
proprietary information ownership agreements and other measures to protect our intellectual property rights. We believe that in order to
have a competitive advantage, we must continue to develop and maintain the proprietary aspects of our technologies.
As of March 13, 2015, we had 44 issued U.S. patents, 22 pending U.S. patent applications, 12 granted foreign patents and 15 pending
foreign patent applications. Our issued patents began to expire in 2014, with the last of these patents expiring in 2031. The first core patents
do not expire until 2022; these include US 6,881,229 and US 6,790,233.
We have seven U.S patents, one European patent, and related pending applications, directed to articulating implants using our high-
strength, high toughness doped silicon nitride MC2 ceramic. The issued patents, which include US 6,881,229; US 7,666,229; US 8,123,812;
US 7,780,738; US 7,695,521; US 7,776,085; US 8,133,284; and EP 1408874, begin to expire in 2022. We also have two U.S. patents, two
European patents, and related pending applications, related to our CSC technology that are directed to implants that have both a dense load-
bearing, or cortical, component and a porous, or cancellous, component, together with a surface coating. The issued patents, which include
US 6,790,233; US 6,846,327; EP 1389978; and EP 2055267, begin to expire in 2022.
We also have three U.S. patents that we acquired in July 2012 from Dytech Corporation Ltd., or Dytech, directed to manufacturing
processes for the production of porous ceramics for use in our orthopedic implants. These patents, which include US 5,563,106, which has
now expired; US 5,705,448; and US 6,617,270, expire between 2015 and 2019. Under our acquisition agreement with Dytech, Dytech
granted to us a perpetual, irrevocable and exclusive license, including the right to grant sublicenses, to certain improvements
17
and know-how related to the acquired patents. In return, we are required to pay Dytech a low single-digit royalty on net sales of products
sold by us, our affiliates, or our licensees that are covered by one or more valid claims of these patents, and a percentage of any non-royalty
licensing income we may receive in the event we grant a license to others.
Our remaining issued patents and pending applications are directed to additional aspects of our products and technologies including, among
other things:
•
•
•
•
designs for pedicle screws;
designs for intervertebral fusion devices;
designs for hip implants; and
designs for knee implants.
We also expect to rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and
maintain our intellectual property position. However, trade secrets are difficult to protect. We seek to protect the trade secrets in our
proprietary technology and processes, in part, by entering into confidentiality agreements with commercial partners, collaborators,
employees, consultants, scientific advisors and other contractors and into invention assignment agreements with our employees and some of
our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the case of the
invention assignment agreements, to grant us ownership of the technologies that are developed.
Competition
The main alternatives to our silicon nitride biomaterial include: PEEK, which is predominantly manufactured by Invibio, BIOLOX® delta,
which is a traditional ceramic manufactured by CeramTec, allograft bone, metals and coated metals.
We believe our main competitors in the orthopedic implant market, which utilize a variety of competitive biomaterials, include: Medtronic,
Inc.; DePuy Synthes Companies, a group of Johnson & Johnson companies; Stryker Corporation; Biomet, Inc.; Zimmer Holdings, Inc.;
Smith & Nephew plc; and Aesculap Inc. Presently, these companies buy ceramic components on an OEM basis from manufacturers such as
CeramTec, Kyocera and CoorTek, Inc., among others. We anticipate that these and other orthopedic companies and OEMs will seek to
introduce new biomaterials and products that compete with ours.
Competition within the industry is primarily based on technology, innovation, product quality, and product awareness and acceptance by
surgeons. Our principal competitors have substantially greater financial, technical and marketing resources, as well as significantly greater
manufacturing capabilities than we do, and they may succeed in developing products that render our implants and product candidates non-
competitive. Our ability to compete successfully will depend upon our ability to develop innovative products with advanced performance
features based on our silicon nitride technologies.
Government Regulation of Medical Devices
Governmental authorities in the United States, at the federal, state and local levels, and other countries extensively regulate, among other
things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import of
products such as those we are commercializing and developing. Failure to obtain approval or clearance to market our products and products
under development and to meet the ongoing requirements of these regulatory authorities could prevent us from continuing to market or
develop our products and product candidates.
United States
Pre-Marketing Regulation
In the United States, medical devices are regulated by the FDA. Unless an exemption applies, a new medical device will require either
prior 510(k) clearance or approval of a premarket approval application, or PMA, before it can be marketed in the United States. The
information that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies depending on
how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the basis of the controls
deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which are those that have the
lowest level or risk associated with them, are subject to general controls, including labeling, premarket notification and adherence to the
QSR. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have
the highest level of risk associated with them, are subject to most of the previously identified requirements as well as to premarket
approval. Most Class I devices and some Class II devices are exempt from the 510(k) requirement, although manufacturers of these devices
are still subject to registration, listing, labeling and QSR requirements.
18
A 510(k) premarket notification must demonstrate that the device in question is substantially equivalent to another legally marketed device,
or predicate device, that did not require premarket approval. In evaluating the 510(k), the FDA will determine whether the device has the
same intended use as the predicate device, and (a) has the same technological characteristics as the predicate device, or (b) has different
technological characteristics, and (i) the data supporting the substantial equivalence contains information, including appropriate clinical or
scientific data, if deemed necessary by the FDA, that demonstrates that the device is as safe and as effective as a legally marketed device,
and (ii) does not raise different questions of safety and effectiveness than the predicate device. Most 510(k)s do not require clinical data for
clearance, but the FDA may request such data. The FDA’s goal is to review and act on each 510(k) within 90 days of submission, but it
may take longer based on requests for additional information. In addition, requests for additional data, including clinical data, will increase
the time necessary to review the notice. If the FDA does not agree that the new device is substantially equivalent to the predicate device,
the new device will be classified in Class III, and the manufacturer must submit a PMA. Since July 2012, however, with the enactment of
the Food and Drug Administration Safety and Innovation Act, or FDASIA, a de novo pathway is directly available for certain low to
moderate risk devices that do not qualify for the 510(k) pathway due to lack of a predicate device. Modifications to a 510(k)-cleared
medical device may require the submission of another 510(k) or a PMA if the changes could significantly affect the safety or effectiveness
or constitute a major change in the intended use of the device.
Modifications to a 510(k)-cleared device frequently require the submission of a traditional 510(k), but modifications meeting certain
conditions may be candidates for FDA review under a Special 510(k). If a device modification requires the submission of a 510(k), but the
modification does not affect the intended use of the device or alter the fundamental scientific technology of the device, then summary
information that results from the design control process associated with the cleared device can serve as the basis for clearing the
application. A Special 510(k) allows a manufacturer to declare conformance to design controls without providing new data. When the
modification involves a change in material, the nature of the “new” material will determine whether a traditional or Special 510(k) is
necessary. For example, in its Device Advice on How to Prepare a Special 510(k), the FDA uses the example of a change in a material in a
finger joint prosthesis from a known metal alloy to a ceramic that has not been used in a legally marketed predicate device as a type of
change that should not be submitted as a Special 510(k). However, if the “new” material is a type that has been used in other legally
marketed devices within the same classification for the same intended use, a Special 510(k) is appropriate. The FDA gives as an example a
manufacturer of a hip implant who changes from one alloy to another that has been used in another legally marketed predicate. Special
510(k)s are typically processed within 30 days of receipt.
The PMA process is more complex, costly and time consuming than the 510(k) clearance procedure. A PMA must be supported by
extensive data including, but not limited to, technical, preclinical, clinical, manufacturing, control and labeling information to demonstrate
to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is submitted, the FDA has 45 days to
determine whether it is sufficiently complete to permit a substantive review. If the PMA is complete, the FDA will file the PMA. The FDA
is subject to performance goal review times for PMAs and may issue a decision letter as a first action on a PMA within 180 days of filing,
but if it has questions, it will likely issue a first major deficiency letter within 150 days of filing. It may also refer the PMA to an FDA
advisory panel for additional review, and will conduct a preapproval inspection of the manufacturing facility to ensure compliance with the
QSR, either of which could extend the 180-day response target. While the FDA’s ability to meet its performance goals has generally
improved during the past few years, it may not meet these goals in the future. A PMA can take several years to complete and there is no
assurance that any submitted PMA will ever be approved. Even when approved, the FDA may limit the indication for which the medical
device may be marketed or to whom it may be sold. In addition, the FDA may request additional information or request the performance of
additional clinical trials before it will reconsider the approval of the PMA or as a condition of approval, in which case the trials must be
completed after the PMA is approved. Changes to the device, including changes to its manufacturing process, may require the approval of a
supplemental PMA.
If a medical device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it submits an
investigational device exemption, or IDE, to the FDA and obtains approval of the IDE from the FDA. The IDE must be supported by
appropriate data, such as animal and laboratory testing results and include a proposed clinical protocol. These clinical trials are also subject
to the review, approval and oversight of an institutional review board, or IRB, which is an independent and multi-disciplinary committee of
volunteers who review and approve research proposals, and the reporting of adverse events and experiences, at each institution at which
the clinical trial will be performed. The clinical trials must be conducted in accordance with applicable regulations, including but not limited
to the FDA’s IDE regulations and current good clinical practices. A clinical trial may be suspended by the FDA, the IRB or the sponsor at
any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the trial.
Even if a clinical trial is completed, the results may not demonstrate the safety and efficacy of a device, or may be equivocal or otherwise
not be sufficient to obtain approval.
19
Post-Marketing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
•
•
compliance with the QSR, which require manufacturers to follow stringent design, testing, control, documentation, record
maintenance, including maintenance of complaint and related investigation files, and other quality assurance controls during
the manufacturing process;
labeling regulations, which prohibit the promotion of products for uncleared or unapproved or “off-label” uses and impose
other restrictions on labeling; and
• medical device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events,
including deaths, or serious injuries that may have been or were caused by a medical device and malfunctions in the device
that would likely cause or contribute to a death or serious injury if it were to recur.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the
following sanctions:
•
•
•
•
•
•
•
warning letters;
fines, injunctions, and civil penalties;
recall or seizure of our products;
operating restrictions, partial suspension or total shutdown of production;
refusal to grant 510(k) clearance or PMA approvals of new products;
withdrawal of 510(k) clearance or PMA approvals; and
criminal prosecution.
To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-
scheduled and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors.
International Regulation
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The
time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements
may differ. For example, the primary regulatory authority with respect to medical devices in Europe is that of the European Union. The
European Union consists of 28 countries and has a total population of over 500 million people. The unification of these countries into a
common market has resulted in the unification of laws, standards and procedures across these countries, which may expedite the
introduction of medical devices like those we are offering and developing. Norway, Iceland, Lichtenstein and Switzerland are not members
of the European Union, but have transposed applicable European medical device laws into their national legislation. Thus, a device that is
marketed in the European Union may also be recognized and accepted in those four non-member European countries as well.
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements of relevant directives will be entitled to bear CE
Conformity Marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be
commercially distributed throughout the European Union. Actual implementation of these directives, however, may vary on a country-by-
country basis. The CE Mark is a mandatory conformity mark on medical devices distributed and sold in the European Union and certifies
that a medical device has met applicable requirements.
The method of assessing conformity varies, but normally involves a combination of self-assessment by the manufacturer and a third-party
assessment by a “Notified Body.” Notified Bodies are independent testing houses, laboratories, or product certifiers authorized by the
European Union member states to perform the required conformity assessment tasks, such as quality system audits and device compliance
testing. An assessment by a Notified Body based within the European Union is required in order for a manufacturer to distribute the product
commercially throughout the European Union. Medium and higher risk devices require the intervention of a Notified Body which will be
responsible for auditing the manufacturer’s quality system. The Notified Body will also determine whether or not the product conforms to
the requirements of the applicable directives. Devices that meet the applicable requirements of E.U. law and have undergone the
appropriate conformity assessment routes will be granted CE “certification.”
20
The CE Mark is mandatory for medical devices sold not only within the countries of the European Union but more generally within most of
Europe. As many of the European standards are converging with international standards, the CE Mark is often used on medical devices
manufactured and sold outside of Europe (notably in Asia that exports many manufactured products to Europe). CE Marking gives
companies easier access into not only the European market but also to Asian and Latin American markets, most of whom recognize the CE
Mark on medical device as a mark of quality and adhering to international standards of consumer safety, health or environmental
requirements.
Compliance with Healthcare Laws
We must comply with various U.S. federal and state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-
kickback and false claims laws, rules, and regulations, as well as other healthcare laws in connection with the commercialization of our
products. Fraud and abuse laws are interpreted broadly and enforced aggressively by various state and federal agencies, including the U.S.
Department of Justice, the U.S. Office of Inspector General for the Department of Health and Human Services and various state agencies.
We have entered into agreements with certain surgeons for assistance with the design of our products, some of whom we anticipate may
make referrals to us or order our products. A majority of these agreements contain provisions for the payments of royalties and/or stock
options. In addition, some surgeons currently own shares of our stock. We have structured these transactions with the intention of
complying with all applicable laws, including fraud and abuse, data privacy and security, and transparency laws. Despite this intention,
there can be no assurance that a particular government agency or court would determine our practices to be in full compliance with such
laws. We could be materially impacted if regulatory or enforcement agencies or courts interpret our financial arrangements with surgeons
to be in violation of healthcare laws, including, without limitation, fraud and abuse, data privacy and security, or transparency laws.
The U.S. federal Anti-Kickback Statute prohibits persons, including a medical device manufacturer (or a party acting on its behalf), from
knowingly or willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for a service or product or the purchasing, ordering, arranging for, or recommending the ordering of, any service or
product for which payment may be made by Medicare, Medicaid or any other federal healthcare program. This statute has been interpreted
to apply to arrangements between medical device manufacturers on one hand and healthcare providers on the other. The term
“remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, such as
cash payments, gifts or gift certificates, discounts, waiver of payments, credit arrangements, ownership interests, the furnishing of services,
supplies or equipment, and the provision of anything at less than its fair market value. Courts have broadly interpreted the scope of the law,
holding that it may be violated if merely “one purpose” of an arrangement is to induce referrals, irrespective of the existence of other
legitimate purposes. The Anti-Kickback Statute prohibits many arrangements and practices that are lawful in businesses outside of the
healthcare industry. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain business
arrangements from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to
induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our
practices may not in all cases meet all of the criteria for safe harbor protection from federal Anti-Kickback Statute liability. The reach of the
Anti-Kickback Statute was broadened by the recently enacted Patient Protection and Affordable Care Act of 2010 and the Health Care and
Education Affordability Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, which, among other things, amends the
intent requirement of the federal Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of the statute
or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a
claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for
purposes of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any person
who is determined to have presented or caused to be presented claims to a federal healthcare program that the person knows or should know
is for an item or service that was not provided as claimed or is false or fraudulent. In addition to the federal Anti-Kickback Statute, many
states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although they do not always
have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not only to payments made by
government healthcare programs but also to payments made by other third-party payors, including commercial insurance companies.
Sales, marketing, consulting, and advisory arrangements between medical device manufacturers and sales agents and physicians are subject
to the Anti-Kickback Statute and other fraud and abuse laws. Government officials have focused recent enforcement efforts on, among
other things, the sales and marketing activities of healthcare companies, including medical device manufacturers, and have brought cases
against individuals or entities whose personnel allegedly offered unlawful inducements to potential or existing customers in an attempt to
procure their business. We expect these activities to continue to be a focus of government enforcement efforts. Settlements of these cases by
healthcare companies have involved significant fines and penalties and in some instances criminal plea agreements. We are also aware of
governmental investigations of some of the largest orthopedic device companies
21
reportedly focusing on consulting and service agreements between these companies and orthopedic surgeons. These developments are
ongoing and we cannot predict the effects they will have on our business.
The federal False Claims Act imposes liability on any person that, among other things, knowingly presents, or causes to be presented, a
false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private
individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a false claim, or has caused
such a claim to be submitted, to the federal government, and to share in any monetary recovery. There are many potential bases for liability
under the False Claims Act. Liability arises, primarily, when a person knowingly submits, or causes another to submit, a false claim for
reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks,
and other improper referrals, and allegations as to misrepresentations with respect to the services rendered. Qui tam actions have increased
significantly in recent years, causing greater numbers of healthcare companies, including medical device manufacturers, to defend false
claim actions, pay damages and penalties, or be excluded from participation in Medicare, Medicaid or other federal or state healthcare
programs as a result of investigations arising out of such actions. In addition, various states have enacted similar laws analogous to the
False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare
program. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact
of such actions. However, the cost of defending such claims, as well as any sanctions imposed, could adversely affect our financial
performance. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created several new federal crimes,
including healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully
executing a scheme to defraud any healthcare benefit program, including private third party payors. The false statements statute prohibits
knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items, or services.
In addition, we may be subject to, or our marketing or research activities may be limited by, data privacy and security regulation by both
the federal government and the states in which we conduct our business. For example, HIPAA and its implementing regulations established
uniform federal standards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the
conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information. The American
Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included expansion of HIPAA’s privacy
and security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became
effective on February 17, 2010. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to
“business associates”—independent contractors or agents of covered entities that create, receive, maintain, or transmit protected health
information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal
penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general
new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees
and costs associated with pursuing federal civil actions. These laws also require the reporting of breaches of protected health information to
affected individuals, regulators and in some cases, local or national media. HIPAA and HITECH impose strict limits on our physician
collaborators’ ability to use and disclose patient information on our behalf.
There are also an increasing number of state “sunshine” laws that require manufacturers to provide reports to state governments on pricing
and marketing information. Several states have enacted legislation requiring medical device companies to, among other things, establish
marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales and marketing activities, and
to prohibit or limit certain other sales and marketing practices. In addition, a federal law known as the Physician Payments Sunshine Act,
now requires medical device manufacturers to track and report to the federal government certain payments and other transfers of value
made to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members.
The first reporting period covered only payments or transfers of value made and ownership or investment interests held by physicians and
their immediate family members from August 1, 2013 to December 31, 2013. The federal government disclosed the reported information
on a publicly available website beginning in September 2014. For calendar year 2014, the Physician Payments Sunshine Act will require
medical device manufacturers to report payments and transfers of values made and ownership or investment interests held by physicians
and their immediate family members for the full calendar year. These laws may adversely affect our sales, marketing, and other activities
by imposing administrative and compliance burdens on us. If we fail to track and report as required by these laws or to otherwise comply
with these laws, we could be subject to the penalty provisions of the pertinent state and federal authorities.
22
Clinical research is heavily regulated by FDA regulations for the protection of human subjects (21 C.F.R. 50 and 56) and also the
regulations of the U.S Department of Health and Human Services, or the Common Rule (45 C.F.R 46). Both FDA human subject
regulations and the Common Rule impose restrictions on the involvement of human subjects in clinical research and require, among other
things, the balancing of the risks and benefits of research, the documented informed consent of research participants, initial and ongoing
review of research by an IRB. Similar regulations govern research conducted in foreign countries. Compliance with human subject
protection regulations is costly and time consuming. Failure to comply could substantially and adversely impact our research program and
the development of our products.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our
business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the
federal and state laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including
criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from participation in government healthcare
programs, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product
clearances and approvals, private “qui tam” actions brought by individual whistleblowers in the name of the government or refusal to allow
us to enter into supply contracts, including government contracts, and the curtailment or restructuring of our operations. Public disclosure
of privacy and data security violations could cause significant reputational harm. Any of these events could adversely affect our ability to
operate our business and our results of operations. To the extent that any of our products are sold in a foreign country, we may be subject to
similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety
surveillance, anti-fraud and abuse laws, implementation of corporate compliance programs, as well as laws and regulations requiring
transparency of pricing and marketing information and governing the privacy and security of health information, such as the E.U.’s
Directive 95/46 on the Protection of Individuals with regard to the Processing of Personal Data, or the Data Directive, and the wide variety
of national laws implementing the Data Directive.
Healthcare Reform
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that
could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and
state levels that seek to reduce healthcare costs.
In March 2010, President Obama signed into law the ACA, a sweeping law intended to broaden access to health insurance, reduce or
constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for
healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose
additional health policy reforms. Among other things, the ACA imposes a 2.3% medical device excise tax on sales of many medical devices
in the United States which became effective on January 1, 2013. Substantial new provisions affecting compliance have also been enacted,
which may affect our business practices with healthcare practitioners and a significant number of provisions are not yet, or have only
recently become, effective. Although it is too early to determine the full effect of the ACA, the new law appears likely to place downward
pressure on pricing of medical devices, especially under the Medicare program, and may also increase our regulatory burdens and operating
costs.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, on August 2, 2011, the
President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a
targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several
government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013.
On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or ATRA, which, among other things,
reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover
overpayments to providers from three to five years. On March 1, 2013, the President signed an executive order implementing the Budget
Control Act’s 2% Medicare payment reductions, and on April 1, 2013, these reductions went into effect. These new laws may result in
additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our financial operations.
We expect that the ACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more
rigorous coverage criteria and in additional downward pressure on the price that we receive for our products. Any reduction in
reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The
implementation of cost containment measures or other healthcare reforms may affect our ability to generate revenue and profits or
commercialize our product candidates.
23
Third-Party Reimbursement
Because we typically receive payment directly from hospitals and surgical centers, we do not anticipate relying directly on payment for any
of our products from third-party payors, such as Medicare, Medicaid, private insurers, and managed care companies. However, our business
will be affected by policies administered by federal and state healthcare programs, such as Medicare and Medicaid, as well as private third-
party payors, which often follow the policies of the state and federal healthcare programs. For example, our business will be indirectly
impacted by the ability of a hospital or medical facility to obtain coverage and third-party reimbursement for procedures performed using
our products. Many hospitals and clinics in the United States belong to group purchasing organizations (that typically incentivize their
hospital members to make a relatively large proportion of purchases from a limited number of vendors of similar products that have
contracted to offer discounted prices). Such contracts often include exceptions for purchasing certain innovative new technologies,
however. Accordingly, the commercial success of our products may also depend to some extent on our ability to either negotiate favorable
purchase contracts with key group purchasing organizations or persuade hospitals and clinics to purchase our product “off contract.” These
third-party payors may deny reimbursement if they determine that a device used in a procedure was not medically necessary; was not used
in accordance with cost-effective treatment methods, as determined by the third-party payor; or was used for an unapproved use. A national
or local coverage decision denying Medicare coverage for one or more of our products could result in private insurers and other third party
payors also denying coverage. Even if favorable coverage and reimbursement status is attained for our products, less favorable coverage
policies and reimbursement rates may be implemented in the future. The cost containment measures that third-party payors and providers
are instituting, both within the United States and abroad, could significantly reduce our potential revenues from the sale of our products
and any product candidates. We cannot provide any assurances that we will be able to obtain and maintain third party coverage or adequate
reimbursement for our products and product candidates in whole or in part.
For inpatient and outpatient procedures, including those that will involve use of our products, Medicare and many other third-party payors
in the United States reimburse hospitals at a prospectively determined amount. This amount is generally based on one or more diagnosis
related groups, or DRGs, associated with the patient’s condition for inpatient treatment and generally based on ambulatory payment
classifications, or APCs, associated with the procedures performed as an outpatient at an ambulation surgicenter. Each DRG or APC is
associated with a level of payment and may be adjusted from time to time, usually annually. Prospective payments are intended to cover
most of the non-physician hospital costs incurred in connection with the applicable diagnosis and related procedures. Implant products,
such as those we plan to sell, represent part of the total procedure costs while labor, hospital room and board, and other supplies and
services represent the balance of those costs. However, the prospective payment amounts are typically set independently of a particular
hospital’s actual costs associated with treating a particular patient and implanting a device. Therefore, the payment that a hospital would
receive for a particular hospital visit would not typically take into account the cost of our products.
Medicare has established a number of DRGs for inpatient procedures that involve the use of products similar to ours. Although Medicare
has authority to create special DRGs for hospital services that more properly reflect the actual costs of expensive or new-technology
devices implanted as part of a procedure, it has declined to do so in the past, and we do not expect that it will do so with respect to our
current products and product candidates. Medicare’s DRG and APC classifications may have implications outside of Medicare, as many
other U.S. third-party payors often use Medicare DRGs and APCs for purposes of determining reimbursement.
We believe that orthopedic implants generally have been well received by third-party payors because of the ability of these implants to
greatly reduce long-term healthcare costs for patients with degenerative joint disease. However, coverage and reimbursement policies vary
from payor to payor and are subject to change. As discussed above, hospitals that purchase medical devices for treatment of their patients
generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these
devices. Both government and private third-party coverage and reimbursement levels are critical to new product acceptance. Neither
hospitals nor surgeons are likely to use our products if they do not receive reimbursement for the procedures adequate to cover the cost of
our products.
While it is expected that hospitals will be able to obtain coverage for procedures using our products, the level of payment available to them
for such procedures may change over time. State and federal healthcare programs, such as Medicare and Medicaid, closely regulate
provider payment levels and have sought to contain, and sometimes reduce, payment levels. Commercial insurers and managed care plans
frequently follow government payment policies, and are likewise interested in controlling increases in the cost of medical care. These third-
party payors may deny payment if they determine that a procedure was not medically necessary, a device used in a procedure was not used
in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved use.
In addition, some payors are adopting pay-for-performance programs that differentiate payments to healthcare providers based on the
achievement of documented quality-of-care metrics, cost efficiencies, or patient outcomes. These programs are intended to provide
incentives to providers to find ways to deliver the same or better results while consuming fewer resources. As a result of these programs,
and related payor efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their costs,
24
including the amounts they pay to medical device suppliers. Adverse changes in payment rates by payors to hospitals could adversely
impact our ability to market and sell our products and negatively affect our financial performance.
In international markets, healthcare payment systems vary significantly by country and many countries have instituted price ceilings on
specific product lines. There can be no assurance that our products will be considered cost-effective by third-party payors, that
reimbursement will be available or, if available, that the third-party payors’ reimbursement policies will not adversely affect our ability to
sell our products profitably.
Member countries of the European Union offer various combinations of centrally financed healthcare systems and private health insurance
systems. The relative importance of government and private systems varies from country to country. Governments may influence the price
of medical devices through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the
cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may be marketed
only once a reimbursement price has been agreed upon. Some of these countries may require, as condition of obtaining reimbursement or
pricing approval, the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available
therapies. Some E.U. member states allow companies to fix their own prices for devices, but monitor and control company profits. The
choice of devices is subject to constraints imposed by the availability of funds within the purchasing institution. Medical devices are most
commonly sold to hospitals or healthcare facilities at a price set by negotiation between the buyer and the seller. A contract to purchase
products may result from an individual initiative or as a result of a competitive bidding process. In either case, the purchaser pays the
supplier, and payment terms vary widely throughout the European Union. Failure to obtain favorable negotiated prices with hospitals or
healthcare facilities could adversely affect sales of our products.
As of March 6, 2015, we had 66 employees. We believe that our success will depend, in part, on our ability to attract and retain qualified
personnel. We have never experienced a work stoppage due to labor difficulties and believe that our relations with our employees are good.
None of our employees are represented by labor unions.
Employees
Executive Officers
Our current executive officers and their respective ages and positions are as follows:
Name
B. Sonny Bal, M.D.
Bryan J. McEntire
Christopher R. Whitfield (1)
Ty A. Lombardi
Age
52
62
47
42
Position
Chairman of the Board of Directors, President and
Chief Executive Officer
Chief Technology Officer
Chief Commercial Officer
Vice President Finance and Principal Accounting
Officer
(1) Mr. Whitfield has submitted his notice of resignation, which will be effective March 31, 2015.
The following is a brief summary of the background of each of our current directors and executive officers.
B. Sonny Bal, M.D. has served on our board of directors since February 2012, as Chairman of our board of directors since August 2014 and
as our President and Chief Executive Officer since October 2014. Dr. Bal is Professor & Chief of Adult Reconstruction at the University of
Missouri, Columbia, and Adjunct Professor of Material Sciences at the University of Missouri at Rolla. Dr. Bal is a member of the
American Academy of Orthopaedic Surgeons, the American Association of Hip and Knee Surgeons and the International Society of
Technology in Arthroplasty. Dr. Bal received his M.D. degree from Cornell University and an M.B.A. from Northwestern University, and a
J.D. from the University of Missouri. Dr. Bal is a licensed attorney and co-founder of the Bal Brenner law firm in North Carolina.
Bryan J. McEntire has served as our Chief Technology Officer since May 2012. From June 2004 to May 2012 he served as our Vice
President of Manufacturing and as our Vice President of Research from December 2006 to May 2012. Mr. McEntire has worked in various
advanced ceramic product development, quality engineering and manufacturing roles at Applied Materials, Inc., Norton Advanced
Ceramics, a division of Saint-Gobain Industrial Ceramics Corporation, Norton/TRW Ceramics and Ceramatec, Inc., a small producer of
ionic-conducting and structural ceramic components located in Salt Lake City, Utah. Mr. McEntire holds a B.S. degree in Materials Science
and Engineering and an M.B.A. from the University of Utah.
25
Christopher R. Whitfield has served as our Chief Commercial Officer since November 2013. From March 2012 to September 2012,
Mr. Whitfield served as the Executive Vice President, Sales and Marketing of Pioneer Surgical Technologies and from October 2009 to
March 2012 as its Vice President, Marketing. From October 2008 to September 2009, he served as the West Area Vice President, Sales for
Zimmer Spine, a division of Zimmer, Inc. From September 2007 to October 2008, he served as the Senior Director, Marketing of Abbot
Spine, Inc., from January 2007 to September 2007 as its Director, Product Management and from June 2005 to January 2007 he served as its
Group Manager, Product Marketing. Mr. Whitfield received a B.S. degree in Business Administration, Marketing and Management from
the University of Texas at Austin.
Ty A. Lombardi joined Amedica in March 2014 as our Director of Finance, and was appointed to serve as the Vice President Finance and
Principal Accounting Officer in January 2015. Prior to joining Amedica, Mr. Lombardi was part owner of Cadence Consulting Corporation,
where he served as principal consultant from January 2006 to March 2014 and provided a wide range of financial and accounting services.
Mr. Lombardi is a Certified Public Accountant and has a M.S. in Accounting from Brigham Young University
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Annual Report, the following risk factors should be considered carefully in evaluating
our company. Our business, financial condition, liquidity or results of operations could be materially adversely affected by any of these
risks.
Risks Related to Our Business and Strategy
We have incurred net losses since our inception and anticipate that we will continue to incur substantial net losses for the
foreseeable future. We may never achieve or sustain profitability.
We have incurred substantial net losses since our inception. For the years ended December 31, 2014 and 2013 we incurred a net loss of
$32.6 million and $8.3 million, respectively, and used cash in operations of $14.5 million and $9.9 million, respectively. We have an
accumulated deficit of $172.5 million at December 31, 2014. Our losses have resulted principally from costs incurred in connection with
our sales and marketing activities, research and development activities, manufacturing activities, general and administrative expenses
associated with our operations, impairments on intangible assets, interest expense, loss on extinguishment of debt and offering costs. Even
if we are successful in launching additional products into the market, we expect to continue to incur substantial losses for the foreseeable
future as we continue to sell and market our current products and research and develop, and seek regulatory approvals for, our product
candidates.
If sales revenue from any of our current products or product candidates that receive marketing clearance from the FDA or other regulatory
body is insufficient, if we are unable to develop and commercialize any of our product candidates, or if our product development is
delayed, we may never become profitable. Even if we do become profitable, we may be unable to sustain or increase our profitability on a
quarterly or annual basis.
Our success depends on our ability to successfully commercialize silicon nitride-based medical devices, which to date have
experienced only limited market acceptance.
We believe we are the first and only company to use silicon nitride in medical applications. To date, however, we have had limited
acceptance of our silicon nitride-based products and our product revenue has been derived substantially from our non-silicon nitride
products. In order to succeed in our goal of becoming a leading biomaterial technology company utilizing silicon nitride, we must increase
market awareness of our silicon nitride interbody spinal fusion products, continue to implement our sales and marketing strategy, enhance
our commercial infrastructure and commercialize our silicon nitride joint replacement components and other products. If we fail in any of
these endeavors or experience delays in pursuing them, we will not generate revenues as planned and will need to curtail operations or seek
additional financing earlier than otherwise anticipated.
Our current products and our future products may not be accepted by hospitals and surgeons and may not become commercially
successful.
Although we received 510(k) regulatory clearance from the FDA for our first silicon nitride spinal fusion products in 2008, we have not
been able to obtain significant market share of the interbody spinal fusion market to date, and may not obtain such market share in the
future. Even if we receive regulatory clearances or approvals for our product candidates in development, these product candidates may not
gain market acceptance among orthopedic surgeons and the medical community. Orthopedic surgeons may elect not to use our products for
a variety of reasons, including:
•
lack or perceived lack of evidence supporting the beneficial characteristics of our silicon nitride technology;
26
•
•
•
•
•
•
•
limited long-term data on the use of silicon nitride in medical devices;
lower than expected clinical benefits in comparison with other products;
the perception by surgeons that there are insufficient advantages of our products relative to currently available products;
hospitals may choose not to purchase our products;
group purchasing organizations may choose not to contract for our products, thus limiting availability of our products to
hospital purchasers;
the price of our products, which may be higher than products made of the other commonly used biomaterials in the interbody
spinal fusion market and total joint market;
lack of coverage or adequate payment from managed care plans and other third-party payors for the procedures that use our
products;
• Medicare, Medicaid or other third-party payors may limit or not permit reimbursement for procedures using our products;
•
•
•
•
ineffective marketing and distribution support;
the time and resources that may be required for training, or the inadequate training, of surgeons in the proper use of our
products;
the development of alternative biomaterials and products that render our products less competitive or obsolete; and
the development of or improvement of competitive products.
If surgeons do not perceive our silicon nitride products and product candidates as superior alternatives to competing products, we will not
be able to generate significant revenues, if any.
Even if surgeons are convinced of the superior characteristics of our silicon nitride products and our product candidates that we
successfully introduce compared to the limitations of the current commonly used biomaterials, surgeons may find other methods or turn to
other biomaterials besides silicon nitride to overcome such limitations. For instance, with respect to interbody spinal fusion products,
surgeons or device manufacturers may use more effective markers for enhancing the imaging compatibility of PEEK devices, more
effective antibiotics to prevent or treat implant-related infections, and more effective osteoconductive and osteoinductive materials when
implanting an interbody spinal fusion device. Device manufacturers may also coat metal with existing traditional ceramics to reduce the
risk of metal wear particles and corrosion in total joint replacement implants. Additionally, surgeons may increase their use of metal
interbody spinal fusion devices if there is an increasing perception that PEEK devices are limited by their strength and resistance to
fracture.
If we are unable to increase the productivity of our sales and marketing infrastructure we will not be able to penetrate the spinal
fusion market.
We market and sell our products to surgeons and hospitals in the United States and select markets in Europe and South America using a
network of independent third-party distributors who have existing surgeon relationships. We manage this distribution network through our
in-house sales and marketing management team. We may also establish distribution collaborations in the United States and abroad in
instances where access to a large or well-established sales and marketing organization may help to expand the market or accelerate
penetration for selected products.
We cannot assure you that we will succeed in entering into and maintaining productive arrangements with an adequate number of
distributors that are sufficiently committed to selling our products. The establishment of a distribution network is expensive and time
consuming. As we launch new products and increase our marketing effort with respect to existing products, we will need to continue to
hire, train, retain and motivate skilled independent distributors with significant technical knowledge in various areas, such as spinal fusion
and total hip and knee joint replacement. In addition, the commissions we pay our distributors have increased over time, which has resulted
in higher sales and marketing expenses, and those commissions and expenses may increase in the future. Furthermore, current and potential
distributors may market and sell the products of our competitors. Even if the distributors market and sell our products, our competitors may
be able, by offering higher commission payments or other incentives, to persuade these distributors to reduce or terminate their sales and
marketing efforts related to our products. The distributors may also help competitors solicit business from our existing customers. Some of
our independent distributors account for a significant portion of our sales volume, and, if we were to lose them, our sales could be adversely
affected.
Even if we engage and maintain suitable relationships with an adequate number of distributors, they may not generate revenue as quickly as
we expect them to, commit the necessary resources to effectively market and sell our products, or ultimately succeed in
27
selling our products. We have been unable to obtain meaningful market share in the interbody spinal fusion device market with our current
silicon nitride products to date and we may not be successful in increasing the productivity of our sales and marketing team and distribution
network to gain meaningful market share for our silicon nitride products, which could adversely affect our business and financial condition.
The orthopedic market is highly competitive and we may not be able to compete effectively against the larger, well-established
companies that dominate this market or emerging and small innovative companies that may seek to obtain or increase their share
of the market.
The markets for spinal fusions and total hip and knee implant products are intensely competitive, and many of our competitors are much
larger and have substantially more financial and human resources than we do. Many have long histories and strong reputations within the
industry, and a relatively small number of companies dominate these markets. Medtronic, Inc.; DePuy Synthes Companies, a group of
Johnson & Johnson companies; Stryker Corporation; Biomet, Inc.; Zimmer Holdings, Inc.; and Smith & Nephew plc, account for a
significant amount of orthopedic sales worldwide.
These companies enjoy significant competitive advantages over us, including:
•
•
•
•
•
•
•
•
•
•
broad product offerings, which address the needs of orthopedic surgeons and hospitals in a wide range of procedures;
products that are supported by long-term clinical data;
greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces
and established distribution networks;
existing relationships with spine and joint reconstruction surgeons;
extensive intellectual property portfolios and greater resources for patent protection;
greater financial and other resources for product research and development;
greater experience in obtaining and maintaining FDA and other regulatory clearances and approvals for products and product
enhancements;
established manufacturing operations and contract manufacturing relationships;
significantly greater name recognition and widely recognized trademarks; and
established relationships with healthcare providers and payors.
Our products and any product candidates that we may introduce into the market may not enable us to overcome the competitive advantages
of these large and dominant orthopedic companies. In addition, even if we successfully introduce additional product candidates
incorporating our silicon nitride biomaterial into the market, emerging and small innovative companies may seek to increase their market
share and they may eventually possess competitive advantages, which could adversely impact our business. Our competitors may also
employ pricing strategies that could adversely affect the pricing of our products and pricing in the spinal fusion and total joint replacement
market generally.
Moreover, many other companies are seeking to develop new biomaterials and products which may compete effectively against our
products in terms of performance and price. For example, Smith & Nephew has developed a ceramic-coated metal, known as Oxinium,
which may overcome certain of the limitations of metal joint replacement products and could directly compete with our silicon nitride and
silicon nitride-coated product candidates.
28
We have significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of our
key customers could have a significant impact on our business and operating results.
A small number of customers account for a substantial portion of our product revenues. Our customers are primarily hospitals and surgical
centers. At December 31, 2014 and 2013, our largest customer, Bon Secours St. Mary’s Hospital, or St. Mary’s, had a receivable balance of
approximately 9% and 15%, respectively, of our total trade accounts receivable. In addition, St. Mary’s accounted for 18% and 14% of our
product revenues for each of the years ended December 31, 2014 and 2013. Sales of our products to our customers, including St. Mary’s,
are not based on long-term, committed-volume purchase contracts, and we may not continue to receive significant revenues from St.
Mary’s or any customer. Because of our significant customer concentration, our revenue could fluctuate significantly due to changes in
economic conditions, the use of competitive products, or the loss of, reduction of business with, or less favorable terms with St. Mary’s or
any of our other significant customers. A significant portion of St. Mary’s’ purchases have been of our non-silicon nitride products, so it
may be able to purchase competitive similar products from others. A reduction or delay in orders from St. Mary’s or any of our other
significant customers, or a delay or default in payment by any significant customer, could materially harm our business and results of
operations.
The manufacturing process for our silicon nitride products is complex and requires sophisticated state-of-the-art equipment,
experienced manufacturing personnel and highly specialized knowledge. If we are unable to manufacture our silicon nitride
products on a timely basis consistent with our quality standards, our results of operation will be adversely impacted.
In order to control the quality, cost and availability of our silicon nitride products, we developed our own manufacturing capabilities. We
operate a 30,000 square foot manufacturing facility which is certified under the ISO 13485 medical device manufacturing standard for
medical devices and operates under the FDA’s quality systems regulations, or QSRs. All operations with the exceptions of raw material
production, cleaning, packaging and sterilization are performed at this facility.
In order to mitigate the risk associated with us being the sole manufacturer of our silicon nitride medical device products, in June 2014, we
entered into a manufacturing development and supply agreement with Kyocera Industrial Ceramics Corporation, or Kyocera. We have
initiated the FDA required actions and processes in order to qualify Kyocera as a second source supplier of our silicon nitride products. We
updated our material master file and submitted a 510(k) with the FDA in the third quarter of 2014 to qualify Kyocera as a second source
supplier of our silicon nitride products. We expect to begin receiving production parts from Kyocera in the latter part of the fourth quarter
of 2014 for distribution in the first quarter of 2015, assuming the FDA accepts and approves our 510(k) submission. Although we expect
this arrangement with Kyocera will lead to Kyocera becoming a secondary qualified manufacturer, if Kyocera fails to become a qualified
manufacturer of these products and product candidates, we will continue to be the sole manufacturer of these products and will need to seek
other potential secondary manufacturers. Our reliance solely on our internal resources to manufacture our silicon nitride products entails
risks to which we would not be subject if we had secondary suppliers for their manufacture, including:
•
•
the inability to meet our product specifications and quality requirements consistently;
a delay or inability to procure or expand sufficient manufacturing capacity to meet additional demand for our products;
• manufacturing and product quality issues related to the scale-up of manufacturing;
•
•
•
the inability to produce a sufficient supply of our products to meet product demands;
the disruption of our manufacturing facility due to equipment failure, natural disaster or failure to retain key personnel; and
our inability to ensure our compliance with regulations and standards of the FDA including QSRs and corresponding state and
international regulatory authorities.
Any of these events could lead to a reduction in our product sales, product launch delays, failure to obtain regulatory clearance or approval
or impact our ability to successfully sell our products and commercialize our products candidates.
We depend on a limited number of third-party suppliers for key raw materials used in the manufacturing of our silicon nitride
products, and the loss of these third-party suppliers or their inability to supply us with adequate raw materials could harm our
business.
We rely on a limited number of third-party suppliers for the raw materials required for the production of our silicon nitride products and
product candidates. Our dependence on a limited number of third-party suppliers involves several risks, including limited control over
pricing, availability, quality, and delivery schedules for raw materials. We have no supply agreements in place with any of our suppliers and
cannot be certain that our current suppliers will continue to provide us with the quantities of raw materials that we require or that satisfy our
anticipated specifications and quality requirements. Any supply interruption in limited or single sourced raw
29
materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and
qualified. We may be unable to find a sufficient alternative supply channel within a reasonable time or on commercially reasonable terms.
Any performance failure on the part of our suppliers could delay the production of our silicon nitride products and product candidates and
delay the development and commercialization of our product candidates, including limiting supplies necessary for commercial sale, clinical
trials and regulatory approvals, which could have a material adverse effect on our business.
Use of third-party manufacturers increases the risk that we will not have adequate supplies of our non-silicon nitride products or
instrumentation sets.
The majority of our product revenue is currently generated by sales of non-silicon nitride products. Our reliance on a limited number of
third-party manufacturers to supply us with our non-silicon nitride products and instruments exposes us to risks that could delay our sales,
or result in higher costs or lost product revenues. In particular, our manufacturers could:
•
•
encounter difficulties in achieving volume production, quality control and quality assurance or suffer shortages of qualified
personnel, which could result in their inability to manufacture sufficient quantities of our commercially available non-silicon
nitride products to meet market demand for those products, or they could experience similar problems that result in the
manufacture of insufficient quantities of our non-silicon nitride product candidates; and
fail to follow and remain in compliance with the FDA-mandated QSRs, compliance which is required for all medical devices,
or fail to document their compliance to QSRs, either of which could lead to significant delays in the availability of materials
for our non-silicon nitride products or instrumentation sets.
If we are unable to obtain adequate supplies of our non-silicon nitride products and related instrumentation sets that meet our specifications
and quality standards, it will be difficult for us to compete effectively. We have no supply agreements in place with our manufacturers and
they may change the terms of our future orders or choose not to supply us with products or instrumentation sets in the future. Furthermore,
if a third-party manufacturer from whom we purchase fails to perform its obligations, we may be forced to purchase products or related
instrumentation from other third-party manufacturers, which we may not be able to do on reasonable terms, if at all. In addition, if we are
required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification
of a new manufacturer or the re-verification of an existing manufacturer could negatively affect our ability to produce and distribute our
non-silicon nitride products or instruments in a timely manner.
In order to be successful, we must expand our available product lines of silicon nitride-based medical devices by commercializing
new product candidates, but we may not be able to do so in a timely fashion and at expected costs, or at all.
Although we are currently marketing our silicon nitride interbody spinal fusion implants, in order to be successful, we will need to expand
our product lines to include other silicon nitride devices. Therefore, we are developing silicon nitride product candidates for total hip and
knee replacement procedures and are exploring the application of our silicon nitride technology for other potential applications. However,
we have yet to commercialize any silicon nitride products beyond our spinal fusion products. To succeed in our commercialization efforts,
we must effectively continue product development and testing, obtain regulatory clearances and approvals, and enhance our sales and
marketing capabilities. We may also have to write down significant inventory if existing products are replaced by new products. Because
of these uncertainties, there is no assurance that we will succeed in bringing any of our current or future product candidates to market. If we
fail in bringing our product candidates to market, or experience delays in doing so, we will not generate revenues as planned and will need
to curtail operations or seek additional financing earlier than otherwise anticipated.
We will depend on one or more strategic partners to develop and commercialize our total joint replacement product candidates,
and if our strategic partners are unable to execute effectively on our agreements with them, we may never become profitable.
Pursuant to a joint development and license agreement with Orthopaedic Synergy, Inc., or OSI, we are dependent on OSI’s ability to
execute product development plans, obtain regulatory approvals, and sell, distribute and market our jointly developed product candidate for
total hip and total knee joint replacement implants that use our MC2 silicon nitride technology. We would similarly be reliant on other
strategic partners to develop and commercialize a total hip or knee joint replacement product candidate that utilizes silicon nitride-coated
components, although we have not yet entered into an agreement with any strategic partner to develop products with these silicon nitride-
coated components and may be unable to do so on agreeable terms. In order to succeed in our joint commercialization efforts, we and OSI,
and any future partners must execute effectively on all elements of a combined business plan, including continuing to establish sales and
marketing capabilities, manage certified, validated and effective commercial-scale manufacturing operations, conduct product development
and testing, and obtain regulatory clearances and approvals for our product
30
candidate. If we or any of our strategic partners fail in any of these endeavors, or experience delays in pursuing them, we will not generate
revenues as planned and will need to curtail operations or seek additional financing earlier than otherwise anticipated.
Part of our strategy is to establish and develop OEM partnerships and arrangements, which subjects us to various risks.
Because we believe silicon nitride is a superior platform and technology for application in the spine, total joint and other markets, we are
seeking to establish OEM partnerships with other companies to replace their materials and products with silicon nitride. Sales of products to
OEM customers would expose our business to a number of risks. Sales through OEM partners could be less profitable than direct sales.
Sales of our products through multiple channels could also confuse customers and cause the sale of our products to decline. In addition,
OEM customers will require that products meet strict standards. Our compliance with these requirements could result in increased
development, manufacturing, warranty and administrative costs. A significant increase in these costs could adversely affect our operating
results. If we fail to meet OEM specifications on a timely basis, our relationships with our OEM partners may be harmed. Furthermore, we
would not control our OEM partners, and they could sell competing products, may not incorporate our technology into their products in a
timely manner and may devote insufficient sales efforts to the OEM products.
The use of physician-owned distributorships could result in increased pricing pressure on our products or harm our ability to sell
our products to physicians who own or are affiliated with those distributorships and the sale of our products through such
distributorships may expose us to regulatory enforcement risk.
Physician-owned distributorships, or PODs, are medical device distributors that are owned, directly or indirectly, by physicians. These
physicians derive a proportion of their revenue from selling or arranging for the sale of medical devices for use in procedures they perform
on their own patients at hospitals that agree to purchase from or through the POD, or that otherwise furnish ordering physicians with
income that is based directly or indirectly on those orders of medical devices.
We may sell and distribute our products through a limited number of PODs. The number of PODs in the orthopedic industry may continue
to grow as physicians search for ways to increase their incomes. These companies and the physicians who own, or partially own, them
have significant market knowledge and access to the surgeons and hospitals that may potentially purchase our products and the physicians
who own these PODs will have financial incentives to purchase from these distributorships. As a result, growth in this area may reduce our
ability to compete effectively for business.
On March 26, 2013, the Department of Health and Human Services Office of Inspector General issued a Special Fraud Alert on Physician-
Owned Entities and identified PODs as “inherently suspect” under the federal Anti-Kickback Statute. While the PODs themselves may be
the target of any government enforcement efforts in this area, it is possible that regulatory scrutiny may extend to other entities that have
relationships with PODs, including us. We are not aware that we are currently subject to any such scrutiny. However, the cost of defending
such enforcement actions, if brought (even without merit), as well as any sanctions, if imposed, could have a material adverse effect on our
business.
If hospitals and other healthcare providers are unable to obtain coverage or adequate reimbursement for procedures performed
with our products, it is unlikely our products will be widely used.
In the United States, the commercial success of our existing products and any future products will depend, in part, on the extent to which
governmental payors at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payors
provide coverage for and establish adequate reimbursement levels for procedures utilizing our products. Because we typically receive
payment directly from hospitals and surgical centers, we do not anticipate relying directly on payment from third-party payors for our
products. However, hospitals and other healthcare providers that purchase our orthopedic products for treatment of their patients generally
rely on third-party payors to pay for all or part of the costs and fees associated with our products as part of a “bundled” rate for the
associated procedures. The existence of coverage and adequate reimbursement for our products and the procedures performed with them by
government and private payors is critical to market acceptance of our existing and future products. Neither hospitals nor surgeons are likely
to use our products if they do not receive adequate reimbursement for the procedures utilizing our products.
31
Many private payors currently base their reimbursement policies on the coverage decisions and payment amounts determined by the
Centers for Medicare and Medicaid Services, or CMS, which administers the Medicare program. Others may adopt different coverage or
reimbursement policies for procedures performed with our products, while some governmental programs, such as Medicaid, have
reimbursement policies that vary from state to state, some of which may not pay for the procedures performed with our products in an
adequate amount, if at all. A Medicare national or local coverage decision denying coverage for one or more of our products could result in
private and other third-party payors also denying coverage for our products. Third-party payors also may deny reimbursement for our
products if they determine that a product used in a procedure was not medically necessary, was not used in accordance with cost-effective
treatment methods, as determined by the third-party payor, or was used for an unapproved use. Unfavorable coverage or reimbursement
decisions by government programs or private payors underscore the uncertainty that our products face in the market and could have a
material adverse effect on our business.
Many hospitals and clinics in the United States belong to group purchasing organizations, which typically incentivize their hospital
members to make a relatively large proportion of purchases from a limited number of vendors of similar products that have contracted to
offer discounted prices. Such contracts often include exceptions for purchasing certain innovative new technologies, however. Accordingly,
the commercial success of our products may also depend to some extent on our ability to either negotiate favorable purchase contracts with
key group purchasing organizations and/or persuade hospitals and clinics to purchase our product “off contract.”
The healthcare industry in the United States has experienced a trend toward cost containment as government and private payors seek to
control healthcare costs by paying service providers lower rates. While it is expected that hospitals will be able to obtain coverage for
procedures using our products, the level of payment available to them for such procedures may change over time. State and federal
healthcare programs, such as Medicare and Medicaid, closely regulate provider payment levels and have sought to contain, and sometimes
reduce, payment levels. Private payors frequently follow government payment policies and are likewise interested in controlling increases
in the cost of medical care. In addition, some payors are adopting pay-for-performance programs that differentiate payments to healthcare
providers based on the achievement of documented quality-of-care metrics, cost efficiencies, or patient outcomes. These programs are
intended to provide incentives to providers to deliver the same or better results while consuming fewer resources. As a result of these
programs, and related payor efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their costs, including
the amounts they pay to medical device manufacturers. We may not be able to sell our implants profitably if third-party payors deny or
discontinue coverage or reduce their levels of payment below that which we project, or if our production costs increase at a greater rate than
payment levels. Adverse changes in payment rates by payors to hospitals could adversely impact our ability to market and sell our products
and negatively affect our financial performance.
In international markets, medical device regulatory requirements and healthcare payment systems vary significantly from country to
country, and many countries have instituted price ceilings on specific product lines. We cannot assure you that our products will be
considered cost-effective by international third-party payors, that reimbursement will be available or, if available, that the third-party
payors’ reimbursement policies will not adversely affect our ability to sell our products profitably. Any failure to receive regulatory or
reimbursement approvals would negatively impact market acceptance of our products in any international markets in which those approvals
are sought.
Prolonged negative economic conditions in domestic and international markets may adversely affect us, our suppliers, partners
and consumers, and the global orthopedic market which could harm our financial position.
Global credit and financial markets have been experiencing extreme disruptions over the past several years, including severely diminished
liquidity and availability of credit, declines in consumer confidence, declines in economic growth, increases in unemployment rates and
uncertainty about economic stability. Credit and financial markets and confidence in economic conditions might deteriorate further. Our
business may be adversely affected by the recent economic downturn and volatile business environment and continued unpredictable and
unstable market conditions. In addition, there is a risk that one or more of our current suppliers may not continue to operate. Any lender that
is obligated to provide funding to us under any future credit agreement with us may not be able to provide funding in a timely manner, or at
all, when we require it. The cost of, or lack of, available credit or equity financing could impact our ability to develop sufficient liquidity to
maintain or grow our company. These negative changes in domestic and international economic conditions or additional disruptions of
either or both of the financial and credit markets may also affect third-party payors and may have a material adverse effect on our business,
results of operations, financial condition and liquidity.
In addition, we believe that various demographics and industry-specific trends will help drive growth in the orthopedics markets, but these
demographics and trends are uncertain. Actual demand for orthopedic products generally, and our products in particular, could be
significantly less than expected if our assumptions regarding these factors prove to be incorrect or do not materialize, or if alternative
treatments gain widespread acceptance.
32
We have a new senior management team and are dependent on our senior management team, engineering team, sales and
marketing team and surgeon advisors, and the loss of any of them could harm our business.
The members of our current senior management team have worked together in their new positions with us for a limited time and may not be
able to successfully implement our strategy. In addition, we have not entered into employment agreements, other than severance and
management retention agreements, with any of the members of our senior management team. There are no assurances that the services of
any of these individuals will be available to us for any specified period of time. The successful integration of our new senior management
team, the loss of members of our senior management team, sales and marketing team, engineering team and key surgeon advisors, or our
inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our business, financial condition
and results of operations.
If we experience significant disruptions in our information technology systems, our business, results of operations and financial
condition could be adversely affected.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to
effectively manage our sales and marketing, accounting and financial functions; manufacturing processes; inventory; engineering and
product development functions; and our research and development functions. As such, our information technology systems are vulnerable
to damage or interruption including from earthquakes, fires, floods and other natural disasters; terrorist attacks and attacks by computer
viruses or hackers; power losses; and computer systems, or Internet, telecommunications or data network failures. The failure of our
information technology systems to perform as we anticipate or our failure to effectively implement new systems could disrupt our entire
operation and could result in decreased sales, increased overhead costs, excess inventory and product shortages, all of which could have a
material adverse effect on our reputation, business, results of operations and financial condition.
Risks Related to Our Capital Resources and Impairments
We will require additional financing and our failure to obtain additional funding would force us to delay, reduce or eliminate our
product development programs or commercialization efforts.
We currently have limited committed sources of capital and we have limited liquidity. Our cash and cash equivalents as of December 31,
2014 and 2013, were $18.2 million and $2.3 million, respectively. We require substantial future capital in order to continue to conduct the
research and development and regulatory clearance and approval activities necessary to bring our products to market, to establish effective
marketing and sales capabilities. Our existing capital resources, including the net proceeds from our initial public offering and secondary
offering of shares of our common stock and financings through Hercules Technology, Magna and the Bridge Lender are not sufficient to
enable us to fund the completion of the development and commercialization of all of our product candidates. We cannot determine with
certainty the duration and completion costs of the current or future development and commercialization of our product candidates for spinal
fusion procedures, joint replacement and coated metals or if, when, or to what extent we will generate revenues from the commercialization
and sale of any of these product candidates for which we obtain regulatory approval. We may never succeed in achieving regulatory
approval for certain or all of these product candidates. The duration, costs and timing of clinical trials and development of our spinal
fusion, joint replacement and coated metal product candidates will depend on a variety of factors, including:
•
•
•
•
the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and
development activities;
future clinical trial results we may must or choose to conduct;
potential changes in government regulation; and
the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of spinal fusion, joint replacement or coated metal
product candidates could mean a significant change in the costs and timing associated with the development of these product candidates.
In addition, the repayment of the Loan and Security Agreement and the liquidity covenant limit our ability to use our cash and cash
equivalents to fund our operations and may restrict our ability to continue development of our product candidates. Additionally, the Loan
and Security Agreements with Hercules Technology restrict our ability to incur additional pari passu indebtedness, which may reduce our
ability to seek additional financing. The Convertible Notes issued to Magna also contain other covenants and events of default customary
for financings of that type, including, among other things, limitations on certain other indebtedness, dividends and distributions, sales and
transfers of assets and transactions with affiliates. If adequate funds are not available on a timely basis, we may terminate or delay the
development of one or more of our product candidates, or delay activities necessary to commercialize our product candidates. Additional
funding may not be available to us on acceptable terms, or at all. Any additional equity financing, if
33
available, may not be available on favorable terms and will most likely be dilutive to our current stockholders, and debt financing, if
available, may involve more restrictive covenants. Our ability to access capital when needed is not assured and, if not achieved on a timely
basis, will materially harm our business, financial condition and results of operations.
As a result of our debt obligations, we will need additional funds to meet our operational needs and capital requirements for product
development, clinical trials and commercialization. The timing and amount of our future capital requirements will depend on many factors,
including:
•
•
•
•
•
•
•
•
•
our ability to satisfy our obligation to pay principal and interest on the Loan and Security Agreement;
our ability to comply with the minimum liquidity covenant related to the Loan and Security Agreement;
the level of sales of our current products and the cost of revenue and sales and marketing;
the extent of any clinical trials that we will be required to conduct in support of the regulatory clearance of our total hip and
knee replacement product candidates;
the scope, progress, results and cost of our product development efforts;
the costs, timing and outcomes of regulatory reviews of our product candidates;
the number and types of products we develop and commercialize;
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims; and
the extent and scope of our general and administrative expenses.
If we do not adhere to the financial covenants set forth in the Loan and Security Agreement with Hercules Technology, we will be
in default of the Loan and Security Agreement.
In June 2014 we entered into a Loan and Security Agreement with Hercules Technology Growth Capital, Inc., or Hercules Technology, as
administrative and collateral agent for the lenders thereunder and as lender, and Hercules Technology III, LP, as lender. The Loan and
Security Agreement provides us with a $20 million term loan with a maturity date of January 1, 2018 and is secured by substantially all of
our assets and is described in more detail in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
section of this Annual Report on Form 10-K. Proceeds of the loan were used to repay in full and terminate our prior credit facility with
General Electric Capital Corporation, or GE Capital, and the remainder of the loan proceeds will be used for general corporate purposes.
The Loan and Security Agreement contains a minimum liquidity covenant that requires us to maintain cash and cash equivalents and
availability under the Loan and Security Agreement of not less than $9.0 million. We anticipate we will need to obtain additional funding
during the fourth quarter of 2015 to maintain compliance with this minimum liquidity covenant under the Loan and Security Agreement
through the next twelve months. Furthermore, if we are unable to access additional funds prior to becoming non-compliant with the
liquidity covenant, the entire remaining balance of the Loan and Security Agreement could become immediately due and payable at the
option of Hercules Technology.
Hercules Technology could declare a default under the Loan and Security Agreement upon the occurrence of a material adverse effect, as
defined under the credit facility, thereby requiring us to either repay the outstanding indebtedness immediately or attempt to reverse the
declaration of default through negotiation or litigation. Any declaration of an event of default would significantly harm our business and
prospectus and could cause the price of our common stock to decline.
Raising additional capital by issuing securities or through debt financings or licensing arrangements may cause dilution to existing
stockholders, restrict our operations or require us to relinquish proprietary rights.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be
diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if
available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring
additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing
arrangements with third parties, we may have to relinquish valuable rights to our technologies or products or grant licenses on terms that
are not favorable to us. Any of these events could adversely affect our ability to achieve our product development and commercialization
goals and have a material adverse effect on our business, financial condition and results of operations.
34
Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a
going concern in its report on our audited financial statements. We may be unable to continue to operate without the threat of
liquidation for the foreseeable future.
Our report from our independent registered public accounting firm for the year ended December 31, 2014 includes an explanatory
paragraph stating that our recurring losses from operations and our need to obtain additional financing in order to satisfy our debt
obligations and to be compliant with covenants under our debt obligations through 2015 raise substantial doubt about our ability to continue
as a going concern. If we are unable to obtain sufficient additional funding, our business, prospects, financial condition and results of
operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a
going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our
consolidated financial statements, and it is likely that investors will lose all or a part of their investment. Future reports from our
independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going
concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as
a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or
at all.
An impairment charge could have a material adverse effect on our financial condition and results of operations.
We are required to test acquired goodwill for impairment on an annual basis. Goodwill represents the excess of the amount paid over the
fair value of the net assets at the date of the acquisition. We have chosen to complete our annual impairment reviews of goodwill at the end
of each calendar year. We also are required to test goodwill for impairment between annual tests if events occur or circumstances change
that would more likely than not reduce our enterprise fair value below its book value. In addition, we are required to test our finite-lived
intangible assets for impairment if events occur or circumstances change that would indicate the remaining net book value of the finite-
lived intangible assets might not be recoverable. These events or circumstances could include a significant change in the business climate,
including a significant sustained decline in our market value, legal factors, operating performance indicators, competition, sale or
disposition of a significant portion of our business and other factors.
If the fair market value of our reporting unit is less than its book value, we could be required to record an impairment charge. The valuation
of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we
evaluate the financial health of our business, including such factors as industry performance, changes in technology and operating cash
flows. Changes in our forecasts or decreases in the value of our common stock could cause book values of our reporting unit to exceed its
fair value, which may result in goodwill impairment charges. The amount of any impairment could be significant and could have a material
adverse effect on our reported financial results for the period in which the charge is taken.
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
Our long-term success depends substantially on our ability to obtain regulatory clearance or approval and thereafter
commercialize our product candidates; we cannot be certain that we will be able to do so in a timely manner or at all.
The process of obtaining regulatory clearances or approvals to market a medical device from the FDA or similar regulatory authorities
outside of the United States can be costly and time consuming, and there can be no assurance that such clearances or approvals will be
granted on a timely basis, or at all. The FDA’s 510(k) clearance process generally takes one to six months from the date of submission,
depending on whether a special or traditional 510(k) premarket notification has been submitted, but can take significantly longer. An
application for premarket approval, or PMA, must be submitted to the FDA if the device cannot be cleared through the 510(k) clearance
process or is not exempt from premarket review by the FDA. The PMA process almost always requires one or more clinical trials and can
take two to three years from the date of filing, or even longer. In some cases, including in the case of our interbody spinal fusion devices
which incorporate our CSC technology and our MC2 silicon nitride femoral head component, the FDA requires clinical data as part of the
510(k) clearance process.
35
It is possible that the FDA could raise questions about our spinal fusion products, our spinal fusion product candidates and our total hip and
knee joint replacement product candidates and could require us to perform additional studies on our products and product candidates. Even
if the FDA permits us to use the 510(k) clearance process, we cannot assure you that the FDA will not require either supporting data from
laboratory tests or studies that we have not conducted, or substantial supporting clinical data. If we are unable to use the 510(k) clearance
process for any of our product candidates, are required to provide clinical data or laboratory data that we do not possess to support our
510(k) premarket notifications for any of these product candidates, or otherwise experience delays in obtaining or fail to obtain regulatory
clearances, the commercialization of our product candidates in the United States will be delayed or prevented, which will adversely affect
our ability to generate additional revenues. It also may result in the loss of potential competitive advantages that we might otherwise attain
by bringing our products to market earlier than our competitors. Additionally, although the FDA allows modifications to be made to
devices that have received 510(k) clearance with supporting documentation, the FDA may disagree with our decision to modify our cleared
devices without submission of a new 510(k) premarket notification, subjecting us to potential product recall, field alerts and corrective
actions. Any of these contingencies could adversely affect our business.
Similar to our compliance with U.S. regulatory requirements, we must obtain and comply with international requirements in order to market
and sell our products outside of the United States and we may only promote and market our products, if approved, as permitted by
applicable regulatory authorities.
The safety of our products is not yet supported by long-term clinical data, and they may prove to be less safe and effective than our
laboratory data indicate.
We obtained FDA clearance for each of our products that we currently market, and we have sought and intend to seek FDA clearance or
approval through the FDA’s 510(k) or PMA process and, where applicable, CE marking for our product candidates. The 510(k) clearance
process is based on the FDA’s agreement that a new product candidate is substantially equivalent to an already marketed product for which
a PMA was not required. While most 510(k) premarket notifications do not require clinical data for clearance, the FDA may request that
such data be provided. Long-term clinical data or marketing experience obtained after clearance may indicate that our products cause
unexpected complications or other unforeseen negative effects. If this happens, we could be subject to the withdrawal of our marketing
clearance and other enforcement sanctions by the FDA or other regulatory authority, product recalls, significant legal liability, significant
negative publicity, damage to our reputation and a dramatic reduction in our ability to sell our products, any one of which would have a
material adverse effect on our business, financial condition and results of operations.
We expect to be required to conduct clinical trials to support regulatory approval of some of our product candidates. We have little
experience conducting clinical trials, they may proceed more slowly than anticipated, and we cannot be certain that our product
candidates will be shown to be safe and effective for human use.
In order to commercialize our product candidates in the United States, we must submit a PMA for some of these product candidates, which
will require us to conduct clinical trials. We also plan to provide the FDA with clinical trial data to support some of our 510(k) premarket
notifications. We will receive approval or clearance from the FDA to commercialize products requiring a clinical trial only if we can
demonstrate to the satisfaction of the FDA, through well-designed and properly conducted clinical trials, that our product candidates are
safe and effective and otherwise meet the appropriate standards required for approval or clearance for specified indications. Clinical trials
are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. Before we may begin clinical trials,
we must submit and obtain approval for an investigational device exemption, or IDE, that describes, among other things, the manufacture
of, and controls for, the device and a complete investigational plan. Clinical trials generally involve a substantial number of patients in a
multi-year study. Because we do not have the experience or the infrastructure necessary to conduct clinical trials, we will have to hire one
or more contract research organizations, or CROs, to conduct trials on our behalf. CRO contract negotiations may be costly and time
consuming and we will rely heavily on the CRO to ensure that our trials are conducted in accordance with regulatory and industry
standards. We may encounter problems with our clinical trials and any of those problems could cause us or the FDA to suspend those trials,
or delay the analysis of the data derived from them.
A number of events or factors, including any of the following, could delay the completion of our clinical trials in the future and negatively
impact our ability to obtain FDA approval for, and to introduce our product candidates:
•
•
•
•
failure to obtain financing necessary to bear the cost of designing and conducting clinical trials;
failure to obtain approval from the FDA or foreign regulatory authorities to commence investigational studies;
conditions imposed on us by the FDA or foreign regulatory authorities regarding the scope or design of our clinical trials;
failure to find a qualified CRO to conduct our clinical trials or to negotiate a CRO services agreement on favorable terms;
36
•
•
•
•
•
•
•
•
delays in obtaining or in our maintaining required approvals from institutional review boards or other reviewing entities at
clinical sites selected for participation in our clinical trials;
insufficient supply of our product candidates or other materials necessary to conduct our clinical trials;
difficulties in enrolling patients in our clinical trials;
negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate
additional clinical studies;
failure on the part of the CRO to conduct the clinical trial in accordance with regulatory requirements;
our failure to maintain a successful relationship with the CRO or termination of our contractual relationship with the CRO
before completion of the clinical trials;
serious or unexpected side effects experienced by patients in whom our product candidates are implanted; or
failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual
obligations in a timely manner.
Our clinical trials may need to be redesigned or may not be completed on schedule, if at all. Delays in our clinical trials may result in
increased development costs for our product candidates, which could cause our stock price to decline and limit our ability to obtain
additional financing. In addition, if one or more of our clinical trials are delayed, competitors may be able to bring products to market
before we do, and the commercial viability of our product candidates could be significantly reduced.
Our current and future relationships with third-party payors and current and potential customers in the United States and
elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency, health
information privacy and security and other healthcare laws and regulations, which could expose us to criminal sanctions, civil
penalties, contractual damages, reputational harm administrative burdens and diminished profits and future earnings.
Our current and future arrangements with third-party payors and current and potential customers, including providers and physicians, as
well as PODs, as discussed above, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations,
including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or
financial arrangements and relationships through which we sell, market and distribute our products. In addition, we may be subject to
transparency laws and patient privacy regulations by U.S. federal and state governments and by governments in foreign jurisdictions in
which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability to
operate include:
•
•
•
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for,
either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment
may be made under federal healthcare programs, such as Medicare and Medicaid;
federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which
impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for
knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs,
claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay
money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability
for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and
their respective implementing regulations, which impose obligations on covered healthcare providers, health plans, and
healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually
identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
37
•
•
the Physician Payments Sunshine Act, which requires (i) manufacturers of drugs, devices, biologics and medical supplies for
which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions,
to report annually to CMS information related to certain “payments or other transfers of value” made to physicians, which is
defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals, with data collection
beginning on August 1, 2013, (ii) applicable manufacturers and applicable group purchasing organizations to report annually
to CMS ownership and investment interests held in such entities by physicians and their immediate family members, with
data collection beginning on August 1, 2013, (iii) manufacturers to submit reports to CMS by March 31, 2014 and the 90th
day of each subsequent calendar year, and (iv) disclosure of such information by CMS on a publicly available website
beginning in September 2014; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales
or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party
payors, including private insurers; state and foreign laws that require medical device companies to comply with the medical
device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require
medical device manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health
information in certain circumstances, many of which differ from each other in significant ways and often are not preempted
by HIPAA, thus complicating compliance efforts. Efforts to ensure that our business arrangements with third parties will
comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental
authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law
involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of
any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal
and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in
government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations,
which could have a material adverse effect on our business. If any of the physicians or other healthcare providers or entities
with whom we expect to do business, including our collaborators, are found not to be in compliance with applicable laws,
they may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government
healthcare programs, which could also materially affect our business.
In July 2012, we received a subpoena from the Department of Justice seeking the production of documents, including documents related to
our relationship with a particular customer and various entities, including a company distributor, and individuals associated with that
distributor. In April 2013, we received a second subpoena requesting similar records. We cooperated with the Department of Justice’s
requests and provided the records requested by the two subpoenas. We have had no further communications with the Department of Justice
since responding to its second request in June 2013. While we do not believe that we are the target of the government’s investigation, if we
are found to have violated one or more applicable laws, we could be subject to the risks and consequences discussed above. In addition,
responding to any additional requests or actions of the Department of Justice in connection with this investigation may be expensive and
time-consuming.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain regulatory approval or clearance of our
product candidates and affect the prices we may obtain for our products.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes
regarding the healthcare system that could prevent or delay clearance and/or approval of our product candidates, restrict or regulate post-
clearance and post-approval activities and affect our ability to profitably sell our products and any product candidates for which we obtain
marketing approval or clearance.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business
and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen
review times of our products. Delays in receipt of or failure to receive regulatory clearances or approvals for our new products would have
a material adverse effect on our business, results of operations and financial condition. In addition, the FDA is currently evaluating the
510(k) process and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the
ability to rescind previously granted 510(k) clearances and additional requirements that may significantly impact the process.
Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare
systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the medical
device industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In
38
March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act, or collectively the ACA, a sweeping law intended, among other things, to broaden access to
health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional
health policy reforms.
Among the provisions of the ACA of importance to our products and product candidates are:
•
•
•
•
•
a 2.3% medical device excise tax on the U.S. sales of most medical devices, which currently includes and we expect will
continue to include U.S. sales of our current products and products candidates that receive clearance or approval;
expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, and new
government investigative powers and enhanced penalties for non-compliance;
new requirements under the federal Open Payments program and its implementing regulations;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research; and
creation of an independent payment advisory board that will submit recommendations to reduce Medicare spending if
projected Medicare spending exceeds a specified growth rate.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, on August 2, 2011, the
President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a
targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several
government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013.
On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or ATRA, which, among other things,
reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover
overpayments to providers from three to five years. On March 1, 2013, the President signed an executive order implementing the Budget
Control Act’s 2% Medicare payment reductions, and on April 1, 2013, these reductions went into effect. These new laws may result in
additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our financial operations.
We expect that the ACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more
rigorous coverage criteria and in additional downward pressure on the price that we receive for our products. Any reduction in
reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The
implementation of cost containment measures or other healthcare reforms may affect our ability to generate revenue and profits or
commercialize our product candidates.
In the European Union and some other international markets, the government provides health care at a low cost to consumers and regulates
prices of healthcare products, patient eligibility or reimbursement levels to control costs for the government-sponsored health care system.
Many countries are reducing their public expenditures and we expect to see strong efforts to reduce healthcare costs in international
markets, including patient access restrictions, suspensions on price increases, prospective and possibly retroactive price reductions and
other recoupments and increased mandatory discounts or rebates and recoveries of past price increases. These cost control measures could
reduce our revenues. In addition, certain countries set prices by reference to the prices in other countries where our products are marketed.
Thus, our inability to secure adequate prices in a particular country may not only limit the marketing of our products within that country,
but may also adversely affect our ability to obtain acceptable prices in other markets. This may create the opportunity for third-party cross
border trade or influence our decision to sell or not to sell a product, thus adversely affecting our geographic expansion plans and revenues.
Risks Related to Our Intellectual Property and Litigation
If the combination of patents, trade secrets and contractual provisions that we rely on to protect our intellectual property is
inadequate, our ability to commercialize our orthopedic products successfully will be harmed, and we may not be able to operate
our business profitably.
Our success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products. We
currently have 44 issued U.S. patents, 22 pending U.S. patent applications, 12 granted foreign patents and 15 pending foreign patent
applications. Our issued patents began to expire in 2014, with the last of these patents expiring in 2031. We rely on a combination of patent
protection, trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology.
However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.
39
The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our issued
patents can be challenged in litigation or proceedings before the U.S. Patent and Trademark Office, or the USPTO, or foreign patent
offices. In addition, our pending patent applications include claims to numerous important aspects of our products under development that
are not currently protected by any of our issued patents. We cannot assure you that any of our pending patent applications will result in the
issuance of patents to us. The USPTO or foreign patent offices may deny or require significant narrowing of claims in our pending patent
applications. Patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. Proceedings before the USPTO or foreign patent offices could result in adverse decisions
as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. The laws of some foreign countries may
not protect our intellectual property rights to the same extent as the laws of the United States, if at all.
Our competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may issue
in the future, which could prevent or limit our ability to market our products and could limit our ability to stop competitors from marketing
products that are substantially equivalent to ours. In addition, competitors may be able to design around our patents or develop products that
provide outcomes that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and assignment of intellectual property agreements with all of our employees, consultants and
advisors as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these agreements may
not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of
unauthorized use or disclosure or other breaches of the agreements.
In the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be difficult, time
consuming and expensive, and would divert management’s attention from managing our business. There can be no assurance that we will
be successful on the merits in any enforcement effort. In addition, we may not have sufficient resources to litigate, enforce or defend our
intellectual property rights.
We have no patent protection covering the composition of matter for our solid MC2 silicon nitride or the process we use for
manufacturing our MC2 silicon nitride, and competitors may create silicon nitride formulations substantially similar to ours.
Although we have a number of U.S. and foreign patents and pending applications relating to our MC2 silicon nitride products or product
candidates, we have no patent protection either for the composition of matter for our silicon nitride or for the processes of manufacturing
MC2 silicon nitride. As a result, competitors may create silicon nitride formulations substantially similar to ours, and use their formulations
in products that may compete with our silicon nitride products, provided they do not violate our issued product patents. Although we have,
and will continue to develop, significant know-how related to these processes, there can be no assurance that we will be able to maintain
this know-how as trade secrets, and competitors may develop or acquire equally valuable or more valuable know-how related to the
manufacture of silicon nitride.
We could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time and
efforts, require us to pay damages, prevent us from marketing our commercially available products or product candidates and/or
reduce the margins we may realize from our products that we may commercialize.
The medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual
property rights. Whether a product infringes a patent involves complex legal and factual issues, and the determination is often uncertain.
There may be existing patents of which we are unaware that our products under development may inadvertently infringe. The likelihood
that patent infringement claims may be brought against us increases as the number of participants in the orthopedic market increases and as
we achieve more visibility in the market place and introduce products to market.
Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant strain on
our financial resources, divert the attention of management from our core business, and harm our reputation. In some cases, litigation may
be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues and against
whom our patents may provide little or no deterrence. If we were found to infringe any patents, we could be required to pay substantial
damages, including triple damages if an infringement is found to be willful, and royalties and could be prevented from selling our products
unless we obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling us to
sell our products on reasonable terms, or at all, and there can be no assurance that we would be able to redesign our products in a way that
would not infringe those patents. If we fail to obtain any required licenses or make any necessary changes to our technologies or the
products that incorporate them, we may be unable to commercialize one or more of our products or may have to withdraw products from
the market, all of which would have a material adverse effect on our business, financial condition and results of operations.
40
In addition, in order to further our product development efforts, we have entered into agreements with orthopedic surgeons to help us
design and develop new products, and we expect to enter into similar agreements in the future. In certain instances, we have agreed to pay
such surgeons royalties on sales of products which incorporate their product development contributions. There can be no assurance that
surgeons with whom we have entered into such arrangements will not claim to be entitled to a royalty even if we do not believe that such
products were developed by cooperative involvement between us and such surgeons. In addition, some of our surgeon advisors are
employed by academic or medical institutions or have agreements with other orthopedic companies pursuant to which they have agreed to
assign or are under an obligation to assign to those other companies or institutions their rights in inventions which they conceive or develop,
or help conceive or develop.
There can be no assurance that one or more of these orthopedic companies or institutions will not claim ownership rights to an invention we
develop in collaboration with our surgeon advisors or consultants on the basis that an agreement with such orthopedic company or
institution gives it ownership rights in the invention or that our surgeon advisors on consultants otherwise have an obligation to assign such
inventions to such company or institution. Any such claim against us, even without merit, may cause us to incur substantial costs, and
would place a significant strain on our financial resources, divert the attention of management from our core business and harm our
reputation.
We may be subject to damages resulting from claims that we, our employees, or our independent sales agencies have wrongfully
used or disclosed alleged trade secrets of our competitors or are in breach of non-competition agreements with our competitors or
non-solicitation agreements.
Many of our employees were previously employed at other orthopedic companies, including our competitors and potential competitors.
Many of our distributors and potential distributors sell, or in the past have sold, products of our competitors. We may be subject to claims
that either we, or these employees or distributors, have inadvertently or otherwise used or disclosed the trade secrets or other proprietary
information of our competitors. In addition, we have been and may in the future be subject to claims that we caused an employee or sales
agent to break the terms of his or her non-competition agreement or non-solicitation agreement. Litigation may be necessary to defend
against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a
distraction to management. If we fail in defending such claims, in addition to paying money damages, we may lose valuable intellectual
property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize products,
which could have an adverse effect on our business, financial condition and results of operations.
If our silicon nitride products or our product candidates conflict with the rights of others, we may not be able to manufacture or
market our products or product candidates, which could have a material and adverse effect on us.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Issued
patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption of validity
under the laws of the United States. If we need suitable licenses to such patents to permit us to develop or market our product candidates,
we may be required to pay significant fees or royalties and we cannot be certain that we would even be able to obtain such licenses.
Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our
products to market, that we use in producing our products, or that we use in treating patients with our products. We know that others have
filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent
applications have already resulted in patents and some are still pending. If we were found to infringe any of these issued patents or any of
the pending patent applications, when and if issued, we may be required to alter our processes or product candidates, pay licensing fees or
cease activities. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or
product candidates conflict with patent rights of others, third parties could bring legal actions against us, in Europe, the United States and
elsewhere, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to
predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can
proceed in secret prior to issuance of a patent, provided such application is not filed in foreign jurisdiction. For U.S. patent applications that
are also filed in foreign jurisdictions, such patent applications will not publish until 18 months from the filing date of the application. As a
result, third parties may be able to obtain patents with claims relating to our product candidates which they could attempt to assert against
us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them, and we
cannot predict the outcome of any such action.
There has been extensive litigation in the medical devices industry over patents and other proprietary rights. If we become involved in any
litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If these legal actions are
successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses and pay
substantial royalties in order to continue to manufacture or market the affected products.
41
We cannot assure you that we would prevail in any legal action or that any license required under a third party patent would be made
available on acceptable terms, or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect
of our business operations, as a result of claims of patent infringement or violation of other intellectual property rights, which could have a
material and adverse effect on our business, financial condition and results of operations.
Risks Related to Potential Litigation from Operating Our Business
We may become subject to potential product liability claims, and we may be required to pay damages that exceed our insurance
coverage.
Our business exposes us to potential product liability claims that are inherent in the design, testing, manufacture, sale and distribution of
our currently marketed products and each of our product candidates that we are seeking to introduce to the market. The use of orthopedic
medical devices can involve significant risks of serious complications, including bleeding, nerve injury, paralysis, infection, and even
death. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance
rates or in our inability to secure coverage in the future on commercially reasonable terms, if at all. In addition, if our product liability
insurance proves to be inadequate to pay a damage award, we may have to pay the excess of this award out of our cash reserves, which
could significantly harm our financial condition. If longer-term patient results and experience indicate that our products or any component
of a product causes tissue damage, motor impairment or other adverse effects, we could be subject to significant liability. A product
liability claim, even one without merit, could harm our reputation in the industry, lead to significant legal fees, and result in the diversion of
management’s attention from managing our business.
Any claims relating to our improper handling, storage or disposal of biological or hazardous materials could be time consuming
and costly.
Although we do not believe that the manufacture of our silicon nitride or non-silicon nitride products will involve the use of hazardous
materials, it is possible that regulatory authorities may disagree or that changes to our manufacturing processes may result in such use. Our
business and facilities and those of our suppliers and future suppliers may therefore be subject to foreign, federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We may incur
significant expenses in the future relating to any failure to comply with environmental laws. Any such future expenses or liability could
have a significant negative impact on our business, financial condition and results of operations.
Risks Related to Our Common Stock
The price of our common stock is volatile and is likely to continue to fluctuate due to reasons beyond our control.
The volatility of orthopedic company stocks, including shares of our common stock, often do not correlate to the operating performance of
the companies represented by such stocks or our operating performance. Some of the factors that may cause the market price of our
common stock to fluctuate include:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to sell our current products and the cost of revenue;
our ability to develop, obtain regulatory clearances or approvals for, and market new and enhanced product candidates on a
timely basis;
the amount of Convertible Notes converted into shares, which are then subsequently sold;
our obligation to issue Additional Bridge Warrants if the Bridge Loan is not repaid in full on or before its maturity date;
changes in governmental regulations or in the status of our regulatory approvals, clearances or future applications;
our announcements or our competitors’ announcements regarding new products, product enhancements, significant contracts,
number and productivity of distributors, number of hospitals and surgeons using products, acquisitions or strategic
investments;
announcements of technological or medical innovations for the treatment of orthopedic pathology;
delays or other problems with the manufacturing of our products, product candidates and related instrumentation;
volume and timing of orders for our products and our product candidates, if and when commercialized;
changes in the availability of third-party reimbursement in the United States and other countries;
quarterly variations in our or our competitors’ results of operations;
changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;
42
•
•
•
•
•
•
•
•
•
•
failure to meet estimates or recommendations by securities analysts, if any, who cover our stock;
changes in the fair value of our derivative liabilities resulting from changes in the market price of our common stock, which
may result in significant fluctuations in our quarterly and annual operating results;
changes in healthcare policy in the United States and internationally;
product liability claims or other litigation involving us;
sales of a substantial aggregate number of shares of our common stock;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
disputes or other developments with respect to intellectual property rights;
changes in accounting principles;
changes to tax policy; and
general market conditions and other factors, including factors unrelated to our operating performance or the operating
performance of our competitors.
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit
or prevent our stockholders from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our
common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted
securities class action litigation against the company that issued the stock. If our stockholders brought a lawsuit against us, we could incur
substantial costs defending the lawsuit regardless of the merits of the case or the eventual outcome. Such a lawsuit also would divert the
time and attention of our management from running our company.
Securities analysts may not continue to provide coverage of our common stock or may issue negative reports, which may have a
negative impact on the market price of our common stock.
Since completing our initial public offering of shares of our common stock in February 2014, a limited number of securities analysts have
begun providing research coverage of our common stock. If securities analysts do not continue to cover our common stock, the lack of
research coverage may cause the market price of our common stock to decline. The trading market for our common stock may be affected
in part by the research and reports that industry or financial analysts publish about our business. If one or more of the analysts who elect to
cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could
lose visibility in the market, which in turn could cause our stock price to decline. In addition, under the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and a global settlement among the Securities and Exchange Commission, or the SEC, other regulatory agencies and a
number of investment banks, which was reached in 2003, many investment banking firms are required to contract with independent
financial analysts for their stock research. It may be difficult for a company such as ours, with a smaller market capitalization, to attract
independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.
The low trading volume of our common stock may adversely affect the price of our shares.
Although our common stock is listed on The NASDAQ Capital Market, our common stock has typically experienced low trading volume.
The average daily trading volume of our common stock over the last three months as of March 12, 2015, was approximately 419,000
shares, as reported by NASDAQ. Limited trading volume may subject our common stock to greater price volatility and may make it
difficult for investors to sell shares of our common stock at a price that is attractive to them.
Future sales of our common stock in the public market may cause our stock price to decline and impair our ability to raise future
capital through the sale of our equity securities.
There are a substantial number of shares of our common stock held by stockholders who owned shares of our capital stock prior to our
initial public offering that they may be able to sell in the public market. Additionally, in March 2015, 411,067 outstanding RSUs were
converted into common stock. The shares of common stock issued for the RSUs are subject to a Lock-up Agreement executed in
connection with our public offering of units in November 2014 that will expire on May 19, 2015. At that time, all shares of common stock
issued on conversion of the RSUs will be eligible to be sold in the public market. Sales by such stockholders of a substantial number of
shares could significantly reduce the market price of our common stock.
43
On November 21, 2014, we announced the pricing of a firm commitment underwritten public offering of 11,441,646 units. Each unit
consists of one share of Amedica common stock and one warrant to purchase one share of common stock. In addition, we granted the
underwriters a 45-day option to purchase up to 1,716,246 additional shares of common stock, and/or 1,716,246 additional warrants, or any
combination thereof, solely to cover over-allotments, if any. The underwriter exercised the overallotment option and acquired 1,716,246
additional warrants. As a result, there are a total of 13,157,892 of such warrants outstanding as of March 24, 2015. Beginning March 26,
2015, the warrants may be exercised on a cashless basis. Due to the terms of the cashless exercise feature of the warrants, the lower the
stock price is for a share of our common stock at the time of exercise the more common shares that may be issued on such exercise. Based
on a share price of $.60 we estimated that the total number of shares that would be issued should all the warrants be exercised through a
cashless exercise to be 17,543,856 shares, resulting in significant dilution to our stockholders.
We have also registered 2,981,972 shares of our common stock that we may issue pursuant to our 2003 Stock Option Plan and our
Amended and Restated 2012 Equity Incentive Plan, or the 2012 Plan. Shares issued by us upon exercise of options and restricted stock units
and other awards ranted under these equity plans are eligible for sale in the public market. If any of these holders cause a large number of
securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our
ability to raise capital in the future.
Moreover, warrants to acquire approximately 633,669 shares of our common stock and 8,627,454 shares of our outstanding common stock
which are deemed to be “restricted securities” pursuant to Rule 144 under the Securities Act, are eligible for sale in reliance on Rule 144. A
holder of warrants to acquire shares of our common stock will be able to net exercise such warrants by surrendering a portion of that
holder’s warrants as payment of the exercise price rather than paying the exercise price in cash.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if
an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our
stockholders to replace or remove our current management.
Our restated certificate of incorporation and restated bylaws contain provisions that could discourage, delay or prevent a merger,
acquisition or other change in control of our company or changes in our board of directors that our stockholders might consider favorable,
including transactions in which you might receive a premium for your shares. These provisions also could limit the price that investors
might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock.
Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could
prevent or frustrate attempts by our stockholders to replace or remove management. These provisions:
•
•
•
•
•
•
allow the authorized number of directors to be changed only by resolution of our board of directors;
provide for a classified board of directors, such that not all members of our board will be elected at one time;
prohibit our stockholders from filling board vacancies, limit who may call stockholder meetings, and prohibit the taking of
stockholder action by written consent;
prohibit our stockholders from making certain changes to our restated certificate of incorporation or restated bylaws except
with the approval of holders of 75% of the outstanding shares of our capital stock entitled to vote;
require advance written notice of stockholder proposals that can be acted upon at stockholders meetings and of director
nominations to our board of directors; and
authorize our board of directors to create and issue, without prior stockholder approval, preferred stock that may have rights
senior to those of our common stock and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a
potential hostile acquirer to prevent an acquisition that is not approved by our board of directors.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business
combinations with stockholders owning 15% or more of our outstanding voting stock. Any delay or prevention of a change in control
transaction or changes in our board of directors could cause the market price of our common stock to decline.
If our stock price continues to be below $1.00, our common stock may be subject to delisting from The NASDAQ Stock Market.
Since the bid price of our common stock closed below the required minimum $1.00 per share for 30 consecutive business days, NASDAQ
notified us that our common stock may be subject to delisting. We were provided a grace period of 180-calendar days, or until August 18,
2015, to regain compliance with the minimum bid price requirement. If at any time during the 180-day grace period, the minimum closing
bid price per share of our common stock closes at or above $1.00 for a minimum of ten consecutive business days, we will regain
compliance and the matter will be closed. If our common stock is delisted, it would adversely impact liquidity of our common stock and
potentially result in lower bid prices for our common stock.
44
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain all available funds and any future earnings for debt service and use in the operation and expansion of
our business. Each of the Hercules Secured Credit Facility and the Convertible Notes issued contain a negative covenant which prohibits us
from paying dividends to our stockholders without the prior written consent of Hercules Technology and Magna, respectively. In addition,
the terms of any future debt or credit facility may preclude us from paying any dividends.
Risks Related to our Senior Convertible Notes
Adjustments to the conversion price for our Convertible Notes issued to Magna will dilute the ownership interests of our existing
stockholders.
The Convertible Notes are convertible at any time after issuance, in whole or in part, at Magna’s option, into shares of common stock at the
lesser of (i) the initial fixed conversion price of $3.75 per share and (ii) a price equal to 80% of the lowest daily volume weighted average
price per share during the five trading days prior to conversion. Accordingly, if the market value of shares of our common stock decreases,
the number of shares issuable upon conversion of the Convertible Notes will increase, and may result in the issuance of a significant
number of additional shares of our common stock upon conversion if our stock price decreases.
Risks Related to Public Companies
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and a “smaller reporting
company” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies
may make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we
continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved. Additionally, under the JOBS Act,
emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We are electing to delay such adoption of new or revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to
the financial statements of other public companies.
We may take advantage of these exemptions until we are no longer an emerging growth company. Under the JOBS Act, we may be able to
maintain emerging growth company status for up to five years, although circumstances could cause us to lose that status earlier, including if
the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before the end of such five-year
period or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no
longer be an emerging growth company as of the following December 31. Additionally, if we issue more than $1.0 billion in non-
convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately.
We are also currently a “smaller reporting company” as defined in the Securities Exchange Act of 1934, and in the event that we are still
considered a smaller reporting company at such time as we cease being an emerging growth company, we will be required to provide
additional disclosure in our SEC filings. However, similar to emerging growth companies, smaller reporting companies are able to provide
simplified executive compensation disclosures in their filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act
requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over
financial reporting, and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being
required to provide two years of audited financial statements in annual reports. We cannot predict whether investors will find our common
stock less attractive because of our reliance on any of these exemptions. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
We incur substantial costs as a result of being a public company and our management expects to devote substantial time to public
company compliance programs.
As a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public company
reporting. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will
45
result in increased general and administrative expenses and may divert management’s time and attention from product development and
commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and
our business may be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer
liability insurance for our directors and officers, and we may be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified
members of our board of directors, particularly to serve on our audit and compensation committees. In addition, if we are unable to continue
to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain the listing of our
common stock on The NASDAQ Capital Market, which would likely have a material adverse effect on the trading price of our common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our 54,000 square foot corporate office and manufacturing facilities are located in Salt Lake City, Utah. We occupy these facilities
pursuant to a lease that expires in January 2020. Pursuant to the terms of the lease agreement, we may extend the lease for two additional
periods of five years each. We believe that our existing facilities are adequate for our current and projected needs for the foreseeable future.
ITEM 3.
LEGAL PROCEEDINGS
We are currently not a party to any material legal proceedings. However, our industry is characterized by frequent claims and litigation,
including claims regarding intellectual property and product liability. As a result, we may be subject to various legal proceedings in the
future.
ITEM 4.
MINE SAFETY DISCLOSURES
This item does not apply to our business.
46
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our shares of common stock are currently quoted on The NASDAQ Capital Market under the symbol “AMDA”.
The following table sets forth the high and low closing bid prices of our common stock, as reported by NASDAQ Capital Markets since our
initial public offering, for the periods indicated:
First Quarter (February 13 to March 31)
Second Quarter
Third Quarter
Fourth Quarter
2014
High
Low
$
$
$
$
9.37 $
6.25 $
4.74 $
2.60 $
5.30
4.40
1.58
0.58
Holders of Record
As of March 6, 2015, we had approximately 482 holders of record of our common stock. Because many of our shares of common stock are
held by brokers and other institutions on behalf of stockholders, this number is not indicative of the total number of stockholders
represented by these stockholders of record.
Dividends
We have not paid dividends to stockholders since inception and do not plan to pay cash dividends in the foreseeable future. We currently
intend to retain earnings, if any, to finance our growth.
Unregistered Sales of Securities
On October 31, 2014, we issued a warrant to purchase 25,000 shares of our common stock to a service provider to serve as a non-exclusive
financial advisor. The exercise price for the warrant is $1.14 per share and the warrant is exercisable, in whole or in part, at any time
beginning April 30, 2015 and expires October 31, 2019. On November 12, 2014, we issued a warrant to purchase 150,000 shares of our
common stock to a service provider to serve as a non-exclusive financial advisor. The exercise price for the warrant is $1.25 per share and
the warrant is exercisable, in whole or in part, at any time beginning May 12, 2015 and expires November 12, 2019. The sale and issuance
of these securities was exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act, as transactions
by an issuer not involving any public offering. Each recipient represented its intentions to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution thereof, and an appropriate legend was placed upon the warrant agreement
issued in each transaction. No underwriter was involved in either transaction.
Use of Proceeds from Sale of Registered Securities
On February 12, 2014, our registration statement on Form S-1 (File No. 333-192232) was declared effective for our initial public offering
of shares of our common stock, or the IPO, pursuant to which we registered the sale of 3,500,000 shares of our common stock at $5.75 per
share, plus up to an additional 525,000 additional shares to cover the underwriters’ overallotment option. The IPO generated net proceeds
to us of approximately $15.4 million, after deducting underwriting discounts and expenses of approximately $5.8 million. The IPO
commenced as of February 12, 2014, and terminated before all of the securities registered under the registration statements were sold
because the underwriters elected to partially exercise their overallotment option by purchasing 182,900 additional shares of our common
stock. JMP Securities LLC acted as the sole book-running manager for the offering. Needham & Company, LLC acted as co-manager for
the IPO. None of the underwriting discounts or other offering expenses were incurred or paid to any of our directors or officers or their
associates or to persons owning 10% or more of our equity securities or to any of our affiliates.
As of December 31, 2014, we have used all of the $15.4 million, of the net proceeds of the IPO as follows: (i) approximately $4.2 million
to fund our debt servicing costs under the existing GE Capital agreement, including principal and interest payments and debt modification
fees; (ii) approximately $4.0 million in working capital to increase our product inventories related primarily to the launch of our second
generation Valeo products and approximately $1.7 million to purchase surgical instruments, both of which expand our sales, marketing and
distribution capabilities for our silicon nitride technology platform; and (iii) approximately $5.5 million in
47
general operating expenditures to fund research and development and commercialization activities, as well as general and administrative
activities. There was no material change in the planned use of proceeds from the IPO as described in our final prospectus filed with the SEC
on February 12, 2014 pursuant to Rule 424(b).
Issuer Purchases of Equity Securities
None
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking
statements based upon current beliefs, plans, expectations, intentions and projections that involve risks, uncertainties and assumptions,
such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected
events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set
forth under “Risk Factors” and elsewhere in this Annual Report.
Overview
We are a commercial biomaterial company focused on using our silicon nitride technology platform to develop, manufacture and sell a
broad range of medical devices. We currently market spinal fusion products and are developing products for use in total hip and knee joint
replacements. We believe our silicon nitride technology platform enables us to offer new and transformative products in the orthopedic and
other medical device markets. We believe we are the first and only company to use silicon nitride in medical applications. Over 20,000 of
our silicon nitride spine products have been implanted in patients.
Biomaterials come in a variety of synthetic or natural materials available in a variety of forms that are used in virtually every medical
specialty. We believe our silicon nitride biomaterial has superior characteristics compared to commonly used biomaterials in the markets
we are targeting, including polyetheretherketone, or PEEK, which is the most common biomaterial used for interbody spinal fusion
products. Specifically, we believe our silicon nitride has the following key attributes: promotion of bone growth; hardness, strength and
resistance to fracture; resistance to wear; non-corrosive; anti-infective properties; biocompatibility; and superior diagnostic imaging
compatibility.
We currently market our Valeo® family of silicon nitride interbody spinal fusion devices in the United States and Europe for use in the
cervical and thoracolumbar areas of the spine. We believe our Valeo devices have a number of advantages over existing products due to
silicon nitride’s key characteristics, resulting in faster and more effective fusion and reduced risk of infection.
In addition to the markets into which we directly sell our products, we are utilizing our silicon nitride technology platform to expand our
current penetration in the spinal fusion market through original equipment manufacturer (“OEM”) and private label partnerships. We also
expect to do the same in other markets such as total hip and knee joint replacements, dental and sports medicine. Although our non-silicon
nitride products have accounted for approximately 52% and 66% of our product revenues for the years ended December 31, 2014 and 2013,
respectively, we believe the continued promotion and potential for adoption of our silicon nitride products and product candidates, if
approved, provides us the greatest opportunity to grow our business in new and existing markets and achieve our goal to become a leading
biomaterial company.
In addition to the markets into which we directly sell our products, we plan to take our technology platform into other medical markets
through original equipment manufacturer (“OEM”) and private label partnerships. We believe our biomaterial expertise, strong intellectual
property and formulaic manufacturing process will allow us to transition currently available medical device products made of inferior
biomaterials and manufacture them using silicon nitride and our technology platform to improve their characteristics.
We are also incorporating our silicon nitride technology into components for use in total hip and knee replacement product candidates that
we plan on developing in collaboration with a strategic partner. We believe that our silicon nitride total hip and knee product candidates
will provide competitive advantages over current products made with traditional biomaterials. We also believe our silicon nitride
technology platform can be used for developing products in other markets and have developed prototypes for use in the dental,
48
sports medicine and trauma markets. As a result of some of the key characteristics of our silicon nitride, we also believe our coating
technology may be used to enhance our metal products as well as commercially available metal spinal fusion, joint replacement and other
medical products.
We operate a 30,000 square foot manufacturing facility located at our corporate headquarters in Salt Lake City, Utah, and we are the only
vertically integrated silicon nitride orthopedic medical device manufacturer in the world. We market and sell our products to surgeons and
hospitals in the United States and select markets in Europe and South America through our established network of more than 50
independent sales distributors who are managed by our experienced in-house sales and marketing management team. We have also started
entering into OEM and private label relationships with third parties to further the commercialization of our silicon nitride technology
platform beyond our own direct marketing and selling efforts.
Recent Developments
Bridge Loan
On November 6, 2014, we entered into a Loan and Security Agreement with Hampshire MedTech Partners II, LP, as lender, or the Bridge
Lender, in connection with a $1.0 million loan to us, or the Bridge Loan, which matured on the earlier of (a) the third business day
following our closing of a qualified secondary offering and (b) December 17, 2014, or the Maturity Date. A “qualified secondary offering”
means a registered public offering of shares of our common stock with gross proceeds to us of at least $10.0 million.
Our obligations under the Bridge Loan were secured by substantially all of our assets, and this security was subordinate to the security
previously granted to our senior secured lender, Hercules Technology. The Bridge Loan was able to be paid, in whole or in part, before the
Maturity Date without any premium payments or penalty charges. Proceeds of the Bridge Loan were used for general corporate purposes.
The Bridge Loan bore interest at the rate of 15% per annum. Interest on the Bridge Loan accrued from the date of issuance, but interest was
not payable until the Maturity Date. The entire principal amount, and all accrued and then unpaid interest, were due and payable on the
Maturity Date. We were obligated to pay the Bridge Lender a $75,000 commitment fee by no later than the Maturity Date. We also agreed
to reimburse the Bridge Lender up to $30,000 of reasonable attorneys’ fees and expenses incurred by the Bridge Lender in connection with
the transaction. The Bridge Loan contained representations and warranties, affirmative and negative covenants, and events of default
customary for a bridge financings of this nature, including, among other things, limitations on certain other indebtedness, loans and
investments, liens, mergers, asset sales and transactions with affiliates, including the application of a default rate of interest equal to the
lower of 18% per annum and the maximum rate of interest permitted by applicable law.
In addition, we issued a warrant to the Bridge Lender, or Closing Bridge Warrant, to purchase up to 267,380 shares of our common stock,
with an exercise price of $1.87 per share. Since we closed a public offering on or before May 6, 2015, at a price per share of common stock
sold to the public less than the exercise price of the Closing Bridge Warrant, the Closing Bridge Warrant exercise price was reduced to
$1.14, the price per share of common stock sold to the public in the offering. The Closing Bridge Warrant is exercisable upon issuance and
expires on November 5, 2019.
In connection with the closing of the Bridge Loan, Hercules Technology provided us a waiver which allowed us to enter into the Bridge
Loan and to perform our obligations under the Bridge Loan without triggering an event of default under the existing obligations to Hercules
Technology. In addition, we entered into an amendment and waiver with Magna that amended the terms of the unsecured senior convertible
notes held by Magna and accordingly allowed us to enter into the Bridge Loan, grant a security interest to secure the Bridge Loan and to
perform our obligations under the Bridge Loan without triggering an event of default under our existing obligations to Magna. Magna also
waived all rights it had to participate in the Bridge Loan as a lender.
Secondary Offering
On November 26, 2014, we completed a secondary offering, in which we sold and issued 11,441,646 units. Each unit was issued at a price
of $1.14 and consisted of one share of common stock and one common stock warrant (“Secondary Offering Warrant”). We received
proceeds of approximately $11.3 million, net of approximately $1.7 million in cash underwriting and other offering costs from the
secondary offering. We issued an additional 1,716,246 Secondary Offering Warrants pursuant to the underwriters’ over-allotment option.
The Secondary Offering Warrants were immediately exercisable after issuance into common shares at an exercise price of $1.48 and
terminate on November 26, 2019. The Secondary Offering Warrants contain a cashless exercise provision whereby the holders may
exercise warrants by paying the exercise price in cash or, in lieu of payment of the exercise price in cash, at any time 120 days after
issuance, by electing to receive a cash payment from the Company equal to the Black Scholes Value (as defined below) of the number
49
of shares the holder elects to exercise (the “Black Scholes Payment”); provided that we have discretion as to whether to deliver the Black
Scholes Payment or, subject to meeting certain conditions, to deliver a number of shares of our common stock determined according to the
following formula (the “Cashless Exercise”):
Total Shares = (A x B) / C
Where:
•
•
•
•
Total Shares is the number of shares of common stock to be issued upon a Cashless Exercise
A is the total number of shares with respect to which the warrant is then being exercised.
B is the Black Scholes Value (as defined below).
C is the closing bid price of our common stock as of two trading days prior to the time of such exercise.
As defined in the Secondary Offering Warrants, “Black Scholes Value” means the Black Scholes value of an option for one share of our
common stock at the date of the applicable Black Scholes Payment or Cashless Exercise, which is calculated using the Black Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the closing bid
price of the Common Stock as of trading day immediately preceding the date of issuance of the warrant, (ii) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term of the warrant as of the applicable Black Scholes Payment
or Cashless Exercise, (iii) a strike price equal to the exercise price in effect at the time of the applicable Black Scholes Payment or Cashless
Exercise, (iv) an expected volatility equal to 135% and (v) a remaining term of such option equal to five years (regardless of the actual
remaining term of the warrant).
The Secondary Offering Warrants also have a mandatory exercise provision, whereby, in the event that our common stock trades at a price
that is 25% or more above the exercise price of the warrants, or $1.85, for a period of at least 20 consecutive trading days at any time 120
days after issuance, we may, subject to certain limitations in the warrants, require the holder of the warrants to exercise the warrants for
cash payment of the exercise price.
Restructuring
On January 7, 2015, our Board of Directors authorized the implementation of certain cost saving measures which included a reduction in
staff of 25 employees, or approximately 28% of our workforce as the result of a comprehensive business review to improve financial
performance, increase operational efficiencies and strengthen the Company’s value proposition. The staff reduction was implemented and
completed on January 8, 2015.
We recorded one-time severance and related costs related to the restructuring of approximately $585,000 in January 2015. We do not
anticipate that there will be any further material future cash expenditure associated with the workforce reduction.
Components of our Results of Operations
We manage our business within one reportable segment, which is consistent with how our management reviews our business, makes
investment and resource allocation decisions and assesses operating performance.
Product Revenue
We derive our product revenue primarily from the sale of spinal fusion devices and related products used in the treatment of spine
disorders. Our product revenue is generated from sales to two types of customers: (1) surgeons and hospitals; and (2) stocking distributors.
Most of our products are sold on a consignment basis through a network of independent sales distributors; however, we also sell our
products to independent stocking distributors. Product revenue is recognized when all four of the following criteria are met: (1) persuasive
evidence that an arrangement exists; (2) delivery of the products has occurred; (3) the selling price of the product is fixed or determinable;
and (4) collectability is reasonably assured. We generate the majority of our revenue from the sale of inventory that is consigned to
independent sales distributors that sell our products to surgeons and hospitals. For these products, we recognize revenue at the time we are
notified the product has been used or implanted and all other revenue recognition criteria have been met. For all other transactions, we
recognize revenue when title and risk of loss transfer to the stocking distributor, and all other revenue recognition criteria have been met.
We generally recognize revenue from sales to stocking distributors at the time the product is shipped to the distributor. Stocking
distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at time of shipment. Our
stocking distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. Our policy is to classify
shipping and handling costs billed to customers as an offset to total shipping expense in the statement of operations, primarily within sales
and marketing. In general, our customers do not have any rights of return or exchange.
50
We believe our product revenue from the sale of our silicon nitride based products will increase due to our sales and marketing efforts and
as we introduce new silicon nitride based products into the market and product revenue from the sale of our and our non-silicon nitride
products to decrease. We expect that our product revenue will continue to be primarily attributable to sales of our products in the United
States.
Cost of Revenue
The expenses that are included in cost of revenue include all direct product costs if we obtained the product from third-party manufacturers
and our in-house manufacturing costs for the products we manufacture. We obtain our non-silicon nitride products, including our metal and
orthobiologic products, from third-party manufacturers, while we currently manufacture our silicon-nitride products in-house.
Specific provisions for excess or obsolete inventory and, beginning in 2013, the excise tax on the sale of medical devices in the United
States, are also included in cost of revenue. In addition, we pay royalties attributable to the sale of specific products to some of our surgeon
advisors that assisted us in the design, regulatory clearance or commercialization of a particular product, and these payments are recorded
as cost of revenue.
Gross Profit
Our gross profit measures our product revenue relative to our cost of revenue. While we expect our cost of revenue to increase in absolute
terms as sales volume increase, we believe our gross profit will be higher as we realize manufacturing efficiencies associated with our
silicon nitride-based products.
Research and Development Expenses
Our net research and development costs are expensed as incurred. Research and development costs consist of engineering, product
development, clinical trials, test-part manufacturing, testing, developing and validating the manufacturing process, manufacturing, facility
and regulatory-related costs. Research and development expenses also include employee compensation, employee and non-employee stock-
based compensation, supplies and materials, consultant services, and travel and facilities expenses related to research activities. To the
extent that certain research and development expenses are directly related to our manufactured products, such expenses and related
overhead costs are allocated to inventory.
We expect to incur additional research and development costs as we continue to develop new spinal fusion products, our product candidates
for total joint replacements, such as our total hip replacement product candidate, and our silicon nitride-coated metals, but we believe that
research and development expenses will decline moderately in 2015.
Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, benefits and other related costs, including stock-based compensation, for personnel
employed in sales, marketing, medical education and training. In addition, our sales and marketing expenses include commissions and
bonuses, generally based on a percentage of sales, to our sales managers and independent sales distributors. We provide our products in kits
or banks that consist of a range of device sizes and separate instruments necessary to complete the surgical procedure. We generally
consign our instruments to our distributors or our hospital customers that purchase the device used in spinal fusion surgery. Our sales and
marketing expenses include depreciation of the surgical instruments.
We expect our sales and marketing expenses will remain flat or slightly decline due to the recently implemented cost saving measures.
Additionally, we expect our commissions to continue to increase in absolute terms over time but remain approximately the same or decrease
as a percentage of product revenue.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for
certain members of our executive team and other personnel employed in finance, legal, compliance, administrative, information technology,
customer service, executive and human resource departments. General and administrative expenses include allocated facility expenses,
related travel expenses and professional fees for accounting and legal services.
We expect our general and administrative expenses to decrease as a result of the restructuring and cost saving measures implemented in
January 2015.
51
Results of Operations
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
The following table sets forth, for the periods indicated, our results of operations for the years ended December 31, 2014 and 2013 (in
thousands):
Product revenue
Costs of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Other income (expense), net
Net loss before income taxes
Provision for income taxes
Net loss
Product Revenue
Year Ended December 31,
2014
2013
$ Change
% Change
$
22,765 $
7,910
14,855
22,314 $
7,045
15,269
451
865
(414 )
6,742
13,588
18,692
39,022
(24,167 )
(8,415 )
(32,582 )
-
(32,582 ) $
3,461
5,759
16,384
25,604
(10,335 )
2,049
(8,286 )
-
(8,286 ) $
3,281
7,829
2,308
13,418
(13,832 )
(10,464 )
(24,296 )
-
(24,296 )
$
2 %
12 %
(3 %)
95 %
136 %
14 %
52 %
134 %
511 %
(293 %)
N/A
(293 %)
The following table sets forth our product revenue from sales of the indicated product category for the years ended December 31, 2014 and
2013 (in thousands):
Silicon Nitride
Non-Silicon Nitride
Total product revenue
Year Ended December 31,
2014
2013
$ Change
% Change
$
$
10,824 $
11,941
22,765 $
7,667 $
14,647
22,314 $
3,157
(2,706 )
451
41 %
(18 %)
2 %
Total product revenue was $22.8 million in 2014 as compared to $22.3 million in 2013, an increase of $0.5 million or 2%. This increase
was primarily driven by increased sales of our silicon nitride products, which increased by $3.2 million or 41%, for 2014 as compared to
2013 primarily due to our continued focus and investment in sales and marketing efforts of our silicon nitride products. The increase in sales
of silicon nitride products was partially offset by a decrease in non-silicon nitride sales of $2.7 million, or 18%, during 2014 as compared to
2013, as sales and marketing was primarily focused on silicon nitride product sales.
The following table sets forth, for the periods indicated, our product revenue by geographic area (in thousands):
Domestic
International
Total product revenue
Year Ended December 31,
2014
2013
$ Change
% Change
$
$
22,696 $
69
22,765 $
22,203 $
111
22,314 $
493
(42 )
451
2 %
(38 %)
2 %
International revenue decreased in 2014 as compared to 2013 as we have primarily focused on increasing sales domestically.
Cost of Revenue
Our cost of revenue increased $0.9 million, or 12%, in 2014 as compared to the same period in 2013. The increase is primarily due to a $1.3
million increase in excess and obsolete inventory as we launched several second generation Valeo products in 2014 which resulted in us
needing to reserve a significant amount of our first generation Valeo products. The increase in excess and obsolete inventory was partially
offset by a decrease in our product costs, as a percentage of product revenue, in 2014 due to production efficiencies. Excluding the impact
of excess and obsolete inventory, our product costs, as a percentage of product revenue, decreased from 26% in 2013 to 23% in 2014 due to
production efficiencies.
52
Gross Profit
Gross profit as a percentage of product revenue decreased by 3% to 65% in 2014 from 68% for the same period in 2013, primarily driven
by an increase in excess and obsolete inventory costs of $1.3 million related to our first generation Valeo products.
Research and Development Expenses
Research and development expenses were $6.7 million in 2014 as compared to $3.4 million in 2013, an increase of $3.3 million, or 95%.
The increase was primarily due to a $1.3 million increase in stock-based compensation due to the RSUs granted in 2013 and the beginning
of 2014. Additionally, there was an increase in personnel costs, clinical study costs and general research and development expenses as we
increased our investment in seeking to develop new products and improve existing products.
General and Administrative Expenses
General and administrative expenses were $13.6 million in 2014 as compared to $5.8 million in 2013, an increase of $7.8 million, or 136%.
The increase was primarily due to an increase in stock-based compensation of $6.0 million. Additionally, there was an increase in personnel
related expenses, insurance expense and other administrative expenses due primarily to increased costs associated with becoming a public
company in 2014.
Sales and Marketing Expenses
Sales and marketing expenses were $18.7 million in 2014 as compared to $16.4 million in 2013, an increase of $2.3 million, or 14%. This
increase was primarily due to an increase in stock-based compensation of $2.1 million due to RSUs granted in 2013 and the beginning of
2014. Additionally, personnel and other selling related expenses increased as a result of increased headcount to enhance our commercial
infrastructure and expand our sales and marketing efforts. In addition, there was an increase in instrument sets depreciation and
amortization in 2014 due to the purchase of new instrument sets for the second generation Valeo products in the latter half of 2013 and into
2014.
Other Income (Expense), Net
Other expense was $8.4 million in 2014 as compared to other income of $2.0 million in 2013, an increase of $10.4 million, or 511%. This
increase was primarily due to a $1.6 million loss on extinguishment of the GE Capital debt primarily due to unamortized deferred financing
costs and the termination fee associated with the debt and a $0.6 million loss on extinguishment of the convertible notes converted during
2014. In addition, because the warrants issued in the Company’s November 2014 secondary offering were considered liabilities, $2.0
million of the secondary offering costs were expensed. Furthermore, there was increased interest expense of $1.8 million from the
additional debt incurred during the second quarter of 2014. Lastly, in 2014 there was an increase in the change in fair value of derivative
liabilities of $0.3 million as compared to a decrease in the change in fair value of derivative liabilities of $4.0 million in 2013 as a result of
significant decrease in the value of our common stock in 2013 as compared to the previous period.
Liquidity and Capital Resources
For the years ended December 31, 2014 and 2013, we incurred a net loss of $32.6 million and $8.3 million, respectively, and used cash in
operations of $14.5 million and $9.9 million, respectively. We have an accumulated deficit of $172.5 million as of December 31, 2014. To
date, our operations have been principally financed from proceeds from the issuance of convertible preferred stock and common stock,
convertible debt and bank debt and, to a lesser extent, cash generated from product sales. As of December 31, 2014, we had approximately
$18.2 million in cash and cash equivalents.
In order to finance the continued growth in product sales, to invest in further product development and to otherwise satisfy obligations as
they mature, we completed an initial public offering of our common stock (“IPO”), in which we sold and issued 3,682,900 shares, including
182,900 shares sold pursuant to the exercise by the underwriters of their over-allotment option, in February 2014, at an issuance price of
$5.75 per share, less underwriting discounts and commissions. As a result of the IPO, we received proceeds of approximately $15.4 million,
net of approximately $5.8 million in IPO related costs.
Furthermore, in order to help finance our operations and maintain compliance with our debt covenant, we completed a secondary offering in
November 2014, in which we sold and issued 11,441,646 units. Each unit was issued at a price of $1.14 and consisted of one share of
common stock and one Secondary Offering Warrant. We received proceeds of approximately $11.3 million, net of approximately $1.7
million in cash underwriting and other offering costs from the secondary offering. We issued an additional 1,716,246 Secondary Offering
Warrants pursuant to the underwriters’ over-allotment option.
53
The Secondary Offering Warrants were immediately exercisable after issuance into common shares at an exercise price of $1.48 and
terminate on November 26, 2019. The Secondary Offering Warrants contain a cashless exercise provision whereby the holders may
exercise warrants by paying the exercise price in cash or, in lieu of payment of the exercise price in cash, at any time 120 days after
issuance, by electing to receive a cash payment from the Company equal to the Black Scholes Value (as defined below) of the number of
shares the holder elects to exercise the Black Scholes Payment; provided that we have discretion as to whether to deliver the Black Scholes
Payment or, subject to meeting certain conditions, to deliver a number of shares of our common stock determined according to the
following formula:
Total Shares = (A x B) / C
Where:
•
•
•
•
Total Shares is the number of shares of common stock to be issued upon a Cashless Exercise
A is the total number of shares with respect to which the warrant is then being exercised.
B is the Black Scholes Value (as defined below).
C is the closing bid price of our common stock as of two trading days prior to the time of such exercise.
As defined in the Secondary Offering Warrants, “Black Scholes Value” means the Black Scholes value of an option for one share of our
common stock at the date of the applicable Black Scholes Payment or Cashless Exercise, which is calculated using the Black Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the closing bid
price of the Common Stock as of trading day immediately preceding the date of issuance of the warrant, (ii) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term of the warrant as of the applicable Black Scholes Payment
or Cashless Exercise, (iii) a strike price equal to the exercise price in effect at the time of the applicable Black Scholes Payment or Cashless
Exercise, (iv) an expected volatility equal to 135% and (v) a remaining term of such option equal to five years (regardless of the actual
remaining term of the warrant).
The Secondary Offering Warrants also have a mandatory exercise provision, whereby, in the event that our common stock trades at a price
that is 25% or more above the exercise price of the warrants, or $1.85, for a period of at least 20 consecutive trading days at any time 120
days after issuance, we may, subject to certain limitations in the warrants, require the holder of the warrants to exercise the warrants for
cash payment of the exercise price.
In June 2014, we entered into the Hercules Term Loan with Hercules Technology. The Hercules Term Loan provides for a $20 million
term loan that matures on January 1, 2018 and is secured by substantially all of our assets. Proceeds of the loan were used to repay in full
and terminate our prior credit facility with GE Capital and the remainder of the proceeds of this loan is being used for general corporate
purposes.
The Hercules Term Loan bears interest at the rate of the greater of either (i) the prime rate plus 7.7%, and (ii) 10.95%. Interest accrues
from the date of the Hercules Term Loan with interest payments due monthly commencing on July 1, 2014. Principal payments are
required commencing August 1, 2015 and are to be made in thirty equal installments, with the remainder due at maturity; provided,
however, in the event that we meet certain conditions set forth in the Hercules Term Loan, the interest only period may be extended through
February 1, 2016, reducing the number of required principal payments to twenty-four. Additionally, under certain circumstances we may,
or Hercules Technology may, require that we repay a portion of the principal in the form of shares of our common stock. The conversion
price used for the calculation of the amount of shares to be delivered in such instance is $5.72 per share.
The Hercules Term Loan contains certain covenants related to restrictions on payments to certain company affiliates, financial reporting
requirements and a minimum liquidity covenant that requires us to maintain cash and cash equivalents of no less than $9.0 million.
We anticipate we will need to obtain additional funding in the fourth quarter of 2015 to maintain compliance with the financial and
liquidity covenants related to the Loan and Security Agreement through the next twelve months. Furthermore, if we are unable to access
additional funds prior to becoming non-compliant with the financial or liquidity covenants, the entire remaining balance of the Loan and
Security Agreement could become immediately due and payable at the option of Hercules Technology. As such, we have classified the
entire debt obligation as a current liability.
The repayment of our obligations under the Hercules Term Loan and the liquidity covenant limit our ability to use our cash and cash
equivalents to fund our operations and may restrict our ability to continue development of our product candidates. Additionally, the
Hercules Term Loan restricts our ability to incur additional pari passu indebtedness, which may reduce our ability to seek additional
54
financing. If adequate funds are not available on a timely basis, we may terminate or delay the development of one or more of our product
candidates, or delay activities necessary to commercialize our product candidates. Additional funding may not be available to us on
acceptable terms, or at all. Any additional equity financing, if available, may not be available on favorable terms and will most likely be
dilutive to our current stockholders, and debt financing, if available, may involve more restrictive covenants. Our ability to access capital
when needed is not assured and, if not achieved on a timely basis, will materially harm our business, financial condition and results of
operations. As a result of our debt obligations, we will need additional funds to meet our operational needs and capital requirements for
product development, clinical trials and commercialization.
On June 30, 2014, we entered into a Securities Purchase Agreement with MG Partners II Ltd., or Magna. Pursuant to the terms of the
Securities Purchase Agreement, we sold to Magna an initial unsecured senior convertible note with an original principal amount of $2.9
million, or the Initial Convertible Note, for a purchase price of $2.5 million. Additionally, on August 11, 2014, Magna purchased an
additional unsecured senior convertible note with an original principal amount of $3.5 million, or the Additional Convertible Note, for a
fixed purchase price of $3.5 million. The Initial Convertible Note and Additional Convertible Note are collectively referred to as the
Convertible Notes.
With respect to the Initial Convertible Note, a total of $400,000 of the outstanding principal amount (together with any accrued and unpaid
interest with respect to such portion of the principal amount) was automatically extinguished when we filed a registration statement
registering the underlying shares and that registration statement was declared effective by the SEC on August 6, 2014. The Securities
Purchase Agreement and the Convertible Notes also contain representations and warranties, covenants and events of default customary for
financings of this type, including, among other things, limitations on certain other indebtedness, dividends and distributions, sales and
transfers of assets and transactions with affiliates and rights to participate in our future financings.
The Initial Convertible Note and Additional Convertible Note mature on June 30, 2016 and August 11, 2016, respectively, (subject to
extension as provided in the Convertible Notes) and accrue interest at an annual rate of 6.0%. On October 1, 2014, the Convertible Notes
became convertible at any time, in whole or in part, at Magna’s option, into shares of our common stock at a conversion price equal to the
lesser of (i) $3.75 per share and (ii) a price equal to 80% of the lowest daily volume weighted average price, or VWAP, of our common
stock during the five trading days prior to conversion.
As of February 28, 2015, Magna had converted a total of $1.7 million of the principal amount of the Convertible Notes into 2,419,982
shares of common stock.
In addition, we issued to Magna a warrant, or the Magna Warrant, to purchase up to 568,889 shares of our common stock at an exercise
price of $4.65 per share.
At no time will Magna be entitled to convert any portion of the Convertible Notes or exercise any portion of the Magna Warrant to the
extent that after such conversion or exercise, Magna (together with its affiliates) would beneficially own more than 4.99% of the
outstanding shares of our common stock as of such date, or the Maximum Percentage. The Maximum Percentage may be raised to any
other percentage not in excess of 9.99% at the option of Magna upon at least 61 days’ prior notice to us, or lowered to any other percentage,
at the option of Magna, at any time. Pursuant to the terms of the Securities Purchase Agreement and as required by the rules of The
NASDAQ Stock Market, until stockholder approval is obtained, we may not issue any shares of common stock upon conversion of the
Convertible Notes or upon exercise of the Magna Warrant in an aggregate amount that exceeds 19.99% of the issued and outstanding shares
of our common Stock on June 30, 2014, or 2,481,000 shares in total. Accordingly, we are required to take all action necessary to obtain
stockholder approval at each meeting of stockholders until such approval is obtained.
We also issued 50,853 shares of our common stock to Magna which represents 4% of the total purchase price for the Convertible Notes
under the Securities Purchase Agreement calculated using a per share price of $4.7195, the VWAP of the Common Stock per share on
June 27, 2014, in connection with our execution of the Securities Purchase Agreement.
We may from time-to-time seek additional financing through the issuance of common stock and/or debt, to satisfy our debt obligations,
meet our working capital requirements, make continued investment in research and development and make capital expenditures needed for
us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. It is also
possible that we may allocate significant amounts of capital toward solutions or technologies for which market demand is lower than
anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us
when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to
respond to business challenges could be significantly limited, or we may even have to scale back our operations. If we raise additional
funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
55
Going Concern
Our ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm our business, financial
condition and results of operations. These uncertainties create substantial doubt about our ability to continue as a going concern. Our
independent registered public accounting firm included an explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern in their report on our annual financial statements for the fiscal year ended December 31, 2014. The financial
information throughout this Annual Report have been prepared on a basis which assumes that we will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial
information and statements do not include any adjustments that may result from the outcome of this uncertainty.
Cash Flows
The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities (in thousands):
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Net cash provided
Year Ended December 31,
2014
(14,522 ) $
(1,738 )
32,227
15,967 $
2013
(9,949 )
253
9,234
(462 )
$
$
Net Cash Used in Operating Activities
Net cash used in operating activities was $14.5 million in 2014, compared to $9.9 million used in 2013, an increase of $4.6 million, or 46%.
The increase in cash used in operating activities during 2014 was primarily attributable to a $1.7 million increase in the change in inventory
as we built up our inventory, $3.4 million reduction in accounts payable and accrued liabilities and an overall increase in operational
expenditures for sales and marketing and general and administrative activities as we continue to focus our efforts on growth. These amounts
were partially offset by a $2.8 million decrease in other current assets primarily due to a reduction of deferred offering costs.
Net Cash Provided by Investing Activities
Net cash used in investing activities was $1.7 million in 2014, compared to $0.3 million provided by investing activities during the same
period in 2013, a decrease of $2.0 million. The decrease in net cash from investing activities during 2014 was primarily attributable to
purchases of property and equipment of $2.2 million and a decrease in restricted cash of $0.4 million as a result of our cash restrictions
being released. No proceeds were received from maturities of marketable securities during 2014 as compared to the same period in 2013
when we received proceeds of $2.7 million.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $32.2 million in 2014, compared to $9.2 million provided in 2013, an increase of $23.0
million, or 249%. This increase in net cash provided by financing activities in 2014 was primarily attributable to receiving $15.4 million in
net proceeds from the issuance of common stock in our IPO, receiving $11.3 million in net proceeds from the issuance of units in our
secondary offering, and receiving net proceeds from the issuance of long-term debt of $25.3 million, which were offset by long-term debt
payments and debt extinguishment costs of $19.8 million. In 2013, we received $8.9 million proceeds from the issuance of convertible
preferred stock and a $2.9 million in proceeds from the issuance of common stock in connection with the exercise of common stock
warrants and options, which were partially offset by net payments of $2.6 million on our GE Secured Lending Facility.
Indebtedness
In December 2012, we entered into a senior secured credit facility with GE Capital, which consisted of an $18.0 million term loan and up to
$3.5 million revolving credit facility. We pledged all of our assets as collateral for the loans. The revolving line of credit was secured by
our accounts receivable, based on certain defined criteria. This credit facility provided by GE Capital was paid in full on June 30, 2014 and
there is no longer any outstanding obligation on this indebtedness.
56
On June 30, 2014, we entered into the Hercules Term Loan, which provides for a $20 million term loan with a maturity date of January 1,
2018 and is secured by substantially all of our assets. The proceeds of the loan were used to repay in full and terminate our prior credit
facility with GE Capital and the remainder of the proceeds is being used for general corporate purposes.
Also, on June 30, 2014, we entered into a Securities Purchase Agreement with MG Partners II Ltd., or Magna. Pursuant to the terms of the
Securities Purchase Agreement, we sold to Magna an initial unsecured senior convertible note with an original principal amount of $2.9
million, or the Initial Convertible Note, for a purchase price of $2.5 million. Additionally, on August 11, 2014, Magna purchased an
additional unsecured senior convertible note with an original principal amount of $3.5 million, or the Additional Convertible Note, for a
fixed purchase price of $3.5 million. The Initial Convertible Note and Additional Convertible Note are collectively referred to as the
Convertible Notes.
With respect to the Initial Convertible Note, a total of $400,000 of the outstanding principal amount (together with any accrued and unpaid
interest with respect to such portion of the principal amount) was automatically extinguished when we filed a registration statement
registering the underlying shares and that registration statement was declared effective by the SEC on August 6, 2014. The Securities
Purchase Agreement and the Convertible Notes also contain representations and warranties, covenants and events of default customary for
financings of this type, including, among other things, limitations on certain other indebtedness, dividends and distributions, sales and
transfers of assets and transactions with affiliates and rights to participate in our future financings. Pursuant to the terms of the Securities
Purchase Agreement and as required by the rules of The NASDAQ Stock Market, until stockholder approval is obtained, we may not issue
any shares of common stock upon conversion of the Convertible Notes or upon exercise of the Magna Warrant in an aggregate amount that
exceeds 19.99% of the issued and outstanding shares of our common Stock on June 30, 2014, or 2,481,000 shares in total. Accordingly, we
are required to take all action necessary to obtain stockholder approval at each meeting of stockholders until such approval is obtained.
The Initial Convertible Note and Additional Convertible Note mature on June 30, 2016 and August 11, 2016, respectively, (subject to
extension as provided in the Convertible Notes) and accrue interest at an annual rate of 6.0%. On October 1, 2014, the Convertible Notes
became convertible at any time, in whole or in part, at Magna’s option, into shares of common stock at a conversion price equal to the
lesser of (i) $3.75 per share and (ii) a price equal to 80% of the lowest daily volume weighted average price, or VWAP, of our common
stock during the five trading days prior to conversion.
As of February 28, 2015, Magna had converted a total of $1.7 million of the principal amount of the Convertible Notes into 2,419,982
shares of common stock.
See above in “Liquidity and Capital Resources” for additional information about the Hercules Term Loan and the Convertible Notes.
Contractual Obligations and Commitments
The following table summarizes our outstanding contractual obligations as of December 31, 2014 (in thousands):
Long-term debt (1)
Operating leases
Total contractual obligations
Total
Less Than
1 Year
1-3 Years
4-5 Years
After
5 Years
$
24,500 $
4,673
$ 29,173 $
2,949 $
883
3,832 $
21,551 $
2,810
24,361 $
- $
-
-
980
980 $ -
(1) Does not include the $1.2 million final payment fee we must pay upon prepayment in full or scheduled maturity of the term loan or
monthly interest payments.
The information above reflects only payment obligations that are fixed and determinable. Our commitments for long-term debt relate to our
term loan with Hercules and convertible notes with Magna and our commitments for operating leases relate to our operating lease for our
corporate headquarters and manufacturing facility in Salt Lake City, Utah and other equipment leases. The above table does not include any
of the contractual obligations with respect to royalties payable upon sales of certain of our products as none of our arrangements contain
minimum royalty payments. We also do not have contractually minimum purchase commitments for the supply of any of our raw
materials, products or instruments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
57
Related-Party Transactions
For a description of our related-party transactions, see “Certain Relationships and Related Party Transactions.”
Seasonality and Backlog
Our business is generally not seasonal in nature. Our sales generally consist of products that are in stock with us or maintained at hospitals
or with our sales distributors. Accordingly, we do not have a backlog of sales orders.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported
amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements,
and the reported amounts of product revenues and expenses during the reporting periods. Certain of our more critical accounting policies
require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates.
By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments,
including those related to inventories, recoverability of long-lived assets and the fair value of our common stock. We use historical
experience and other assumptions as the basis for our judgments and making these estimates. Because future events and their effects cannot
be determined with precision, actual results could differ significantly from these estimates. Any changes in those estimates will be reflected
in our consolidated financial statements as they occur. As an “emerging growth company,” we have elected to delay the adoption of new or
revised accounting standards until those standards would otherwise apply to private companies. As a result, our financial statements may
not be comparable to those of other public companies. While our significant accounting policies are more fully described in the footnotes to
our consolidated financial statements included elsewhere in this Annual Report, we believe that the following accounting policies and
estimates are most critical to a full understanding and evaluation of our reported financial results. The critical accounting policies addressed
below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We derive our product revenue primarily from the sale of spinal fusion devices and related products used in the treatment of spine
disorders. Our product revenue is generated from sales to two types of customers: (1) surgeons and hospitals; and (2) stocking distributors.
Most of our products are sold on a consignment basis through a network of independent sales distributors; however, we also sell our
products to independent stocking distributors. Product revenue is recognized when all four of the following criteria are met: (1) persuasive
evidence that an arrangement exists; (2) delivery of the products has occurred; (3) the selling price of the product is fixed or determinable;
and (4) collectability is reasonably assured. We generate the majority of our revenue from the sale of inventory that is consigned to
independent sales distributors that sell our products to surgeons and hospitals. For these products, we recognize revenue at the time we are
notified the product has been used or implanted and all other revenue recognition criteria have been met. For all other transactions, we
recognize revenue when title and risk of loss transfer to the stocking distributor, and all other revenue recognition criteria have been met.
We generally recognize revenue from sales to stocking distributors at the time the product is shipped to the distributor. Stocking
distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at time of shipment. Our
stocking distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. Our policy is to classify
shipping and handling costs billed to customers as an offset to total shipping expense in the statement of operations, primarily within sales
and marketing. In general, our customers do not have any rights of return or exchange.
Accounts Receivable and Allowance for Doubtful Accounts
The majority of our accounts receivable is composed of amounts due from hospitals or surgical centers. Accounts receivable are carried at
cost less an allowance for doubtful accounts. On a regular basis, we evaluate accounts receivable and estimate an allowance for doubtful
accounts, as needed, based on various factors such as customers’ current credit conditions, length of time past due, and the general economy
as a whole. Receivables are written off against the allowance when they are deemed uncollectible.
Inventories
Inventories are stated at the lower of cost or market, with cost for manufactured inventory determined under the standard cost method
which approximates the first-in first-out method. Manufactured inventory consists of raw material, direct labor and manufacturing overhead
cost components. Inventories purchased from third-party manufacturers are stated at the lower of cost or market using the first-in, first out
method. We review the carrying value of inventory on a periodic basis for excess or obsolete items and record an expense for the identified
items as necessary. We have made adjustments to, and it is reasonably possible that we may be required to
58
make further adjustments to, the carrying value of inventory in future periods. We hold some consigned inventory at distributors and other
customer locations where revenue recognition criteria have not yet been met.
Long-Lived Assets, Indefinite-Lived Intangibles and Goodwill
Periodically we assess potential impairment of our long-lived assets, which include property, equipment, and acquired intangible assets. We
perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance
relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or our overall
business strategy, and significant industry or economic trends. When we determine that the carrying value of a long-lived asset may not be
recoverable based upon the existence of one or more of the above indicators, we determine the recoverability by comparing the carrying
amount of the asset to net future undiscounted cash flows that the asset is expected to generate and recognize an impairment charge equal to
the amount by which the carrying amount exceeds the fair market value of the asset. We amortize intangible assets on a straight-line basis
over their estimated useful lives.
For indefinite lived intangible assets that are not subject to amortization, the impairment test consists of a comparison of the fair value of an
intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess.
Our long-lived assets include surgical instruments used by spine surgeons during surgical procedures to facilitate the implantation of our
products. There are no contractual terms with respect to the usage of our instruments by our customers. Surgeons are under no contractual
commitment to use our instruments. We maintain ownership of these instruments and, when requested, we allow the surgeons to use the
instruments to facilitate implantation of our related products. We do not currently charge for the use of our instruments and there are no
minimum purchase commitments of our products. As our surgical instrumentation is used numerous times over several years, often by
many different customers, instruments are capitalized as property and equipment once they have been placed in service. Once placed in
service, instruments are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method based on
average estimated useful lives. Estimated useful lives of surgical instruments are three years and are determined based on a variety of
factors including reference to associated product life cycles. As instruments are used as tools to assist surgeons, depreciation of instruments
is recognized as a sales and marketing expense.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets
may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the assets are
less than the assets’ carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its
fair value.
We test goodwill for impairment annually as of December 31, or whenever events or changes in circumstances indicate that goodwill may
be impaired. For goodwill impairment testing purposes, we consider the value of our equity, including the value of our convertible
preferred stock, in the total carrying value of our single reporting unit. We perform a first step analysis by comparing the carrying amount
of net assets to the fair value of our single reporting unit. If the fair value is determined to be less than the carrying amount, a second step
analysis is performed to compute the amount of impairment as the difference between the implied estimated fair value of goodwill and the
carrying amount.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial
statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide for tax contingencies whenever it is
deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws.
Tax contingencies are based upon their technical merits relative tax law and the specific facts and circumstances as of each reporting
period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
We recognize uncertain income tax positions taken on income tax returns at the largest amount that is more-likely than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of
being sustained.
59
Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of our income
tax provision. For the years ended December 31, 2014 and 2013, we did not record any material interest income, interest expense or
penalties related to uncertain tax positions or the settlement of audits for prior periods.
Stock-Based Compensation Expense
Common Stock Valuation
Prior to our IPO in February 2014, our board of directors had determined the fair value of the common stock with assistance from
management and based upon information available at the time of grant. The valuation of our common stock required us to make complex
and subjective judgments. We considered a combination of valuation methodologies, including income, market and transaction approaches.
The most significant factors considered by our board of directors when determining the fair value of our common stock were as follows:
•
•
•
•
•
•
•
•
•
•
•
external market and economic conditions affecting the medical device industry;
prices at which we sold shares of our convertible preferred stock to third-party investors;
the superior rights and preferences of securities senior to our common stock, such as our preferred stock, at the time of each
grant;
our need for future financing to fund commercial operations;
the lack of marketability of our common stock;
third-party valuations of our common stock;
our historical operating and financial performance;
the status of our research and development efforts;
the status of our new product releases to the spine market;
the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company; and
estimates and analysis provided by management.
Prior to our IPO, we had regularly obtained third-party valuations to assist our board of directors in determining the fair value of our
common stock for each stock option grant and other stock-based awards, on an annual basis since 2007. Since our IPO, we have used the
price of our common stock as quoted on NASDAQ.
Significant Factors and Assumptions Used in Determining Fair Value of Common Stock
The $5.75 issuance price of the common stock sold in our IPO in February 2014 was used as the estimated fair value of the shares of our
common stock as of and for the quarter ended December 31, 2013 due to the close proximity to the valuation dates and there were no
significant changes that would indicate a decrease or increase in the stock price. The price of $17.53 was used as the estimated fair value of
our common shares for estimated fair value calculations done as of and prior to September 30, 2013. The price of $17.53 was based on a
third party valuation performed in September 2012. The valuation technique used in the third party valuation was a hybrid of the
discounted cash flow method and the guideline public company method. The significant assumptions used in determining the $17.53
estimated fair value of our common shares using a hybrid of the discounted cash flow method and the guideline public company
methodology were as follows:
Weighted-average cost of capital (WACC)
Revenue growth rate (range)
Compounded average revenue growth rate
EBITDA margin (range)
17%
32.5% to 5%
17.7%
(23.8)% to 32.7%
Stock-Based Compensation
We apply the fair value recognition provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or
ASC, Topic 718, Compensation-Stock Compensation, or ASC 718. Determining the amount of stock-based compensation to be recorded
requires us to develop estimates of the fair value of stock options and other equity awards as of their grant date. Stock-based compensation
expense is recognized ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair
value of stock-based awards requires that we make highly subjective assumptions. Use of this valuation methodology requires that we
make assumptions as to the volatility of our common stock, the expected term of
60
our stock options, the risk free rate of return for a period that approximates the expected term of our stock options and our expected
dividend yield. Because we were a privately-held company with no trading history prior to February 2014 and have limited stock history
since February 2014, we utilize the historical stock price volatility from a representative group of public companies to estimate expected
stock price volatility. We selected companies from the medical device industry, specifically those who are focused on the design,
development and commercialization of products for the treatment of spine disorders, and who have similar characteristics to us, such as
stage of life cycle and size. We intend to continue to utilize the historical volatility of the same or similar public companies to estimate
expected volatility until a sufficient amount of historical information regarding the price of our publically traded stock becomes available.
We use the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-based
Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide
a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero
because we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free rate of return used for each
grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. No options were
granted to employees during the year ended December 31, 2013. The following assumptions were used in the calculation to estimate the
fair value of options granted to employees using the Black-Scholes-Merton valuation model during the year ended December 31, 2014:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted-average expected volatility
1.85 %
6.30
0 %
47 %
The following assumptions were used in the Black-Scholes-Merton valuation model related to non-employee stock options granted during
the years ended December 31, 2014 and 2013:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted-average expected volatility
December 31,
2014
December 31,
2013
2.52 %
9.7
0 %
44 %
2.74 %
10.0
0 %
52 %
The estimated fair value of stock-based awards for employee and non-employee director services are expensed over the requisite service
period. Option awards issued to non-employees, excluding non-employee directors, are recorded at their fair value as determined in
accordance with authoritative guidance, are periodically revalued as the options vest and are recognized as expense over the related service
period. As a result, the charge to operations for non-employee awards with vesting conditions is affected each reporting period by changes
in the fair value of our common stock.
We are required to estimate the level of forfeitures expected to occur and record stock-based compensation expense only for those awards
that we ultimately expect will vest. We estimate our forfeiture rate based on the type of award, employee class and historical experience.
Derivative Liabilities
Derivative liabilities includes the fair value of instruments such as common stock warrants, preferred stock warrants and convertible
features of notes, that are initially recorded at fair value and are required to be re-measured to fair value at each reporting period under
provisions of ASC 480, Distinguishing Liabilities from Equity, or ASC 815, Derivatives and Hedging. The change in fair value of the
instruments is recognized as a component of other income (expense), net in our statement of comprehensive loss until the instruments settle
or expire. We estimate the fair value of these instruments using the Black-Scholes-Merton valuation model. The significant assumptions
used in estimating the fair value include the exercise price, volatility of the stock underlying the instrument, risk-free interest rate, estimated
fair value of the stock underlying the instrument and the estimated life of the instrument.
The effect of changes to these significant assumptions on the estimated liability for these instruments is as follows:
Fair value of underlying stock increases
Risk free interest increases
Expected average life increases
Expected dividend yield increases
Expected volatility increases
Warrant liability increases
Warrant liability decreases
Warrant liability increases
Warrant liability decreases
Warrant liability increases
61
Upon consummation of our IPO in February 2014, all classes of our convertible preferred stock were converted into common stock. Upon
conversion of the underlying classes of convertible preferred stock, pursuant to the terms of the preferred stock warrants, the remaining
warrants to purchase our convertible preferred stock were converted into common stock warrants and classified as a component of equity
and are no longer subject to re-measurement.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue
from Contracts with Customers. The core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transfer of
promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for delivering those goods and services. This model involves a five-step process that includes identifying the contract with the customer,
identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the
performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. The guidance
in the ASU supersedes existing revenue recognition guidance and is effective for annual reporting periods beginning after December 15,
2016 with early application not permitted. The ASU allows two methods of adoption; a full retrospective approach where three years of
financial information are presented in accordance with the new standard, and a modified retrospective approach where the ASU is applied
to the most current period presented in the Consolidated Financial Statements. We are currently evaluating the impact of adopting the new
revenue standard on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going
Concern, which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The
new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern. The
update is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The
impact on our financial statements of adopting ASU 2014-15 is currently being assessed by management.
Jumpstart Our Business Startups Act of 2012
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was enacted. Section 107 of the JOBS Act, provides that
an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of
1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the
adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such
adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the
relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our
financial statements may not be comparable to the financial statements of other public companies. We may take advantage of these
reporting exemptions until we are no longer an “emerging growth company.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS
Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these
exemptions, including without limitation, (1) providing an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying with any requirement that may be adopted by the Public
Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional
information about the audit and the consolidated financial statements, known as the auditor discussion and analysis. We may be able to
remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues
of $1 billion or more, (b) the last day of our fiscal year following the fifth anniversary of the date of our IPO, (c) the date on which we have
issued more than $1 billion in non-convertible debt during the previous three years or (d) the date on which we are deemed to be a large
accelerated filer under the rules of the SEC. Additionally, we are also currently a “smaller reporting company” as defined in the Securities
Exchange Act of 1934, and in the event that we are still considered a smaller reporting company at such time as we cease being an
emerging growth company, we will be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent
registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
62
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The consolidated financial statements of Amedica appear at the end of this Annual Report beginning with the index to Financial Statements
on page F-1 (see Part IV, Item 15 “Financial Statements”), and are incorporated herein.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports filed or submitted under
the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and
forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in
our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods
required by the Commission’s rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer
(principal executive officer) and Vice President Finance (principal accounting officer), of the effectiveness of the design and operation of
these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of December 31, 2014. Based on this
evaluation, the Chief Executive Officer (principal executive officer) and Vice President Finance (principal accounting officer) concluded
that our disclosure controls and procedures were effective as of December 31, 2014, the end of the period covered by this Annual Report on
Form 10-K.
(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making our
assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
assessment, management has concluded that, as of December 31, 2014, our internal control over financial reporting was effective.
Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above.
Management does not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not
absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
63
(c) Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2014, we implemented the following controls that management believes are reasonably likely to
materially affect our internal control over financial reporting and that are intended to help address the material weaknesses identified by our
previous auditors:
• We implemented a formal process to account for income taxes and the effect on the income tax provision whereby an
experienced tax consultant prepares the tax provision after a detailed review of the trial balance with management and the tax
provision is then reviewed by management to help ensure the tax treatment of transactions are recorded correctly.
ITEM 9B. OTHER INFORMATION
None.
64
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Section 16(a) compliance, the Audit Committee, our code of ethics and background of our directors will be presented
in our Proxy Statement for the 2015 annual meeting of Shareholders and is incorporated herein by reference. The information required
pursuant to General Instructions G(3) of Form 10-K on our executive officers is presented under Item 1 of this report on Form 10-K.
ITEM 11.
EXECUTIVE COMPENSATION
Information required by this Item 11 on executive compensation will be presented in our 2015 Proxy Statement and is incorporated herein
by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by this Item 12 on security ownership of certain beneficial owners and managements will be presented in our 2015
Proxy Statement and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item 13 regarding certain related transactions and director independence will be presented in our 2015 Proxy
Statement and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item 14 will be presented in our 2015 Proxy Statement and is incorporated herein by reference.
65
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the Index to Consolidated Financial Statements beginning on Page F-1 hereof.
PART IV
(1) Financial Statements. The following consolidated financial statements and the notes thereto, and the Report of Independent Registered
Public Accounting Firms are incorporated by reference as provided in Item 8 of this report:
· Report of Independent Registered Public Accounting Firm
· Consolidated Balance Sheets at December 31, 2014 and 2013
· Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2014 and 2013
· Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Period from
December 31, 2012 through December 31, 2014
· Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
· Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
(2) Consolidated Financial Statement Schedules
Consolidated Financial Statement Schedules have been omitted because they are either not required or not applicable, or because the
information required to be presented is included in the consolidated financial statements or the notes thereto included in this Annual Report.
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report and such Exhibit
Index is incorporated by reference.
Exhibit
Number
3.1
Restated Certificate of Incorporation of the Registrant
Exhibit Description
3.2
Restated Bylaws of the Registrant
Filed with this
Report
Incorporated by
Reference herein from
Form or Schedule
Filing Date
SEC File/Reg.
Number
Form 8-K
(Exhibit 3.1)
Form 8-K
(Exhibit 3.1)
2/20/14
001-33624
2/20/14
001-33624
4.1
Form of Common Stock Certificate of the Registrant
Amendment No. 3
4.2
Warrant Agreement by and between the Registrant and
Creation Capital LLC, dated as of February 24, 2006
4.3
Series D Warrant Agreement by and between the
Registrant and Creation Capital LLC, dated as of April 27,
2007
4.4
Common Stock Warrant Agreement by and between the
Registrant and Creation Capital LLC, dated as of April 30,
2008
4.5
Series E Warrant Agreement by and between the
Registrant and Creation Capital LLC, dated as of
September 14, 2010
to Form S-1
(Exhibit 4.1)
Form S-1
(Exhibit 4.5)
Form S-1
(Exhibit 4.6)
Form S-1
(Exhibit 4.7)
Form S-1
(Exhibit 4.8)
1/29/14
333-192232
11/8/13
333-192232
11/8/13
333-192232
11/8/13
333-192232
11/8/13
333-192232
4.6
Form of Warrant to Purchase Shares of Common Stock of
Amendment No. 3
the Registrant, issued on May 9, 2011
to Form S-1
(Exhibit 4.9)
1/29/14
333-192232
66
Exhibit
Number
4.7
Exhibit Description
Warrant to Purchase 156,978 Shares of Series F
Convertible Preferred Stock by and between the Registrant
and GE Capital Equity Investments, Inc., dated as of
December 17, 2012
4.8
Warrant to Purchase 113,022 Shares of Series F
Convertible Preferred Stock by and between the Registrant
and Zions First National Bank, dated as of December 17,
2012
Filed with this
Report
Incorporated by
Reference herein from
Form or Schedule
Filing Date
SEC File/Reg.
Number
Form S-1
(Exhibit 4.10)
Form S-1
(Exhibit 4.11)
11/8/13
333-192232
11/8/13
333-192232
4.9
Form of Warrant to Purchase Shares of Common Stock of
the Registrant, issued on March 4, 2011 and May 9, 2011
Form S-1
(Exhibit 4.12)
11/8/13
333-192232
4.10
Form of Amendment to Warrant to Purchase Shares of
Common Stock of the Registrant, dated as of
December 18, 2012
4.11
Form of Amendment No. 2 to Warrant to Purchase Shares
of Common Stock of the Registrant, dated as of
February 1, 2013
4.12
4.13
Warrant to Purchase Shares of Common Stock of the
Registrant by and between the Registrant and the
University of Utah Research Foundation, dated as of
February 17, 2010
Form of Warrant to Purchase Shares of Common Stock of
the Registrant, issued on April 18, 2011, November 15,
2011, November 16, 2011, February 22, 2012,
February 29, 2012 and March 7, 2012
Form S-1
(Exhibit 4.13)
Form S-1
(Exhibit 4.14)
Form S-1
(Exhibit 4.15)
Form S-1
(Exhibit 4.16)
4.14
Form of Warrant to Purchase Shares of Common Stock of
Amendment No. 2
the Registrant, issued on August 30, 2013 and
September 20, 2013, as amended
4.15
Form of Amendment to Warrant to Purchase Common
Stock of the Registrant, dated as of December 23, 2013
4.16
Warrant to Purchase Shares of Common Stock of the
Registrant by and between the Registrant and Zions First
National Bank, dated as of March 17, 2011
4.17
Series E Warrant Agreement by and between the
Registrant and Zions First National Bank, dated as of
April 7, 2010
4.18
Form of Warrant to Purchase Shares of Common Stock of
the Registrant, issued to TGP Securities, Inc. on
August 30, 2013 and September 20, 2013, as amended
to Form S-1
(Exhibit 4.17)
Amendment No. 3
to Form S-1
(Exhibit 4.17.1)
Form S-1
(Exhibit 4.18)
Amendment No. 2
to Form S-1
(Exhibit 4.19)
Amendment No. 2
to Form S-1
(Exhibit 4.20)
4.19
Form of Amendment to Warrant to Purchase Shares of
Amendment No. 3
Common Stock of the Registrant, issued to TGP
Securities, Inc., dated as of December 23, 2013
4.20
Form of Magna Senior Convertible Note
4.21
Magna Warrant to Purchase Common Stock
to Form S-1
(Exhibit 4.21)
Form 8-K
(Exhibit 4.1)
Form 8-K
(Exhibit 4.2)
67
11/8/13
333-192232
11/8/13
333-192232
11/8/13
333-192232
11/8/13
333-192232
12/20/13
333-192232
1/29/14
333-192232
11/8/13
333-192232
12/20/13
333-192232
12/20/13
333-192232
1/29/14
333-192232
7/1/2014
001-33624
7/1/2014
001-33624
Exhibit
Number
4.22
Hercules Warrant to Purchase Common Stock
Exhibit Description
Filed with this
Report
Incorporated by
Reference herein from
Form or Schedule
Filing Date
SEC File/Reg.
Number
Form 8-K
(Exhibit 4.3)
7/1/2014
001-33624
4.23
Form of Warrant to be Issued to Investors in the Offering
Amendment No. 3
4.24
Form of Unit Purchase Option to be Issued to the
Underwriters in the Offering
to Form S-1
(Exhibit 4.24)
Amendment No. 3
to Form S-1
(Exhibit 4.25)
11/19/14
333-199753
11/19/14
333-199753
4.25
Form of Warrant Agent Agreement by and between the
Amendment No. 3
Registrant and American Stock Transfer and Trust
Company
4.26
Warrant to purchase shares of common stock of the
Registrant by and between the Registrant and Hampshire
MedTech Partner II, L.P., dated as of November 6, 2014
4.27
Form of Warrant to Purchase Shares of Common Stock of
the Registrant issued on September 17, 2014.
4.28
Form of Warrant to Purchase Shares of Common Stock of
the Registrant issued on November 12, 2014.
X
X
10.1
Securities Purchase Agreement by and between the
Registrant and MG Partners II Ltd, dated as of June 30,
2014
10.2
Registration Rights Agreement by and between the
Registrant and MG Partners II Ltd., dated as of June 30,
2014
10.3
Loan and Security Agreement by and among the
Registrant, its subsidiary, Hercules Technology Growth
Capital, Inc., and Hercules Technology III, L.P., dated as
of June 30, 2014
10.4
Joint Development and License Agreement by and
between the Registrant and Orthopaedic Synergy, Inc.,
dated as of February 8, 2010**
10.5
10.6
10.7
Distribution Agreement by and between the Registrant and
Orthopaedic Synergy, Inc., dated as of February 22, 2010,
and First Amendment and Addendum thereto, dated as of
November 1, 2012**
Centrepointe Business Park Lease Agreement Net by and
between the Registrant and Centrepointe Properties, LLC,
dated as of April 21, 2009
First Addendum to Centrepointe Business Park Lease
Agreement Net by and between the Registrant and
Centrepointe Properties, LLC, dated as of January 31,
2012
10.8
Form of Severance and Change of Control Agreement*
68
to Form S-1
(Exhibit 4.26)
Form 8-K
(Exhibit 4.1)
11/19/14
333-199753
11/7/14
001-33624
Form 8-K
(Exhibit 10.1)
Form 8-K
(Exhibit 10.2)
Form 8-K
(Exhibit 10.3)
Amendment No. 3
to Form S-1
(Exhibit 10.7)
Amendment No. 3
to Form S-1
(Exhibit 10.8)
Form S-1
(Exhibit 10.10)
Form S-1
(Exhibit 10.11)
Amendment No. 2
to Form S-1
(Exhibit 10.12)
7/1/2014
001-33624
7/1/2014
001-33624
7/1/2014
001-33624
1/29/14
333-192232
1/29/14
333-192232
11/8/13
333-192232
11/8/13
333-192232
12/20/13
333-192232
Exhibit
Number
10.9
Exhibit Description
Form of Indemnification Agreement by and between the
Registrant and its officers and directors 8
Filed with this
Report
Incorporated by
Reference herein from
Form or Schedule
Amendment No. 2
to Form S-1
(Exhibit 10.14)
Filing Date
SEC File/Reg.
Number
12/20/13
333-192232
10.10
Amedica Corporation Amended and Restated 2012 Equity
Amendment No. 4
Incentive Plan*
to Form S-1
(Exhibit 10.15)
2/12/14
333-192232
10.11
Form of 2012 Stock Option Grant Notice and Stock Option
Amendment No. 4
Agreement*
10.12
Form of 2012 Restricted Stock Award and Restricted
Stock Unit Agreement*
to Form S-1
(Exhibit 10.16)
Amendment No. 4
to Form S-1
(Exhibit 10.17)
2/12/14
333-192232
2/12/14
333-192232
10.13
Amedica Corporation 2003 Stock Option Plan*
Form S-1
(Exhibit 10.18)
11/8/13
333-192232
10.14
Form of 2003 Non-Qualified Stock Option Agreement and
Notice of Exercise of Non-Qualified Stock Option
thereunder*
Form S-1
(Exhibit 10.19)
11/8/13
333-192232
10.15
Form of 2003 Incentive Stock Option Agreement and
Form S-1
Notice of Exercise of Incentive Stock Option thereunder*
(Exhibit 10.20)
11/8/13
333-192232
10.16
Form of Executive Retention Program Agreement*
Form 8-K
(Exhibit 10.1)
8/14/14
001-33624
21.1
List of Subsidiaries of the Registrant
Form S-1
(Exhibit 21.1)
11/8/13
333-192232
23.1
Consent of Independent Registered Public Accounting
Firm
23.2
Consent of Independent Registered Public Accounting
31.1
31.2
32
*
**
Firm
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes
Oxley
Act of 2002
Management contract or compensatory plan or
arrangement.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
and then filed separately with the SEC.
X
X
X
X
X
69
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 24, 2015
Date: March 24, 2015
AMEDICA CORPORATION
/S/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
(Principal Executive Officer)
/S/ Ty A. Lombardi
Ty A. Lombardi
Vice President Finance
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Date: March 24, 2015
Date: March 24, 2015
Date: March 24, 2015
Date: March 24, 2015
/S/ B. Sonny Bal
B. Sonny Bal, M.D., Director
/S/ David W. Truetzel
David W. Truetzel, Director
/S/ Jeffrey S. White
Jeffrey S. White, Director
/S/ Eric A. Stookey
Eric A. Stookey, Director
70
AMEDICA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2014 and 2013
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Amedica Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Amedica Corporation as of December 31, 2014 and the related
consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash
flows for the year ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Amedica Corporation at December 31, 2014, and the results of its operations and its cash flows for the year ended December 31, 2014, in
conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has recurring losses from operations and negative operating cash flows and
needs to obtain additional financing to be compliant with debt covenants through 2015. These issues raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mantyla McReynolds, LLC
Mantyla McReynolds, LLC
Salt Lake City, Utah
March 24, 2015
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Amedica Corporation
We have audited the accompanying consolidated balance sheets of Amedica Corporation as of December 31, 2013, and the related
consolidated statements of operations and comprehensive loss, statements of convertible preferred stock and stockholders’ deficit, and cash
flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Amedica Corporation at December 31, 2013, and the consolidated results of its operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has recurring losses from operations and needs to obtain additional financing
which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 31, 2014
F-3
Amedica Corporation
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
2014
December 31,
2013
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Trade accounts receivable, net of allowance of $54 and $49, respectively
Prepaid expenses and other current assets
Deferred offering costs
Inventories, net
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other long-term assets
Total assets
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long-term debt
Total current liabilities
Deferred rent
Long-term debt
Other long-term liabilities
Derivative liabilities
$
$
$
Commitments and contingencies
Convertible preferred stock, $0.01 par value, 130,000,000 shares authorized; 0 and
80,910,394 shares issued and outstanding at December 31, 2014 and December 31, 2013,
respectively; aggregate liquidation value of $0 and $149,692 at December 31, 2014 and
December 31, 2013, respectively
Stockholders’ equity (deficit):
Common stock, $0.01 par value; 250,000,000 shares authorized; 26,353,666 and 597,675
shares issued and outstanding at December 31, 2014 and December 31,
2013, respectively
Additional paid-in capital / (capital deficiency)
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
$
See accompanying notes.
F-4
18,247 $
-
2,513
1,247
-
11,675
33,682
3,515
4,188
6,163
35
47,583 $
778 $
3,146
19,070
22,994
517
3,061
134
13,970
2,279
392
2,817
1,575
2,763
10,084
19,910
3,531
4,688
6,163
35
34,327
3,377
3,711
17,925
25,013
575
-
134
210
-
161,456
264
179,148
(172,505 )
6,907
47,583 $
6
(13,144 )
(139,923 )
(153,061 )
34,327
Amedica Corporation
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
Product revenue
Costs of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Loss on extinguishment of debt
Change in fair value of derivative liabilities
Offering costs
Other expense
Total other income (expense)
Net loss before income taxes
Provision for income taxes
Net Loss
Other comprehensive loss, net of tax:
Unrealized loss on marketable securities
Total comprehensive loss
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
See accompanying notes.
F-5
$
$
$
Year Ended December 31,
2014
2013
22,765 $
7,910
14,855
6,742
13,588
18,692
39,022
(24,167 )
12
(3,650 )
(2,194 )
(251 )
(2,026 )
(306 )
(8,415 )
(32,582 )
-
(32,582 )
-
(32,582 ) $
22,314
7,045
15,269
3,461
5,759
16,384
25,604
(10,335 )
16
(1,851 )
-
3,970
-
(86 )
2,049
(8,286 )
-
(8,286 )
(2 )
(8,288 )
(2.66 ) $
(15.52 )
12,239,953
534,073
Amedica Corporation
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
Balance at December 31, 2012
76,170,394 $ 153,474
Convertible
Preferred Stock
Shares
Amount
Additional
Paid-In
Capital/
(Capital
Accumulated
Other
Comprehensive
Accumulated
Common Stock
Total
Stockholders’
Equity
(Deficit)
Shares
348,734 $
Amount
Deficiency)
3 $ (16,651 ) $
Income (Loss)
Deficit
2 $ (131,637 ) $ (148,283 )
Issuance of Series F preferred
stock for
$2.00 per share net of
issuance costs
Issuance of common stock in
connection
with exercise of warrants
Issuance of common stock upon
cashless
exercise of stock options
Issuance of common stock upon
exercise of
stock options
Stock-based compensation
Unrealized loss on marketable
securities
Net loss
Balance at December 31, 2013
4,740,000
7,982
–
–
–
–
–
–
–
–
178,516
2
2,876
–
–
2,878
–
–
27,624
–
–
–
–
–
–
–
–
–
29,680
13,121
1
–
76
555
–
–
–
–
77
555
–
–
–
–
80,910,394 $ 161,456
–
–
597,675 $
–
–
–
–
6 $ (13,144 ) $
–
(8,286 )
(2 )
(2 )
–
(8,286 )
- $ (139,923 ) $ (153,061 )
Issuance of common stock in
connection
with IPO, net of issuance costs
–
– 3,682,900
37
14,361
–
–
14,398
Preferred stock converted to
common upon
IPO
Issuance of units in connection
with
secondary offering, net of
issuance
costs
Issuance of common stock upon
exercise of
warrants
Issuance of common stock with
notes
payable
Issuance of common stock upon
conversion
of notes payable
Stock-based compensation
Net loss
Balance at December 31, 2014
See accompanying notes.
(80,910,394) (161,456) 8,029,779
80 162,352
–
–
162,432
–
– 11,441,646
115
1,932
–
–
2,047
–
–
9,328
–
24
–
–
24
–
–
50,853
1
219
–
–
220
–
–
–
– $
– 2,047,082
494,403
–
–
–
- 26,353,666 $
20
5
–
2,408
10,996
–
264 $ 179,148 $
–
–
–
–
–
(32,582 )
- $ (172,505 ) $
2,428
11,001
(32,582 )
6,907
F-6
Amedica Corporation
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December,
2014
2013
$
(32,582 ) $
Cash flow from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense
Amortization of intangible assets
Amortization of lease incentive for tenant improvements
Non cash interest expense
Loss on extinguishment of debt
Stock based compensation
Change in fair value of derivative liabilities
Loss on disposal of equipment
Provision for inventory reserve
Bad debt expense
Offering costs
Changes in operating assets and liabilities:
Trade accounts receivable
Prepaid expenses and other current assets
Inventories
Other long-term assets
Accounts payable and accrued liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchase of property and equipment
Proceeds from sale of property and equipment
Decrease (increase) in restricted cash
Purchases of marketable securities
Proceeds from maturities of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of units, net of issuance costs
Proceeds from issuance of stock in connection with exercise of warrants
Proceeds from exercise of stock options
Proceeds from issuance of preferred stock
Proceeds from line of credit
Payments on line of credit
Payments on long-term debt
Debt extinguishment payments
Proceeds from issuance of long-term debt
Payment of deferred financing costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Noncash investing and financing activities
Preferred stock converted into common stock
Reclassification of warrant liability
Stock and derivative liabilities issued with long-term debt
Debt converted to common stock
Derivative liabilities issued with preferred stock
Supplemental cash flow information
Cash paid for interest
See accompanying notes.
$
$
$
$
$
$
$
F-7
1,839
501
20
1,849
2,194
10,217
251
305
2,630
65
2,026
239
2,775
(3,438 )
-
(3,413 )
(14,522 )
(2,172 )
43
392
-
-
(1,737 )
15,369
11,320
-
-
-
-
-
(19,000 )
(810 )
26,800
(1,452 )
32,227
15,968
2,279
18,247 $
161,456 $
5 $
3,477 $
1,500 $
- $
(8,286 )
1,706
501
20
431
-
555
(3,970 )
81
1,293
5
-
1,194
(4,220 )
(2,551 )
3
3,289
(9,949 )
(2,332 )
37
(132 )
-
2,680
253
-
-
2,878
77
8,852
10,940
(13,513 )
-
-
-
-
9,234
(462 )
2,741
2,279
-
-
-
-
871
1,731 $
1,403
AMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2014 and 2013
1. Organization and Summary of Significant Accounting Policies
Amedica Corporation (“Amedica” or “the Company”) was incorporated in the state of Delaware on December 10, 1996. Amedica is a
commercial-stage biomaterial company focused on using its silicon nitride technology platform to develop, manufacture, and
commercialize a broad range of medical devices. The Company believes it is the first and only manufacturer to use silicon nitride in
medical applications. The Company acquired US Spine, Inc. (“US Spine”), a Delaware spinal products corporation with operations in
Florida, on September 20, 2010. The Company’s products are primarily sold in the U.S.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in
the United States (“U.S. GAAP”), and include all assets and liabilities of the Company and its wholly-owned subsidiary, US Spine. All
material intercompany transactions and balances have been eliminated.
Liquidity and Capital Resources
For the years ended December 31, 2014 and 2013, the Company incurred a net loss of $32.6 million and $8.3 million, respectively and
used cash in operations of $14.5 million and $9.9 million, respectively. The Company had an accumulated deficit of $172.5 million and
$139.9 million at December 31, 2014 and 2013, respectively. To date, the Company’s operations have been principally financed from
proceeds from the issuance of preferred and common stock, convertible debt and bank debt and, to a lesser extent, cash generated from
product sales. It is anticipated that the Company will continue to generate operating losses and use cash in operations through 2015.
As discussed further in Note 7, the Company refinanced its long-term debt and entered into a term loan with Hercules Technology Growth
Capital, Inc. (“Hercules Technology”), as administrative and collateral agent for the lenders thereunder and as lender, and Hercules
Technology III, LP, as lender (the “Hercules Term Loan”). The Hercules Term Loan has a liquidity covenant that requires the Company to
maintain a cash balance in excess of $9.0 million. At December 31, 2014, the Company’s cash balance was approximately $18.2 million.
The Company anticipates that it will need to obtain additional funding during the fourth quarter of 2015 to maintain compliance with the
liquidity covenants related to the Hercules Term Loan through 2015. Furthermore, if the Company is unable to access additional funds
prior to becoming non-compliant with the liquidity covenant, the entire remaining balance of the debt could become immediately due and
payable at the option of the lender. Although the Company will seek additional financing, additional funding may not be available to the
Company on acceptable terms, or at all. Any additional equity financing, if available to the Company, may not be available on favorable
terms and will most likely be dilutive to its current stockholders, and debt financing, if available, may involve more restrictive covenants.
The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm its
business, financial condition and results of operations. These uncertainties create substantial doubt about the Company’s ability to continue
as a going concern. No adjustment has been made to the Company’s financial statements as a result of this uncertainty.
Reverse Stock Split
On February 11, 2014, the Company effected a 1 for 25.7746 reverse stock split of the Company’s common stock. The par value and the
authorized shares of the common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock
share and per-share amounts for all periods presented in these financial statements prior to February 11, 2014 have been adjusted
retroactively to reflect the reverse stock split.
Public Offerings
On February 12, 2014, the Company completed an initial public offering (“IPO”) of its common stock, in which the Company sold and
issued 3,682,900 shares, including 182,900 shares sold pursuant to the exercise by the underwriters of their over-allotment option, at an
issuance price of $5.75 per share, less underwriting discounts and commissions. As a result of the IPO, the Company received proceeds of
approximately $15.4 million, net of approximately $5.8 million in underwriting and other offering costs.
F-8
On November 26, 2014, the Company completed a secondary offering, in which the Company sold and issued 11,441,646 units. Each unit
was issued at a price of $1.14 and consisted of one share of common stock and one common stock warrant. As a result of the secondary
offering, the Company received proceeds of approximately $11.3 million, net of approximately $1.7 million in cash underwriting and other
offering costs.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Some of the more
significant estimates relate to inventory, stock-based compensation, long-lived and intangible assets, and derivative liabilities.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities, accounts receivable and restricted cash. The Company limits its exposure to credit loss by placing its cash and cash
equivalents with high credit-quality financial institutions in bank deposits, money market funds, U.S. government securities and other
investment grade debt securities that have strong credit ratings. The Company has established guidelines relative to diversification of its
cash and marketable securities and their maturities that are intended to secure safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates and changes in the Company’s operations and financial
position. Although the Company may deposit its cash and cash equivalents with multiple financial institutions, its deposits, at times, may
exceed federally insured limits.
The Company’s customers are primarily hospitals and surgical centers. At December 31, 2014, no customer receivable balance was 10% or
greater of the Company’s total trade accounts receivable. At December 31, 2013, one customer receivable balance was 15% of the
Company’s total trade accounts receivable. There were two customers that accounted for 10% or more of the Company’s revenue
representing 28% of revenue for the year ended December 31, 2014. There was one customer that accounted for 10% or more of the
Company’s revenue representing 14% of revenue for the year ended December 31, 2013.
Credit to customers is granted based upon an analysis of the customers’ individual credit worthiness. The Company’s allowance for bad
debts as of December 31, 2014 and 2013 was $54,000 and $49,000, respectively. For the years ended December 31, 2014 and 2013, the
Company recorded bad debt expense of $65,000 and $5,000, respectively.
Revenue Recognition
The Company derives its product revenue primarily from the sale of spinal fusion devices and related products used in the treatment of
spine disorders. The Company’s product revenue is generated from sales to two types of customers: (1) surgeons and hospitals and
(2) stocking distributors. Most of our products are sold on a consignment basis through a network of independent sales distributors;
however, the Company also sells its products to independent stocking distributors. Product revenue is recognized when all four of the
following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products has occurred; (3) the selling
price of the product is fixed or determinable; and (4) collectability is reasonably assured. The Company generates the majority of its
revenue from the sale of inventory that is consigned to independent sales distributors that sell the Company’s products to surgeons and
hospitals. For these products, we recognize revenue at the time we are notified the product has been used or implanted and all other
revenue recognition criteria have been met. For all other transactions, the Company recognizes revenue when title and risk of loss transfer
to the stocking distributor, and all other revenue recognition criteria have been met. The Company generally recognizes revenue from sales
to stocking distributors at the time the product is shipped to the distributor. Stocking distributors, who sell the products to their customers,
take title to the products and assume all risks of ownership at time of shipment. The Company’s stocking distributors are obligated to pay
within specified terms regardless of when, if ever, they sell the products. The Company’s policy is to classify shipping and handling costs
billed to customers as an offset to total shipping expense in the statement of operations, primarily within sales and marketing. In general,
the Company’s customers do not have any rights of return or exchange.
Cost of Revenue
The expenses that are included in cost of revenue include all direct product costs and manufacturing costs. Specific provisions for excess or
obsolete inventory are also included in cost of revenue. Beginning in January 2013, cost of revenue also includes the 2.3% excise tax on the
sale of medical devices in the United States.
F-9
Cash, Cash Equivalents, Restricted Cash, and Investments
The Company considers all cash on deposit, money market accounts and highly-liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents. Restricted cash consisted of cash we received from payments of our accounts
receivables held in a segregated account that could have been applied to pay amounts owed under our revolving credit facility with General
Electric Capital Corporation. The Company’s investments in marketable debt and equity securities were deemed by management to be
available for sale and were reported at fair market value with the net unrealized appreciation or depreciation reported as a component of
accumulated other comprehensive loss in stockholders’ deficit. At the time of sale, any realized appreciation or depreciation, calculated by
the specific identification method, was recognized in other income and expense.
Inventories
Inventories are stated at the lower of cost or market, with cost for manufactured inventory determined under the standard cost method
which approximates first-in first-out (“FIFO”). Manufactured inventory consists of raw material, direct labor and manufacturing overhead
cost components. Inventories purchased from third-party manufacturers are stated at the lower of cost or market using the first-in, first-out
method. The Company reviews the carrying value of inventory on a periodic basis for excess or obsolete items, and records any write-down
as a cost of revenue, as necessary. It is reasonably possible that the Company may be required to make adjustments to the carrying value of
inventory in future periods. Inventory write-downs for excess or obsolete inventory are recorded as a cost of revenue. The Company holds
consigned inventory at distributor and other customer locations where revenue recognition criteria have not yet been achieved.
Property and Equipment
Property and equipment, including surgical instruments and leasehold improvements, are stated at cost, less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which
range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease
term, generally five years.
In accounting for long-lived assets, the Company makes estimates about the expected useful lives of the assets, the expected residual
values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. The
Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances indicate that the
carrying amount of an asset may not be recovered. The Company has not recognized any impairment loss for property and equipment for
the years ended December 31, 2014 and 2013.
Long-Lived Assets, Indefinite-lived Intangible and Goodwill
Periodically, the Company assesses potential impairment of its long-lived assets, which include property, equipment, and acquired
intangible assets. The Company performs an impairment review whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not
limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of its
use of acquired assets or its overall business strategy, and significant industry or economic trends. When the Company determines that the
carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, the Company
determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected
to generate and recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the
asset. The Company amortizes finite-lived intangible assets on a straight-line basis over their estimated useful lives. The Company
recorded no impairment loss for definite-lived intangible assets during the years ended December 31, 2014 and 2013.
F-10
The Company tests goodwill and indefinite-lived intangibles for impairment annually as of December 31, or whenever events or changes in
circumstances indicate that goodwill or indefinitely-lived intangibles may be impaired. For goodwill, the Company initially assesses
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount. For goodwill impairment testing purposes, we consider the value of
our equity, including the value of our convertible preferred stock, in the total carrying value of our single reporting unit. If, after assessing
the totality of events or circumstances, the Company determines it is more-likely-than-not that the fair value of a reporting unit is less than
its carrying amount, then the Company performs a first step by comparing the book value of net assets to the fair value of the Company’s
single reporting unit. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of
impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company performed the first step
and determined that it was not more-likely-than-not that the fair value of the Company’s single reporting unit was less than its carrying
amount and no goodwill impairment was recognized during the years ended December 31, 2014 and 2013.
The impairment test for indefinite-lived intangible assets not subject to amortization involves a comparison of the estimated fair value of
the intangible asset, using the income approach, with its carrying value. If the carrying value of the intangible asset exceeds its fair value,
an impairment loss is recognized in an amount equal to that excess. The Company recorded no impairment loss for indefinite-lived
intangible assets during the years ended December 31, 2014 and 2013.
Derivative Liabilities
Derivative liabilities includes the fair value of instruments such as common stock warrants, preferred stock warrants and convertible
features of notes, that are initially recorded at fair value and are required to be re-measured to fair value at each reporting period under
provisions of ASC 480, Distinguishing Liabilities from Equity, or ASC 815, Derivatives and Hedging. The change in fair value of the
instruments is recognized as a component of other income (expense), in the Company’s statements of operations and comprehensive loss
until the instruments settle or expire. The Company estimates the fair value of these instruments using the Black-Scholes-Merton valuation
model. The significant assumptions used in estimating the fair value include the exercise price, volatility of the stock underlying the
instrument, risk-free interest rate, estimated fair value of the stock underlying the instrument and the estimated life of the instrument.
The effect of changes to these significant assumptions on the estimated liability for these instruments is as follows:
Fair value of underlying stock increases
Risk free interest increases
Expected average life increases
Expected dividend yield increases
Expected volatility increases
Warrant liability increases
Warrant liability decreases
Warrant liability increases
Warrant liability decreases
Warrant liability increases
Research and Development
All research and development costs, including those funded by third parties, are expensed as incurred. Research and development costs
consist of engineering, product development, test-part manufacturing, testing, developing and validating the manufacturing process, and
regulatory related costs. Research and development expenses also include employee compensation, employee and nonemployee stock-
based compensation, supplies and materials, consultant services, and travel and facilities expenses related to research activities.
Advertising Costs
Advertising costs are expensed as incurred. The primary component of the Company’s advertising expenses is advertising in trade
periodicals. Advertising costs were approximately $149,000 and $403,000 million for the years ended December 31, 2014 and 2013,
respectively.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when
the reported amounts of the assets and liabilities are recovered or settled. The Company recognizes interest and penalties as a component of
the provision for income taxes. No interest or penalties were recognized in the years ended December 31, 2014 and 2013.
F-11
Stock-Based Compensation
The Company measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of
the awards as determined on the date of grant and is recognized as expense over the remaining requisite service period. The Company
utilizes the Black-Scholes-Merton option pricing model to estimate the fair value of employee stock options. The Black-Scholes-Merton
model requires the input of highly subjective and complex assumptions, including the estimated fair value of the Company’s common stock
on the date of grant, the expected term of the stock option, and the expected volatility of the Company’s common stock over the period
equal to the expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of
such instruments using the Black-Scholes-Merton option pricing model. The measurement of stock-based compensation expense for these
instruments is variable and subject to periodic adjustments to the estimated fair value until the awards vest. Any resulting change in the
estimated fair value is recognized in the Company’s consolidated statements of operations during the period in which the related services
are rendered.
Offering Costs
Offering costs consist of legal, accounting and other advisory costs related to the Company’s efforts to raise capital. At December 31, 2013,
the Company had deferred offering costs of $2.8 million related to the IPO of the Company’s common stock. Additional costs related to the
Company’s IPO activities were deferred until the completion of the IPO in February 2014, at which time they were reclassified to additional
paid-in capital as a reduction of the IPO proceeds.
Since the warrants issued in the Company’s November 2014 secondary offering were considered liabilities, a portion of the offering costs
were expensed and the remaining amount was reclassified to additional paid-in capital as a reduction of proceeds from the secondary
offering.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) No. 2014-09, Revenue
from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.
The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process
to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than
are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim
periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of
adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15 Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,
which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new
standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern. The update
is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The impact on
the Company’s financial statements of adopting ASU 2014-15 is currently being assessed by management.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the
weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Dilutive
common stock equivalents are comprised of convertible preferred stock, warrants for the purchase of convertible preferred stock and
common stock, convertible notes, and stock options and restricted stock units outstanding under the Company’s equity incentive plans. For
all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the
Company’s net loss position.
F-12
Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as
follows (in common stock equivalent shares):
Common stock warrants
Convertible notes
Common stock options
Restricted stock units
Convertible preferred stock
Preferred stock warrants
December 31,
2014
16,657,021
8,772,111
1,383,479
1,059,745
2013
473,835
-
106,544
168,832
- 3,884,788
102,810
-
27,872,356 4,736,809
Shares are based on the terms of securities outstanding as of the date presented. When anti-dilution provisions were triggered for the Series
F convertible preferred stock, additional dilution occurred.
2. Inventories
The components of inventory were as follows (in thousands):
Raw materials
WIP
Finished Goods
December 31, December 31,
2014
2013
$
$
839 $
486
10,350
11,675 $
1,025
1,410
7,649
10,084
Finished goods include consigned inventory in the amounts of approximately $3.0 million and $5.5 million as of December 31, 2014 and
December 31, 2013, respectively.
3. Property and Equipment
The following is a summary of the components of property and equipment (in thousands):
Manufacturing and lab equipment
Surgical instruments
Leasehold improvements
Software and computer equipment
Furniture and equipment
Less: accumulated depreciation and amortization
F-13
December 31,
2014
2013
$
$
7,427 $
8,217
1,439
845
628
18,556
(15,041 )
3,515 $
7,163
7,721
1,439
807
621
17,751
(14,220 )
3,531
4. Intangible Assets
Intangible assets consisted of the following (in thousands):
Customer relationships
Developed technology
Other patents and patent applications
Trademarks
Less accumulated amortization
December 31,
2014
December 31,
2013
$
$
3,990 $
4,685
562
350
9,587
(5,399 )
4,188 $
3,990
4,685
562
350
9,587
(4,899 )
4,688
Based on the recorded intangibles at December 31, 2014, the estimated amortization expense for each of the five years ending in 2019 is
approximately $501,000 per year and $1.5 million thereafter.
5. Fair Value Measurements and Marketable Securities
Financial Instruments Measured and Recorded at Fair Value on a Recurring Basis
The Company measures and records certain financial instruments at fair value on a recurring basis. Fair value is based on the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1 - quoted market prices for identical assets or liabilities in active markets.
Level 2 - observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 - unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other
market participants. These valuations require significant judgment.
The Company classifies assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to
their fair value measurement. No financial assets were measured on a recurring basis at December 31, 2014 and December 31, 2013. The
following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy at
December 31, 2014 and 2013:
Description
Derivative liability
Common stock warrants
Conversion feature of notes
Total derivative liability
Description
Derivative liability
Preferred stock warrants
Common stock warrants
Total derivative liability
Fair Value Measurements at December 31, 2014
Level 1
Level 2
Level 3
Total
- $
-
- $
- $
-
- $
11,358 $
2,612
13,970 $
11,358
2,612
13,970
Fair Value Measurements at December 31, 2013
Level 1
Level 2
Level 3
Total
- $
-
- $
- $
-
- $
11 $
199
210 $
11
199
210
$
$
$
$
F-14
The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy
during the years ended December 31, 2014 and 2013. The following table presents a reconciliation of the derivative liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2014 and 2013:
Balance at December 31, 2012
Issuances of derivatives
Modification of terms
Change in fair value
Balance at December 31, 2013
Balance at December 31, 2013
Issuances of derivatives
Reclassification from liability to equity
Extinguishment of derivative liabilities
Change in fair value
Balance at December 31, 2014
Common
Stock
Warrants
Preferred
Stock
Warrants
Conversion
Feature of
Notes
Total
Derivative
Liability
$
$
$
$
(2,783 ) $
(871 )
(424 )
3,879
(199 ) $
(199 ) $
(12,617 )
-
24
1,434
(11,358 ) $
(526 ) $
-
-
515
(11 ) $
(11 ) $
-
5
-
6
- $
- $
-
-
-
- $
- $
(1,930 )
-
1,008
(1,690 )
(2,612 ) $
(3,309 )
(871 )
(424 )
4,394
(210 )
(210 )
(14,547 )
5
1,032
(250 )
(13,970 )
Common Stock Warrants
The Company has issued certain warrants to purchase shares of common stock, which are considered mark-to-market liabilities and are re-
measured to fair value at each reporting period in accordance with accounting guidance.
The assumptions used in estimating the common stock warrant liability at December 31, 2014 and December 31, 2013 were as follows:
Estimated fair value of common share
Weighted-average risk free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
December 31,
2014
December 31,
2013
$
$
0.80
1.53 %
4.7
0 %
116 %
5.75
1.26 %
4.1
0 %
47 %
Preferred Stock Warrants
The Company had issued warrants to purchase shares of convertible preferred stock in prior periods. The Company accounted for these
warrants under the provisions of ASC Topic 480, Distinguishing Liabilities from Equity. Accordingly, the Company initially recorded a
liability for the fair value of these warrants and then re-measured the liability at the end of each reporting period.
Upon completion of the IPO in February 2014, all 2,344,731 outstanding warrants exercisable for shares of preferred stock were converted
into 159,834 warrants exercisable for shares of common stock and the convertible preferred stock warrant liability was reclassified to
stockholders’ equity. There were no warrants exercisable for shares of preferred stock outstanding at December 31, 2014.
The assumptions used in estimating the preferred stock warrant liability at December 31, 2013 were as follows:
Estimated fair value of common share
Weighted-average risk free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
F-15
December 31,
2013
$
5.75
1.11 %
3.6
0 %
44 %
Conversion Feature of Notes
The Company entered into convertible notes in 2014. The conversion features of the notes were evaluated and determined to be derivatives
and are re-measured to fair value at each reporting period.
The assumptions used in estimating the conversion feature of the notes at December 31, 2014 were as follows:
Estimated fair value of common share
Weighted-average risk free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
$
December 31,
2014
0.80
0.67 %
1.6
0 %
32 %
Fair Value of Other Financial Instruments
The Company’s recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The recorded value of notes payable approximates the fair value as the interest rate
approximates market interest rates.
Marketable Securities
There were no marketable securities at December 31, 2014 and 2013. The Company received proceeds of $2.7 million from the maturities
and sales of marketable securities and realized gains from these sales of $2,000 during the year ended December 31, 2013.
6. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Commissions
Payroll and related expenses
Royalties
Interest payable
Final loan payment fees
Offering costs
Deferred rent
Other
December 31,
2014
December 31,
2013
$
$
846 $
1,001
531
333
233
-
57
145
3,146 $
989
645
277
119
1,281
323
32
45
3,711
7. Debt and Line of Credit
In December 2012, the Company closed on a $21.5 million senior secured credit facility with a bank consortium led by GE Capital (the
“GE Secured Lending Facility”). The facility consisted of a term loan in the original principal amount of $18.0 million and an up to
$3.5 million revolving line of credit secured by the Company’s accounts receivable, based on certain defined criteria, and was to mature in
May 2016. The term loan included interest only payments for a period of 12 months, followed by monthly principal payments of
approximately $600,000 for a period of 30 months, which the Company commenced paying in January 2014. The term loan bore interest at
the fixed rate of 7.5% per annum. There was no amount outstanding under the revolving line of credit at December 31, 2013 and on
June 30, 2014 when the GE Secured Lending Facility was extinguished. The facility required a non-refundable final payment fee of
$720,000, as well as an annual management fee of $15,000 per year.
At the time of extinguishment on June 30, 2014, the total outstanding principal of the GE Secured Lending Facility was $14.4 million,
although the financial statements reflected a carrying value of $14.3 million due to the bifurcated value of warrants issued in connection
with the GE Secured Lending Facility, which was being amortized to interest expense over the life of the loan. The Company had been in
covenant default with regards to the liquidity covenant of the GE Secured Lending Facility several times during 2013. The Company
entered into four amendments to its agreement with GE Capital during 2013 to forego the liquidity covenant
F-16
testing required under the facility. The fourth amendment to the agreement, which was entered into in December 2013, stipulated the
liquidity covenant would not be tested by GE through January 31, 2014. In January 2014, the Company entered into a fifth amendment to
the agreement that extended the time through which the liquidity covenant would not be tested to February 28, 2014. In connection with
these amendments, the Company incurred amendment fees which were being amortized to interest expense over the remaining life of the
loans. The unamortized deferred financing costs were $1.1 million at the time of extinguishment. The Company recorded a $1.6 million
loss on extinguishment of debt during the year ended December 31, 2014.
On June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules in connection with the Hercules Term Loan.
The Hercules Term Loan provided the Company with a $20 million term loan, of which $15.3 million of the proceeds from the Hercules
Term Loan were used to repay in full and terminate the GE Secured Lending Facility. The termination of the GE Secured Lending Facility
was accounted for as an extinguishment of debt resulting in a $1.6 million loss on extinguishment of debt, which was calculated as the
difference between the reacquisition price and the net carrying amount of the GE Secured Lending Facility. On June 30, 2014, the
Company also entered into a Securities Purchase Agreement with MG Partners II Ltd. (“Magna”) pursuant to which the Company sold to
Magna an initial convertible note (“Initial Convertible Note”) with an original principal amount of $2.9 million for a purchase price of $2.5
million. Additionally, on August 11, 2014, the Company sold to Magna an additional unsecured senior convertible note (“Additional
Convertible Note”) with an original principal amount of $3.5 million for a purchase price of $3.5 million. The Initial Convertible Note and
the Additional Convertible Note are collectively referred to as the Magna Convertible Notes.
Hercules Term Loan
The Hercules Term Loan matures on January 1, 2018. The Hercules Term Loan included a $200,000 closing fee, which was paid to
Hercules Technology on the closing date of the loan. The closing fee has been recorded as a debt discount and is being amortized to
interest expense over the life of the loan. The Hercules Term Loan also includes a non-refundable final payment fee of $1.5 million. The
final payment fee is being accrued and recorded to interest expense over the life of the loan. In addition, the Company issued a warrant to
Hercules Technology (“Hercules Warrant”) to purchase 516,129 shares of the Company’s common stock at an initial exercise price of
$4.65, subject to adjustment. The Hercules Warrant was determined to be a derivative and the $900,000 estimated fair value of the
Hercules Warrant was recorded as a debt discount and derivative liability. The debt discount is being amortized to interest expense over the
life of the loan and the derivative liability will be marked to market at each reporting period. The Hercules Warrant expires on June 30,
2019. Financing costs were $1.1 million, which were recorded as deferred financing costs and are being amortized to interest expense over
the life of the loan. The Hercules Term Loan also has an early termination fee of $1.2 million if the loan is paid prior to July 1, 2015.
The Hercules Term Loan bears interest at the rate of the greater of either (i) the prime rate plus 7.7%, and (ii) 10.95%. Interest accrues from
the closing date of the loan and interest payments are due monthly. Principal payments are required commencing August 1, 2015 and are to
be made in 30 equal installments of approximately $700,000, with the remainder due at maturity. If, however, the Company meets certain
revenue conditions, the interest only period may be extended through February 1, 2016, reducing the number of required principal
payments to 24 equal installments. Additionally, under certain circumstances the Company may, or Hercules Technology may, require that
$1.5 million of the principal be paid in the form of shares of common stock at a fixed conversion price of $5.72 per share. The conversion
feature was evaluated and determined to be conventional convertible debt with no beneficial conversion feature.
The Hercules Term Loan contains certain covenants related to restrictions on payments to certain Company affiliates, financial reporting
requirements and a minimum liquidity covenant that requires the Company to maintain cash and cash equivalents of not less than $9.0
million. Although the Company was in compliance with the liquidity covenant at December 31, 2014, the Company anticipates that it will
be non-compliant with the liquidity covenant during the fourth quarter of 2015 if additional financing is not obtained, and has therefore
classified the entire obligation as a current liability.
Magna Convertible Notes
The Initial Convertible Note and the Additional Convertible Note mature on June 30, 2016 and August 11, 2016, respectively, (subject to
extension by the holder) and accrue interest at an annual rate of 6.0%. With respect to the Initial Convertible Note, $150,000 of the
outstanding principal amount (together with any accrued and unpaid interest with respect to such portion of the principal amount) was
automatically extinguished when the Company filed a registration statement registering the shares issued in connection with the Securities
Purchase Agreement on July 17, 2014. In addition, $250,000 of the outstanding principal amount of the Initial Convertible Note (together
with any accrued and unpaid interest with respect to such portion of the principal amount) was automatically extinguished when the
registration statement was declared effective on August 6, 2014.
The Company issued 50,853 shares of its common stock to Magna as a commitment fee. The estimated fair value of the shares of common
stock was $229,000 and was recorded as a debt discount and is being amortized to interest expense over the life of the loan.
F-17
The Magna Convertible Notes are convertible at any time after issuance, in whole or in part, at Magna’s option, into shares of common
stock at a conversion price equal to the lesser of (i) $3.75 per share or (ii) a price equal to 80% of the lowest daily volume weighted average
price (“VWAP”) of our common stock during the five trading days prior to conversion.
As of December 31, 2014, Magna had converted a total of $1.5 million of the principal amount of the Convertible Notes into 2,047,082
shares of common stock. The Company recorded a loss upon extinguishment of $598,000 during the year ended December 31, 2014. At
December 31, 2014, the outstanding principal amounts of the Initial Convertible Note and the Additional Convertible Note were $1.0
million and $3.5 million, respectively. At December 31, 2014, the Convertible Notes if-converted value exceeded its principal amount by
approximately $2.3 million using the closing stock price at December 31, 2014.
The conversion features embedded in the Initial Convertible Note and the Additional Convertible Note were determined to be derivatives
and the estimated fair value of the conversion features of $848,000 and $1.1 million, respectively, were recorded as a debt discount and
derivative liability. The debt discount is being amortized to interest expense over the life of the notes and the derivative liability is marked
to market at each reporting period.
In addition, the Company issued a warrant to Magna (“Magna Warrant”) to purchase up to 568,889 shares of its common stock at an initial
exercise price of $4.65 per share. The Magna Warrant was determined to be a derivative and the estimated fair value of the warrant
associated with the Magna Convertible Notes was $290,000 and was recorded as a debt discount and derivative liability. The debt discount
is being amortized to interest expense over the life of the loans and the derivative liability is marked to market at each reporting period.
The Company recorded $144,000 in interest expense as per the stated interest on the Convertible Notes during the year ended December
31, 2014. The Company accreted $384,000 in interest expense related to the debt discounts on the Convertible Notes during the year
ended December 31, 2014. The effective interest rate for the Initial Convertible Note and the Additional Convertible Note was 50% and
29%, respectively.
Bridge Loan
On November 6, 2014, the Company entered into a Loan and Security Agreement with Hampshire MedTech Partners II, LP (“Bridge
Lender”), in connection with a $1.0 million loan to us (“Bridge Loan”), which matured on the earlier of (a) the third business day following
the closing of a qualified secondary offering and (b) December 17, 2014. The Bridge Loan bore interest at the rate of 15% per annum and
was due on payable upon maturity. Furthermore, the Company was obligated to pay the Bridge Lender a $75,000 commitment upon
maturity. The Company closed on a qualified secondary offering on November 26, 2014 and paid the Bridge Loan and associated accrued
interest and fees on December 1, 2014.
In addition, the Company issued a warrant to the Bridge Lender (“Closing Bridge Warrant”), to purchase up to 267,380 shares of our
common stock, with an initial exercise price of $1.87 per share. The Closing Bridge Warrant was determined to be a derivative and the
$107,000 estimated fair value of the Closing Bridge Warrant was recorded as a debt discount and derivative liability. The debt discount
was amortized to interest expense over the life of the loan and derivative liability is marked to market at each reporting period. Because we
closed a public offering at a price per share of common stock less than the initial exercise price of the Closing Bridge Warrant, the number
of warrants increased to 438,596 and the exercise price was reduced to $1.14. The Closing Bridge Warrant was exercisable upon issuance
and expires on November 5, 2019. Furthermore, a warrant to purchase up to 25,000 shares of our common stock at an exercise price of
$1.48 was granted to an investment advisor. This warrant was determined to be a derivative and the $20,000 estimated fair value of this
warrant was recorded as a debt discount and derivative liability. The debt discount was amortized to interest expense over the life of the
loan.
Outstanding long-term debt consisted of the following (in thousands):
GE Secured Lending Facility
Hercules Term Loan
Convertible Note
Total debt
Less: Current portion
Long-term debt
Outstanding
Principal
December 31, 2014
Unamortized
Discount
Net Carrying
Amount
Outstanding
Principal
December 31, 2013
Unamortized
Discount
Net Carrying
Amount
$
$
- $
20,000
4,500
24,500
(20,000 )
4,500 $
- $
(930 )
(1,439 )
(2,369 )
930
(1,439 ) $
- $
19,070
3,061
22,131
(19,070 )
3,061 $
18,000 $
-
-
18,000
(18,000 )
- $
(75 ) $
-
-
(75 )
75
- $
17,925
-
-
17,925
(17,925 )
-
F-18
The following summarizes by year the future principal payments as of December 31, 2014 (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Total future principal payments
8. Equity
Authorized Stock
Hercules Term
Loan
Magna
Convertible Notes
Total
$
$
- $
2,949
7,666
8,567
818
20,000 $
- $
-
4,500
-
-
4,500 $
-
2,949
12,166
8,567
818
24,500
In February 2014, prior to the completion of the IPO, the Company’s certificate of incorporation was amended and restated to increase the
number of authorized common shares from 150,000,000 to 250,000,000 and the number of authorized preferred shares from 100,000,000 to
130,000,000.
Common Stock
Initial Public Offering
On February 12, 2014, the Company completed an IPO of its common stock, in which the Company sold and issued 3,682,900 shares of
common stock, including 182,900 shares sold pursuant to the exercise by the underwriters of their over-allotment option, at an issuance
price of $5.75 per share, less underwriting discounts and commissions. The Company received proceeds of approximately $15.4 million,
net of approximately $5.8 million in underwriting and other offering costs from the IPO.
On February 11, 2014, the holders of a majority of the outstanding shares of the Company’s Series F convertible preferred stock agreed to
waive the conversion adjustment under the Company’s Restated Certificate of Incorporation such that in no event would the denominator
used to calculate the conversion ratio be less than $8.00, provided that the Company completed its IPO on or before June 30, 2014. Upon
completion of the IPO in February 2014, all 80,910,394 outstanding shares of preferred stock converted into 8,029,779 shares of common
stock and the value of the convertible preferred stock of $161.5 million was reclassified to stockholders’ equity. Furthermore, upon
completion of the IPO, 2,344,731 warrants representing all outstanding warrants exercisable for shares of preferred stock converted into
warrants exercisable for 159,834 shares of common stock and the convertible preferred stock warrant liability was reclassified to
stockholders’ equity. Following the completion of the IPO, there were no shares of preferred stock or warrants exercisable for shares of
preferred stock outstanding.
Secondary Offering
On November 26, 2014, the Company completed a secondary offering, in which the Company sold and issued 11,441,646 units. Each unit
was issued at a price of $1.14 and consisted of one share of common stock and one common stock warrant (“Secondary Offering Warrant”).
The Company received proceeds of approximately $11.3 million, net of approximately $1.7 million in cash underwriting and other offering
costs from the secondary offering. The Company issued an additional 1,716,246 Secondary Offering Warrants pursuant to the
underwriters’ over-allotment option.
The Secondary Offering Warrants were immediately exercisable after issuance into common shares at an exercise price of $1.48 and
terminate on November 26, 2019. The Secondary Offering Warrants contain a cashless exercise provision whereby the holders may
exercise warrants by paying the exercise price in cash or, in lieu of payment of the exercise price in cash, at any time 120 days after
issuance, by electing to receive a cash payment from the Company equal to the Black Scholes Value (as defined below) of the number of
shares the holder elects to exercise (the “Black Scholes Payment”); provided that we have discretion as to whether to deliver the Black
Scholes Payment or, subject to meeting certain conditions, to deliver a number of shares of our common stock determined according to the
following formula (the “Cashless Exercise”):
Where:
•
Total Shares is the number of shares of common stock to be issued upon a Cashless Exercise
Total Shares = (A x B) / C
F-19
•
•
•
A is the total number of shares with respect to which the warrant is then being exercised.
B is the Black Scholes Value (as defined below).
C is the closing bid price of our common stock as of two trading days prior to the time of such exercise.
As defined in the Secondary Offering Warrants, “Black Scholes Value” means the Black Scholes value of an option for one share of our
common stock at the date of the applicable Black Scholes Payment or Cashless Exercise, which is calculated using the Black Scholes
Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the closing bid
price of the Common Stock as of trading day immediately preceding the date of issuance of the warrant, (ii) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term of the warrant as of the applicable Black Scholes Payment
or Cashless Exercise, (iii) a strike price equal to the exercise price in effect at the time of the applicable Black Scholes Payment or Cashless
Exercise, (iv) an expected volatility equal to 135% and (v) a remaining term of such option equal to five years (regardless of the actual
remaining term of the warrant).
The Secondary Offering Warrants also have a mandatory exercise provision, whereby, in the event that the Company’s common stock
trades at a price that is 25% or more above the exercise price of the warrants for a period of at least 20 consecutive trading days at any time
120 days after issuance, the Company may, subject to certain limitations in the warrants, require the holder of the warrants to exercise the
warrants for cash payment of the exercise price.
The Secondary Offering Warrants are considered to be liabilities and are marked to market at each reporting period. The Company
estimated the fair value of the Secondary Offering Warrants to be $10.5 million. The Company recorded $10.5 million of the $13.0 million
gross proceeds from the secondary offering to derivative liabilities and $2.5 million to equity. Furthermore, $2.0 million of the offering
costs were expensed and $488,000 was recorded to additional paid-in capital as a reduction of proceeds from the secondary offering. Had
the cashless exercise provision been exercised by all holders of the Secondary Offering Warrants at December 31, 2014, the Company
would have had to either pay $10.5 million in cash or issue 15,479,873 shares of common stock. The number of shares of common stock
that would be required to satisfy the cashless exercise provision increases as the price of the Company’s stock decreases and decreases as
the price of the Company’s stock increases.
In addition, as part of the underwriter agreement, the Company issued a Unit Option to the Underwriter to purchase a Unit at an exercise
price of $1.43. The Unit includes a share of common stock and a Secondary Offering Warrant. The Unit Option was determined to be a
liability and the estimated fair value of $658,000 was included in offering costs. Furthermore, 200,000 common stock warrants were issued
to a financial advisor who advised on the transaction. These warrants were determined to be liabilities and the estimated fair value of
$115,000 was included in offering costs.
Other Issuances
During the year ended December 31, 2014, the Company issued 50,583 shares of common stock to Magna as a commitment fee associated
with the convertible notes and 50,000 shares of restricted common stock as consideration for termination of a consulting agreement.
Furthermore, 444,403 shares of common stock were issued upon the vesting of restricted stock awards and 9,328 upon exercise of warrants.
The Company had reserved shares of common stock for future issuance as follows:
Convertible preferred stock:
Shares outstanding
Warrants
Series C convertible preferred stock
Series D convertible preferred stock
Series E convertible preferred stock
Series F convertible preferred stock
Common stock warrants
Convertible notes
Common stock options
Restricted stock units
Shares available for grant under equity plans
F-20
December 31,
2014
2013
-
3,884,788
-
-
-
-
16,657,021
8,772,111
52,325
12,786
27,224
10,475
473,835
-
1,383,479
1,059,745
-
27,872,356
106,544
168,832
91,659
4,828,468
Shares are based on the terms of securities outstanding as of the date presented. Upon completion of the IPO in February 2014, antidilution
provisions were triggered for the Series F convertible preferred stock and Series F warrants and the Series F preferred stock converted into
4,906,874 shares of common stock and the Series F warrants converted into warrants to purchase 67,499 shares of common stock. Upon
completion of the IPO, all shares of preferred stock converted into 8,029,779 shares of common stock.
Convertible Preferred Stock
In August and September 2013, the Company issued an aggregate of 4,740,000 shares of Series F convertible preferred stock at a purchase
price of $2.00 per share, and associated warrants to purchase 91,951 shares of common stock. The warrants expire after five years and had
an exercise price of $25.77 and $0.47 per share at December 31, 2013 and 2014, respectively. In addition, the Company issued warrants to
purchase an aggregate of 9,311 shares of common stock to a placement agent, in August and September 2013. These warrants expire after
five years and had an exercise price of $56.70 and $0.47 per share at December 31, 2013 and 2014, respectively.
There was no outstanding convertible preferred stock at December 31, 2014. At December 31, 2013, convertible preferred stock consisted
of the following:
Series
Series A
Series A-1
Series B
Series B-1
Series C
Series C-1
Series D
Series D-1
Series E
Series F
Undesignated
Total
Shares Issued
and
Outstanding
Designated
Shares
5,800,000 5,365,398 $
10,400,000 10,390,463
2,300,000 1,944,147
3,300,000 3,299,141
7,900,000 6,682,562
4,325,000 4,275,000
8,300,000 7,978,800
6,300,000 6,145,667
16,200,000 15,201,716
20,710,000 19,627,500
-
14,465,000
100,000,000 80,910,394 $
Aggregate
Liquidation
Preference
(in thousands)
3,219
6,234
2,333
3,959
13,365
8,550
23,936
18,437
30,404
39,255
-
149,692
Upon completion of the IPO in February 2014, all 80,910,394 outstanding shares of preferred stock converted into 8,029,779 shares of
common stock and the value of the convertible preferred stock of $161.5 million was reclassified to stockholders’ equity.
The rights and preferences of the convertible preferred stock were as follows:
Dividends
Holders of the convertible preferred stock shall be entitled to receive noncumulative dividends in preference to any dividend on common
stock payable only if declared by the Board of Directors. As of December 31, 2014 and 2013, the Board of Directors had not declared any
dividends.
Liquidation Preference
In the event of any liquidation or winding up of the Company, including in the event of the merger, consolidation and sale of the Company,
the holders of Series F convertible preferred stock were entitled to receive, in preference to holders of all other series of preferred stock and
holders of common stock, a per share amount equal to $2.00, plus all accrued but unpaid dividends, when, as and if declared. If the Series F
convertible preferred stock liquidation preference had been paid in full to holders of such preferred stock, thereafter, the holders of Series A
and A-1, Series B and B-1, Series C and C-1, Series D and D-1 convertible preferred stock, and Series E convertible preferred stock, would
have been entitled to receive ratably, and in preference to the holders of common stock, a per share amount equal to $0.60 for Series A and
A-1 convertible preferred stock, $1.20 for Series B and B-1 convertible preferred stock, $2.00 for Series C and C-1 convertible preferred
stock, $3.00 for Series D and D-1 convertible preferred stock, and $2.00 for Series E convertible preferred stock plus, with respect to each
such series of preferred stock, all declared but unpaid dividends. After the payment of the liquidation preference to the holders of the
preferred stock, the remaining assets would have been distributed ratably to the holders of the common stock.
F-21
A sale, merger, reorganization, liquidation, dissolution or winding up of the Company may have, in certain circumstances, been deemed to
be a liquidation event and trigger the liquidation preferences associated with the outstanding shares of convertible preferred stock. Because
a change in control could occur and not be solely within the control of the Company, all convertible preferred stock was deemed to be
redeemable and classified outside of permanent equity in the accompanying consolidated balance sheets. However, because the timing of
any such redemption was uncertain, the Company did not accrete the carrying value of the convertible preferred stock to its liquidation
preference.
Conversion
The holders of the convertible preferred stock had the right to convert the shares of preferred stock held by such holders, at any time, into
shares of common stock. Upon conversion, any declared but unpaid dividends on the preferred stock would have been paid in additional
shares of common stock.
The convertible preferred stock was automatically converted into common stock, at the then applicable conversion ratio, upon the closing
of a public offering of shares of common stock at a per share price not less than the then applicable conversion price (as adjusted for stock
splits, stock dividends, recapitalizations, etc.).
The conversion ratio of each series of convertible preferred stock at December 31, 2013, was as follows:
Series
Series A
Series A-1
Series B
Series B-1
Series C
Series C-1
Series D
Series D-1
Series E
Series F
Conversion Ratio
0.0388
0.0582
0.0414
0.0591
0.0435
0.0631
0.0505
0.0653
0.0441
0.0388
On February 11, 2014, the holders of a majority of the outstanding shares of the Company’s Series F convertible preferred stock agreed to
waive the conversion adjustment under the Company’s Restated Certificate of Incorporation such that in no event would the denominator
used to calculate the conversion ratio be less than $8.00, provided that the Company completed its IPO on or before June 30, 2014. Upon
completion of the IPO in February 2014, all 19,627,500 shares of Series F convertible preferred stock converted into 4,906,874 shares of
common stock.
The conversion ratio of each series of convertible preferred stock at time of conversion was as follows:
Series
Series A
Series A-1
Series B
Series B-1
Series C
Series C-1
Series D
Series D-1
Series E
Series F
Conversion Ratio
0.0388
0.0582
0.0414
0.0591
0.0435
0.0631
0.0505
0.0653
0.0441
0.2500
Voting Rights
The preferred stock will vote together with the common stock, and not as separate classes, except as specifically provided below or as
otherwise required by law. Each share of preferred stock shall have a number of votes equal to the number of shares of common stock the
preferred stock is convertible into on an as-converted basis.
F-22
Unless an affirmative vote of 50% of the combined outstanding shares of preferred stock, voting separately as a class, is obtained, the
Company shall not undertake any of the following: (i) declaration or payment of any dividend or other distribution or payment on the (or
the redemption, purchase or other acquisition for value of any) capital stock of the Company or any subsidiary; (ii) any liquidation,
dissolution, recapitalization or reorganization of the Company; (iii) transfer or disposition of assets or rights with a value of more than
$1,000,000; and/or (iv) any amendment to the Company’s certificate of incorporation that changes or alters any of the preferences, voting
powers or other rights and privileges of preferred stock.
Registration Rights
The preferred stockholders and warrant holders were granted registration rights that provide these holders the right to request, beginning
180 days after the completion of a qualifying initial public offering, that the Company file a registration statement to register under the
Securities Act the common stock that would be issued upon conversion of the preferred shares or exercise of the warrants. Thereupon, the
Company is obligated to use commercially reasonable efforts to timely file a registration statement. These registration rights are subject to
certain conditions and limitations, including the Company’s right, based on advice of the lead managing underwriter of a future offering, to
limit the number of shares included in any such registration under certain circumstances.
9. Stock-Based Compensation
Option and Equity Plans
In January 2014, the Company’s board of directors increased the aggregate number of shares issuable under the 2012 Employee, Director
and Consultant Equity Incentive Plan (the “2012 Plan”) to 3,000,000, which was approved by the shareholders in February 2014.
The total number of shares available for grant under the 2012 Plan at December 31, 2014 was 113,914.
Stock Options
A summary of the Company’s stock option activity for the year ended December 31, 2014 was as follows:
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Exercisable at December 31, 2014
Vested and expected to vest at December 31, 2014
Options
106,544 $
1,448,751 $
-
(157,102 ) $
(14,714 ) $
1,383,479 $
339,110 $
1,327,485 $
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
(Years)
Intrinsic Value
28.90
3.30
-
3.84
10.54
5.13
11.42
5.22
9.2 $
8.1 $
9.2 $
18,600
-
17,700
The aggregate intrinsic value in the table above is calculated as the difference between the estimated fair value of the Company’s stock at
December 31, 2014 and the exercise price of each option.
The weighted average grant date fair value of options granted during the years ended December 31, 2014 and 2013 was $1.67 and $0.07,
respectively. The total intrinsic value of options exercised during the years ended December 31, 2014 and 2013 was $0 and $900,000,
respectively, calculated as the difference between the exercise price of the underlying stock option awards and the estimated fair value of
the Company’s common stock on the date of exercise. Cash received from option exercises for the years ended December 31, 2014 and
2013 was $0 and $77,000, respectively. The Company recorded no tax benefit related to options exercised during the years ended
December 31, 2014 and 2013.
The Company estimates the fair value of each stock option on the grant date using the Black-Scholes-Merton valuation model, which
requires several estimates including an estimate of the fair value of the underlying common stock on grant date. The expected volatility
was based on an average of the historical volatility of a peer group of similar companies. The expected term was calculated utilizing the
simplified method. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term
of the option.
F-23
No options were granted to employees during the year ended December 31, 2013. The following weighted average assumptions were used
in the calculation to estimate the fair value of options granted to employees during the year ended December 31, 2014:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted-average expected volatility
1.85 %
6.30
0 %
47 %
Restricted Stock Awards
Restricted stock awards (“RSA”) activity for the year ended December 31, 2014 was as follows:
Unvested at December 31, 2013
Granted
Vested
Forfeited
Unvested at December 31, 2014
Weighted-
Average
Grant Date
Fair Value
14.36
5.71
6.09
5.98
Number of
Awards
168,832 $
1,815,259 $
(1,650,562 ) $
(333,529 ) $
-
The total fair value of RSAs vested during the years ended December 31, 2014 and 2013 was $3.0 million and $110,000, respectively.
In February 2013, employees of the Company elected to exchange 93,968 stock options for an equal number of restricted stock units
(“RSUs”) pursuant to a one-time tender offer approved by the board of directors. The RSUs vested upon the expiration of a lock-up period
in connection with an underwritten public offering of shares of the Company’s common stock. The incremental fair value on the date of the
exchange, representing the difference between the value of the original stock options and the value of the RSUs issued of approximately
$758,000 was recognized during the year ended December 31, 2014.
Stock-Based Awards Granted to Nonemployees
The Company from time to time grants options to purchase common stock or restricted stock awards to non-employees for services
rendered and records expense ratably over the vesting period of each award and records expense ratably over the vesting period of each
stock option award. The Company estimates the fair value of the stock options using the Black-Scholes-Merton valuation model at each
reporting date. The Company granted 165,387 options and 94,560 restricted stock awards to non-employees and recorded stock-based
compensation expense of $712,000 during the year ended December 31, 2014. The Company granted 13,191 options and 13,121 restricted
stock awards to nonemployees and recorded $248,000 in stock-based compensation expense during the year ended December 31, 2013.
The following assumptions were used in the Black-Scholes-Merton valuation model related to non-employee stock options granted during
the years ended December 31, 2014 and 2013:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted-average expected volatility
F-24
December 31,
2014
December 31,
2013
2.52 %
9.7
0 %
44 %
2.74 %
10.0
0 %
52 %
Summary of Stock-Based Compensation Expense
Total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss was
allocated as follows (in thousands):
Cost of revenue
Research and development
General and administrative
Selling and marketing
Capitalized into inventory
Total stock-based compensation expense
Year Ended December 31,
2014
2013
$
$
317 $
1,318
6,244
2,338
784
11,001 $
-
56
224
273
2
555
Unrecognized stock-based compensation at December 31, 2014 was as follows (in thousands):
Weighted
Average
Stock options
10. Income Taxes
Unrecognized Remaining Period
Stock-Based of Recognition
Compensation
1,197
$
(in years)
2.1
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax benefit (in thousands):
Federal statutory rate
State taxes, net of federal benefit
Research and development credits
Equity related expenses
Change in valuation allowance
Total income tax expense
Years Ended December 31,
2014
2013
(34.0 )%
(4.3 )%
(0.7 )%
2.9 %
36.1 %
0.0 %
(34.0 )%
(4.3 )%
(3.0 )%
(5.0 )%
46.3 %
0.0 %
Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Depreciation
Research credits
Other
Total deferred tax assets
Deferred tax liabilities:
Amortization of intangible assets
Total deferred tax liabilities
Net deferred tax assets
Less valuation allowance
Net deferred tax assets (liabilities)
F-25
December 31,
2014
2013
$
$
50,673 $
60
2,587
6,057
59,377
(918 )
(918 )
58,459
(58,593 )
(134 ) $
42,661
17
2,350
2,823
47,851
(1,028 )
(1,028 )
46,823
(46,957 )
(134 )
At December 31, 2014 and 2013, the Company had net operating loss carryforwards for federal and state income tax purposes of
approximately $132.5 million and $111.5 million, respectively. The federal and state net operating loss carryforwards will expire from
2023 to 2034, unless previously utilized.
During the years ended December 31, 2014 and 2013, the Company recognized no amounts related to tax interest or penalties related to
uncertain tax positions. The Company is subject to taxation in the United States and various state jurisdictions. The Company currently has
no years under examination by any jurisdiction.
A valuation allowance has been established as realization of such deferred tax assets has not met the more likely-than-not threshold
requirement. If the Company’s judgment changes and it is determined that the Company will be able to realize these deferred tax assets, the
tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction to income tax
expense. The tax valuation allowance increased by approximately $11.7 million and $3.8 million for the years ended December 31, 2014
and 2013, respectively.
11. Commitments and Contingencies
The Company currently leases laboratory, manufacturing and office space and equipment under noncancelable operating leases which
provide for rent holidays and escalating payments. Lease incentives, including rent holidays, allowances for tenant improvements and rent
escalation provisions, are recorded as deferred rent. Rent under operating leases is recognized on a straight-line basis beginning with lease
commencement through the end of the lease term. For each of the years ended December 31, 2014 and 2013, rental expense was
approximately $810,000 and $830,000, respectively.
The following table summarizes future minimum rental payments required under operating leases that have initial or remaining non-
cancelable lease terms in excess of one year as of December 31, 2014 (in thousands):
Years ending December 31:
2015
2016
2017
2018
2019
Total minimum lease payments
$
$
883
910
938
962
980
4,673
The Company has entered into consulting and development agreements with some of its advisors, including some surgeon advisors. The
Company has agreed to pay some of the surgeon advisors a portion of the net profits attributable to the sale of specific spine products for
which the surgeon advisors provided the Company with consulting and related services related to the conceptualization, development,
testing, clearance, approval and/or related matters involving implant products. The Company is obligated to pay royalties to different
surgeon advisors in connection with the sale of certain of its implant products. These agreements generally continue until the later of (a) ten
years from the date of the agreements, and (b) the expiration of the patent rights relating to the devices covered by the agreements, when
rights have been assigned by the individuals to the Company. The Company incurred royalties of $1.3 million and $892,000 related to
these agreements for the years ended December 31, 2014 and 2013, respectively. None of the royalty arrangements contain minimum
royalty payments.
The Company has executed agreements with certain executive officers of the Company which, upon the occurrence of certain events
related to a change in control, call for payments to the executives up to three times their annual salary and accelerated vesting of previously
granted stock options.
From time to time, the Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of its
business activities. Management believes any liability that may ultimately result from the resolution of these matters will not have a
material adverse effect on the Company’s consolidated financial position, operating results, or cash flows.
12. Related-Party Transactions
Gregg R. Honigblum, the Chief Executive Officer of each of Creation Capital, LLC (“Creation Capital”) and Creation Capital Advisors,
LLC (“Creation Advisors”), joined the Company’s board of directors in December 2006 and resigned in September 2013. The Company
completed offerings of preferred stock and convertible debt through Creation Capital, as its placement agent, and it received strategic
financial advisory services from Creation Advisors.
F-26
In connection with the conversion of notes to shares of Series F convertible preferred stock in December 2012, the Company was obligated
to pay Creation Advisors a strategic financial advisory fee of approximately $447,000. Creation Advisors agreed to a payment plan whereby
the Company would pay one half of the advisory fee (or approximately $224,000) immediately, and pay the other half in monthly
installments over a period of 24 months.
In conjunction with a warrant restructuring and the sale and issuance of other shares of common stock in March 2013, Creation Advisors
was paid a strategic financial advisory fee of approximately $250,000. In October 2013, the Company entered into a one-year consulting
agreement for financial advisory services with Creation Advisors in which Creation Advisors was to receive compensation of up to
$180,000 in cash (payable $15,000 per month). The Company paid $45,000 during the year ended December 31, 2013 under this
agreement. The Company paid $45,000 under this agreement during the year ended December 31, 2014. This agreement was terminated in
March 2014 and as consideration for termination of the agreement, the Company paid $60,000 and issued 50,000 restricted shares of
common stock, valued at $372,000, to Creation Advisers.
13. 401(k) Plan
Effective June 1, 2004, the Company adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code.
The plan covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholdings, subject to
certain limitations. The plan permits, but does not require, additional matching contributions to the plan by the Company on behalf of the
participants in the plan. The Company incurred approximately $164,000 and $162,000 relating to retirement contributions for the years
ended December 31, 2014 and 2013, respectively.
14. Subsequent Events
In January 2015, Magna converted an additional $202,000 of the principal amount of the Convertible Notes into 372,900 shares of common
stock.
In January 2015, the Company had a reduction in force and recorded $585,000 in severance expense.
F-27
THIS WARRANT AND THE SHARES OF CAPITAL STOCK ISSUED UPON ANY EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE
STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, INCLUDING A
PLEDGEE, UNLESS (1) EITHER (A) A REGISTRATION WITH RESPECT THERETO SHALL BE EFFECTIVE UNDER THE
SECURITIES ACT, OR (B) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE, AND (2)
THERE SHALL HAVE BEEN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.
Exhibit 4.27
Right to Purchase ________ Shares of
Common Stock of Amedica Corporation
Warrant No. C-
COMMON STOCK PURCHASE WARRANT
Amedica Corporation, a Delaware corporation (the “Company”), hereby certifies that for value received ____________(the
“Holder”), or assigns, is entitled to purchase, subject to the terms and conditions hereinafter set forth, up to ________ shares of Common
Stock (the “Warrant Shares”) (subject to adjustment as hereinafter provided) at the Exercise Price, payable as hereinafter provided. This
Warrant is being issued pursuant to the terms of that certain financial advisory services engagement agreement, dated September 17, 2014,
by and between the Company and Westlake Securities LLC (the “Engagement Agreement”).
1. Definitions. As used herein, the following terms shall have the following meanings, unless the context otherwise requires:
(a) “Change of Control” shall mean the occurrence of any of the following events: (i) any “Person” (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), becomes the
“Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then
outstanding voting securities pursuant to a transaction or a series of related transactions which the Board of Directors of
the Company (the “Board”) does not approve; or (ii) (A) a merger or consolidation of the Company whether or not
approved by the Board, other than a merger or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or the parent of such corporation) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving entity or parent of such corporation, as the
case may be, outstanding immediately after such merger or consolidation; (B) or the Company’s stockholders approve an
agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.
(b) “Common Stock” shall mean the Company’s common stock, $0.01 par value per share.
(b) “Exercise Price” shall mean the purchase price to be paid upon exercise of this Warrant in accordance with the terms
hereof, which price initially shall be $0.86 per Warrant Share. The Exercise Price shall be subject to adjustment from time
to time pursuant to the provisions of Section 5 hereof.
(c) “Warrant Expiration Date” shall mean 5:00 p.m., Eastern Time, on September 17, 2019.
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised at any time or from time to time, on any day which is not a
Saturday, Sunday or holiday under the laws of the State of Utah beginning on March 17, 2015 and prior to the Warrant
Expiration Date, for all or any part of the Warrant Shares. In order to exercise this Warrant, in whole or in part, the Holder
shall deliver to the Company at its principal executive offices, or at such other office as the Company may designate by
notice in writing, (i) this originally executed Warrant and (ii) a duly executed written notice of Holder's election to
exercise its Warrant in whole or in part substantially in the form of Exhibit A attached hereto, and shall pay to the
Company by check made payable to the order of the Company or wire transfer of funds to a bank account designated by
the Company an amount equal to the aggregate Exercise Price for all Warrant Shares as to which this Warrant is being
exercised.
(b) Cashless Exercise. In addition to and without limiting the rights of the Holder hereof under the terms of this Warrant,
the Holder may elect to receive, without the payment by the Holder of the Exercise Price, shares of Common Stock equal
to the value of the Warrant Shares or any portion thereof by the surrender of this Warrant (or such portion of this Warrant
being so exercised) together with the Net Issue Election Notice annexed hereto as
Exhibit B duly executed and completed, at its principal executive offices, or at such other office as the Company may
designate by notice in writing. Thereupon, the Company shall issue to the Holder such number of fully paid, validly
issued and nonassessable shares of Common Stock, as is computed using the following formula:
X= Y(A-B)
A
where
X = the number of shares of Common Stock to be issued to the Holder (or such other person or persons as
directed by the Holder) upon such exercise of the rights under this Section 2(c)
Y = the total number of Warrant Shares which the Holder has surrendered for cashless exercise
A = the “Fair Market Value” of one share of Common Stock on the date that the Holder delivers the Net Issue
Election Notice to the Company as provided herein
B = the Exercise Price in effect under this Warrant on the date that the Holder delivers the Net Issue Election
Notice to the Company as provided herein
The “Fair Market Value” of a share of Common Stock as of a particular date (the “Valuation Date”) shall mean the
following: (y) if the Common Stock is then listed on a stock exchange or quoted on a quotation system, the closing sale
price of one share of Common Stock on such exchange or system on the last trading day prior to the Valuation Date; or (z)
if the Common Stock is not then listed on a stock exchange or quoted on a quotation system, the Fair Market Value of one
share of Common Stock as of the Valuation Date shall be determined in good faith by the Board of Directors of the
Company (the “Board”). The Board shall respond promptly in writing to an inquiry by the Holder prior to the exercise
hereunder as to the Fair Market Value of a share of Common Stock.
(c) Issuance of Common Stock. Upon receipt of the documents and payments described in Section 2(a) or Section 2(b), as
the case may be, the Company shall, as promptly as practicable, execute or cause to be executed, and deliver to the Holder
a certificate or certificates representing the aggregate number of full Warrant Shares (or such other stock or securities that
may be issuable upon exercise of the Warrant) issuable upon such exercise. The stock certificate or certificates so
delivered shall be in the denomination specified in said notice and shall be registered in the name of the Holder. This
Warrant shall be deemed to have been exercised and a certificate or certificates for shares of Common Stock shall be
deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes as of the date said notice, together with this Warrant and
the documents and payments described in Section 2(a) or 2(b), as the case may be, are received by the Company as
aforesaid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of said certificate
or certificates, deliver to the Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of
Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
(d) Transfer Restriction Legend. Each certificate for Common Stock issued upon exercise of this Warrant, unless at the
time of exercise the offer and sale of the Warrant Shares are registered under the Securities Act, shall bear the following
legend (and any additional legend required by applicable law or rule) on the face thereof:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.”
3 . Reservation of Shares. The Company covenants that it will at all times until the Warrant Expiration Date reserve and keep
available out of its authorized and unissued Common Stock, solely for the purpose of issue upon exercise of this Warrant, such number of
Warrant Shares as shall then be issuable upon the exercise of this Warrant.
- 2 -
4. Loss, Theft, Destruction or Mutilation. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction of
such Warrant and a customary and reasonable indemnity and surety bond, if requested by the Company), and, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu hereof, a new
Warrant of like tenor.
5. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares issuable upon exercise of this
Warrant will be proportionately increased, and if the Company at any time combines (by reverse stock split, recapitalization or otherwise)
its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination
will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately
decreased.
6. Consolidation, Merger, etc. If there shall be a merger or consolidation of the Company with or into another corporation (other
than a merger or reorganization involving only a change in the state of incorporation of the Company), then as a part of such transaction,
provision shall be made so that the Holder hereof shall thereafter be entitled to receive the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from the merger or consolidation, to which the Holder would have been
entitled if the Holder had exercised this Warrant immediately prior thereto.
7. Notice of Adjustment. Upon any adjustment or other change relating to the Exercise Price or the securities purchasable upon
the exercise of this Warrant, then, and in each such case, the Company shall promptly prepare and deliver to Holder notice, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated.
8. Fractional Shares. The Company shall not issue fractions of shares, upon exercise of this Warrant or otherwise, or distribute
certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, such fraction shall
neither be issued nor extinguished until the final exercise of this Warrant, in which event if a fraction is issuable, the Company shall pay to
the Holder an amount in cash equal to such fraction multiplied by the Exercise Price, as adjusted to date pursuant to Section 5 hereof.
9. Holder Not Deemed Stockholder. The Holder shall not be entitled to vote or to receive dividends or be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained
herein be construed to confer upon the Holder any of the rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof, or to receive dividends or subscription rights, until Holder
shall have exercised this Warrant in accordance with the provisions hereof.
10. Successors and Assigns. This Warrant, and the obligations and rights of the Company hereunder, shall be binding upon and
inure to the benefit of the Company, the Holder, and their respective successors and permitted assigns.
11. Waiver and Amendment. Any provision of this Warrant may be amended, waived or modified only upon the written consent
of the Company and the Holder.
1 2 . Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be
delivered in accordance with the terms of Section 7.A of the Engagement Agreement.
13. Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Delaware, United States of America, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of Delaware or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Delaware.
14. Headings; References. All headings used herein are used for convenience only and will not be used to construe or interpret
this Warrant. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
15. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and
conditions contained herein.
[Remainder of page intentionally left blank.]
- 3 -
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of September 17, 2014.
AMEDICA CORPORATION
By:
Name: Kevin Ontiveros
Title:
Chief Legal Officer
- 4 -
EXHIBIT A
EXERCISE FORM
(To be signed only on exercise of Warrant)
Amedica Corporation
1885 West 2100 South
Salt Lake City, UT 84119
The undersigned hereby irrevocably elects to exercise the right to purchase represented by the within Warrant for, and to purchase
thereunder, _____________ shares of common stock, $0.01 par value per share, of Amedica Corporation (the “Common Stock”) at a price
of $_______ per share of Common Stock, and herewith makes payment of $___________ (such payment being by check made payable to
the order of Amedica Corporation, or wire transfer of funds to a bank account designated by Amedica Corporation, or any combination
thereof), surrenders the Warrant and all right, title and interest therein to Amedica Corporation and requests that certificates for such shares
be issued in the name of:
_________________________________________________________________
(Please print name, address, and social security number)
_________________________________________________________________
and, if said number of shares shall not be all the shares purchasable thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of the undersigned holder of the within Warrant or his Assignee as below
indicated and delivered to the address stated below.
NAME OF HOLDER OR ASSIGNEE:______________________________________
(Please print)
ADDRESS OF HOLDER
OR ASSIGNEE:_____________________________________________________
SIGNATURE OF HOLDER:_____________________________________________
DATED:__________________
- 5 -
EXHIBIT B
NET ISSUE ELECTION NOTICE
(To be signed only on exercise of Warrant)
Amedica Corporation
1885 West 2100 South
Salt Lake City, UT 84119
The undersigned hereby elects under Section 2(b) of this Warrant to surrender the right to purchase [______________] shares of common
stock, $0.01 par value per share, of Amedica Corporation (the “Common Stock”) pursuant to the within Warrant and hereby requests the
issuance of [______________] shares of Common Stock. The undersigned requests that certificates for such shares be issued in the name
of:
_________________________________________________________________
(Please print name, address, and social security number)
_________________________________________________________________
and, if said number of shares shall not be all the shares purchasable thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of the undersigned holder of the within Warrant or his Assignee as below
indicated and delivered to the address stated below.
NAME OF HOLDER OR ASSIGNEE:______________________________________
(Please print)
ADDRESS OF HOLDER
OR ASSIGNEE:_____________________________________________________
SIGNATURE OF HOLDER:_____________________________________________
DATED:__________________
- 6 -
THIS WARRANT AND THE SHARES OF CAPITAL STOCK ISSUED UPON ANY EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE
STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, INCLUDING A
PLEDGEE, UNLESS (1) EITHER (A) A REGISTRATION WITH RESPECT THERETO SHALL BE EFFECTIVE UNDER THE
SECURITIES ACT, OR (B) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE, AND (2)
THERE SHALL HAVE BEEN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.
Exhibit 4.28
Right to Purchase ________ Shares of
Common Stock of Amedica Corporation
Warrant No. C-
COMMON STOCK PURCHASE WARRANT
Amedica Corporation, a Delaware corporation (the “Company”), hereby certifies that for value received ___________ (the
“Holder”), or assigns, is entitled to purchase, subject to the terms and conditions hereinafter set forth, up to _________ shares of Common
Stock (the “Warrant Shares”) (subject to adjustment as hereinafter provided) at the Exercise Price, payable as hereinafter provided. This
Warrant is being issued pursuant to the terms of that certain financial advisory services engagement agreement, dated November 12, 2014,
by and between the Company and Westlake Securities LLC (the “Engagement Agreement”).
1. Definitions. As used herein, the following terms shall have the following meanings, unless the context otherwise requires:
(a) “Change of Control” shall mean the occurrence of any of the following events: (i) any “Person” (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), becomes the
“Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then
outstanding voting securities pursuant to a transaction or a series of related transactions which the Board of Directors of
the Company (the “Board”) does not approve; or (ii) (A) a merger or consolidation of the Company whether or not
approved by the Board, other than a merger or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or the parent of such corporation) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving entity or parent of such corporation, as the
case may be, outstanding immediately after such merger or consolidation; (B) or the Company’s stockholders approve an
agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.
(b) “Common Stock” shall mean the Company’s common stock, $0.01 par value per share.
(b) “Exercise Price” shall mean the purchase price to be paid upon exercise of this Warrant in accordance with the terms
hereof, which price initially shall be $1.25 per Warrant Share. The Exercise Price shall be subject to adjustment from time
to time pursuant to the provisions of Section 5 hereof.
(c) “Warrant Expiration Date” shall mean 5:00 p.m., Eastern Time, on November 12, 2019.
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised at any time or from time to time, on any day which is not a
Saturday, Sunday or holiday under the laws of the State of Utah beginning on May 12, 2015 and prior to the Warrant
Expiration Date, for all or any part of the Warrant Shares. In order to exercise this Warrant, in whole or in part, the Holder
shall deliver to the Company at its principal executive offices, or at such other office as the Company may designate by
notice in writing, (i) this originally executed Warrant and (ii) a duly executed written notice of Holder's election to
exercise its Warrant in whole or in part substantially in the form of Exhibit A attached hereto, and shall pay to the
Company by check made payable to the order of the Company or wire transfer of funds to a bank account designated by
the Company an amount equal to the aggregate Exercise Price for all Warrant Shares as to which this Warrant is being
exercised.
(b) Cashless Exercise. In addition to and without limiting the rights of the Holder hereof under the terms of this Warrant,
the Holder may elect to receive, without the payment by the Holder of the Exercise Price, shares of Common Stock equal
to the value of the Warrant Shares or any portion thereof by the surrender of this Warrant (or such portion of this Warrant
being so exercised) together with the Net Issue Election Notice annexed hereto as
Exhibit B duly executed and completed, at its principal executive offices, or at such other office as the Company may
designate by notice in writing. Thereupon, the Company shall issue to the Holder such number of fully paid, validly
issued and nonassessable shares of Common Stock, as is computed using the following formula:
X= Y(A-B)
A
where
X = the number of shares of Common Stock to be issued to the Holder (or such other person or persons as
directed by the Holder) upon such exercise of the rights under this Section 2(c)
Y = the total number of Warrant Shares which the Holder has surrendered for cashless exercise
A = the “Fair Market Value” of one share of Common Stock on the date that the Holder delivers the Net Issue
Election Notice to the Company as provided herein
B = the Exercise Price in effect under this Warrant on the date that the Holder delivers the Net Issue Election
Notice to the Company as provided herein
The “Fair Market Value” of a share of Common Stock as of a particular date (the “Valuation Date”) shall mean the
following: (y) if the Common Stock is then listed on a stock exchange or quoted on a quotation system, the closing sale
price of one share of Common Stock on such exchange or system on the last trading day prior to the Valuation Date; or (z)
if the Common Stock is not then listed on a stock exchange or quoted on a quotation system, the Fair Market Value of one
share of Common Stock as of the Valuation Date shall be determined in good faith by the Board of Directors of the
Company (the “Board”). The Board shall respond promptly in writing to an inquiry by the Holder prior to the exercise
hereunder as to the Fair Market Value of a share of Common Stock.
(c) Issuance of Common Stock. Upon receipt of the documents and payments described in Section 2(a) or Section 2(b), as
the case may be, the Company shall, as promptly as practicable, execute or cause to be executed, and deliver to the Holder
a certificate or certificates representing the aggregate number of full Warrant Shares (or such other stock or securities that
may be issuable upon exercise of the Warrant) issuable upon such exercise. The stock certificate or certificates so
delivered shall be in the denomination specified in said notice and shall be registered in the name of the Holder. This
Warrant shall be deemed to have been exercised and a certificate or certificates for shares of Common Stock shall be
deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes as of the date said notice, together with this Warrant and
the documents and payments described in Section 2(a) or 2(b), as the case may be, are received by the Company as
aforesaid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of said certificate
or certificates, deliver to the Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of
Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
(d) Transfer Restriction Legend. Each certificate for Common Stock issued upon exercise of this Warrant, unless at the
time of exercise the offer and sale of the Warrant Shares are registered under the Securities Act, shall bear the following
legend (and any additional legend required by applicable law or rule) on the face thereof:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.”
3. Reservation of Shares. The Company covenants that it will at all times until the Warrant Expiration Date reserve and keep
available out of its authorized and unissued Common Stock, solely for the purpose of issue upon exercise of this Warrant, such number of
Warrant Shares as shall then be issuable upon the exercise of this Warrant.
- 2 -
4. Loss, Theft, Destruction or Mutilation. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant (including a reasonably detailed affidavit with respect to the circumstances of any loss, theft or destruction of
such Warrant and a customary and reasonable indemnity and surety bond, if requested by the Company), and, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu hereof, a new
Warrant of like tenor.
5. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares issuable upon exercise of this
Warrant will be proportionately increased, and if the Company at any time combines (by reverse stock split, recapitalization or otherwise)
its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination
will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately
decreased.
6. Consolidation, Merger, etc. If there shall be a merger or consolidation of the Company with or into another corporation (other
than a merger or reorganization involving only a change in the state of incorporation of the Company), then as a part of such transaction,
provision shall be made so that the Holder hereof shall thereafter be entitled to receive the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from the merger or consolidation, to which the Holder would have been
entitled if the Holder had exercised this Warrant immediately prior thereto.
7. Notice of Adjustment. Upon any adjustment or other change relating to the Exercise Price or the securities purchasable upon
the exercise of this Warrant, then, and in each such case, the Company shall promptly prepare and deliver to Holder notice, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated.
8. Fractional Shares. The Company shall not issue fractions of shares, upon exercise of this Warrant or otherwise, or distribute
certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, such fraction shall
neither be issued nor extinguished until the final exercise of this Warrant, in which event if a fraction is issuable, the Company shall pay to
the Holder an amount in cash equal to such fraction multiplied by the Exercise Price, as adjusted to date pursuant to Section 5 hereof.
9. Holder Not Deemed Stockholder. The Holder shall not be entitled to vote or to receive dividends or be deemed the holder of
Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained
herein be construed to confer upon the Holder any of the rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof, or to receive dividends or subscription rights, until Holder
shall have exercised this Warrant in accordance with the provisions hereof.
10. Successors and Assigns. This Warrant, and the obligations and rights of the Company hereunder, shall be binding upon and
inure to the benefit of the Company, the Holder, and their respective successors and permitted assigns.
11. Waiver and Amendment. Any provision of this Warrant may be amended, waived or modified only upon the written consent
of the Company and the Holder.
12. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be
delivered in accordance with the terms of Section 7.A of the Engagement Agreement.
13. Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Delaware, United States of America, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of Delaware or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Delaware.
14. Headings; References. All headings used herein are used for convenience only and will not be used to construe or interpret
this Warrant. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
15. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and
conditions contained herein.
[Remainder of page intentionally left blank.]
- 3 -
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of November 12, 2014.
AMEDICA CORPORATION
By:
Name: Kevin Ontiveros
Title:
Chief Legal Officer
- 4 -
EXHIBIT A
EXERCISE FORM
(To be signed only on exercise of Warrant)
Amedica Corporation
1885 West 2100 South
Salt Lake City, UT 84119
The undersigned hereby irrevocably elects to exercise the right to purchase represented by the within Warrant for, and to purchase
thereunder, _____________ shares of common stock, $0.01 par value per share, of Amedica Corporation (the “Common Stock”) at a price
of $_______ per share of Common Stock, and herewith makes payment of $___________ (such payment being by check made payable to
the order of Amedica Corporation, or wire transfer of funds to a bank account designated by Amedica Corporation, or any combination
thereof), surrenders the Warrant and all right, title and interest therein to Amedica Corporation and requests that certificates for such shares
be issued in the name of:
_________________________________________________________________
(Please print name, address, and social security number)
_________________________________________________________________
and, if said number of shares shall not be all the shares purchasable thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of the undersigned holder of the within Warrant or his Assignee as below
indicated and delivered to the address stated below.
NAME OF HOLDER OR ASSIGNEE:______________________________________
(Please print)
ADDRESS OF HOLDER
OR ASSIGNEE:_____________________________________________________
SIGNATURE OF HOLDER:_____________________________________________
DATED:__________________
- 5 -
EXHIBIT B
NET ISSUE ELECTION NOTICE
(To be signed only on exercise of Warrant)
Amedica Corporation
1885 West 2100 South
Salt Lake City, UT 84119
The undersigned hereby elects under Section 2(b) of this Warrant to surrender the right to purchase [______________] shares of common
stock, $0.01 par value per share, of Amedica Corporation (the “Common Stock”) pursuant to the within Warrant and hereby requests the
issuance of [______________] shares of Common Stock. The undersigned requests that certificates for such shares be issued in the name
of:
_________________________________________________________________
(Please print name, address, and social security number)
_________________________________________________________________
and, if said number of shares shall not be all the shares purchasable thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of the undersigned holder of the within Warrant or his Assignee as below
indicated and delivered to the address stated below.
NAME OF HOLDER OR ASSIGNEE:______________________________________
(Please print)
ADDRESS OF HOLDER
OR ASSIGNEE:_____________________________________________________
SIGNATURE OF HOLDER:_____________________________________________
DATED:__________________
- 6 -
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-194977) pertaining to the Amedica
Corporation 2003 Stock Option Plan, the Amedica Amended and Restated 2012 Equity Incentive Plan, and the Amedica 2013 Employee
Stock Purchase Plan of Amedica Corporation of our report dated March 31, 2014, with respect to the consolidated financial statements of
Amedica Corporation as of December 31, 2013 and for the year then ended included in its Annual Report (Form 10-K) for the year ended
December 31, 2014, filed with the Securities and Exchange Commission.
Exhibit 23.1
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 24, 2015
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-194977) pertaining to the Amedica
Corporation Amended and Restated 2012 Equity Incentive Plan and the Amedica Corporation 2003 Stock Option Plan, of our report dated
March 24, 2015, with respect to the consolidated financial statements of Amedica Corporation included in this Annual Report (Form 10-K)
for the year ended December 31, 2014.
Exhibit 23.2
/s/Mantyla McReynolds
Salt Lake City, Utah
March 24, 2015
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, B. Sonny Bal, certify that:
1. I have reviewed this annual report on Form 10-K of Amedica Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 24, 2015
By:
/s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
I, Ty A. Lombardi, certify that:
1. I have reviewed this annual report on Form 10-K of Amedica Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: March 24, 2015
/s/Ty A. Lombardi
Ty A. Lombardi
Principal Accounting Officer
CERTIFICATIONS UNDER SECTION 906
Exhibit 32
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United
States Code), each of the undersigned officers of Amedica Corporation., a Delaware corporation (the “Company”), does hereby certify, to
such officer’s knowledge, that:
The Annual Report for the year ended December 31, 2014 (the “Form 10-K”) of the Company fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the Company.
Date: March 24, 2015
Date: March 24, 2015
/s/ B. Sonny Bal
B. Sonny Bal, M.D.
Chief Executive Officer
/s/ Ty A. Lombardi
Ty A. Lombardi
Principal Accounting Officer