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, 2017
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)
Securities registered pursuant to Section 12(b) of the Act:
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(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 [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 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
[ ]
Accelerated Filer
[ ]
Non-Accelerated Filer
[ ] [Do not check if a smaller reporting company]
Smaller reporting company
[X]
Emerging growth company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 $19,428,662.
The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, as of March 27, 2018 was 4,276,844.
None
DOCUMENTS INCORPORATED BY REFERENCE:
Item Number and Caption
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.
Item 16.
Signatures
Index to Consolidated Financial Statements
Exhibits and Financial Statement Schedules
Form 10-K Summary
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F-1
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. Amedica
Corporation (“we”, “us”, “ourselves”) has 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://investors.amedica.com/sec.cfm 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-15 reverse split of our common stock which
was effected on January 25, 2016 and a 1-for-12 reverse split which was effected on November 10, 2017.
3
ITEM 1. BUSINESS
PART I
Overview
We are a materials company focused on developing, manufacturing and selling silicon nitride ceramics that are used in medical implants
and in a variety of industrial devices. At present, we commercialize silicon nitride in the spine implant market. We believe that our versatile
silicon nitride manufacturing expertise positions us favorably to introduce new and innovative devices in the medical and non-medical
fields. We also believe that we are the first and only company to commercialize silicon nitride medical implants.
We have received 510(k) regulatory clearance in the United States, a CE mark in Europe, ANVISA approval in Brazil, and ARTG and
Prostheses approvals in Australia for a number of our devices that are designed for spinal fusion surgery. To date, more than 33,000 of our
silicon nitride devices have been implanted into patients, with a 10-year successful track record. In March 2018, we received clearance
from the United States Food and Drug Administration, or FDA, to market a modified novel composite spinal fusion device that combines
porous and solid silicon nitride, and is comparable to our commercially-available Valeo®C cervical implants.
We believe that silicon nitride has a superb combination of properties that make it ideally suited for human implantation. Other
biomaterials are based on bone grafts, metal alloys, and polymers- all of which have practical limitations. In contrast, silicon nitride has a
legacy of success in the most demanding and extreme industrial environments. As a human implant material, silicon nitride offers bone
ingrowth, resistance to bacterial infection, resistance to corrosion, superior strength and fracture resistance, and ease of diagnostic imaging,
among other advantages.
We market and sell our Valeo brand of silicon nitride implants to surgeons and hospitals in the United States and to selected markets in
Europe and South America through more than 50 independent sales distributors who are supported by an in-house sales and marketing
management team. These implants are designed for use in cervical (neck) and thoracolumbar (lower back) spine surgery. In 2016 we
entered into a 10-year exclusive distribution agreement with Shandong Weigao Orthopaedic Device Company Limited (“Weigao”) to sell
Amedica-branded silicon nitride spinal fusion devices within the People’s Republic of China (“China”). Weigao, a large orthopedic
company, has expertise in acquiring Chinese Food and Drug Administration (“CFDA”) approval of medical devices, and will assist us in
obtaining regulatory approval. Weigao has committed to minimum purchase requirements totaling 225,000 implants in the first six years
following CFDA clearance. We are also working with other partners in Japan to obtain regulatory approval for silicon nitride in that
country. China and Japan are relevant because historically, ceramic implants are more familiar to, and more readily accepted by surgeons
outside the United States, i.e., in Asia and Europe.
In addition to silicon nitride, we also sell metal-based products in the United States that provide surgeons and hospitals with a complete
package for spinal surgery. These metal products are designed to address spinal deformity and degenerative conditions. Although these
metal products have accounted for approximately 53% and 48% of our product revenues for each of the years ended December 31, 2017
and 2016, respectively, we remain focused on developing and promoting silicon nitride, and driving its adoption through a scientifically-
intense, data-driven strategy.
In addition to direct sales, we have targeted original equipment manufacturer (“OEM”) and private label partnerships in order to accelerate
adoption of silicon nitride, both in the spinal space, and also in future markets such as hip and knee replacements, dental, extremities,
trauma, and sports medicine. Existing biomaterials, based on plastics, metals, and bone grafts have well-recognized limitations that we
believe are addressed by silicon nitride, and we are uniquely positioned to convert existing, successful implant designs made by other
companies into silicon nitride. We believe OEM and private label partnerships will allow us to work with a variety of partners, accelerate
the adoption of silicon nitride, and realize incremental revenue at improved operating margins, when compared to the cost-intensive direct
sales model.
4
We believe that silicon nitride addresses many of the biomaterial-related limitations in fields such as hip and knee replacements, dental
implants, sports medicine, extremities, and trauma surgery. We further believe that the inherent material properties of silicon nitride, and
the ability to formulate the material in a variety of compositions, combined with precise control of the surface properties of the material,
opens up a number of commercial opportunities across orthopedic surgery, neurological surgery, maxillofacial surgery, and other medical
disciplines.
We operate a 30,000 square foot manufacturing facility at our corporate headquarters in Salt Lake City, Utah, and we believe we are the
only vertically integrated silicon nitride medical device manufacturer in the world.
Biomaterials
Biomaterials are natural or synthetic 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.
There are four general categories of biomaterials:
● 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.
● 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.
● 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.
● 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.
Within orthopedics, biomaterials are extensively used in spinal fusion procedures, hip and knee replacements and the repair or stabilization
of fractured bones. Currently, Amedica is the only FDA-cleared and ISO 13485 certified silicon nitride medical device manufacturing
facility in the world. We believe we are the only provider of ceramics-based medical devices used for spinal fusion applications.
Overview
Market Opportunity
We believe our silicon nitride biomaterial 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, as well as dental applications. We believe we can also utilize our silicon nitride technology platform
to develop future products in additional markets, such as the sports medicine, extremities, and trauma markets.
5
Of the interbody spinal fusion procedures conducted in the United States today, a 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. We believe the market has reached another inflection point as surgeons and hospitals recognized the limitations of devices
currently available. 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.
We believe that the main drivers for growth within the orthopedic biomaterials market and, in particular, the spinal fusion and joint
replacement markets, are the following:
● 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.
● 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.
● Market Expansion into New Geographic Areas. We anticipate 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 Brazil and 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 the limitations of currently available products, its size, and the key characteristics silicon nitride possesses,
which are critical for superior interbody spinal fusion outcomes.
● 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. A material which
stimulates bone growth and accelerates fusion rates is ideal in spinal fusion procedures.
● Antibacterial. 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
antibacterial 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.
● 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.
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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.
PEEK (polyetheretherketone)
We believe PEEK is the most frequently used biomaterial for interbody spinal devices and accounted for the majority of interbody spinal
devices implanted in the United States in 2017. 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. This fibrous layer could cause a non-fusion, allow bacterial
colonization, and/or potentially lead to costly revision surgery.
● 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 general 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.
● 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.
Due to radiographic X-rays being the most common way for surgeons to assess fusion, and PEEK being invisible on X-rays, it is
extremely difficult to clearly assess the extent to which fracture rates occur with PEEK interbody fusion devices.
● Lacks Antibacterial Properties. PEEK does not have any inherent antibacterial properties. In fact, a biofilm may form around a
PEEK device after implantation, which could allow for the colonization of bacteria, leading to infection and costly revision
surgeries.
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Allograft Bone
We believe allograft bone was the second most frequently used biomaterial in interbody spinal fusion devices in the United States in 2017.
We believe 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.
● Inconsistent Quality. Generally, allograft bone is not as strong as live bone within the body or other materials used in interbody
devices. Because the cadaveric bone can be harvested from a wide variety of sources, this often leads to inconsistent patient
outcomes. Allograft bone is subject to inconsistent quality and size, which may require surgeons to make compromises on the fit of
the device during surgery. In addition, techniques used to sterilize allograft bone, like gamma irradiation, can cause the allograft to
become brittle and more susceptible to fracture.
● Lacks Antibacterial Properties and Risk of Disease Transmission. In addition to not having inherent antibacterial properties,
allograft bone exposes patients to a greater risk of disease transmission and an adverse auto-immune response.
Metals
We believe metal interbody devices accounted for a fraction of the devices implanted in the United States in 2016. We believe metal-based
interbody fusion devices 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 Antibacterial Properties. Metals do not have inherent antibacterial properties and do not suppress the colonization of bacteria
in and around the device, which can lead to infection and/or costly revision surgeries.
● 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: 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 oxide ceramic-on-cross-linked polyethylene. The use of hip replacement implants
incorporating metal-on-metal and traditional oxide 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 commonly 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:
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● 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
leads 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 costly 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, tends 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 medical condition called metallosis, which involves the deposition and build-up of metal debris in
the soft tissues of the body. Both metal sensitivity and metallosis can result in revision surgery. In addition, we believe traditional
oxide ceramics currently used in total joint replacements accelerate wear of the cross-linked polyethylene liner as compared to our
non-oxide ceramic composition found in our silicon nitride biomaterial platform.
● 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 the hip and knee joints during daily activities. We believe there are strength limitations associated
with traditional oxide ceramic-on-cross-linked polyethylene and traditional oxide ceramic-on-traditional oxide ceramic implants.
● Antibacterial. The biomaterials should have antibacterial properties to reduce the risk of bacteria colonization, infection, revision
surgeries and associated increased costs. None of the most commonly used biomaterials in joint replacement implants have
antibacterial properties.
Our Silicon Nitride Technology Platform
We believe we are the only FDA-cleared and ISO 13485 certified silicon nitride medical device manufacturing facility in the world, and the
only provider of ceramics-based medical devices used for spinal fusion 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 oxide ceramics, which do not possess all of these
characteristics:
● Promotes Bone Growth. Our silicon nitride is osteoconductive through its inherent surface topography that provides scaffolding for
new bone growth. We 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 optimal bone growth environments. Our silicon nitride has an inherent surface chemistry that is more similar to bone than
PEEK and metals. 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.
● 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.
9
● Antibacterial. We have demonstrated in in vitro and in vivo studies that silicon nitride has inherent antibacterial properties, which
reduce the risk of infection in and around a silicon nitride device. PEEK, traditional ceramics, metals and bone do not have inherent
antibacterial characteristics. These properties were highlighted in an in vitro study (Acta Biomater. 2012 Dec;8(12):4447-54. doi:
10.1016/j.actbio.2012.07.038. Epub 2012 Jul 31.), 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 antibacterial 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, 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. 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 could have higher resistance to wear than metal-
on-cross-linked polyethylene and traditional oxide ceramic-on-cross-linked polyethylene joint implants, the two most commonly
used total hip replacement implants. Wear debris associated with metal implants increases the risk of metal sensitivity and
metallosis. It 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 and traditional oxide ceramic
products.
Our Forms of Silicon Nitride
The chemical composition of our in-house formulation of silicon nitride and our 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 biomaterial in a variety
of ways depending on the 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. This form of silicon nitride is a fully dense, load-bearing solid used for devices that require high strength,
toughness, fracture resistance and low wear, including interbody spinal fusion devices, hip and knee replacement implants, and
dental implants.
● Porous Silicon Nitride. While this form of silicon nitride has a chemical composition that is identical to that of our monolithic solid
silicon nitride, this formulation has a porous structure, which is engineered to mimic cancellous bone, the spongy 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. We believe our porous silicon nitride can act as a substitute for the orthobiologics currently used to fill
interbody devices in an effort to stimulate fusion, as a bone void filler, and as a porous scaffold for medical devices.
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● Composite Silicon Nitride. This form of silicon nitride is a combination, or composite, of our solid monolithic and porous
formulations 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 component on the outside and a porous 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 an
extremely thin layer of 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 antibacterial barrier between the device
and the adjacent bone or tissue.
We believe we can use our silicon nitride technology platform to become a leading biomaterial company and have the following principal
competitive strengths:
Our Competitive 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 the only company to develop and manufacture a ceramic for use in FDA cleared spinal fusion 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.
● 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. 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 fixation products. We offer a full suite of
spinal fusion solutions, 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.
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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.
● Continue Establishing and Cultivating OEM and Private Label Partnerships. Because we believe silicon nitride is a superior
platform and technology for application in the spine, total joint, dental, and extremities markets, we have established, and will seek
to establish, additional partnerships with other medical device companies to replace their inferior materials and products with
products manufactured from silicon nitride. For example, under an OEM arrangement, we would manufacture the company’s spinal
fusion implant designs with silicon nitride and leverage their existing instrumentation, allowing the company to convert their
existing line of spinal fusion devices with limited capital expenditures. Additionally, a private label arrangement would allow our
partners to sell Amedica’s Valeo line of silicon nitride interbody spinal fusion devises under their own brand name. The private
label agreements typically provide a quicker pathway to revenue as compared to the OEM arrangements.
● 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, we have a sales agent
agreement with a Brazilian medical device distributor to distribute our Valeo line of silicon nitride interbody implants. 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 and solid silicon nitride components for use in total hip and knee replacement product candidates that we plan to
develop in collaboration with a strategic partner. We are also working with the FDA to define the regulatory pathway required for
development and commercialization 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, extremities,
sports medicine, cardiovascular and trauma markets. We have manufactured prototypes of dental implants, extremities, sports
medicine and trauma products, and 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 future products in these areas.
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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 for our first generation spinal fusion devices, 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 which we launched 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 broad 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, our second
generation LL Valeo interbody spinal fusion devices in August 2015 and our second generation C Valeo interbody spinal fusion devices in
February 2016.
Our current products are:
Valeo Interbody Fusion Devices
AL: Anterior Lumbar
PL: Posterior Lumbar
OL: Oblique Lumbar
TL: Transforaminal Lumbar
LL: Lateral Lumbar
C: Cervical
CORP: Corpectomy
C+CSC (cleared in Australia and the EU but not the USA)
C+CSC with Lumen
Generation
1st and 2nd
1st and 2nd
1st and 2nd
1st and 2nd
2nd
1st and 2nd
1st
1st
1st
In 2009, we received a CE Mark to commercialize the Valeo interbody spinal fusion devices made from our composite silicon nitride. The
porous silicon nitride center 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
Europe and Australia. 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 a 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 and 24 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. In March 2018, the FDA cleared our
510(k) premarket application to commercialize a composite silicon nitride implant which we refer to as our Valeo C+CsC with Lumen
Interbody Fusion Device. The Valeo C+CsC with Lumen Interbody Fusion Device is a composite spinal fusion implant that combines
different densities of our proprietary medical grade silicon nitride ceramic. An outer shell of solid silicon nitride is manufactured around a
porous core, called CsC (Cancellous structured Ceramic). The Valeo C+CsC device is already used in Europe, and the Valeo C+CsC with
Lumen is the introduction of this porous technology in the US.
Valeo Composite (Monolithic + Porous Silicon Nitride)
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Our Non-Silicon Nitride Spinal Fixation Products
We sell a line of complementary non-silicon nitride spinal fixation products to provide surgeons and hospitals with a broader range of
products. Product revenue from the sale of our non-silicon nitride spinal fixation products further supports development of our silicon
nitride products and product candidates. In November 2016 the FDA notified the company that the new pedicle screw system, which we
refer to as our Taurus™ Pedicle Screw System, was cleared for commercialization. The Taurus Pedicle Screw System is intended to
immobilize and stabilize the spinal segments to supplement fusion of the lumbar and/or sacral spine. Taurus™ is a modular degenerative
system, connecting strength with intra-operative flexibility. The Taurus™ modular screw can be attached in-situ facilitating screw-to-screw
distraction, improving disc space visualization. The dual-lead screw design maintains a rapid insertion speed, while improving screw
pullout strength. Additionally, the tension head-body holds its position at any angle, and the patented helical flange technology eliminates
head splay and cross-threading.
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 silicon nitride, which 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 have initiated biomechanical testing of our solid silicon nitride femoral heads. The final results of this test will
be released in 2018. If the tests indicate that silicon nitride femoral heads are superior in terms of wear performance, taper corrosion,
strength and in vitro hydrothermal stability, we eventually intend to commercialize this product in cooperation with a strategic partner.
However, clearance of these types of devices by the FDA will be required. Currently, the FDA has indicated that a limited one to two year
clinical trial may be necessary to obtain clearance. If clearance is eventually obtained, we intend to commercially launch products for use in
total hip replacement in 2020 or 2021.
Our Total Knee Implant Product Candidates
We have developed a femoral condyle design made from our solid 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.
Following the potential clearance of the femoral head components (discussed above), we intend to initiate biomechanical testing with a
strategic partner for silicon nitride components for use in knee replacement procedures to support a 510(k) submission to the FDA. If this
clearance is eventually 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, extremities, sports medicine and trauma markets.
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We have entered into a joint development agreement with a dental implant design company and distributor of dental technologies for the
development of a silicon nitride based dental implant system and devices.
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
applications, an osteotomy wedge for extremities applications, 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 composition 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 reviewed publications. We believe our product development strategy is consistent with the manner in which
other biomaterials have been 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 cleared by the FDA 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 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.
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In 2008, we conducted an animal study in which we evaluated the level of osteointegration of our porous 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 porous silicon nitride to a depth of 3 millimeters, or mm. This
animal study demonstrated the rapid osteointegration potential of our porous silicon nitride composition.
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.
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
(MPam1/2)(1)
8 – 11
3 – 5
5 – 10
2 – 3
1 – 2
50 – 100
75
(1) GPa is a giga-pascal. Pascals are a measure of pressure. MPam1/2 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.
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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 oxide ceramic-on-
cross-linked polyethylene articulating hip components.
Antibacterial Properties
The results of the two studies at Brown University in 2012, demonstrate that our solid silicon nitride has antibacterial 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.
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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 select markets in Europe and South America. To supplement our independent sales distributors, in select international markets,
such as Europe, China, Japan, Australia, Latin America 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, we have
entered into a distribution agreement with a Brazilian medical device distributor for distribution of our Valeo line of products in Brazil, are
looking for an appropriate distribution partner in Australia, and we are working with strategic partners in China and Japan to gain approval
of our products for commercialization in those countries. 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, 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. We also
expect to do the same in other markets such as total hip and knee joint replacements, dental, extremities, 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.
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.
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Non-Silicon Nitride and Instruments Manufacturing
We obtain our non-silicon nitride spinal fixation 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
fixation 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, nondisclosure agreements, proprietary information ownership agreements
and other intellectual property 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 27, 2018, we had 58 issued U.S. patents, 5 pending U.S. patent applications, 1 pending PCT application, 6 granted foreign
patents and 1 pending foreign patent applications. Our first issued patent expired in 2016, with the last of these patents expiring in 2034.
The first core patents do not expire until 2022; these include US 6,881,229 and US 6,790,233.
We have fourteen U.S. patents and one pending U.S. patent application directed to articulating implants using our high-strength, high
toughness doped silicon nitride solid ceramic. The issued patents, which include US 6,881,229; US 7,666,229; US 7,758,646; US 7,695,521;
US 7,771,481; US 7,776,085; US 7,780,738; US 8,016,890; US 8,123,812; US 8,133,284, US 8,377,134; US 8,747,540; US 9,051,639; US
9,517,136; begin to expire in 2022. The pending U.S. patent application has been assigned serial no. 15/162,363 and a non-final Office
action was issued January 25, 2018.
We also have six U.S. patents and five foreign patent (Switzerland, Germany, France, Greece and the Netherlands) 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. These issued patents, which include US 6,790,233; US 6,846,327; US 7,695,521; US 8,133,284;
US 8,747,408; US 9,649,197; and EP 1389978, begin to expire in 2022. EP 1389978 was registered in Switzerland, Germany, France,
Greece and the Netherlands.
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 include US 5,563,106 and US 5,705,448,
which have now expired; these patents also include US 6,617,270, which expires in 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 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.
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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 oxide 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.
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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.
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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.
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.
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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.” 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. 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.
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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 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.
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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.
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.
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Healthcare Reform
The regulations we are subject to may change as result of legislative and regulatory healthcare reform.
Significant healthcare reform was enacted in 2010 when the Patient Protection and Affordable Care Act or the PPACA, was signed into
law. State laws also were enacted to implement the PPACA. While a primary goal of these healthcare reform efforts was to expand
coverage to more individuals, it also involved increased government price controls, additional regulatory mandates and other measures
designed to constrain medical costs. The PPACA significantly impacts the medical device industry. Among other things, the PPACA:
● imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United
States, which began on January 1, 2013, but was suspended during 2016 and 2017 and has been suspended for 2018 and 2019;
● establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical
effectiveness research in an effort to coordinate and develop such research; and
● implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and
other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013,
former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. Moreover, certain legislative
changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under the Trump
Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which among other
things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component of PPACA’s
approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018, which, among other
things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted recommendations to
reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
Additional legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal
healthcare reform measures will be adopted in the future, any of which could reduce the number of patients with coverage or limit the
amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our
products or additional pricing pressure.
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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.
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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, 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.
Employees
As of March 1, 2018, we had 33 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.
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, 2017 and 2016 we incurred a net loss of
$9.3 million and $14.8 million, respectively, and used cash in operations of $4.8 million and $7.2 million, respectively. We have an
accumulated deficit of $220.6 million at December 31, 2017. 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 and property and equipment, 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.
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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;
● 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 payers for the procedures that use our
products;
● Medicare, Medicaid or other third-party payers 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.
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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 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.
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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 payers.
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.
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, 2017 and 2016, our largest customer, Bon Secours St. Mary’s Hospital, or St. Mary’s, had a receivable balance of
approximately 12% and 16%, respectively, of our total trade accounts receivable. In addition, St. Mary’s accounted for 21 % and 18% of
our product revenues for the years ended December 31, 2017 and 2016, respectively. 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.
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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 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. Kyocera has been qualified as a second source supplier of our silicon nitride products. Although we expect this
arrangement with Kyocera to continue, if Kyocera ceases to continue as a qualified manufacturer of these products and product candidates,
we will 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, including the CFDA.
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 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.
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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.
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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.
We are seeking a strategic partner to develop and commercialize our total joint replacement product candidates. We will be reliant on our
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 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 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
establishing OEM partnerships with other companies to replace their materials and products with silicon nitride. Sales of products to OEM
customers will 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.
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 payers at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payers
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 payers for our
products. However, hospitals and other healthcare providers that purchase our orthopedic products for treatment of their patients generally
rely on third-party payers 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 payers 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.
Many private payers 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 payers also denying coverage for our products. Third-party payers 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 payer, or was used for an unapproved use. Unfavorable coverage or reimbursement
decisions by government programs or private payers underscore the uncertainty that our products face in the market and could have a
material adverse effect on our business.
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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 payers 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 payers frequently follow government payment policies and are likewise interested in controlling increases in
the cost of medical care. In addition, some payers 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 payer 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 payers 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 payers 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 payers, that reimbursement will be available or, if available, that the third-party
payers’ 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.
Moreover, certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and
under the Trump Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which
among other things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component
of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018, which,
among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted
recommendations to reduce Medicare spending if projected Medicare spending exceeded a specified growth rate we cannot predict the
ultimate content, timing or effect of any changes to the Health Care Reform Act or other federal and state reform efforts. There is no
assurance that federal or state healthcare reform will not adversely affect our business and financial results, and we cannot predict how
future federal or state legislative, judicial or administrative changes relating to healthcare reform will affect our business.
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.
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 payers and may have a material adverse effect on our business, results of operations, financial
condition and liquidity.
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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.
We 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. We may not have sufficient personnel to effectuate our business strategy due to our recent
reduction in force.
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 change-in-control
severance 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 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.
In October 2016, we implemented a substantial reduction in our workforce by approximately 38% to lower operating expenses. This most
recent restructuring plan and other such efforts could result in disruptions to our operations. We may not have sufficient number of
qualified personnel to effectuate our business strategy which 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,
2017 was $0.5 million. 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 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.
36
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 under the Loan and Security Agreement and the associated liquidity covenant limit (as described
below) 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 Agreement restricts our ability to incur additional pari passu indebtedness, which
may reduce our ability to seek additional 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 or could cause us to cease 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 covenants set forth in the Exchange Notes, we will be in default of the Exchange Notes.
On January 3, 2018, we entered into an Assignment Agreement (the “Assignment Agreement”) with MEF I, LP and Anson Investments
Master Fund, LP (the “Assignees” and each an “Assignee”), Hercules Technology III, L.P. (“HT III”) and Hercules Capital, Inc. (“HC”
and, together with HT III, “Hercules”), pursuant to which Hercules assigned to the Assignees all amounts remaining due under the Loan
and Security Agreement, dated June 30, 2014, as amended, between the Company and Hercules (the “Loan and Security Agreement”) and
(2) the note (the “Hercules Note”) between the Company and Hercules evidencing the amounts due under the Loan and Security
Agreement. The total amount assigned by Hercules to the Assignees equals in the aggregate $2.2 million, which is secured by the same
collateral underlying the Loan and Security Agreement.
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On January 3, 2018, we entered into an exchange agreement (the “Exchange Agreement”) with the Assignees, pursuant to which the
Company agreed to exchange (the “Exchange”) the Hercules Note held by the Assignees for senior secured convertible promissory notes
each in the principal amount of $1.1 million for an aggregate principal amount of $2.3 million (the “Exchange Notes”).
The Exchange Notes contain certain covenants and other obligations to which we are required to adhere to while the Exchange Notes are
outstanding. If we were to breach any of these covenants or obligations the Assignees could declare that an event of default has occurred
under the Exchange Notes, and declare that the outstanding principal amount of the Exchange Notes, plus accrued but unpaid interest,
liquidated damages and other amounts owing in respect thereof through the date of acceleration, immediately due and payable, in cash or in
shares of common stock. Additionally, after the occurrence of any event of default, the interest rate on the Exchange Notes shall accrue at
an additional interest rate equal to the lesser of two percent (2%) per month (twenty-four percent (24%) per annum) or the maximum rate
permitted under applicable law. Any declaration of an event of default would significantly harm our business and prospects and could cause
the price of our common stock to decline.
If we do not adhere to the covenants set forth in the Note, we will be in default of the Note.
On January 31, 2018, we entered into a securities purchase agreement (the “Purchase Agreement”) with L2 Capital LLC (“L2” or the
“Holder”). Pursuant to the Purchase Agreement, the Company agreed to sell an original issue discount promissory note in the aggregate
principal amount of up to $0.8 million (the “Note”) for an aggregate purchase price of up to $0.8 million (the “Consideration”) and
warrants to purchase up to an aggregate of 68,257 shares of common stock of the Company (the “Warrants”).
The Note contains certain covenants and other obligations to which we are required to adhere to while the Note is outstanding. If we were
to breach any of these covenants or obligations the Holder could declare that an event of default has occurred under the Note, and declare
that the outstanding principal amount of the Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect
thereof through the date of acceleration, immediately due and payable, in cash or in shares of common stock. Additionally, after the
occurrence of any event of default, the interest rate on the Note shall accrue at an additional interest rate equal to eighteen percent (18%)
per annum or the maximum rate permitted under applicable law. Any declaration of an event of default would significantly harm our
business and prospects 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 may 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. Further, our current debt obligations to our current debt holders could
also impair our ability to raise future capital through equity or debt transactions. 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.
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, 2017 includes an explanatory
paragraph stating that our recurring losses from operations raises 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.
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We have identified material weaknesses in our internal control over financial reporting and such weaknesses have led to a conclusion
that our disclosure controls and procedures were not effective as of December 31, 2017. Our ability to remediate these material
weaknesses, our discovery of additional weaknesses, and our inability to achieve and maintain effective disclosure controls and
procedures and internal control over financial reporting, have and could continue to adversely affect our results of operations, our stock
price and investor confidence in our company.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over
financial reporting. As disclosed in more detail under “Controls and Procedures” in Part II, Item 9A of this Report, management has
concluded that, as of December 31, 2017, our internal control over financial reporting was not effective due to the material weaknesses
described below.
The design and operating effectiveness of our controls were inadequate to ensure that complex accounting matters are properly accounted
for and reviewed in a timely manner. As a result, we failed to accurately record a complex equity transaction which caused the restatements
of our first, second and third quarter 2017 filings and annual 2016 filing. In addition, we failed to properly evaluate and test certain long-
lived assets for impairment, which ultimately resulted in recognition of an impairment charge. These errors are a result of the following
control deficiencies:
Control Environment and Risk Assessment – The Company did not have an effective control environment with the structure necessary
for effective internal controls over financial reporting. Further, the Company did not have an effective risk assessment to identify and assess
risks associated with changes to the Company’s structure and the impact on internal controls. The Company did not have appropriately
qualified personnel to meet the Company’s control objectives. The Company does not have personnel with an appropriate level of US
GAAP knowledge and experience to properly review and evaluate the work performed by other Company personnel and experts related to
complex accounting matters.
Control Activities – The Company did not have control activities that were designed and operating effectively including management
review controls, controls related to monitoring and assessing the work of consultants, and controls to verify the completeness and adequacy
of information. Specifically, the Company did not have procedures for competent personnel to review work performed by experts in
relation to complex debt and equity transactions and impairment valuations.
Monitoring Activities – The Company did not maintain effective monitoring controls related to the financial reporting process. The
Company did not effectively monitor the changes in internal control related to changes in the roles and responsibilities associated with the
changes in personnel and organizational structure. The failure to properly monitor impacted the timing, accuracy, and completion of the
work related to significant accounting matters.
Our Chief Executive Officer and Principal Financial Officer continue with a review of our controls relating to complex accounting matters.
Although our analysis is not complete, we have added additional resources with expertise in accounting for complex accounting matters
including timely review and evaluation of assets for potential impairment. We are also considering redesigning controls to add additional
layers of review and approval whenever entering into or subsequently converting, exercising, amending, repricing, exiting or otherwise
experiencing changes in or to complex financial instruments.
If we fail to remediate these material weaknesses and maintain an effective system of disclosure controls or internal control over financial
reporting, our business and results of operations could be harmed, investors could lose confidence in our reported financial information and
our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. Any of these could result
in delisting actions by the NASDAQ Stock Market, investigation and sanctions by regulatory authorities, and adversely affect our business
and the trading price of our common stock. In addition, failure to maintain effective internal control over financial reporting could result in
investigations or sanctions by regulatory authorities.
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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 definite-lived
intangible assets for impairment if events occur or circumstances change that would indicate the remaining net book value of the definite-
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 solid silicon nitride femoral head component, the FDA requires clinical data as part of the
510(k) clearance process.
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, including those
of the CFDA, 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. There is no guarantee that we will receive the necessary regulatory approvals
for our product candidates either inside the United States or internationally, including approvals from the CFDA. If our product candidates
do not receive necessary regulatory approvals, our business could be materially and adversely affected.
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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;
● 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.
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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 payers 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 payers and current and potential customers, including providers and physicians, as
well as physician owned distributorships or PODs, 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;
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● 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;
● 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 payers,
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.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, President Donald Trump signed into law sweeping tax reform, which overhauls individual, business and
international taxes including, but not limited to:
● Cutting the corporate federal statutory tax rate to 21%;
● Limiting net interest expense deductions to 30% of adjusted taxable income; and
● Limiting the net operating loss deduction to 80% of taxable income.
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The reduction in tax rate will result in a reduction in the deferred tax assets. We have previously used the 35% federal statutory tax rate to
calculate the value of those assets. Also, if we fail to generate significant taxable income, we may not be able to fully deduct the interest
expense on our debt, which could result in us having to pay increased federal income taxes. We have also generated substantial taxable
losses in the past and may continue to do so in the future. Although the treatment of tax losses generated before December 31, 2017 has not
changed, tax losses generated in fiscal 2018 and beyond will only be able to offset 80% of taxable income, although the losses may be
carried forward indefinitely. This could cause us to have to pay federal income taxes despite generating a loss for federal income tax
purposes in the future. We continue to work with our tax advisors to determine the full impact that the new tax bill will have on our
Company.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain and monitor 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 payers 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 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:
● imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United
States, which began on January 1, 2013, but was suspended during 2016 and 2017 and has been suspended for 2018 and 2019;
● establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical
effectiveness research in an effort to coordinate and develop such research; and
● implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and
other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013,
former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. Moreover, certain legislative
changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under the Trump
Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which among other
things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component of PPACA’s
approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018, which, among other
things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted recommendations to
reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
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Additional legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal
healthcare reform measures will be adopted in the future, any of which could reduce the number of patients with coverage or limit the
amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our
products or additional pricing pressure.
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 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.
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.
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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 silicon nitride or the process we use for manufacturing
our solid 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 solid 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
solid 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.
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.
46
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.
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.
47
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;
● our ability to enter into OEM and private label partnership agreements and the terms of those agreements;
● 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;
48
● 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;
● 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.
49
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.
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. The Loan and Security Agreement contains a negative covenant which prohibits us from paying dividends to our stockholders
without the prior written consent of Hercules Technology. In addition, the terms of any future debt or credit facility may preclude us from
paying any dividends.
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.
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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 $700.0 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 could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital.
On January 2, 2018, the Company received a notification from the Listing Qualifications Department of Nasdaq indicating that the
Company is not in compliance with Nasdaq Listing Rule 5620(a) due to its failure to hold an annual meeting of shareholders within twelve
months of the end of the Company’s fiscal year ended December 31, 2016. On February 16, 2018, we submitted a plan to regain
compliance. Our plan was accepted by Nasdaq and we now have until June 29, 2018, to regain compliance. There can be no assurance that
the Company will be able to regain compliance with Nasdaq requirements or will otherwise be in compliance with other Nasdaq listing
criteria.
If we cease to be eligible to trade on the Nasdaq Capital Market:
● We may have to pursue trading on a less recognized or accepted market, such as the OTC Bulletin Board or the “pink sheets.”
● The trading price of our common stock could suffer, including an increased spread between the “bid” and “asked” prices quoted by
market makers.
● Shares of our common stock could be less liquid and marketable, thereby reducing the ability of stockholders to purchase or sell our
shares as quickly and as inexpensively as they have done historically. If our stock is traded as a “penny stock,” transactions in our
stock would be more difficult and cumbersome.
● We may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less
attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in,
or prohibited from, investing in our common stock. This may also cause the market price of our common stock to decline.
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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 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 December 2019. 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.
The company is subleasing approximately 6,500 square feet to a third party through April of 2018 and approximately 5,354 square feet to
another third party through December 2018.
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.
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”.
52
The following table sets forth the high and low sale prices of our common stock, as reported by NASDAQ Capital Markets for the periods
indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
High
Low
8.87 $
5.39 $
5.24 $
6.94 $
2016
High
Low
43.44 $
33.60 $
16.80 $
13.08 $
4.24
3.15
3.24
2.89
13.92
14.64
7.20
7.20
$
$
$
$
$
$
$
$
Prices listed are adjusted to reflect both the 1/25/16 reverse stock split and the 11/10/17 reverse stock split.
Holders of Record
As of March 27, 2018, we had approximately 376 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 declared or 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.
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 materials company focused on developing, manufacturing and selling silicon nitride ceramics that are used in medical implants
and in a variety of industrial devices. At present, we commercialize silicon nitride in the spine implant market. We believe that our facile
silicon nitride manufacturing expertise positions us favorably to introduce new and innovative devices in the medical and non-medical
fields. We also believe that we are the first and only company to commercialize silicon nitride medical implants.
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We have received 510(k) regulatory clearance in the United States, a CE mark in Europe, and ANVISA approval in Brazil for a number of
our devices that are designed for spinal fusion surgery. To date, more than 28,000 of our silicon nitride devices have been implanted into
patients, with an 8-year successful track record. In December 2016, we re-filed an FDA 510(k) submission for clearance in the United
States of a modified novel composite spinal fusion device that combines porous and solid silicon nitride and obviates the need for bone
grafts that is comparable to our commercially-available Valeo®C cervical implants.
We believe that silicon nitride has a superb combination of properties that make it ideally suited for human implantation. Other
biomaterials are based on bone grafts, metal alloys, and polymers; all of which have practical limitations. In contrast, silicon nitride has a
legacy of success in the most demanding and extreme industrial environments. As a human implant material, silicon nitride offers bone
ingrowth, resistance to bacterial infection, resistance to corrosion, superior strength and fracture resistance, and ease of diagnostic imaging,
among other advantages.
We market and sell our Valeo brand of silicon nitride implants to surgeons and hospitals in the United States and to selected markets in
Europe and South America through more than 50 independent sales distributors who are supported by an in-house sales and marketing
management team. These implants are designed for use in cervical (neck) and thoracolumbar (lower back) spine surgery. In 2016 we
entered into a 10-year exclusive distribution agreement with Shandong Weigao Orthopaedic Device Company Limited (“Weigao”) to sell
Amedica-branded silicon nitride spinal fusion devices within the People’s Republic of China (“China”). Weigao, a large orthopedic
company, has expertise in acquiring Chinese Food and Drug Administration (“CFDA”) approval of medical devices, and will assist us in
obtaining regulatory approval. Weigao has committed to minimum purchase requirements totaling 225,000 implants in the first six years
following CFDA clearance. We are also working with other partners in Japan to obtain regulatory approval for silicon nitride in that
country. China and Japan are relevant because historically, ceramic implants are more familiar to, and more readily accepted by surgeons
outside the United States, i.e., in Asia and Europe.
In addition to silicon nitride, we also sell metal-based products in the United States that provide surgeons and hospitals with a complete
package for spinal surgery. These metal products are designed to address spinal deformity and degenerative conditions. Although these
metal products have accounted for approximately 53% and 48% of our product revenues for the years ended December 31, 2017 and 2016,
respectively, we remain focused on developing and promoting silicon nitride, and driving its adoption through a scientifically-intense, data-
driven strategy.
In addition to direct sales, we have targeted original equipment manufacturer (“OEM”) and private label partnerships in order to accelerate
adoption of silicon nitride, both in the spinal space, and also in future markets such as hip and knee replacements, dental, extremities,
trauma, and sports medicine. Existing biomaterials, based on plastics, metals, and bone grafts have well-recognized limitations that we
believe are addressed by silicon nitride, and we are uniquely positioned to convert existing, successful implant designs made by other
companies into silicon nitride. We believe OEM and private label partnerships will allow us to work with a variety of partners, accelerate
the adoption of silicon nitride, and realize incremental revenue at improved operating margins, when compared to the cost-intensive direct
sales model.
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We believe that silicon nitride addresses many of the biomaterial-related limitations in fields such as hip and knee replacements, dental
implants, sports medicine, extremities, and trauma surgery. We further believe that the inherent material properties of silicon nitride, and
the ability to formulate the material in a variety of compositions, combined with precise control of the surface properties of the material,
opens up a number of commercial opportunities across orthopedic surgery, neurological surgery, maxillofacial surgery, and other medical
disciplines.
We operate a 30,000 square foot manufacturing facility at our corporate headquarters in Salt Lake City, Utah, and we believe we are the
only vertically integrated silicon nitride medical device manufacturer in the world.
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 and fixation devices and related products used in the treatment of
spine disorders. Our product revenue is generated from sales to three types of customers: (1) surgeons and hospitals; (2) stocking
distributors; and (3) private label customers. 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 and private label customers. 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 or private label customers, and all other revenue recognition criteria have been met. We generally recognize revenue
from sales to stocking distributors and private label customers at the time the product is shipped to the distributor. Stocking distributors and
private label customers, 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 and private label customers 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.
We believe our product revenue will increase due to our sales and marketing efforts and as we continue to introduce new products into the
market. 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
products, from third-party manufacturers, while we currently manufacture our silicon-nitride products in-house.
Specific provisions for excess or obsolete inventory 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. These payments are recorded as cost of revenue. In addition, during 2016 we incurred impairment charges relating to the ceramic
equipment used to manufacture implants.
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Gross Profit
Our gross profit measures our product revenue relative to our cost of revenue. We expect our gross profit to decrease as we expand the
penetration of our silicon nitride technology platform through OEM and private label partnerships, which offer additional avenues for the
adoption of silicon nitride, but they are not an area of focus at the moment.
Research and Development Expenses
Our 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 dental applications which, may increase our total
research and development expenses.
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 sets necessary to perform 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 (and for 2016, impairment charges) of the surgical instruments.
We expect our commissions 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 consist primarily 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 also include other expenses not part of
the other cost categories mentioned above, including facility expenses and professional fees for accounting and legal services. In addition,
during 2016 we incurred impairment charges relating to leasehold improvements.
We expect our general and administrative expenses to remain stable or slightly decline as we continue to manage costs closely and look for
opportunities to make improvements.
Reverse Stock Split
On November 10, 2017, the Company effected a 1 for 12 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 the accompanying consolidated financial statements prior to November 10, 2017
have been adjusted retroactively to reflect the reverse stock split.
56
Results of Operations
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
The following table sets forth, for the periods indicated, our results of operations for the years ended December 31, 2017 and 2016 (in
thousands):
Year Ended December 31,
2017
2016
$ Change
% Change
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 loss before income taxes
Provision for income taxes
Net loss
Deemed dividend related to beneficial conversion feature and
accretion of discount on convertible series A preferred stock
Net loss attributable to common stockholders
$
11,227 $
6,352
4,876
15,226 $
3,777
11,449
5,077
4,380
6,472
15,929
(11,053)
1,724
(9,329)
-
(9,329)
6,345
6,292
10,347
22,984
(11,535)
(3,228)
(14,763)
-
(14,763)
(3,999)
2,575
(6,573)
(1,268)
(1,912)
(3,875)
(7,055)
482
4,952
5,434
-
5,434
-
(9,329) $
(6,278)
(21,041) $
(6,278)
11,712
$
57
-26%
68%
-57%
-20%
-30%
-37%
-31%
4%
153%
37%
N/A
37%
N/A
56%
Product Revenue
The following table sets forth our product revenue from sales of the indicated product category for the years ended December 31, 2017 and
2016 (in thousands):
Silicon Nitride
Non-Silicon Nitride
Total product revenue
Year Ended December 31,
2017
2016
$ Change
% Change
$
$
5,258 $
5,969
11,227 $
7,896 $
7,330
15,226 $
(2,638)
(1,361)
(3,999)
-33%
-19%
-26%
Total product revenue was $11.2 million in 2017 as compared to $15.2 million in 2016, a decrease of $4.0 million or 26%. This decline was
due to silicon nitride sales decreasing by $2.6 million, or 33%, and non-silicon nitride sales decreasing by $1.4 million, or 19%, as
compared to the same period in 2016. This decrease was primarily due to the loss of surgeons and the consequences from our restructuring,
both of which occurred during the latter part of 2016.
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,
2017
2016
$ Change
% Change
$
$
11,088 $
139
11,227 $
14,919 $
307
15,226 $
(3,831)
(168)
(3,999)
-26%
-55%
-26%
International revenue decreased in 2017 as compared to 2016. This is due to our Brazilian distributor moving from building inventory
during 2016 to maintaining inventory levels during the same period in 2017.
Costs of Revenue and Gross Profit
Our cost of revenue increased $2.6 million, or 68%, as compared to the same period in 2016 even though our sales decreased. The increase
was primarily due to an increase in the provision for inventory reserve of $3.4 million. Gross profit decreased $6.6 million, or 57%,
primarily due to the increase in the provision for inventory reserve.
Research and Development Expenses
Research and development expenses decreased $1.3 million, or 20%, as compared to the same period in 2016. This decrease was primarily
due to a $0.8 million reduction in personnel related expenses related to the October 2016 reduction in force and a $0.5 million decrease in
other misc. accounts.
General and Administrative Expenses
General and administrative expenses decreased $1.9 million, or 30%, as compared to the same period in 2016. This decrease was primarily
due to a $0.9 million decrease in personnel related expenses related to the October 2016 reduction in force, a $1.0 million decrease in legal
and patent expenses, a $0.1 million decrease in investor relations expenses and the Company’s efforts to reduce costs and $0.2 million
reduction in impairment on leasehold improvements, offset by $0.3 million increase in accounting and consulting fees.
Sales and Marketing Expenses
Sales and marketing expenses decreased $3.9 million, or 37%, as compared to the same period in 2016. This decrease was primarily due to
a $1.4 million decrease in commissions, a $0.6 million decrease in personnel related expenses related to the October 2016 reduction in
force, a $1.2 million decrease in depreciation expense, a $0.5 million decrease in impairment of instrument sets and a $0.2 million decrease
in other accounts.
58
Deemed Dividend
Deemed dividend in 2016 related to a beneficial conversion feature and accretion of discount on convertible preferred stock valued at $6.3
million in 2016, compared to none for 2017. A beneficial conversion amount was calculated in association with the 2016 issuance of
certain convertible preferred stock and warrants that could convert to common stock at a discount below the trading price on the date of
issuance. The preferred stock was converted to common stock during 2016. No such stock was issued or converted during 2017.
Other Income (Expense), Net
Other expenses decreased $5.0 million, or 153%, as compared to the same period in 2016. This decrease was primarily due to a $3.2 million
decrease in interest expense, a $0.6 million increase on gain in fair value of derivative liabilities, a $0.4 million decrease in offering costs
and a $0.7 million decrease in expense due to the extinguishment of debt.
Liquidity and Capital Resources
The consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from
uncertainty related to its ability to continue as a going concern within one year from the date of issuance of these consolidated financial
statements.
For the years ended December 31, 2017 and 2016, we incurred a net loss of $9.3 million and $14.8 million, respectively, and used cash in
operations of $4.7 million and $7.2 million, respectively. We had an accumulated deficit of $220.6 million and $211.3 million as of
December 31, 2017 and 2016, respectively. To date, our 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
we will continue to generate operating losses in the foreseeable future and use cash in operations. Our continuation as a going concern is
dependent upon its ability to increase sales, implement cost saving measures, maintain compliance with debt covenants and/or raise
additional funds through the capital markets. Whether and when we can attain profitability and positive cash flows from operations or
obtain additional financing is uncertain.
In 2016 we implemented certain cost saving measures, including workforce and office space reductions, and have continued to evaluate
additional cost savings alternatives during 2017. These additional cost savings measures may include additional workforce and research and
development reductions, as well as cuts to certain other operating expenses. In addition to these cost saving measures an experienced and
highly successful leader for the Sales and Marketing team was recruited and hired. This individual has subsequently hired additional
experienced personnel in Sales and Market Development. We are actively generating additional scientific and clinical data to have it
published in leading industry publications. The unique features of our silicon nitride material are not well known, and such the publication
of such data would help sales efforts as we approach new prospects. We are also making additional changes to the sales strategy, including
a focus on revenue growth of silicon nitride lateral lumbar implants and the newly developed pedicle screw system (known as Taurus).
On July 28, 2017, we entered into a $2.5 million term loan with a related party. We have common stock that is publicly traded and have
been able to successfully raise capital when needed since the date of our initial public offering. Subsequent to December 31, 2017, we were
able to raise equity funding through the exercise of outstanding warrants (see Note 13). We are engaged in discussions with investment and
banking firms to examine financing alternatives, including options for a public offering of our preferred or common stock.
Although we are seeking to obtain additional equity and/or debt financing, such funding is not assured and may not be available to us on
favorable or acceptable terms and may involve significant restrictive covenants. Any additional equity financing is also not assured and, if
available to us, will most likely be dilutive to its current stockholders. If we are not able to obtain additional debt or equity financing on a
timely basis, the impact on us will be material and adverse.
These uncertainties create substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these uncertainties.
59
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 by investing activities
Net cash provided by (used in) financing activities
Net cash used
Net Cash Used in Operating Activities
Year Ended December 31,
2016
2017
$
$
(4,680) $
(1,137)
(559)
(6,376) $
(7,170)
(617)
3,217
(4,570)
Net cash used in operating activities was $4.7 million in 2017, compared to $7.2 million used in 2016, a decrease of $2.5 million. Offset by
the decrease in the net loss, and related non-cash add backs to the net loss, the decrease in cash used for operating activities during 2017
was primarily due to changes in the movement of working capital items during 2017 as compared to the same period in 2016 as follows: a
$0.7 million decrease in trade accounts receivable, a $0.1 increase in prepaid expenses and other current assets, a $0.5 million decrease in
inventories and a $1.1 million increase in accounts payable and accrued liabilities.
Net Cash Provided by Investing Activities
Net cash used in investing activities was $1.1 million during 2017, compared to $0.6 million used in investing activities during the same
period in 2016, an increase of $0.5 million. The increase in cash used in investing activities during 2017 was due to increased purchases of
property and equipment.
Net Cash Provided by Financing Activities
Net cash used in financing activities was $0.6 million during 2017, compared to $3.2 million provided during the same period in 2016, an
increase of $3.8 million. The $3.8 million increase in 2017 was primarily due to a $3.0 million decrease in cash generated from the issuance
of common and preferred stock, a $4.6 million decrease in cash generated from the issuance of derivative warrant liabilities, which was
offset by an increase in net debt proceeds of $4.0 million.
North Stadium Term Loan
On July 28, 2017, we entered into a $2.5 million term loan (the “North Stadium Loan”) with North Stadium Investments, LLC (“North
Stadium”), a company owned and controlled by our Chief Executive Officer and Chairman of the Board. The North Stadium Loan bears
interest at 10% per annum and requires us to make monthly interest only payments from September 5, 2017 through July 5, 2018. All
principal and unpaid interest (if any) under the North Stadium Loan is due and payable on July 28, 2018. The North Stadium Loan is
secured by substantially all of the assets of the Company and is junior to security interest in assets encumbered by the Hercules Term Loan
(see below). In connection with the North Stadium Loan we also issued North Stadium a warrant to purchase up to 55,000 shares of our
common stock at a purchase price of $5.04 per share, subject to a 5-year term. The relative estimated value of the warrants on the date of
grant approximated $0.2 million, which is being amortized as interest expense over the life of the term loan.
60
Hercules Term Loan
On June 30, 2014, we entered into a Loan and Security Agreement with Hercules which provided us with a $20.0 million term loan. The
Hercules Term Loan matured on January 1, 2018. The Hercules Term Loan included a $0.2 million closing fee, which was paid to
Hercules on the closing date of the loan. The closing fee was 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 $1.7 million. The final payment fee is
being accrued and recorded to interest expense over the life of the loan. 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%, provided however, that during an adjustment period, the term loan interest rate shall
mean for any day a per annum rate of interest equal to the grater of either (i) the prime rate plus 9.2%, and (ii) 12.45%. The applicable rate
was 11.95% as of December 31, 2017. Interest accrues from the closing date of the loan and interest payments are due monthly. Principal
payments commenced August 1, 2015 and are currently being made in equal monthly installments totaling approximately $0.5 million,
with the remainder due at maturity. The Hercules Term Loan is secured by a first priority security interest in substantially all of its assets,
including intellectual property, of us and contains covenants restricting our payments to certain affiliates and certain financial reporting
requirements.
On September 8, 2015, we entered into a Consent and First Amendment to Loan and Security Agreement (the “Amendment”) with
Hercules. The Amendment modified the liquidity covenant to reduce the required minimum cash and cash equivalents balance by $0.5
million for every $1.0 million in principal paid, up to a minimum of $2.5 million. Once the Hercules Term Loan principal balance is below
$2.5 million we are only required to maintain a cash and cash equivalents balance equal to the outstanding principal balance on the
Hercules Term loan. The minimum cash and cash equivalents balance required to maintain compliance with the minimum liquidity
covenant as of December 31, 2017, was approximately $0.6 million. Subsequent to December 31, 2017, the Hercules term loan was paid in
full.
See discussion below with respect to the assignment of $3.0 million of the principal balance of the Hercules Term Loan to Riverside
Merchant Partners, LLC (“Riverside”) and the subsequent agreement between us and Riverside to exchange the $3.0 million of the
Hercules Term Loan held by Riverside for subordinated convertible promissory notes in the aggregate principal amount of $3.0 million.
Hercules and Riverside Debt Exchange
On April 4, 2016, we entered into an Assignment and Second Amendment to Loan and Security Agreement (the “Assignment Agreement”)
with Riverside and Hercules, pursuant to which Hercules sold $1.0 million of the principal amount outstanding under the Hercules Term
Loan to Riverside. In addition, pursuant to the terms of the Assignment Agreement, Riverside acquired an option to purchase an additional
$2.0 million of the principal amount outstanding under the Hercules Term Loan from Hercules. On April 18, 2016, Riverside exercised and
purchased an additional $1.0 million of the principal amount of the Hercules Term Loan and on April 27, 2016, Riverside exercised the
remainder of its option and purchased an additional $1.0 million of the principal amount of the Hercules Term Loan from Hercules.
61
Riverside Debt
On April 4, 2016, we entered into an exchange agreement (the “Exchange Agreement”) with Riverside, pursuant to which we agreed to
exchange $1.0 million of the principal amount outstanding under the Hercules Term Loan held by Riverside for a subordinated convertible
promissory note in the principal amount of $1.0 million (the “First Exchange Note”) and a warrant to purchase 8,333 shares of common
stock of ours at a fixed exercise price of $19.56 per share (the “First Exchange Warrant”) (the “Exchange”). All principal accrued under the
Exchange Notes was convertible into shares of common stock at the election of the Holder at any time at a fixed conversion price of $17.16
per share (the “Conversion Price”). The closing stock price on April 4, 2016, was $19.56 and a beneficial conversion feature of $0.2 million
was recorded to equity and as a debt discount. The warrant value of $0.1 million was recorded to equity and as a debt discount.
In addition, pursuant to the terms and conditions of the Exchange Agreement, ourselves and Riverside had the option to exchange an
additional $2.0 million of the principal amount of the Hercules Term Loan for an additional subordinated convertible promissory note in
the principal amount of up to $2.0 million and an additional warrant to purchase 8,333 shares of common stock (the “Second Exchange
Warrant”). The Exchange Agreement also provided that if the volume-weighted average price of our common stock was less than the
Conversion Price, we would issue up to an additional 12,500 shares of common stock (the “True-Up Shares”) to Riverside, which was
subsequently reduced to 11,667 shares of common stock.
On April 18, 2016, ourselves and Riverside exercised their option to exchange an additional $1.0 million of the principal amount of the
Hercules Term Loan for an additional subordinated convertible promissory note in the principal amount of $1.0 million (the “Second
Exchange Note”). The closing stock price on April 18, 2016, was $24.24 and a beneficial conversion feature of $0.4 million was recorded
to equity and as a debt discount. Additionally, on April 27, 2016, ourselves and Riverside exercised their option to exchange an additional
$1.0 million of the principal amount of the Term Loan for an additional subordinated convertible promissory note in the principal amount
of $1.0 million (the “Third Exchange Note”) and an additional warrant to purchase 8,333 shares of our common stock at a fixed exercise
price of $19.92 per share. The warrant value of $0.1 million was recorded to equity and as a debt discount. The closing stock price on April
27, 2016, was $19.92 and a beneficial conversion feature of $0.3 million was recorded to equity and as a debt discount. Financing costs
were $0.3 million and were recorded to interest expense. The unamortized deferred financing costs and debt discount of the Hercules Term
Loan exchanged were $0.2 million at the time of the exchange and were recorded as a loss on extinguishment of debt related to the debt
exchange. The First Exchange Note, the Second Exchange Note and the Third Exchange Note are collectively referred to herein as the
“Exchange Notes.”
Pursuant to the terms of the Exchange Notes, since the volume-weighted average price of our common stock was less than the Conversion
Price on May 6, 2016, we issued an additional 11,667 shares of common stock to Riverside and recorded the value of the True-Up Shares
of $0.2 million to interest expense and equity.
All principal outstanding under each of the Exchange Notes was to be due on April 3, 2018 (the “Maturity Date”). Each of the Exchange
Notes bore interest at a rate of 6% per annum, with the interest that would accrue on the initial principal amount of the Exchange Notes
during the first 12 months being guaranteed and deemed earned as of the date of issuance. Prior to the Maturity Date, all interest accrued
under the Exchange Notes was payable in cash or, if certain conditions were met, payable in shares of common stock at our option, at a
conversion price of $16.08 per share. During 2016, the entire principal amount of the First and Second Exchange Notes, $0.3 million of the
Third Exchange Note, and the interest related to the First, Second, and Third Exchange Notes was converted into 145,227 shares of
common stock. In July 2016, we paid Riverside $0.8 million to redeem in full the remaining principal balance of the Third Exchange Note.
The debt discounts associated with the converted debt was recorded to interest expense.
62
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
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
A summary of our significant accounting policies and estimates is discussed in Management’s Discussion and Analysis of Financial
Condition and Results of Operations and in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2016. There have been no material changes to those policies for the year ended December 31, 2017. The
preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles requires us to make
judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of
uncertainty that require judgments, estimates and assumptions include the accounting for income taxes and other contingencies as well as
valuation of derivative liabilities, asset impairment and collectability of accounts receivable. We use historical and other information that
we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and
assumptions that are used to prepare 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 three types of customers: (1) surgeons and hospitals; (2) stocking distributors; and
(3) private label customers. 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 and private label customers. 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 facilitate sales of 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 or private label customer, 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. 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
invoiced amount 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.
63
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined under the standard costs,
which approximate actual costs, determined on the first-in first-out (“FIFO”) 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 records any write-down as a cost of revenue, as necessary. It is reasonably possible that we 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. We hold consigned inventory at distributor and other customer locations where revenue recognition criteria have not yet been
achieved.
Long-Lived Assets and Goodwill
We periodically evaluate the carrying value of definite-lived intangibles when 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 its use of
acquired assets or its overall business strategy, and significant industry or economic trends. We amortize definite-lived intangible assets on
a straight-line basis over their useful lives. We record no impairment loss for definite-lived intangible assets during the years ended
December 31, 2017 and 2016.
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 recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair
market value of the asset.
If our revenues or other estimated operating results are not achieved at or above our forecasted level, and we are unable to recover such
costs through price increases, the carrying value of certain of our assets may prove to be unrecoverable and we may incur impairment
charges of definitive-live intangible assets.
In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for
impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We are permitted the
option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than
not that the fair value of any reporting unit is less than its corresponding carrying value. If, after assessing the totality of events and
circumstances, we conclude that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying
value then we are not required to take further action. However, if we conclude otherwise, then it is required to perform a quantitative
impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. We consider
valuation factors and an estimated control premium. The estimated fair value of the reporting unit exceeded the carrying value as of
December 31, 2017 and 2016. The declining price of our stock is an early indicator that goodwill impairment may be a factor during 2018.
We will continue to monitor our market capitalization and impairment indicators. In the event that goodwill is impaired, an impairment
charge to earnings would become necessary.
If the fair value is less than its carrying value, a second step of the test is required to determine if recorded goodwill is impaired. In the
event that goodwill is impaired, an impairment charge to earnings would become necessary.
64
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.
Periodically we review the carrying value of our property and equipment that are held and used in our operations for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is
determined based upon expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management’s
best estimate, assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash
flows, the asset is deemed impaired and an impairment charge would be recognized to the extent the carrying value exceeded the estimated
fair value of the asset. We estimate the fair value of assets based on the estimated future discounted cash flows arising from the use of the
asset. Management has evaluated its property and equipment and identified specific asset impairments during the year ended December 31,
2016. No impairment was identified during the year ended December 31, 2017.
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 is 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.
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, 2017 and 2016, 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
We measure 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. We utilize 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 our common stock on the date of grant, the expected term
of the stock option, and the expected volatility of our common stock over the period equal to the expected term of the grant. We estimate
forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We account 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 our consolidated statements of operations during the period in which the related services are rendered.
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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 and our historical stock price. 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 publicly 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.
We account 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 our consolidated statements of operations during the period in which the related services are rendered.
Derivative Liabilities
Derivative liabilities include 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 our consolidated statements of operations until the instruments settle, expire or are
no longer classified as derivative liabilities. We estimate the fair value of these instruments using the Black-Scholes-Merton or Monte-
Carlo valuation models depending on the complexity of the underlying instrument. 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.
New Accounting Pronouncement, Not Yet Adopted
In August 2016, the Financial Accounting Standards Board (“FASB”) updated accounting guidance on the following eight specific cash
flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt
instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent
consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the
settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity
method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the
predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. These updates are
effective for us with its annual period beginning January 1, 2019, and interim periods therein, with early adoption permitted. The guidance
in this standard is not expected to have a material impact on the consolidated financial statements.
In March 2016, the FASB updated the accounting guidance related to stock compensation. This update simplifies the accounting for
employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as the well as classification in the statement of cash flows. The standard is effective for us with its annual period beginning
January 1, 2018. The guidance in this standard is not expected to have a material impact on the consolidated financial statements for us.
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In February 2016, the FASB updated the accounting guidance related to leases as part of a joint project with the International Accounting
Standards Board (“IASB”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to
recognize assets and liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this update will
require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows
arising from leases, including qualitative and quantitative requirements. The standard is effective for us with its annual period beginning
January 1, 2020, and interim periods therein, with early adoption permitted. We are currently evaluating the potential impact this new
standard may have on its consolidated financial statements but believes the most significant change will relate to building leases.
In May 2014, in addition to several amendments issued during 2016, the FASB updated the accounting guidance related to revenue from
contracts with customers, 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. The standard 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 us with the annual period beginning January 1, 2019, 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. We have
yet to begin evaluation of the new accounting standard and therefore has yet to determine the impact, if any, that the new standard will
have on its consolidated financial statements.
In January of 2017, the FASB issued ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments in this guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure
goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s carrying amount
exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied
on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2021. Early
adoption is permitted for goodwill impairment tests performed after January 1, 2017. The impact of this guidance for us will depend on the
outcomes of future goodwill impairment tests.
We have reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its
results of operations, financial position or cash flows. Based on that review, we believe that none of these pronouncements will have a
significant effect on its consolidated financial statements.
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.
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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.
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. C H A N G E S IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On September 20, 2017, we informed BDO USA, LLP (“BDO”) of their dismissal as our independent registered public accounting firm.
The dismissal was authorized by the Audit Committee of our Board of Directors. On the same date, the Audit Committee engaged Tanner
LLC (“Tanner”) as our independent registered public accounting firm for the fiscal year ending December 31, 2017.
The report of BDO on our consolidated financial statements for the fiscal year ended December 31, 2016 did not contain any other adverse
opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that
BDO’s report indicated that there was substantial doubt as to our ability to continue as a going concern.
In connection with the audit of our financial statements for fiscal year ended December 31, 2016, there were no disagreements between us
and BDO on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of BDO, would have caused BDO to make reference to the subject matter of the
disagreements in connection with their audit report on our consolidated financial statements.
In connection with the audit of our financial statements for the year ended December 31, 2016, BDO identified material weaknesses in our
internal control over financial reporting and advised us that the internal controls necessary for us to develop reliable financial statements do
not exist.
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We have not consulted with Tanner during our two most recently completed fiscal years prior to their appointment as our auditor with
respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements, or any other matters or reportable events as identified in Items 304(a)(2)(i) and
(ii) of Regulation S-K.
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 principal financial 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, 2017. Based on this evaluation, the Chief
Executive Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2017, the end of the period
covered by this Annual Report on Form 10-K due to the material weaknesses described below.
(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.
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.
Management, including our Chief Executive Officer, has assessed the effectiveness of our internal control over financial reporting as of
December 31, 2017. In making our assessment of the effectiveness of internal control over financial reporting, management used the
criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
As defined in SEC Regulation S-X, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis. Based on this assessment, management determined that, as of December 31, 2017, the
Company’s internal control over financial reporting was not effective due to the material weaknesses described below.
The design and operating effectiveness of our controls were inadequate to ensure that complex accounting matters are properly accounted
for and reviewed in a timely manner. As a result, we failed to accurately record a complex warrant transaction which caused the
restatements of our first, second and third quarter 2017 reports on Form 10Q and our 2016 Annual Report on Form 10-K. In addition, we
failed to properly evaluate and test certain long-lived assets for impairment, which ultimately resulted in recognition of an impairment
charge. These errors are a result of the following control deficiencies:
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Control Environment and Risk Assessment – The Company did not have an effective control environment with the structure necessary
for effective internal controls over financial reporting. Further, the Company did not have an effective risk assessment to identify and assess
risks associated with changes to the Company’s structure and the impact on internal controls. The Company did not have appropriately
qualified personnel to meet the Company’s control objectives. The Company does not have personnel with an appropriate level of US
GAAP knowledge and experience to properly review and evaluate the work performed by other Company personnel and experts related to
complex accounting matters.
Control Activities – The Company did not have control activities that were designed and operating effectively including management
review controls, controls related to monitoring and assessing the work of consultants, and controls to verify the completeness and adequacy
of information. Specifically, the Company did not have procedures for competent personnel to review work performed by experts in
relation to complex debt and equity transactions and impairment valuations.
Monitoring Activities – The Company did not maintain effective monitoring controls related to the financial reporting process. The
Company did not effectively monitor the changes in internal control related to changes in the roles and responsibilities associated with the
changes in personnel and organizational structure. The failure to properly monitor impacted the timing, accuracy, and completion of the
work related to significant accounting matters.
Our Chief Executive Officer continues with a review of our controls relating to complex accounting matters. Although our analysis is not
complete, we have added additional resources with expertise in accounting for complex accounting matters including timely review and
evaluation of assets for potential impairment. We are also considering redesigning controls to add additional layers of review and approval
whenever entering into or subsequently converting, exercising, amending, repricing, exiting or otherwise experiencing changes in or to
complex financial instruments.
Notwithstanding the identified material weaknesses, the Company believes the consolidated financial statements included in this Annual
Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the
periods presented in accordance with accounting principles generally accepted in the United States of America.
(d) Changes in Internal Control Over Financial Reporting
Other than described above in the Item 9A. Controls and Procedures, there were no changes in our internal control over financial reporting
that occurred during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Directors
The following table sets forth the names, ages, and positions with Amedica for each of our directors.
Name
B. Sonny Bal, M.D.
David W. Truetzel
Jeffrey S. White
Eric A. Stookey
Age
55
60
64
47
Positions
Chairman of the Board of Directors, President and Chief Executive Officer
Director
Director
Director
Our Board is divided into three classes (Class I, Class II and Class III) with staggered three-year terms. Directors in each class are elected
to serve for three-year staggered terms that expire in successive years. Officers serve at the discretion of our Board. The following is
information on the business experience of each director now serving and a discussion of the qualifications, attributes and skills that led to
the Board of Directors’ conclusion that each one is qualified to serve as a director.
David W. Truetzel has served on our Board of Directors since our acquisition of US Spine, Inc. in September 2010. Mr. Truetzel has been
the general partner of Augury Capital Partners, a private equity fund that invests in life sciences and information technology companies,
which he co-founded in 2006. Mr. Truetzel is a director of Enterprise Bank, Inc., Verifi, Inc., a provider of electronic payment solutions,
Clearent, LLC, a credit card processing provider, and Paranet, LLC, an IT services provider. Mr. Truetzel holds a B.S. in Business
Administration from Saint Louis University and an M.B.A. from The Wharton School. We believe that Mr. Truetzel’s financial and
managerial expertise qualify him to serve on our Board of Directors.
Eric A. Stookey has served on our Board of Directors since October 2014. Mr. Stookey has served as Chief Operating Officer of
Osteoremedies, LLC since March of 2015. From October 2011 until August 2014, Mr. Stookey served as the President of the Extremities-
Biologics division at Wright Medical Group Inc. Mr. Stookey also served in various other marketing and sales positions at Wright Medical
Group Inc. since 1995, including as the Senior Vice President and Chief Commercial Officer from January 2010 to November 2011, as the
Vice President North American Sales from 2007 to January 2010, as the Vice President US Sales from 2005 to 2007, as the Senior Director
of Sales, Central Region, from 2003 to 2005 and as the Director of Marketing for Large Joint Reconstruction Products from 2001 to 2003.
Mr. Stookey earned his M.B.A. from Christian Brothers University and his B.S. in Business from the Indiana University School of
Business. We believe that Mr. Stookey’s industry and executive leadership experience qualifies him to serve on our Board of Directors.
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 was a tenured Professor in Orthopaedic Surgery at the
University of Missouri, Columbia, and has an extensive history of research into silicon nitride ceramics. He is Adjunct Professor of
Material Sciences at Missouri Science and Technology University 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, a J.D. from the University of Missouri,
and a Ph.D. in Engineering from the Kyoto Institute of Technology in Japan. We believe that Dr. Bal’s breadth of experience and scientific
expertise in silicon nitride qualifies him to serve as our Chairman, President and Chief Executive Officer.
Jeffrey S. White has served on our Board of Directors since January 2014. Since January 2013, Mr. White has served as Principal at
Medtech Advisory Group LLC, a firm he founded that advises early and mid-stage medical technology firms. In that capacity Mr. White
has consulted MiMedx Group Inc., the leading amniotic tissue and allograft regenerative biomaterials firm since mid-2015 and served as
Vice President, Product Management Strategies at MiMedix. Mr. White previously served as a director of Residency Select LLC, a
company which offers psychometric assessment, training and compliance products to medical and surgical residency programs. Mr. White
also served in 2014 and 2015 as President and director of Liventa Bioscience LLC, a provider of specialty amniotic tissue allografts for use
in surgical and wound care applications. From May 2006 to December 2012 he served as Global Director of Business Development for
Synthes Inc., a global orthopedic firm that was acquired by Johnson and Johnson in 2012. Mr. White has served as Chief Executive Officer
and/or co-founder of several start-up surgical device firms and has previously held executive level positions at United States Surgical
Corporation, unit of Covidien plc. Mr. White holds a B.S. in Biology from Union College in Schenectady NY. We believe that Mr. White’s
experience as an executive and founder of medical device companies qualifies him to serve on our Board of Directors.
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Executive Officers
Our current executive officers and their respective ages and positions are as follows:
Name
B. Sonny Bal, M.D.
Bryan J. McEntire
Age
55
65
Position
Chairman of the Board of Directors, President and Chief Executive Officer,
Principal Financial Officer
Chief Technology Officer
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 was a tenured Professor in Orthopaedic Surgery at the
University of Missouri, Columbia, and has an extensive history of research into silicon nitride ceramics. He is Adjunct Professor of
Material Sciences at Missouri Science and Technology University 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, a J.D. from the University of Missouri,
and a Ph.D. in Engineering from the Kyoto Institute of Technology in Japan. We believe that Dr. Bal’s breadth of experience and scientific
expertise in silicon nitride qualifies him to serve as our Chairman, President and Chief Executive Officer.
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. Dr. McEntire has worked in various
advanced ceramic product development, quality engineering and manufacturing roles at Applied Materials, Inc., (Santa Clara, CA), Norton
Advanced Ceramics, a division of Saint-Gobain Industrial Ceramics Corporation (E. Granby, CT), Norton/TRW Ceramics (Northboro,
MA) and Ceramatec, Inc., (Salt Lake City, UT). Dr. McEntire has a BS degree in Materials Science and Engineering and an MBA both
from the University of Utah (Salt Lake City, UT), and a Ph.D. from the Kyoto Institute of Technology (Kyoto, Japan).
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant
to which the officer was selected to serve as an officer.
Family Relationships
None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
Other Directorships
None of the directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act
(or which otherwise are required to file periodic reports under the Exchange Act).
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Other Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any bankruptcy or criminal proceedings (other than traffic and other minor
offenses) or been subject to any of the items set forth under Item 401(f) of Regulation S-K, nor have there been any judgments or
injunctions brought against any of our directors or executive officers during the last ten years that we consider material to the evaluation of
the ability and integrity of any director or executive officer.
The Board and Committees
Our Board of Directors has four members. The Chairman of the Board and our Chief Executive Officer, B. Sonny Bal, MD, PhD, is a
member of the Board and is a full-time employee of Amedica. The other three members of the Board, David W. Truetzel, Eric A. Stookey
and Jeffrey S. White, are non-employee directors, and the Board has determined that these persons (who constitute a majority of the Board)
are “independent directors” under the criteria set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Board met twenty-one (21)
times during the year ended December 31, 2017. All directors attended 86% of the meetings of the Board held during 2017.
In accordance with our restated Certificate of Incorporation, our Board of Directors is divided into three classes with staggered three-year
terms. At each annual meeting of stockholders, the successors to the directors whose terms then expire will be elected to serve until the
third annual meeting following such election. Our directors are divided among the three classes as follows:
● The Class I directors terms will expire at the annual meeting of stockholders to be held in 2018. There are currently no Class I
directors.
● The Class II directors are David W. Truetzel and Eric A. Stookey, and their terms will expire at the annual meeting of
stockholders to be held in 2019.
● The Class III directors are B. Sonny Bal, M.D. and Jeffrey S. White, and their terms were initially scheduled to expire at the
annual meeting of stockholders which was to be held in 2017. However, because there was no annual meeting of stockholders
held in 2017 their terms are now set to expire at the annual meeting of stockholders to be held in 2018.
Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors.
and Nominating Committee. The written
Our Board of Directors has three permanent committees: the Audit Committee, the Compensation Committee, and the Corporate
Governance
at
http://investors.amedica.com/corporate-governance.cfm. Our Board of Directors may from time to time establish other standing
committees. In addition, from time to time, special committees may be established under the direction of our Board of Directors when
necessary to address specific issues.
our website
committees
charters
these
are
for
on
The following table sets forth a description of the three permanent Board committees and the chairpersons and members of those
committees, all of whom are independent directors:
Committee
Audit Committee
Independent Chairman
Independent Members
David W. Truetzel
Eric A. Stookey
Jeffrey S. White
Compensation Committee
Jeffrey S. White
David W. Truetzel
Eric A. Stookey
Governance and Nominating Committee
Eric A. Stookey
Jeffrey S. White
David W. Truetzel
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Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is currently comprised of the following members: Eric A. Stookey (Chairman),
David W. Truetzel and Jeffrey S White. Among other items, the Corporate Governance and Nominating Committee is tasked by the Board
to: (1) identify individuals qualified to serve as members of the Board and, where appropriate, recommend individuals to be nominated by
the Board for election by the stockholders or to be appointed by the Board to fill vacancies consistent with the criteria approved by the
Board; (2) develop and periodically evaluate and recommend changes to Amedica’s Corporate Governance Guidelines and Code of Ethics,
and to review the Company’s policies and programs that relate to matters of corporate responsibility, including public issues of significance
to the Company and its stakeholders; and (3) oversee an annual evaluation of the performance of the Board. The Board has determined that
each of the members of the Corporate Governance and Nominating Committee is “independent” under the standard set forth in Rule
5605(a)(2) of the Nasdaq Listing Rules. The Corporate Governance and Nominating Committee did not meet in 2017. The Corporate
Governance and Nominating Committee operates under a written charter adopted by the Board of Directors, which sets forth the
responsibilities and powers delegated by the Board to the Corporate Governance and Nominating Committee.
Board Nominations
The Nominating and Governance Committee has adopted a policy and procedures for shareholders to recommend nominees to the
Company’s Board. The Committee will only consider qualified proposed nominees that meet the qualification standards set forth on
Appendix A to the Committee’s charter available on the Company’s website at www.amedica.com. Pursuant to the policy, only
shareholders who meet minimum percentage ownership requirements as established by the Board may make recommendations for
consideration by the Committee. At this time, the Board has set a minimum percentage ownership of 5% of the Company’s issued and
outstanding shares of common stock for a period of at least one year. To make recommendations, s shareholder must submit the
recommendation in writing by mail, courier or personal delivery to: Corporate Secretary, Amedica Corporation, 1885 West 2100 South,
Salt Lake City, UT 84119. For each annual meeting the Committee will consider only one proposed nominee from each shareholder or
shareholder group (within the meaning of Regulation 13D under the Exchange Act).
The recommendation must set forth (1) the name, address, including telephone number, of the recommending shareholder or shareholder
group; (2) the number of the Company’s shares of common stock held by such shareholder and proof of ownership if the shareholder is not
a holder of record; and (3) a statement that the shareholder has a good faith intention of holding the shares through the record date of the
Company’s next annual meeting. For shareholder groups this information must be submitted for each shareholder in the group.
The recommendation must set forth in relation to the proposed nominee being recommended by the shareholder: (1) the information
required by Items 401, 403 and 404 of Regulation S-K under the Exchange Act, (2) any material relationships or agreements between the
proposed nominee and the recommending shareholder or the Company’s competitors, customers, labor unions or other persons with special
interests in the Company; (3) a statement regarding the qualifications of the proposed nominee to serve on the Board; (4) a statement that
the proposed nominee can fairly represent the interests of all shareholders of the Company; and (5) a signed consent by the proposed
nominee to being interviewed by the Nominating and Governance Committee.
Recommendations must be made not later than 120 calendar days prior to the first anniversary of the date of the proxy statement for the
prior annual meeting of shareholders. In the event that the date of the annual meeting of shareholders for the current year is more than 30
days following the first anniversary date of the annual meeting of shareholders for the prior year, the submission of a recommendation will
be considered timely if it is submitted not earlier than the close of business on the 120 days prior to such annual meeting and not later than
the close of business on the later of 90 days prior to such annual meeting or the close of business 10 days following the day on which
public announcement of the date of such meeting is first made by the Company.
Audit Committee
We have a standing Audit Committee and audit committee charter, which complies with Rule 10A-3 of the Exchange Act, and the
requirements of the Nasdaq Listing Rules. Our Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange
Act. The Audit Committee is currently comprised of the following members: David W. Truetzel (Chairman), Eric A. Stookey and Jeffrey S
White. The Audit Committee provides oversight for financial reporting matters, internal controls, and compliance with the Company’s
financial policies, and meets with its auditors when appropriate. The Audit Committee met three (3) times in 2017, and all director members
of the committee attended 100% of the meetings. The Board has determined that David W. Truetzel is an “audit committee financial
expert” within the meaning of Item 407(d)(5) of Regulation S-K. Further, the Board has determined that each of David W. Truetzel, Jeffrey
S. White and Eric A. Stookey are “independent” under the standard set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Audit
Committee operates under a written charter adopted by the Board of Directors, which sets forth the responsibilities and powers delegated by
the Board to the Audit Committee.
74
Compensation Committee
The Compensation Committee of the Board is comprised of the following members: Jeffrey S. White, (Chairman), David W. Truetzel and
Eric A. Stookey. The Board has determined that each of David W. Truetzel, Jeffrey S. White and Eric A. Stookey are “independent” under
the standard set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. The Compensation Committee recommends to the Board for
determination compensation of our executive officers, including the chief executive officer, and addresses salary and benefit matters for
other key personnel and employees of the Company. The Compensation Committee did not meet in 2017, and all director members of the
committee attended the meetings. The Compensation Committee operates under a written charter adopted by the Board of Directors, which
sets forth the responsibilities and powers delegated by the Board to the Compensation Committee.
Code of Business Conduct
The Board has adopted a Code of Business Conduct that applies to all of our employees, officers and directors, including those officers
responsible for financial reporting. The code of business conduct is available on our website at http://investors.amedica.com/corporate-
governance.cfm. We intend to disclose any amendments to the code or any waivers of its requirements on our website.
The Bylaws of the Company provide that no contract or transaction between Amedica and one or more of its directors or officers, or
between Amedica and any other corporation, firm, association, or other organization in which one or more of its directors or officers are
financially interested, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in
the meeting of the Board of Directors or committee that authorizes or approves the contract or transaction, or because their votes are
counted for such purpose, provided that:
● the material facts as to his, her, or their relationship or interest as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee and noted in the minutes, and the Board of Directors or committee authorizes the contract
or transaction in good faith by the affirmative vote of a majority of disinterested directors, even though the disinterested
directors are less than a quorum;
● the material facts as to his, her, or their relationship or interest as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the
stockholders; or
● the contract or transaction is fair as to Amedica as of the time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors, and persons who beneficially own more
than 10% of our common stock (“10% Stockholders”), to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (“SEC”). Such officers, directors and 10% Stockholders are also required by SEC rules to furnish us with copies of
all Section 16(a) forms that they file.
Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, the
Company believes that during fiscal year ended December 31, 2017, the filing requirements applicable to its officers, directors and greater
than 10% percent beneficial owners were complied with.
75
ITEM 11. EXECUTIVE COMPENSATION
The following discussion relates to the compensation of our “named executive officers.”
Summary Compensation Table
The following table sets forth information about certain compensation awarded or paid to our named executive officers for the 2016 and
2017 fiscal years.
Name and
Principal
Position
B. Sonny Bal
Chief Executive Officer
Bonus
(1)
Year Salary
2017 $ 400,000 $
- $
2016 400,000 73,500
Non-Equity
Incentive Plan
Compensation
- $
-
Stock
Awards
(2)
Option
Awards
(2)
Bryan McEntire
Chief Technology Officer
2017 231,822
-
2016 225,000 35,438
-
-
All
Other Comp (3)
18,940 $
10,600
Total
Compensation
418,940
484,100
9,239
9,000
241,061
269,438
- $
-
-
-
- $
-
-
-
(1) Unless otherwise noted, 2016 bonus amount reflects a bonus paid in March 2017 for meeting certain corporate objectives for 2016.
(2) These columns represent the aggregate grant date fair value of stock option awards granted during the year indicated, in accordance with
ASC Topic 718 and do not correspond to the actual value that may be realized by the named executives. For additional information on
the assumptions underlying the valuation of the Company’s stock-based awards, please refer to Note 9 of the Company’s consolidated
financial statements included in this Annual Report on Form 10-K for the fiscal year ended 2017.
(3) Amount reflects the aggregation of any matching of 401(k) contributions and employee benefit insurance premiums paid by us, unless
otherwise noted.
Narrative Disclosure to Summary Compensation Table. We do not have written employment agreements with any of our executive officers.
All of our executive officers serve on an at-will basis. The base salaries for our named executive officers were determined by our
compensation committee after reviewing a number of factors, including: the responsibilities associated with the position, the seniority of
the executive’s position, the base salary level in prior years, our financial position; and for executive officers other than our Chief
Executive Officer, recommendations made by our Chief Executive Officer.
Outstanding Equity Awards at Fiscal Year-End
The following table shows information regarding equity awards held by our named executive officers as of December 31, 2017:
Name
B. Sonny Bal
Bryan McEntire
Number of Securities
Underlying Unexercised
Options (#)
Option
Exercise
Exercisable Unexercisable
Price
Option
Expiration
Date
Number of Securities
Underlying Stock
Awards
(#)
9
472
203
483
556
377
206
- $
15
75
350
4,638.60
174.00
77.40
12.24
3/15/2022
1/7/2025
9/16/2025
9/14/2026
Vested
-
-
-
-
-
-
12
72
171.00
174.00
20.28
8/13/2024
1/7/2025
1/4/2026
-
-
-
76
Not Vested
-
-
-
-
-
-
-
-
Award
Grant
Date
-
-
-
-
-
-
-
-
401(k) Plan
We offer our executive officers, including our named executive officers, retirement benefits, including participation in our tax-qualified
profit sharing plan that includes a “cash-or-deferred” (or 401(k)) feature in the same manner as other employees. The plan is intended to
satisfy the requirements of Section 401 of the Internal Revenue Code. Our employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit and have a like amount contributed to the plan. In addition, we may make discretionary and/or
matching contributions to the plan in amounts determined annually by our Board. We currently elect to match the contributions of our
employees who participate in our 401(k) plan as follows: a match of 100% on the first 3% of compensation contributed by a plan
participant and a match of 50% on amounts above 3%, up to 5%, of compensation contributed by a plan participant.
Potential Payments upon Termination or Change in Control
We had entered into certain agreements and maintained certain plans that may have required us to make certain payments and/or provide
certain benefits to the executive officers named in the Summary Compensation Table in the event of a termination of employment or
change in control.
Pursuant to severance agreements that we have entered into with each of our named executive officers, upon the consummation of a change
in control, all outstanding options, restricted stock and other such rights held by the executives will fully vest. Additionally, if a change in
control occurs and at any time during the one-year period following the change in control (i) we or our successor terminate the executive’s
employment other than for cause (but not including termination due to the executive’s death or disability) or (ii) the executive terminates
his employment for good reason, then such executive has the right to receive payment consisting of a lump sum payment equal to two times
his highest annual salary with us during the preceding three-year period, including the year of such termination and including bonus
payments (measured on a fiscal year basis), but not including any reimbursements and amounts attributable to stock options and other non-
cash compensation. “Change in control” is defined in the severance agreements as occurring upon: (i) any “person” (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities representing 50% or more of the total voting power represented by our then outstanding voting securities
(excluding securities held by us or our affiliates or any of our employee benefit plans) pursuant to a transaction or a series of related
transactions which our Board did not approve; (ii) a merger or consolidation of our company, other than a merger or consolidation which
would result in our voting securities outstanding immediately prior thereto continuing to represent at least 50% of the total voting securities
or such surviving entity or parent of such corporation outstanding immediately after such merger or consolidation; or (iii) the approval by
our stockholders of an agreement for the sale or disposition of all or substantially all of our assets. As defined in the severance agreements,
“cause” means: (i) the executive’s commission of a felony (other than through vicarious liability or through a motor vehicle offense); (ii)
the executive’s material disloyalty or dishonesty to us; (iii) the commission by the executive of an act of fraud, embezzlement or
misappropriation of funds; (iv) a material breach by the executive of any material provision of any agreement to which the executive and we
are party, which breach is not cured within 30 days after our delivery to the executive of written notice of such breach; or (v) the
executive’s refusal to carry out a lawful written directive from our Board. “Good reason” as defined in the severance agreements means,
without the executive’s consent: (i) a change in the principal location at which the executive performs his duties to a new work location
that is at least 50 miles from the prior location; or (ii) a material change in the executive’s compensation, authority, functions, duties or
responsibilities, which would cause his position with us to become of less responsibility, importance or scope than his prior position,
provided, however, that such material change is not in connection with the termination of the executive’s employment with us for any
reason.
77
In the event that an officer entitled to receive or receives payment or benefit under the severance agreements described above, or under any
other plan, agreement or arrangement with us, or any person whose action results in a change in control or any other person affiliated with
us and it is determined that the total amount of payments will be subject to excise tax under Section 4999 of the Internal Revenue Code, or
any similar successor provisions, we will be obligated to pay such officer a “gross up” payment to cover all taxes, including any excise tax
and any interest or penalties imposed with respect to such taxes due to such payment.
Code of Business Conduct Violations
It is our policy under our Code of Business Conduct to take appropriate action against any executive officer whose actions are found to
violate the Code or any other policy of Amedica. Disciplinary actions may include immediate termination of employment and, where
Amedica has suffered a loss, pursuing its remedies against the executive officer responsible. Amedica will cooperate fully with the
appropriate authorities where laws have been violated.
Board Compensation
The following table shows the total compensation paid or accrued during the fiscal year ended December 31, 2017 to each of our non-
employee directors.
Name
David W. Truetzel
Jeffrey S. White
Eric A. Stookey
Fees Earned or
Paid in Cash
($)
Value of Stock
Awards (1)
($)
Value of Option
Grants (1)
($)
$
$
130,000
49,500
49,500
$
-
-
-
Total
($)
130,000
49,500
49,500
$
-
-
-
(1) These columns represent the aggregate grant date fair value of restricted stock awards and stock option awards granted during the year
indicated, in accordance with ASC Topic 718 and do not correspond to the actual value that may be realized by the directors. For
additional information on the assumptions underlying the valuation of the Company’s stock-based awards, please refer to Note 9 of the
Company’s consolidated financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 31,
2017.
During 2016, our Board approved the following compensation schedule for non-employee directors (paid on a quarterly basis):
● Annual Retainer of $40,000 paid in four equal installments of $10,000 each at the beginning of each calendar quarter;
● $1,000 for each board and committee meeting attended in person;
● $500 for each board and committee meeting attended via telephone or other remote medium; and
● Reimbursement of reasonable expenses as supported by documentation and receipts.
Starting in 2015, a new Board appointee receives an award of 40,000 stock options upon appointment. Further, each member of the Board
will also be awarded an option grant for 15,000 stock options on an annual basis.
The chair of the Audit Committee is paid an annual retainer of $120,000 payable in monthly increments of $10,000 each.
78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 27, 2018 by:
●
●
●
●
each of our current directors;
each of our executive officers; and
all of our directors and executive officers as a group;
each stockholder known by us to own beneficially more than 5% of our Common Stock.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the
securities. Shares of common stock that may be acquired by an individual or group within 60 days of March 27, 2018, pursuant to the
exercise or vesting of options or warrants or conversion of convertible promissory notes, are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. Percentage of shares beneficially owned is based on 4,276,844 shares issued
and outstanding on March 27, 2018.
Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power
with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such
stockholders. The address for each director and executive officer listed is: c/o Amedica Corporation, 1885 West 2100 South, Salt Lake
City, Utah 84119.
Name and Address of Beneficial Owner
Five Percent Stockholders:
None
Directors and Named Executive Officers:
B. Sonny Bal, M.D. (1)
David W. Truetzel (2)
Jeffrey S. White (3)
Eric A. Stookey (4)
Bryan McEntire (5)
All executive officers and directors as a group (5 persons)
Shares Beneficially Owned
Number
Percentage
-
56,628
3,572
443
389
1,713
62,745
-
1.3%
*
*
*
*
1.5%
*
Indicates ownership of less than 1% of the outstanding shares of the Company’s common stock.
(1) Represents 332 shares of Common Stock and options and warrants to purchase 56,296 shares of Common Stock that are currently
exercisable within 60 days of March 14, 2018.
(2) Represents 2,102 shares of Common Stock and options and warrants to purchase 1,470 shares of Common Stock that are currently
exercisable within 60 days of March 14, 2018.
(3) Represents 54 shares of Common Stock and options to purchase 389 shares of Common Stock that are currently exercisable within 60
days of March 14, 2018.
(4) Represents options to purchase 389 shares of Common Stock that are currently exercisable within 60 days of March 14, 2018.
(5) Represents 375 shares of Common Stock and options to purchase 1,338 shares of Common Stock that are currently exercisable within
60 days of March 14, 2018.
79
The following table sets forth information as of December 31, 2017 relating to all of our equity compensation plans:
Equity Compensation Plan Information
Plan Category
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by Stockholders
Total
(a) Number of
Shares
to be Issued upon
Exercise of
Outstanding
Options
(b) Weighted-
average
Exercise
Price of
Outstanding
Options
(c) Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Referenced
in Column (a))
11,446(1) $
-
11,446(1) $
367.08(2)
-
367.08(2)
75,600
-
75,600
(1) Includes options outstanding under our 2012 Equity Incentive Plan
(2) Represents weighted-average exercise price per share of common stock acquirable upon exercise of outstanding stock options.
2012 Equity Incentive Plan
The 2012 Plan is intended to encourage ownership of common stock by our employees and directors and certain of our consultants in order
to attract and retain such people, to induce them to work for the benefit of us and to provide additional incentive for them to promote our
success. The number of shares of our common stock reserved for issuance under the 2012 Plan is 95,202, which number is automatically
increased on January 1 of each of year by the lesser of (i) 18,031 shares of our common stock on such date, (ii) 5% of the number of
outstanding shares of our common stock on such date, and (iii) such other amount determined by the board through the termination of the
2012 Plan.
Types of Awards. The 2012 Plan provides for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards,
including RSUs.
● Incentive and Nonqualified Stock Options. The plan administrator determines the exercise price of each stock option. The
exercise price of an NQSO may not be less than the fair market value of our common stock on the date of grant. The exercise price
of an incentive stock option may not be less than the fair market value of our common stock on the date of grant if the recipient
holds 10% or less of the combined voting power of our securities, or 110% of the fair market value of a share of our common stock
on the date of grant otherwise.
● Stock Grants. The plan administrator may grant or sell stock, including restricted stock, to any participant, which purchase price,
if any, may not be less than the par value of shares of our common stock. The stock grant will be subject to the conditions and
restrictions determined by the administrator. The recipient of a stock grant shall have the rights of a stockholder with respect to the
shares of stock issued to the holder under the 2012 Plan.
● Stock-Based Awards. The administrator of the 2012 Plan may grant other stock-based awards, including stock appreciation rights,
phantom stock awards and RSUs, with terms approved by the administrator, including restrictions related to the awards. The holder
of a stock-based award shall not have the rights of a stockholder until shares of our common stock are issued pursuant to such
award.
Plan Administration. Our Board is the administrator of the 2012 Plan, except to the extent it delegates its authority to a committee, in which
case the committee shall be the administrator. Our Board has delegated this authority to our compensation committee. The administrator
has the authority to determine the terms of awards, including exercise and purchase price, the number of shares subject to awards, the value
of our common stock, the vesting schedule applicable to awards, the form of consideration, if any, payable upon exercise or settlement of an
award and the terms of award agreements for use under the 2012 Plan.
80
Eligibility. Our Board will determine the participants in the 2012 Plan from among our employees, directors and consultants. A grant may
be approved in advance with the effectiveness of the grant contingent and effective upon such person’s commencement of service within a
specified period.
Termination of Service. Unless otherwise provided by our Board or in an award agreement, upon a termination of a participant’s service, all
unvested options then held by the participant will terminate and all other unvested awards will be forfeited.
Transferability. Awards under the 2012 Plan may not be transferred except by will or by the laws of descent and distribution, unless
otherwise provided by our Board in its discretion and set forth in the applicable agreement, provided that no award may be transferred for
value.
Adjustment. In the event of a stock dividend, stock split, recapitalization or reorganization or other change in change in capital structure, our
Board will make appropriate adjustments to the number and kind of shares of stock or securities subject to awards.
Corporate Transaction. If we are acquired, our Board of Directors (or Compensation Committee) will: (i) arrange for the surviving entity or
acquiring entity (or the surviving or acquiring entity’s parent company) to assume or continue the award or to substitute a similar award for
the award; (ii) cancel or arrange for cancellation of the award, to the extent not vested or not exercised prior to the effective time of the
transaction, in exchange for such cash consideration, if any, as our Board of Directors in its sole discretion, may consider appropriate; or
(iii) make a payment, in such form as may be determined by our Board of Directors equal to the excess, if any, of (A) the value of the
property the holder would have received upon the exercise of the award immediately prior to the effective time of the transaction, over (B)
any exercise price payable by such holder in connection with such exercise. In addition, in connection with such transaction, our Board of
Directors may accelerate the vesting, in whole or in part, of the award (and, if applicable, the time at which the award may be exercised) to
a date prior to the effective time of such transaction and may arrange for the lapse, in whole or in part, of any reacquisition or repurchase
rights held by us with respect to an award.
Amendment and Termination. The 2012 Plan will terminate on September 6, 2022 or at an earlier date by vote of the stockholders or our
Board; provided, however, that any such earlier termination shall not affect any awards granted under the 2012 Plan prior to the date of
such termination. The 2012 Plan may be amended by our Board, except that our Board may not alter the terms of the 2012 Plan if it would
adversely affect a participant’s rights under an outstanding stock right without the participant’s consent. Stockholder approval will be
required for any amendment to the 2012 Plan to the extent such approval is required by law, include the Internal Revenue Code or
applicable stock exchange requirements.
Amendment of Outstanding Awards. The administrator may amend any term or condition of any outstanding award including, without
limitation, to reduce or increase the exercise price or purchase price, accelerate the vesting schedule or extend the expiration date, provided
that no such amendment shall impair the rights of a participant without such participant’s consent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Except as set forth below, we have not entered into any transactions since January 1, 2015 to which we have been a party, in which the
amount involved in the transaction exceeded the lesser of $120,000 or one percent of the average of our total assets at year-end for the last
two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5%
of our common stock, on an as converted basis, or any member of the immediate family of any of the foregoing persons had or will have a
direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which
are described under “Executive and Director Compensation.”
81
On July 28, 2017, we closed on a $2.5 million term loan with North Stadium Investments, LLC, or North Stadium, a company owned and
controlled by our Chief Executive Officer and Chairman of the Board, Dr. Sonny Bal. In connection with the loan, we issued to North
Stadium, a Secured Promissory Note in the amount of $2.5 million (the “Note”). The Note bears interest at the rate of 10% per annum,
requires us to make monthly interest only payments for a period of 12 months, and principal and any unpaid accrued interest are due and
payable 12 months from the effective date of the Note, July 28, 2017. The Note is secured by substantially all of the assets of the Company
pursuant to a security agreement between the Company and North Stadium. In connection with the Loan and as additional consideration for
the Loan, the Company issued to North Stadium a warrant to acquire up to 55,000 common shares with a purchase price set at $5.04 per
share and a 5-year term.
Indemnification Agreements . We have entered into indemnification agreements with each of our executive officers and directors that
require us to indemnify such persons against any and all expenses, including judgments, fines or penalties, attorney’s fees, witness fees or
other professional fees and related disbursements and other out-of-pocket costs incurred, in connection with any action, suit, arbitration,
alternative dispute resolution mechanism, investigation, inquiry or administrative hearing, whether threatened, pending or completed, to
which any such person may be made a party by reason of the fact that such person is or was a director, officer, employee or agent of our
company, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in,
or not opposed to, our best interests. The indemnification agreements also set forth procedures that will apply in the event of a claim for
indemnification thereunder. We believe that these provisions and agreements are necessary to attract and retain qualified persons as
directors and officers.
Policy for Review of Related Party Transactions
We have a policy for the review of transactions with related persons as set forth in our Audit Committee Charter and internal practices. The
policy requires review, approval or ratification of all transactions in which we are a participant and in which any of our directors, executive
officers, shareholders holding more than 5% of our outstanding common stock, an immediate family member of any of the foregoing
persons or any other person who the Board determines may be considered to be a related person has a direct or indirect material interest and
which meet the threshold requirements set forth in Item 404 of Regulation S-K under the Exchange Act (typically $120,000 or more in
value). All related party transactions must be reported for review by the Audit Committee pursuant to the Audit Committee’s charter.
In reviewing and approving such transactions, the Audit Committee shall obtain, or shall direct management to obtain on its behalf, all
information that the Audit Committee believes to be relevant and important to a review of the transaction prior to its approval. Following
receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by the Audit Committee
prior to approval. No related party transaction shall be entered into prior to the completion of these procedures.
Following its review, the Audit Committee determines whether these transactions are in, or not inconsistent with, the best interests of the
Company and its stockholders, taking into consideration whether they are on terms no less favorable to the Company than those available
with other parties and the related person’s interest in the transaction.
Our policy for review of transactions with related persons was followed in all of the transactions set forth above and all such transactions
were reviewed and approved in accordance with our policy for review of transactions with related persons.
Director Independence
Information regarding the independence of directors is disclosed above under Item 10 under the heading “The Board and Committees” and
incorporated herein by reference.
82
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees and expenses from our principal accounting firm, Tanner LLC for 2017 and for BDO USA, LLP who acquired Mantyla
McReynolds LLC during 2016, and which are separately presented, for fees and expenses incurred during fiscal years ended December 31,
2017 and 2016, were as follows (in thousands):
MANTYLA
MCREYNOLDS
LLC
Year Ended
December 31,
2016
BDO USA,
LLP
Year Ended
December 31,
2016
TANNER LLC
Year Ended
December 31,
2017
$
103,520 $
485,991 $
-
-
-
-
-
-
$
103,520 $
485,991 $
260,081
-
15,500
-
275,581
Audit fees
Audit related fees
Tax fees
All other fees
Total Fees
Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee’s Chairman pursuant to
delegated authority by the Audit Committee, other than de minimus non-audit services for which the pre-approval requirements are waived
in accordance with the rules and regulations of the Securities and Exchange Commission.
Audit Fees
Consist of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated
financial statements included in quarterly reports and services that are normally provided by the principal accountants in connection with
statutory and regulatory filings or engagements.
Audit Related Fees
Consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our
consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees
Consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of
federal and state income tax returns.
All Other Fees
Consist of fees for product and services other than the services reported above.
Policy for Approval of Audit and Permitted Non-Audit Services
The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non-audit services to be provided by
our independent auditors before the accountant is engaged to render these services. The Audit Committee may consult with management in
the decision-making process, but may not delegate this authority to management. The Audit Committee may delegate its authority to pre-
approve services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the
next committee meeting.
83
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:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
F-2, F-3
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
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
3.1
Restated Certificate of Incorporation of the Registrant
Form 8-K (Exhibit
2/20/14
001-33624
3.1)
3.1.1
Certificate of Amendment to the Restated Certificate
Form 8-K (Exhibit
1/22/16
001-33624
of Incorporation of Amedica Corporation
3.1)
3.1.2
Certificate of Amendment to the Restated Certificate
Form 8-K (Exhibit
11/16/17
001-33624
of Incorporation of Amedica Corporation
3.1)
3.2
Restated Bylaws of the Registrant
Form 8-K (Exhibit
2/20/14
001-33624
4.1
Form of Common Stock Certificate of the Registrant
4.2
Form of Warrant to Purchase Shares of Common Stock
of the Registrant, issued on May 9, 2011
3.1)
Amendment No. 3 to
Form S-1 (Exhibit
4.1)
Amendment No. 3 to
Form S-1 (Exhibit
4.9)
1/29/14
333-192232
1/29/14
333-192232
4.3
Warrant to Purchase Shares of Series F Convertible
Form S-1 (Exhibit
11/8/13
333-192232
Preferred Stock by and between the Registrant and GE
Capital Equity Investments, Inc., dated as of December
17, 2012
4.10)
84
Exhibit
Number
Exhibit Description
4.4
4.5
Warrant to Purchase Shares of Series F Convertible
Preferred Stock by and between the Registrant and
Zions First National Bank, dated as of December 17,
2012
Form of Warrant to Purchase Shares of Common Stock
of the Registrant, issued on March 4, 2011 and May 9,
2011
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
Form S-1 (Exhibit
11/8/13
333-192232
4.11)
Form S-1 (Exhibit
11/8/13
333-192232
4.12)
4.6
Form of Amendment to Warrant to Purchase Shares of
Form S-1 (Exhibit
11/8/13
333-192232
Common Stock of the Registrant, dated as of
December 18, 2012
4.13)
4.7
Form of Amendment No. 2 to Warrant to Purchase
Form S-1 (Exhibit
11/8/13
333-192232
Shares of Common Stock of the Registrant, dated as of
February 1, 2013
4.14)
4.8
Form of Warrant to Purchase Shares of Common Stock
Amendment No. 2
12/20/13
333-192232
of the Registrant, issued on August 30, 2013 and
September 20, 2013, as amended
to Form S-1 (Exhibit
4.17)
4.9
4.10
Form of Amendment to Warrant to Purchase Common
Stock of the Registrant, dated as of December 23, 2013
Amendment No. 3
1/29/14
333-192232
to Form S-1 (Exhibit
4.17.1)
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
Amendment No. 2
12/20/13
333-192232
to Form S-1 (Exhibit
4.20)
4.11
Form of Amendment to Warrant to Purchase Shares of
Amendment No. 3
1/29/14
333-192232
Common Stock of the Registrant, issued to TGP
Securities, Inc., dated as of December 23, 2013
to Form S-1 (Exhibit
4.21)
4.12
Hercules Warrant to Purchase Common Stock
Form 8-K (Exhibit
7/1/2014
001-33624
4.3)
4.13
Form of Warrant to be Issued to Investors in the
Amendment No. 3
11/19/14
333-199753
Offering
to Form S-1 (Exhibit
4.24)
4.14
Form of Unit Purchase Option to be Issued to the
Amendment No. 3
11/19/14
333-199753
Underwriters in the Offering
to Form S-1 (Exhibit
4.25)
85
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
4.15
Form of Warrant Agent Agreement by and between the
Registrant and American Stock Transfer and Trust
Company
Amendment No. 3
11/19/14
333-199753
to Form S-1 (Exhibit
4.26)
4.16
Warrant to purchase shares of common stock of the
Form 8-K (Exhibit
11/7/14
001-33624
Registrant by and between the Registrant and
Hampshire MedTech Partner II, L.P., dated as of
November 6, 2014
4.1)
4.17
Form of Warrant to Purchase Shares of Common Stock
Form 10-K (Exhibit
3/24/15
001-33624
of the Registrant issued on September 17, 2014.
4.27)
4.18
Form of Warrant to Purchase Shares of Common Stock
Form 10-K (Exhibit
3/24/15
001-33624
of the Registrant issued on November 12, 2014.
4.28)
4.19
Senior Convertible Note by Registrant payable to MG
Partners II, Ltd., Issuance Date: August 12, 2014,
Exchange Date: April 2, 2015
Form 8-K (Exhibit
4/3/15
001-33624
4.2)
4.20
Form of Series B Warrant
Form 8-K (Exhibit
9/8/15
001-33624
4.2)
4.21
Form of Series D Warrant
Form 8-K (Exhibit
9/8/15
001-33624
4.4)
4.22
Form of Amended and Restated Series A warrant
Form 8-K (Exhibit
12/14/15
001-33624
4.1)
4.23
Form of Amended and Restated Series C Warrant
Form 8-K (Exhibit
12/14/15
001-33624
4.2)
4.24
Form of Common Stock Purchase Warrant issued on
Form 8-K (Exhibit
4/05/16
001-33624
April 4, 2016.
4.25
Form of Series E Warrant
4.26
Form of Underwriters Warrant Issued in 2016 Offering
4.27
Form of Series A Preferred Stock Certificate
4.1)
Amendment No. 3 to
Form S-1 (Exhibit
4.25)
Amendment No. 3 to
Form S-1 (Exhibit
4.26)
Amendment No. 3 to
Form S-1 (Exhibit
4.27)
6/30/16
333-211520
6/30/16
333-211520
6/30/16
333-211520
4.28
Form of Warrant
Form 8-K (Exhibit
1/20/17
001-33624
4.1)
4.29
Secured Promissory Note with North Stadium
Form 8-K (Exhibit
8/3/17
001-33624
Investments, LLC
4.1)
86
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
4.30
North Stadium Investments, LLC Warrant to Purchase
Form 8-K (Exhibit
8/3/17
001-33624
Common Stock
4.2)
4.31
L2 Capital LLC Common Stock Purchase Warrant
Form 8-K (Exhibit
2/1/18
001-33624
4.1)
10.1
Securities Purchase Agreement by and between the
Form 8-K (Exhibit
7/1/2014
001-33624
Registrant and MG Partners II Ltd, dated as of June 30,
2014
10.1)
10.2
10.3
Registration Rights Agreement by and between the
Registrant and MG Partners II Ltd., dated as of June
30, 2014
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
Form 8-K (Exhibit
7/1/2014
001-33624
10.2)
Form 8-K (Exhibit
7/1/2014
001-33624
10.3)
10.4
Centrepointe Business Park Lease Agreement Net by
Form S-1 (Exhibit
11/8/13
333-192232
and between the Registrant and Centrepointe
Properties, LLC, dated as of April 21, 2009
10.10)
10.5
First Addendum to Centrepointe Business Park Lease
Agreement Net by and between the Registrant and
Centrepointe Properties, LLC, dated as of January 31,
2012
Form S-1 (Exhibit
11/8/13
333-192232
10.11)
10.6
Form of Change of Control Agreement*
Form 8-K (Exhibit
7/22/15
001-33624
10.1)
10.7
Form of Indemnification Agreement by and between
Amendment No. 2
12/20/13
333-192232
the Registrant and its officers and directors
to Form S-1 (Exhibit
10.14)
10.8
Amedica Corporation Amended and Restated 2012
Amendment No. 4
2/12/14
333-192232
Equity Incentive Plan*
to Form S-1 (Exhibit
10.15)
10.9
Form of 2012 Stock Option Grant Notice and Stock
Amendment No. 4
2/12/14
333-192232
Option Agreement*
to Form S-1 (Exhibit
10.16)
10.10
Form of 2012 Restricted Stock Award and Restricted
Amendment No. 4
2/12/14
333-192232
Stock Unit Agreement*
to Form S-1 (Exhibit
10.17)
10.11
Amedica Corporation 2003 Stock Option Plan*
Form S-1 (Exhibit
11/8/13
333-192232
10.18)
10.12
Form of 2003 Non-Qualified Stock Option Agreement
and Notice of Exercise of Non-Qualified Stock Option
thereunder*
Form S-1 (Exhibit
11/8/13
333-192232
10.19)
87
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
10.13
Form of 2003 Incentive Stock Option Agreement and
Form S-1 (Exhibit
11/8/13
333-192232
Notice of Exercise of Incentive Stock Option
thereunder*
10.20)
10.14
Amendment and Exchange Agreement, date April 2,
Form 8-K (Exhibit
4/3/15
001-33624
2015, by and between the Registrant and MG Partners
II, Ltd
10.1)
10.15
10.16
10.17
10.18
10.19
Consent and First Amendment to Loan and Security
Agreement dated September 8, 2015 by and among
Hercules Technology Growth Capital Inc., the
financial institutions signatory thereto, Amedica
Corporation, and the guarantors signatory thereto.
First Amendment to Warrant to Purchase Shares of
Common Stock of Amedica Corporation dated
September 8, 2015, by and between Amedica
Corporation and Hercules Technology III, L.P.
Settlement and Waiver Agreement dated September 8,
2015, by and among Amedica Corporation and MG
Partners II, Ltd.
Form 8-K (Exhibit
9/8/15
001-33624
10.1)
Form 8-K (Exhibit
9/8/15
001-33624
10.2)
Form 8-K (Exhibit
9/8/15
001-33624
10.3)
Placement Agency Agreement between Amedica
Corporation and Ladenburg Thalmann & Co. Inc.
Form 8-K (Exhibit
9/8/15
001-33624
10.4)
Form of Securities Purchase Agreement between
Amedica Corporation and the Purchasers Dated
September 8, 2015
Form 8-K (Exhibit
9/8/15
001-33624
10.5)
10.20
Form of Registration Rights Agreement
Form 8-K (Exhibit
9/8/15
001-33624
10.6)
10.21
Form of Leak-Out Agreement
Form 8-K (Exhibit
12/14/15
10.22
Assignment and Second Amendment to Loan and
Security Agreement, dated April 4, 2016, by and
among the Company Riverside Merchant Partners,
LLC, Hercules Technology III, L.P. and Hercules
Capital, Inc., the financial institutions signatory
thereto, Amedica Corporation, and the guarantors
signatory thereto
88
10.1)
Form 8-K (Exhibit
5/05/16
001-33624
10.1)
Exhibit
Number
Exhibit Description
Filed with
this
Report
Incorporated by
Reference herein
from
Form or Schedule
Filing Date
SEC
File/Reg.
Number
10.23
Exchange Agreement dated April 4, 2016, by and
Form 8-K (Exhibit
5/05/16
001-33624
among Amedica Corporation and Riverside Merchant
Partners, LLC
10.2)
10.24
Subordinated Convertible Promissory Note, dated
Form 8-K (Exhibit
5/05/16
001-33624
April 4, 2016, by and among Amedica Corporation and
Riverside Merchant Partners, LLC
10.3)
10.25
10.26
Warrant Agency Agreement, dated July 8, 2016, by
and between Amedica Corporation and American
Stock Transfer & Trust Company, LLC
Warrant Agency Agreement dated January 24, 2017,
by and between Amedica Corporation and American
Stock Transfer & Trust Company, LLC
Form 8-K (Exhibit
7/8/16
001-33624
10.1)
Form 8-K (Exhibit 8-
1/24/17
001-33624
K)
10.27
Security Agreement, dated July 28, 2017
Form 8-K (Exhibit
8/3/17
001-33624
10.28
Assignment Agreement, dated January 3, 2018, by and
among the Company, US Spine, Inc., MEF I, L.P.,
Anson Investments Master Fund LP, Hercules
Technology III, L.P. and Hercules Capital, Inc.
10.1)
Form 8-K (Exhibit
1/4/18
001-33624
10.1)
10.29
Exchange Agreement, dated January 3, 2018, by and
Form 8-K (Exhibit
1/4/18
001-33624
among Amedica Corporation and MEF I, L.P.
10.2)
10.30
Securities Purchase Agreement, dated January 30,
2018, by and among the Company and L2 Capital,
LLC.
Form 8-K (Exhibit
2/1/18
001-33624
10.1)
10.31
Promissory Note payable to L2 Capital.
Form 8-K Exhibit
2/1/18
001-33624
10.2
21.1
List of Subsidiaries of the Registrant
Form S-1 (Exhibit
11/8/13
333-192232
21.1)
23.1
Consent of Independent Registered Public Accounting
Firm, BDO USA, LLP
23.2
Consent of Independent Registered Public Accounting
Firm, Tanner LLC
31.1
Certification of Chief Executive Officer
31.2
Certification of Principal Financial Officer
32
Certification pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
101 SCH
XBRL Taxonomy Extension Schema Document (A)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document (A)
101.DEF XBRL Taxonomy Extension Definition Linkbase
Document (A)
101.LAB XBRL Taxonomy Extension Label Linkbase
Document (A)
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Document (A)
X
X
X
X
X
X
X
X
X
X
*
(A)
Management contract of compensatory plan or arrangement
XBRL (EXTENSIBLE BUSINESS REPORTING LANGUAGE) information is furnished and not filed for purposes of Section
11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
ITEM 16. 10-K Summary
None.
89
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 29, 2018
AMEDICA CORPORATION
/s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
(Principal Executive Officer and Principal Financial 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 29, 2018
Date: March 29, 2018
Date: March 29, 2018
Date: March 29, 2018
/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
90
AMEDICA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As of and For the Years ended December 31, 2017 and 2016
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
F-2, F-3
F-4
F-5
F-6
F-7
F-8
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Amedica Corporation
Salt Lake City, Utah
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Amedica Corporation and subsidiaries (the “Company”) as of December
31, 2017 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December 313, 2017, and the results of its operations and its cash flows
for the year then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
Other Matter
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 consolidated 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 and to finance its operations. 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ TANNER LLC
We have served as the Company’s auditors since 2017
March 29, 2018
Salt Lake City, Utah
F-2
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 (the “Company”) as of December 31, 2016 and the
related consolidated statements of operations, stockholders’ equity, 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
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, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 13, the accompanying consolidated financial statements have been restated to correct misstatements.
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 consolidated 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 2016. 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 consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
Salt Lake City, Utah
September 19, 2017 (December 26, 2017 as to the effects of the restatement described in Note 13 to the 2016 restated financial statements
and the reverse stock split described in Note 1)
F-3
Amedica Corporation
Consolidated Balance Sheets
(in thousands, except share and per share data)
As of December 31,
2017
2016
$
539 $
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance of $63 and $22, respectively
Prepaid expenses and other current assets
Inventories
Total current assets
Inventories, net
Property and equipment, net
Intangible assets, net
Goodwill
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Debt – related party
Debt
Derivative liabilities, current portion
Total current liabilities
Deferred rent
Other long-term liabilities
Derivative liabilities, net of current portion
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity:
Convertible preferred stock, $0.01 par value, 130,000,000 shares authorized; no shares
issued and outstanding.
Common stock, $0.01 par value, 250,000,000 shares authorized, 3,028,065 and 2,280,407
shares issued and outstanding at December 31, 2017 and 2016, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F-4
$
$
$
1,240
190
1,241
3,210
1,136
1,446
2,651
6,163
35
14,641 $
1,732 $
2,682
2,356
605
896
8,271
179
288
461
9,199
6,915
1,620
239
7,213
15,987
-
889
3,187
6,163
35
26,261
658
3,183
-
7,012
3,137
13,990
319
189
528
15,026
-
30
226,041
(220,629)
5,442
14,641 $
-
22
222,513
(211,300)
11,235
26,261
Amedica Corporation
Consolidated Statements of Operations
(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 (expenses):
Interest expense
Loss on extinguishment of debt
Change in fair value of derivative liabilities
Offering costs
Other income
Total other income (expense), net
Net loss before income taxes
Provision for income taxes
Net loss
Deemed dividend related to beneficial conversion feature and accretion of discount on
convertible series A preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Year Ended December 31,
2016
2017
$
11,227 $
6,352
4,876
5,077
4,380
6,472
15,929
(11,053)
(1,263)
-
3,118
(131)
-
1,724
(9,329)
-
(9,329)
$
$
-
(9,329) $
(3.13) $
15,226
3,777
11,449
6,345
6,292
10,347
22,984
(11,535)
(4,511)
(661)
2,476
(571)
39
(3,228)
(14,763)
-
(14,763)
(6,278)
(21,041)
(13.63)
2,978,904
1,543,735
Amedica Corporation
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Balance at December 31, 2015
Issuance of common stock upon cashless exercise of
warrants
Issuance of common stock and warrants with offering,
net of issuance costs
Issuance of preferred stock and warrants with
offering, net of issuance costs
Accretion of convertible preferred stock discount
Deemed dividend on convertible preferred stock
Preferred stock converted to common stock
Issuance of common stock upon exercise of warrants,
net of issuance costs
Beneficial conversion feature associated with issuance
of convertible notes
Issuance of common stock upon conversion of debt
Issuance of common stock in connection with
settlement of litigation
Stock-based compensation
Net loss
Balance at December 31, 2016
Issuance of common stock with offering, net of
issuance costs
Round-up common shares issued in association with
reverse stock split
Stock-based compensation
Warrants issued in association with debt
Net loss
Balance at December 31, 2017
Preferred Stock
Shares Amount Shares
Amount Capital
Common Stock
Paid-In Accumulated Total
- $
-
907,187 $
9 $210,760 $
Deficit
Equity
(196,537) $ 14,232
-
-
-
44,700
-
-
-
-
-
438,167
4
2,536
-
2,540
7,392
-
-
(7,392)
-
-
-
-
-
-
-
616,000
-
-
-
6
3,622
6,278
(6,278)
(6)
-
-
-
-
3,622
6,278
(6,278)
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
37,262
-
720
-
720
-
-
-
156,893
-
2
1,138
2,677
-
-
1,138
2,679
-
80,198
1
793
-
794
-
-
-
-
- 2,280,407
-
-
273
-
22 222,513
273
-
(14,763) (14,763)
(211,300) 11,235
-
741,667
8
3,120
-
3,128
5,991
-
-
-
-
-
-
-
- 3,028,065 $
-
-
-
-
-
219
189
-
30 $226,041 $
-
-
-
(9,329)
-
219
189
(9,329)
(220,629) $ 5,442
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Amedica Corporation
Consolidated Statements of Cash Flow
(in thousands)
Cash flow from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Year Ended December 31,
2016
2017
$
(9,329) $
(14,763)
Depreciation expense
Amortization of intangible assets
Amortization of lease incentive for tenant improvements
Impairment of property and equipment
Non-cash interest expense
Non-cash issuance of stock to settle litigation
Loss on extinguishment of debt
Stock based compensation
Change in fair value of derivative liabilities
Loss on extinguishment of derivative liabilities
(Gain) 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
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
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs ($601 and $300)
Proceeds from issuance of preferred stock, net of issuance costs ($371)
Proceeds from issuance of warrant derivative liability, net of issuance costs of ($131 and
$571)
Proceeds from issuance of stock in connection with exercise of warrants, net of issuance
costs
Payments on debt
Debt extinguishment payments
Payments for capital lease
Deferred costs paid for debt
Proceeds from issuance of debt – related party
Net cash provided by (used in) financing activities
Net decrease used in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
578
536
20
-
821
-
-
219
(3,118)
-
1
4,550
41
131
339
48
287
196
(4,680)
(1,186)
49
(1,137)
3,128
-
679
-
(6,816)
-
-
(50)
2,500
(559)
(6,376)
6,915
$
539 $
Year Ended December 31,
2016
2017
Noncash investing and financing activities
Preferred stock converted to common stock
Derivative liability reduced with exercise of warrants
Capital lease for property and equipment
Notes payable and accrued interest converted to common stock
Debt exchange - Riverside
Debt discount for Riverside note – beneficial conversion feature (BCF) and warrants
Deemed dividend on convertible preferred stock
Debt discount from warrants issued with debt
Supplemental cash flow information
Cash paid for interest
$
$
- $
-
-
-
-
-
-
189
442 $
The accompanying notes are an integral part of these consolidated financial statements.
F-7
1,435
501
20
852
2,904
794
661
273
(2,476)
(1)
(27)
1,161
-
571
1,040
(3)
749
(861)
(7,170)
(671)
54
(617)
2,540
3,622
5,246
447
(6,630)
(1,728)
(13)
(267)
-
3,217
(4,570)
11,485
6,915
6
274
60
2,679
3,000
1,138
6,278
-
1,606
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 in consolidation.
Liquidity and Capital Resources
The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which
contemplates the realization of assets and settlement of liabilities in the normal course of business, and does not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may
result from uncertainty related to its ability to continue as a going concern within one year from the date of issuance of these consolidated
financial statements.
For the years ended December 31, 2017 and 2016, the Company incurred a net loss of $9.3 million and $14.8 million, respectively, and
used cash in operations of $4.7 million and $7.2 million, respectively. The Company had an accumulated deficit of $220.6 million and
$211.3 million as of December 31, 2017 and 2016, 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. The Company’s
continuation as a going concern is dependent upon its ability to increase sales, implement cost saving measures, maintain compliance with
debt covenants and/or raise additional funds through the capital markets. Whether and when the Company can attain profitability and
positive cash flows from operations or obtain additional financing is uncertain.
In 2016, the Company implemented certain cost saving measures, including workforce and office space reductions, and continued to
evaluate additional cost savings alternatives during 2017. These additional cost savings measures may include additional workforce and
research and development reductions, as well as cuts to certain other operating expenses. In addition to these cost saving measures an
experienced and highly successful leader for the Sales and Marketing team was recruited and hired. This individual has subsequently hired
additional experienced personnel in Sales and Market Development. The Company is actively generating additional scientific and clinical
data to have it published in leading industry publications. The unique features of our silicon nitride material are not well known, and such
the publication of such data would help sales efforts as the Company approaches new prospects. The Company is also making additional
changes to the sales strategy, including a focus on revenue growth of silicon nitride lateral lumbar implants and the newly developed
pedicle screw system (known as Taurus).
On July 28, 2017, the Company entered into a $2.5 million term loan with a related party. The Company has common stock that is publicly
traded and has been able to successfully raise capital when needed since the date of the Company’s initial public offering. Subsequent to
December 31, 2017, the Company was able to raise equity funding through the exercise of outstanding warrants (see Note 13). The
Company is engaged in discussions with investment and banking firms to examine financing alternatives, including options for a public
offering of the Company’s preferred or common stock.
Although the Company is seeking to obtain additional equity and/or debt financing, such funding is not assured and may not be available to
the Company on favorable or acceptable terms and may involve significant restrictive covenants. Any additional equity financing is also
not assured and, if available to the Company, will most likely be dilutive to its current stockholders. If the Company is not able to obtain
additional debt or equity financing on a timely basis, the impact on the Company will be material and adverse.
F-8
These uncertainties create substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these uncertainties.
Reverse Stock Split
On November 10, 2017, the Company effected a 1 for 12 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 consolidated financial statements prior to November 10, 2017 have been
adjusted retroactively to reflect the reverse stock split.
Use of Estimates
The preparation of consolidated 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
consolidated 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,
goodwill, 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.
At December 31, 2017, one customer receivable balance was 12% of the Company’s total trade accounts receivable.
One customer accounted for 21% of the Company’s total revenues for the year ended December 31, 2017.
At December 31, 2016, one customer receivable balance was 16% of the Company’s total trade accounts receivable. One customer
accounted for 17% of the Company’s total revenues for the year ended December 31, 2016.
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 three types of customers: (1) surgeons and hospitals; (2)
stocking distributors; and (3) private label customers. Most of the Company’s 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 and private label
customers. 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 facilitate sales of 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 or private label customer, and all other
revenue recognition criteria have been met. The Company recognizes revenue from sales to stocking distributors and private label
customers at the time the product is shipped. 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 consolidated statements of operations, primarily within sales and marketing. In general, the
Company’s customers do not have any rights of return or exchange.
F-9
Costs of Revenue
The expenses that are included in costs 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 the majority of our silicon-nitride
products in-house.
Specific provisions for excess or obsolete inventory are also included in costs 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 costs of revenue.
Cash and Cash Equivalents
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.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined under the standard costs,
which approximate actual costs, determined on the first-in first-out (“FIFO”) 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. 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.
Periodically the Company reviews the carrying value of the Company’s property and equipment that are held and used in the Company’s
operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to
which the assets relate, utilizing management’s best estimate, assumptions, and projections at the time. If the carrying value is determined
to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment charge would be recognized to the
extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the
estimated future discounted cash flows of the asset. Management has evaluated its property and equipment and identified specific asset
impairments during the year ended December 31, 2016. No impairment was identified during the year ended December 31, 2017.
F-10
Accounts Receivable and Allowance for Doubtful Accounts
The majority of the Company’s accounts receivable is composed of amounts due from hospitals or surgical centers. Accounts receivable
are carried at invoiced amount less an allowance for doubtful accounts. On a regular basis, the Company evaluates 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.
Long Lived Intangible Assets and Goodwill
The Company periodically evaluates the carrying value of definite-lived intangibles when 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. The Company amortizes
definite-lived intangible assets on a straight-line basis over their useful lives. The Company recorded no impairment loss for definite-lived
intangible assets during the years ended December 31, 2017 and 2016.
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.
If the Company’s revenues or other estimated operating results are not achieved at or above our forecasted level, and the Company is
unable to recover such costs through price increases, the carrying value of certain of the Company’s assets may prove to be unrecoverable
and we may incur impairment charges of definitive-live intangible assets.
In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for
impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company is
permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is
more likely than not that the fair value of any reporting unit is less than its corresponding carrying value. If, after assessing the totality of
events and circumstances, the Company concludes that it is not more likely than not that the fair value of any reporting unit is less than its
corresponding carrying value then the Company is not required to take further action. However, if the Company concludes otherwise, then
it is required to perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to
its carrying value. The Company considers valuation factors and an estimated control premium. If the fair value is less than its carrying
value, a second step of the test is required to determine if recorded goodwill is impaired. In the event that goodwill is impaired, an
impairment charge to earnings would become necessary.
The estimated fair value of the reporting unit exceeded the carrying value as of December 31, 2017 and 2016. The declining price of the
Company’s stock is an early indicator that goodwill impairment may be a factor during 2018. The Company will continue to monitor the
Company’s market capitalization and impairment indicators. In the event that goodwill is impaired, an impairment charge to earnings
would become necessary.
Derivative Liabilities
Derivative liabilities include 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 consolidated statements of operations until the instruments settle,
expire or are no longer classified as derivative liabilities. The Company estimates the fair value of these instruments using the Black-
Scholes-Merton or Monte-Carlo valuation models depending on the complexity of the underlying instrument. 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.
F-11
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 less than $0.1 million for each of the years ended December 31, 2017 and 2016.
Income Taxes
The Company recognizes 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.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides 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.
The Company recognizes 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.
The Company’s 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, 2017 and 2016, the Company 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
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.
F-12
Because the Company was a privately-held company with no trading history prior to February 2014 and has limited stock history since
February 2014, the Company utilizes the historical stock price volatility from a representative group of public companies to estimate
expected stock price volatility and our historical stock price. The Company 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. The Company intends 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 publicly traded stock becomes available. The Company uses 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 the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to
estimate the expected term of stock options granted to employees. The Company utilizes a dividend yield of zero because the Company has
never paid cash dividends and has 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.
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 debt and equity capital.
Offering costs paid in cash or by issuing warrants associated with the Company’s equity fundraising activities are either recorded to
additional paid in capital as a reduction of the proceeds or immediately expensed depending on the amount of the offering costs compared
to the gross proceeds.
Offering costs paid in cash or by issuing warrants associated with the Company’s debt fundraising activities are recorded as a debt discount
and amortized as interest expense over the lie of the debt or immediately expensed depending on the amount of offering costs compared to
debt, with the offset to additional paid in capital.
New Accounting Pronouncement, Not Yet Adopted
In August 2016, the Financial Accounting Standards Board (“FASB”) updated accounting guidance on the following eight specific cash
flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt
instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent
consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the
settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity
method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the
predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. These updates are
effective for the Company for its annual period beginning January 1, 2019, and interim periods therein, with early adoption permitted. The
guidance in this standard is not expected to have a material impact on the consolidated financial statements.
In March 2016, the FASB updated the accounting guidance related to stock compensation. This update simplifies the accounting for
employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as the well as classification in the statement of cash flows. The standard is effective for the Company for its annual period
beginning January 1, 2018. The guidance in this standard is not expected to have a material impact on the consolidated financial statements
of the Company.
F-13
In February 2016, the FASB updated the accounting guidance related to leases as part of a joint project with the International Accounting
Standards Board (“IASB”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to
recognize assets and liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this update will
require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows
arising from leases, including qualitative and quantitative requirements. The standard is effective for the Company for its annual period
beginning January 1, 2020, and interim periods therein, with early adoption permitted. The Company is currently evaluating the potential
impact this new standard may have on its consolidated financial statements but believes the most significant change will relate to building
leases.
In May 2014, in addition to several amendments issued during 2016, the FASB updated the accounting guidance related to revenue from
contracts with customers, 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. The standard 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 the Company for its annual period beginning January 1, 2019, 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 has yet to begin evaluation of the new accounting standard and therefore has yet to determine the impact, if any, that the
new standard will have on its consolidated financial statements.
In January of 2017, the FASB issued ASU 2017-04— Intangibles—Goodwill and Other (Topic 350) : Simplifying the Test for Goodwill
Impairment. The amendments in this guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure
goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s carrying amount
exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied
on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2021. Early
adoption is permitted for goodwill impairment tests performed after January 1, 2017. The impact of this guidance for the Company will
depend on the outcomes of future goodwill impairment tests.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any,
on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these
pronouncements will have a significant effect on its consolidated financial statements.
New Accounting Pronouncement, Adopted in 2017
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory”. The amendments clarify
that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the consolidated financial
statements. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those annual
periods. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual
reporting period. The adoption of this guidance did not have a material impact on the consolidated financial statements.
F-14
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.
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
Common stock options
2. Inventories
The components of inventory were as follows (in thousands):
Raw materials
WIP
Finished goods
As of December 31,
2017
2016
1,503,711
11,302
1,515,013
1,118,938
11,446
1,130,384
As of December 31,
2017
2016
$
$
740 $
52
1,585
2,377 $
761
75
6,377
7,213
Finished goods include consigned inventory of approximately $0.5 million and $5.6 million as of December 31, 2017 and 2016,
respectively. As of December 31, 2017, inventories totaling $1.2 million and $1.1 million were classified as current and long-term,
respectively (all inventory was classified as current as of December 31, 2016). Inventories classified as current represent the carrying value
of inventories as of the date indicated, that management estimates will be sold during the following year. The above inventory totals are
recorded net of a provision for slow moving inventory of approximately $9.4 million and $4.8 million at December 31, 2017 and 2016,
respectively. Included in cost of goods sold for the years ended December 31, 2017 and 2016 is approximately $4.6 million and $1.2
million, respectively, of cost relating to the provision for slow moving.
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
Year Ended December 31,
2016
2017
$
$
223 $
6,398
863
745
635
8,864
(7,418)
1,446 $
223
5,269
863
816
629
7,800
(6,911)
889
Depreciation expense for 2017 and 2016 was approximately $0.6 million and $1.4 million, respectively.
F-15
Management analyzed the undiscounted cash flows expected to be generated by the ceramic product line asset group and concluded that
due to continuing declining revenues that the carrying value of ceramic related assets exceeded the total of the undiscounted cash flows. As
a result, the Company recognized impairment charges of approximately $0.2 million related to its ceramics equipment, approximately $0.2
million related to leasehold improvements, and approximately $0.5 million related to its ceramics surgical instrument sets, totaling $0.9
million of impairment charges for the year ended December 31, 2016, to bring the carrying value to the estimated fair value. No
impairment charge was recorded during the year ended December 31, 2017.
4. Intangible Assets
Intangible assets consisted of the following (in thousands):
Customer relationships
Developed technology
Other patents and patent applications
Trademarks
Less: accumulated amortization
Year Ended December 31,
2016
2017
$
$
3,989 $
4,685
562
350
9,587
(6,936)
2,651 $
3,990
4,685
562
350
9,587
(6,400)
3,187
Amortization expense is expected to approximate $0.5 million per year during 2018 through 2021, $0.4 million in 2022 and a total of $0.1
million thereafter, until fully amortized. Amortization expense totaled approximately $0.5 million for both of the years ended December
31, 2017 and 2016.
5. Fair Value Measurements
Financial Instruments Measured and Recorded at Fair Value on a Recurring Basis
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. 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 as of December 31, 2017 and 2016. The following
tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of December
31, 2017 and 2016.
F-16
Description
Derivative liability
Fair Value Measurements as of December 31, 2017
(in thousands)
Level 1
Level 2
Level 3
Total
Common stock warrants
$
- $
- $
1,357 $
1,357
Description
Derivative liability
Fair Value Measurements as of December 31, 2016
(in thousands)
Level 1
Level 2
Level 3
Total
Common stock warrants
$
- $
- $
3,665 $
3,665
F-17
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, 2017 and 2016. 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, 2017 and 2016 (in
thousands):
Balance at December 31, 2015
Issuance of derivatives
Decrease in liability due to warrants being Exercised
Change in fair value
Balance at December 31, 2016
Issuance of derivatives
Change in fair value
Balance at December 31, 2017
Common Stock Warrants
Common Stock
Warrants
$
$
(598)
(5,817)
274
2,476
(3,665)
(810)
3,118
(1,357)
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. As of December 31, 2017 and 2016, approximately
$0.5 million of the derivative liability was calculated using the Black-Scholes-Merton valuation model. As of December 31, 2017 and
2016, approximately $0.9 million and $3.1 million respectively, were calculated using the Monte Carlo Simulation valuation model.
Issuances of common stock warrants deemed to be derivative liabilities during both of the years ended December 31, 2017 and 2016, were
valued at approximately $0.8 million and $5.8 million, respectively, on the date of issuance using the Monte Carlo Simulation valuation
model.
The assumptions used in estimating the common stock warrant liability using the Black-Scholes-Merton valuation model at December 31,
2017 and 2016 were as follows:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
December 31, 2017
December 31, 2016
1.89%
1.9
-%
107%
0.92%
2.5
-%
136%
The assumptions used in estimating the common stock warrant liability using the Monte Carlo Simulation valuation model at December 31,
2017 and 2016 were as follows:
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted average expected volatility
December 31,
2017
January 24, 2017
December 31,
2016
July 08, 2016
2.2%
3.6
-%
64%
F-18
1.94%
5.0
-%
66%
1.47%
4.5
-%
65%
0.95%
5.0
-%
68%
In addition, if any time after the second anniversary of the issuance of the warrant, both: (1) the 30-day volume weighted average price of
the Company’s stock exceeds $3.00; and (2) the average daily trading volume for such 30-day period exceeds $0.4 million, the Company
may call this warrant for $0.01 per share. Because of the call provision, management believes the Monte Carlo Simulation valuation model
provides a better estimate of fair value for the warrants issued during 2017 and 2016 than the Black-Scholes-Merton valuation model.
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.
6. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Commissions
Payroll and related expenses
Royalties
Interest payable
Final loan payment fees
Other
7. Debt
North Stadium Term Loan – Related Party
Year Ended December 31,
2016
2017
$
$
311 $
477
96
6
1,650
142
2,682 $
466
461
416
76
1,333
431
3,183
On July 28, 2017, the Company entered into a $2.5 million term loan (the “North Stadium Loan”) with North Stadium Investments, LLC
(“North Stadium”), a company owned and controlled by the Company’s Chief Executive Officer and Chairman of the Board. The North
Stadium Loan bears interest at 10% per annum and requires the Company to make monthly interest only payments from September 5, 2017
through July 5, 2018. All principal and unpaid interest (if any) under the North Stadium Loan is due and payable on July 28, 2018. The
North Stadium Loan is secured by substantially all of the Company’s assets but is junior to security interest in assets encumbered by the
Hercules Term Loan (see below). In connection with the North Stadium Loan the Company also issued North Stadium a warrant to
purchase up to 55,000 shares of the Company’s common stock at a purchase price of $5.04 per share, subject to a 5-year term. The relative
estimated value of the warrants on the date of grant approximated $0.2 million, which is being amortized as interest expense over the life of
the term loan.
Hercules Term Loan
On June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules which provided the Company with a $20.0
million term loan. The Hercules Term Loan matured on January 1, 2018. The Hercules Term Loan included a $0.2 million closing fee,
which was paid to Hercules on the closing date of the loan. The closing fee was 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 $1.7 million. The
final payment fee is being accrued and recorded to interest expense over the life of the loan. 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%, provided however, that during an adjustment period, the term loan
interest rate shall mean for any day a per annum rate of interest equal to the grater of either (i) the prime rate plus 9.2%, and (ii) 12.45%.
The applicable rate was 11.95% as of December 31, 2017. Interest accrues from the closing date of the loan and interest payments are due
monthly. Principal payments commenced August 1, 2015 and are currently being made in equal monthly installments totaling
approximately $0.5 million, with the remainder due at maturity. The Hercules Term Loan is secured by a first priority security interest in
substantially all of its assets, including intellectual property, of the Company and contains covenants restricting payments to certain
Company affiliates and certain financial reporting requirements.
F-19
On September 8, 2015, the Company entered into a Consent and First Amendment to Loan and Security Agreement (the “Amendment”)
with Hercules. The Amendment modified the liquidity covenant to reduce the required minimum cash and cash equivalents balance by $0.5
million for every $1.0 million in principal paid, up to a minimum of $2.5 million. Once the Hercules Term Loan principal balance is below
$2.5 million the Company is only required to maintain a cash and cash equivalents balance equal to the outstanding principal balance on
the Hercules Term loan. The minimum cash and cash equivalents balance required to maintain compliance with the minimum liquidity
covenant as of December 31, 2017, was approximately $0.6 million. Subsequent to December 31, 2017, the Company entered into an
exchange agreement pursuant to which the Company agreed to exchange the Hercules Term Loan for two senior secured convertible
promissory notes (See Note 13).
See discussion below with respect to the assignment of $3.0 million of the principal balance of the Hercules Term Loan to Riverside
Merchant Partners, LLC (“Riverside”) and the subsequent agreement between the Company and Riverside to exchange the $3.0 million of
the Hercules Term Loan held by Riverside for subordinated convertible promissory notes in the aggregate principal amount of $3.0
million.
Hercules and Riverside Debt Exchange
On April 4, 2016, the Company entered into an Assignment and Second Amendment to Loan and Security Agreement (the “Assignment
Agreement”) with Riverside and Hercules, pursuant to which Hercules sold $1.0 million of the principal amount outstanding under the
Hercules Term Loan to Riverside. In addition, pursuant to the terms of the Assignment Agreement, Riverside acquired an option to
purchase an additional $2.0 million of the principal amount outstanding under the Hercules Term Loan from Hercules. On April 18, 2016,
Riverside exercised and purchased an additional $1.0 million of the principal amount of the Hercules Term Loan and on April 27, 2016,
Riverside exercised the remainder of its option and purchased an additional $1.0 million of the principal amount of the Hercules Term
Loan from Hercules.
Riverside Debt
On April 4, 2016, the Company entered into an exchange agreement (the “Exchange Agreement”) with Riverside, pursuant to which the
Company agreed to exchange $1.0 million of the principal amount outstanding under the Hercules Term Loan held by Riverside for a
subordinated convertible promissory note in the principal amount of $1.0 million (the “First Exchange Note”) and a warrant to purchase
8,333 shares of common stock of the Company at a fixed exercise price of $19.56 per share (the “First Exchange Warrant”) (the
“Exchange”). All principal accrued under the Exchange Notes was convertible into shares of common stock at the election of the Holder at
any time at a fixed conversion price of $17.16 per share (the “Conversion Price”). The closing stock price on April 4, 2016, was $19.56 and
a beneficial conversion feature of $0.2 million was recorded to equity and as a debt discount. The warrant value of $0.1 million was
recorded to equity and as a debt discount.
In addition, pursuant to the terms and conditions of the Exchange Agreement, the Company and Riverside had the option to exchange an
additional $2.0 million of the principal amount of the Hercules Term Loan for an additional subordinated convertible promissory note in
the principal amount of up to $2.0 million and an additional warrant to purchase 8,333 shares of common stock (the “Second Exchange
Warrant”). The Exchange Agreement also provided that if the volume-weighted average price of the Company’s common stock was less
than the Conversion Price, the Company would issue up to an additional 12,500 shares of common stock (the “True-Up Shares”) to
Riverside, which was subsequently reduced to 11,667 shares of common stock.
On April 18, 2016, the Company and Riverside exercised their option to exchange an additional $1.0 million of the principal amount of the
Hercules Term Loan for an additional subordinated convertible promissory note in the principal amount of $1.0 million (the “Second
Exchange Note”). The closing stock price on April 18, 2016, was $24.24 and a beneficial conversion feature of $0.4 million was recorded
to equity and as a debt discount. Additionally, on April 27, 2016, the Company and Riverside exercised their option to exchange an
additional $1.0 million of the principal amount of the Term Loan for an additional subordinated convertible promissory note in the
principal amount of $1.0 million (the “Third Exchange Note”) and an additional warrant to purchase 8,333 shares of the Company’s
common stock at a fixed exercise price of $19.92 per share. The warrant value of $0.1 million was recorded to equity and as a debt
discount. The closing stock price on April 27, 2016, was $19.92 and a beneficial conversion feature of $0.3 million was recorded to equity
and as a debt discount. Financing costs were $0.3 million and were recorded to interest expense. The unamortized deferred financing costs
and debt discount of the Hercules Term Loan exchanged were $0.2 million at the time of the exchange and were recorded as a loss on
extinguishment of debt related to the debt exchange. The First Exchange Note, the Second Exchange Note and the Third Exchange Note are
collectively referred to herein as the “Exchange Notes.”
F-20
Pursuant to the terms of the Exchange Notes, since the volume-weighted average price of the Company’s common stock was less than the
Conversion Price on May 6, 2016, the Company issued an additional 11,667 shares of common stock to Riverside and recorded the value of
the True-Up Shares of $0.2 million to interest expense and equity.
All principal outstanding under each of the Exchange Notes was to be due on April 3, 2018 (the “Maturity Date”). Each of the Exchange
Notes bore interest at a rate of 6% per annum, with the interest that would accrue on the initial principal amount of the Exchange Notes
during the first 12 months being guaranteed and deemed earned as of the date of issuance. Prior to the Maturity Date, all interest accrued
under the Exchange Notes was payable in cash or, if certain conditions were met, payable in shares of common stock at the Company’s
option, at a conversion price of $16.08 per share. During 2016, the entire principal amount of the First and Second Exchange Notes, $0.3
million of the Third Exchange Note, and the interest related to the First, Second, and Third Exchange Notes was converted into 145,227
shares of common stock. In July 2016, the Company paid Riverside $0.8 million to redeem in full the remaining principal balance of the
Third Exchange Note. The debt discounts associated with the converted debt was recorded to interest expense.
Magna Note
In July 2016, the Company paid Magna $0.9 million to redeem in full the remaining principal balance and interest related to the Magna
Note. The outstanding principal amount of the Magna Note at extinguishment was $0.8 million. The Magna Note would have matured on
August 11, 2016, and accrued interest at an annual rate of 6.0%.
Long-term debt consisted of the following (in thousands):
December 31, 2017
Unamortized
Discount
and Debt
Issuance
Costs
Outstanding
Principle
$
605 $
Net
Carrying Outstanding
Principle
Amount
- $
605 $
2,500
3,105
(3,105)
(144)
(144)
144
2,356
2,961
(2,961)
$
- $
- $
- $
7,421 $
-
7,421
(7,421)
- $
December 31, 2016
Unamortized
Discount
and Debt
Issuance
Costs
Net
Carrying
Amount
7,012
-
7,012
(7,012)
-
(409) $
-
(409)
409
- $
Hercules Term Loan
North Stadium
Total debt
Less: Current portion
Long-term debt
8. Equity
January 2017 Offering
During 2017, the Company completed a secondary offering in which the Company sold 741,667 shares of common stock and warrants to
purchase 333,750 shares of common stock. The Company received approximately $3.9 million in proceeds from the offering, with $3.1
million, net of issuance costs of $0.6 million, allocated to common stock and $0.8 million allocated to the warrants. In association with the
warrants that were recorded as a derivative liability, the Company immediately expensed $0.1 million of issuance costs. The warrants
became exercisable on the closing date, expire on the five-year anniversary of the closing date, and have an initial exercise price per share
equal to $6.60 subject to adjustments for events of recapitalization, stock dividends, stock splits, stock combinations, reclassifications,
reorganizations or similar events affecting the Company’s common stock.
On February 24, 2017, the underwriter in the 2017 secondary offering exercised its option to purchase additional warrants for 30,000 shares
of the Company’s common stock.
F-21
July 2016 Offering
In July 2016, the Company completed a secondary offering in which the Company sold 5,258,000 Class A Units, including 1,650,000 units
sold pursuant to the exercise by the underwriters of their over-allotment option, priced at $1.00 per unit, and 7,392 Class B Units, priced at
$1,000 per unit. Each Class A Unit consisted of 1/12th share of common stock and one warrant to purchase 1/12th share of common stock.
Each Class B Unit consisted of one share of preferred stock convertible into 83 shares of common stock and warrants to purchase 83 shares
of common stock. The securities comprising the units were immediately separable and were issued separately. In total, the Company issued
438,167 shares of common stock, 7,392 shares of preferred stock convertible into 616,000 shares of common stock and warrants to
purchase 1,054,167 shares of common stock at a fixed exercise price of $12.00 per share. The Company received proceeds of
approximately $11.4 million, net of underwriting and other offering costs.
The Company raised $4.9 million associated with the Class A Units, with $2.5 million, net of issuance costs of $0.3 million, allocated to
the common stock and $2.4 million allocated to the warrants. The Company also raised $7.0 million associated with the Class B Units with
$3.6 million, net of issuance costs of $0.4 million, allocated to preferred stock and $3.4 million allocated to the warrants. The $5.8 million
allocated to warrants were recorded as a derivative liability. In association with the warrants that were recorded as a derivative liability, the
Company immediately expensed approximately $0.5 million of issuance costs. The 7,392 preferred shares were convertible into 616,000
shares of common stock and had an effective conversion rate of $6.48 per share based on the proceeds that were allocated to them. The
stock price on July 8, 2016, was $10.56 per share which resulted in a fair value in excess of carrying value of $4.08 per share or $2.5
million in total. The fair value in excess of carrying value, or beneficial conversion feature, was recorded as an adjustment within equity
(e.g., deemed dividend). The Company recorded a non-cash, deemed dividend of $6.3 million ($2.5 and $3.8 million—calculated as $0.4
million in offering costs plus $3.4 million measured as the difference between the stated value and the allocated proceeds) related to a
beneficial conversion feature and accretion of a discount on convertible preferred stock.
Subsequent to the secondary offering, all 7,392 shares of convertible preferred stock have been converted into 616,000 shares of common
stock. Furthermore, the Company received $0.4 million and issued 37,208 shares of common stock upon the exercise of certain warrants
issued in the secondary offering.
Other Issuance
On April 1, 2016, Hampshire MedTech Partners II, GP (“Hampshire GP”) filed suit against the Company in the Travis County, Texas
200th Judicial District Court relating to a Warrant to Purchase Shares of Common Stock issued to Hampshire MedTech Partners II, LP
(“Hampshire LP”) on November 6, 2014 (the “Warrant”). Hampshire GP alleged that as a result of a subsequent financing the Company
breached the anti-dilution provision of the Warrant by failing to increase the number of shares subject to the Warrant as well as failing to
reduce the exercise price of the Warrant. In November 2016, the Company and Hampshire GP settled the lawsuit through the execution of
a Settlement Agreement and Release. Pursuant to the terms of settlement, the Company issued 80,198 shares of common stock with a fair
value of $794,000 and the pre-existing warrants held by Hampshire GP were cancelled. The value of the shares issued were recognized as
loss on settlement in the consolidated statements of operations.
During 2016, 156,893 shares of common stock were issued related to the Riverside Debt discussed in Note 7.
F-22
9. Stock-Based Compensation
A summary of the Company’s outstanding stock option activity for the years ended December 31, 2017 and 2016 is as follows:
December 31, 2017
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Vested and expected to vest at December 31, 2017
Weighted-
Average
Exercise Price
Options
11,446 $
-
-
-
(144) $
11,302 $
9,835 $
11,302 $
367.08
-
-
-
8,719.64
264.26
287.31
264.26
Weighted-
Average
Remaining
Contractual Life
(Years)
8.2 $
-
-
-
-
7.3 $
8.3 $
7.3 $
Intrinsic Value
-
-
-
-
-
-
-
-
December 31, 2016
Weighted-
Average
Exercise Price
Options
Weighted-
Average
Remaining
Contractual Life
(Years)
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Vested and expected to vest at December 31, 2016
9,364 $
3,280
-
-
(1,198) $
11,446 $
8,996 $
11,446 $
F-23
498.60
16.44
-
-
495.96
367.08
507.72
367.08
- $
-
-
-
-
8.2 $
7.9 $
8.7 $
Intrinsic Value
-
-
-
-
-
-
-
-
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. 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, 2016, (no options were granted for the year ended December 31, 2017):
Weighted-average risk-free interest rate
Weighted-average expected life (in years)
Expected dividend yield
Weighted-average expected volatility
Summary of Stock-Based Compensation Expense
December 31, 2016
1.63%
6.30
0%
66.00%
Total stock-based compensation expense included in the consolidated statements of operations is allocated as follows (in thousands):
Cost of revenue
Research and development
General and administrative
Selling and marketing
Capitalized into inventory
As of December 31,
2017
2016
$
$
10 $
64
92
53
-
219 $
17
104
132
17
3
273
Unrecognized stock-based compensation at December 31, 2016 and 2017 were as follows (in thousands):
Stock options
Stock options
As of December 31, 2016
Unrecognized
Stock-Based
Compensation
256
$
Weighted
Average
Remaining
Period
of Recognition
(in years)
1.13
As of December 31, 2017
Weighted
Average
Remaining
Period
of Recognition
(in years)
0.40
Unrecognized
Stock-Based
Compensation
37
$
F-24
10. Income Taxes
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 expense:
Federal statutory rate
State taxes, net of federal benefit
Return to provision
Equity related expenses
Change in statutory rate
Change in valuation allowance
Other permanent differences
Total income tax expense
December 31,
2017
2016
(35.0)%
(5.1)%
(0.2)%
(10.4)%
272.7%
(221.1)%
0.1%
0.0%
(35.0)%
(3.4)%
0.0%
(1.8)%
0.0%
40.1%
0.1%
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
Stock-based compensation
Inventory Reserve
Federal R&D Credit
Accrued Expenses
Depreciation
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Intangibles
Total deferred tax liabilities
Less valuation allowance
Net deferred tax liability
December 31,
2017
2016
$
$
41,840 $
2,907
2,340
2,222
492
-
108
49,909
(37)
(210)
(247)
(49,796)
(134)
$
61,279
4,373
1,846
2,222
640
474
248
71,082
-
(697)
(697)
(70,519)
(134)
At December 31, 2017 and 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of
approximately $167.7 million and $160.2 million, respectively. The federal and state net operating loss carryforwards will expire from
2023 to 2037, unless previously utilized. Additionally, the Company believes an ownership change has occurred that would trigger the
limitation on usage of net operating losses imposed by Internal Revenue Code section 382. Because of this limitation, a significant portion
of the net operating losses would more likely than not expire unused.
During the years ended December 31, 2017 and 2016, the Company recognized no amounts related to 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 decreased by approximately $20.7 million and increased by $5.6 million for the years ended
December 31, 2017 and 2016, respectively.
F-25
Recent Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform Act”) was signed into law by the President of the United States. The Tax
Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. federal corporate tax rate
from 35% to 21% effective for our calendar year ending December 31, 2018. U.S. GAAP requires that the impact of tax legislation be
recognized in the period in which the law was enacted.
The Tax Reform Act reduces the federal corporate tax rate to 21% effective for our calendar year ending December 31, 2018. We
recognized the effects of the Tax Reform Act for the re-measurement of the net deferred tax liabilities during the year ended December 31,
2017.
We recognized the income tax effects of the Tax Reform Act in our 2017 financial statements in accordance with Staff Accounting Bulletin
No. 118 (“SAB 118”), which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in
which the 2017 Tax Reform Act was signed into law. The guidance addresses how a company recognizes provision amounts when a
company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to
complete its accounting for the effect of the changes in the Tax Reform Act. As such, the financial results reflect the income tax effects of
the Tax Reform Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax
effects of the Tax Reform Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined.
Pursuant to the SAB 118, we are allowed a measurement period of up to one year after the enactment date of the Tax Reform Act to
finalize the recording of the related tax impacts.
11. Commitment 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; this lease ends 2019. 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. Sublease income is recorded as a reduction of rent expense.
For each of the years ended December 31, 2017 and 2016, rental expense was $1.0 million and $0.6 million, respectively. Sublease income
was $0.1 million and $0.1 million during both of the years ended December 31, 2017 and 2016.
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, 2017 (in thousands):
Year ending December 31:
2018
2019
2020
Total minimum lease payments
Operating
Leases
Sublease Income
Total
$
$
952 $
980
980
2,912 $
(126) $
-
-
(126) $
826
980
980
2,786
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 $0.3 million and $0.06 million related to
these agreements for the years ended December 31, 2017 and 2016, respectively. None of the royalty arrangements contain minimum
royalty payments.
F-26
On May 13, 2015, the Company entered into a joint agreement for research and development of silicon nitride-based devices. This
agreement is effective for a period of five years from the date of commencement. The Company incurred payments of $0.03 million related
to this agreement for each of the years ended December 31, 2017 and 2016.
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. 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 $0.1 million relating to retirement contributions for each of the years ended
December 31, 2017 and 2016.
13. Restatement to Previously Issued 2016 Consolidated Balance sheet and Related Statements of Operations, Stockholders’ Equity
and Cash Flows
The Company previously restated and re-issued (on December 26, 2017) the 2016 consolidated financial statements because of the failure
to record a derivative liability from the issuance of 1,054,167 common stock warrants during July 2016 that were previously recorded as
equity. The impact of this change as of and for the year ended December 31, 2016, is as follows (in thousands, except share and per share
data):
As Previously
Reported
Year ended December 31, 2016
Restatement -
Warrant Liability
As Restated After
Restatement
Total other expense, net
Total net loss/comprehensive loss
Deemed dividend related to beneficial conversion feature and accretion
of a discount a Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Derivative liabilities, current portion
$
$
$
$
$
$
(5,063) $
(16,598)
(6,278)
(22,876) $
1,835 $
1,835
-
1,835 $
(3,228)
(14,763)
(6,278)
(21,041)
(14.82) $
1.19 $
(13.63)
1,543,735
-
1,543,735
22
227,486
(213,135)
14,373 $
$
(4,973)
1,835
(3,138) $
22
222,513
(211,300)
11,235
- $
3,137 $
3,137
For the twelve months ended December 31, 2016, the consolidated statement of cash flows changed from that which was previously
reported as follows: A $571,000 positive addback for offering costs was recorded to offset a $571,000 increase to net loss, with no net cash
impact on cash flows from operating activities. In addition, the allocation of proceeds among common stock, preferred stock and derivative
liability changed, with no net cash flow impact on cash flows from financing activities.
14. Restatement to Previously Issued 2017 Condensed Consolidated Financial Statements
Subsequent to the issuance of the condensed consolidated financial statements as of March 31, 2017, June 30, 2017 and September 30,
2017, and for the three, six and nine-month periods then ended, the Company identified errors related to a failure to record a derivative
liability from the issuance of 1,054,167 common stock warrants during July 2016 and the issuance of 333,750 common stock warrants
during January 2017 that were previously recorded as equity. The impact of this change to the Company’s previously issued condensed
consolidated financial statements as of and for the above outlined periods were restated in amended Quarterly Reports on Form 10-Q/A.
The impact of these changes for the above-mentioned periods are repeated below (in thousands, except share and per share data):
F-27
March 31, 2017
Total other income (expense), net
Total net loss
Deemed dividend related to beneficial conversion feature and accretion of a discount on
Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Derivative liabilities, current portion
$
$
$
$
$
$
Three months ended March 31, 2017
As Previously
Reported
As Restated
(348) $
(2,150)
-
(2,150) $
(0.06) $
2,826,469
30 $
231,345
(215,285)
16,090 $
- $
1,290
(512)
-
(512)
(0.18)
2,826,469
30
225,432
(211,511)
13,911
2,179
For the three months ended March 31, 2017, the condensed consolidated statement of cash flows changed from that which was previously
reported as follows: An approximate $131,000 positive addback for offering costs was recorded to offset an approximate $131,000 increase
to net loss, with no net cash impact on cash flows from operating activities. In addition, the allocation of proceeds among common stock,
preferred stock and derivative liability changed, with no net cash flow impact on cash flows from financing activities.
June 30, 2017
Total other income (expense), net
Total net loss
Deemed dividend related to beneficial conversion feature and accretion of a discount on
Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Derivative liabilities, current portion
Total other income (expense), net
Total net loss
Deemed dividend related to beneficial conversion feature and accretion of a discount on
Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Derivative liabilities, current portion
Three months ended June 30, 2017
As Previously
Reported
As Restated
(382) $
(2,106)
-
(2,106) $
(0.06) $
3,022,073
30 $
231,404
(217,391)
14,043 $
- $
21
(1,703)
-
(1,703)
(0.56)
3,022,073
30
225,491
(213,254)
22,650
1,776
Six months ended June 30, 2017
As Previously
Reported
As Restated
(730) $
(4,256)
-
(4,256) $
(0.12) $
2,918,240
30 $
231,404
(217,391)
14,043 $
- $
1,311
(2,215)
-
(2,215)
(0.76)
2,918,240
30
225,491
(213,254)
12,267
1,776
$
$
$
$
$
$
$
$
$
$
$
$
For the three and six months ended June 30, 2017, the condensed consolidated statement of cash flows changed from that which was
previously reported as follows: An approximate $131,000 positive addback for offering costs was recorded to offset an approximate
$131,000 increase to net loss, with no net cash impact on cash flows from operating activities. In addition, the allocation of proceeds among
common stock, preferred stock and derivative liability changed, with no net cash flow impact on cash flows from financing activities.
F-28
September 30, 2017
Total other income (expense), net
Total net loss
Deemed dividend related to beneficial conversion feature and accretion of a discount on
Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Derivative liabilities, current portion
Total other expense, net
Total net loss
Deemed dividend related to beneficial conversion feature and accretion of a discount on
Series A Preferred Stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Common stock, $0.01 par value
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Derivative liabilities, current portion
Three months ended September 30, 2017
As Previously
Reported
As Restated
(259) $
(2,815)
-
(2,815) $
(0.93) $
3,022,073
30 $
231,647
(220,206)
11,471 $
- $
487
(2,069)
-
(2,069)
(0.68)
3,022,073
30
225,733
(215,323)
10,440
1,031
Nine months ended September 30, 2017
As Previously
Reported
As Restated
(989) $
(7,070)
-
(7,070) $
(2,42) $
2,918,240
30 $
231,647
(220,206)
$
11,471
1,797
(4,284)
-
(4,284)
(1.47)
2,918,240
30
225,733
(215,323)
10,440
- $
1,031
$
$
$
$
$
$
$
$
$
$
$
$
For the three and nine months ended September 30, 2017, the condensed consolidated statement of cash flows changed from that which
was previously reported as follows: An approximate $131,000 positive addback for offering costs was recorded to offset an approximate
$131,000 increase to net loss, with no net cash impact on cash flows from operating activities. In addition, the allocation of proceeds among
common stock, preferred stock and derivative liability changed, with no net cash flow impact on cash flows from financing activities.
15. Subsequent Events
On January 3, 2018, the Company entered into an exchange agreement pursuant to which the Company agreed to exchange the Hercules
Term Loan (see Note 7) for two senior secured convertible promissory notes each in the principal amount of $1.1 million for an aggregate
principal amount of $2.2 million, (the “Exchange Notes”). The Exchange Notes will mature on February 3, 2019 (the “Maturity Date”).
The Exchange Notes bear interest at a rate of 15% per annum. Prior to the Maturity Date, principal and interest accrued under the Exchange
Notes is payable in cash or, if certain conditions are met, payable in shares of common stock of the Company. All principal accrued under
the Exchange Notes is convertible into shares of the Company’s common stock (“Conversion Shares”) at the election of the holders at any
time at a fixed conversion price of $3.87 per share. Upon the occurrence of an event of default, the Assignees are entitled to convert all or
any part of their Exchange Note at a conversion price (the “Alternate Conversion Price”) equal to 70% of the lowest traded price of the
Company’s common stock during the ten trading days prior to the conversion date, provided that (i) in no event may the Alternate
Conversion Price be less than $1.75 per share and (ii) the Assignees shall not be entitled to receive more than 19.99% of the outstanding
Common Stock. So long as this Exchange Notes remains outstanding or the Assignees hold any Conversion Shares, the Company is
prohibited from entering into any financing transaction pursuant to which the Company sells its securities at a price lower than $1.75 per
share.
On January 31, 2018, the Company signed a promissory note in the aggregate principal amount of up to $0.8 million (the “Note”) for an
aggregate purchase price of up to $0.7 million and warrants to purchase up to an aggregate of 68,257 shares of common stock of the
Company (the “Warrants”) at an exercise price of $3.31 per share. The maturity date is six months from date of funding. The Note bears
interest at a rate of 8% per year and a default interest rate of 18% per year. The Note may be converted by the holder of the Note at any time
following an event of default. The conversion price of the Note in the event of a default is equal to the product of (i) 0.70 multiplied by (ii)
the lowest volume weighted average price, or VWAP, of the Company’s common stock during the 20 trading period ending in the Holder’s
sole discretion on the last complete trading day prior to conversion, or, the conversion date.
On March 6, 2018, the “Company entered into a warrant amendment agreement (the “Amendment Agreement”) with certain holders of
previously issued Series E Common Stock Purchase Warrants (collectively, “Investor”). In connection with that certain Series E Common
Stock Purchase Warrant between the Company and Investor dated July 8, 2016, the Company issued to Investor warrants to purchase up to
832,000 shares of common stock (the “Warrant Shares”) at an exercise price of $12.00 per share, (the “Investor Warrants”). Under the
terms of the Amendment Agreement, in consideration of Investor exercising 600,000 of the Investor Warrants (the “Warrant Exercise”),
the exercise price per share of the Investor Warrants was reduced to $2.125 per share. In addition, and as further consideration, the
Company issued to Investor warrants to purchase up to the number of shares of common stock equal to 100% of the number of Warrant
Shares issued pursuant to the Warrant Exercise at an exercise price per share equal to $2.00 per share. The New Warrants are exercisable
for up to five years from the Effective Date. The Company also granted to an advisor to the transaction securities purchase warrants
covering a number of shares of the Company’s common stock equal 1.5% of the total number of shares of the Company’s common stock
underlying the Investor Warrants.
F-29
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
Amedica Corporation
Salt Lake City, Utah
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-207289, 333-205545, and 333-
214804) and Form S-8 (No. 333-194977) of Amedica Corporation (the “Company”) of our report dated September 19, 2017 (December 26,
2017 as to the effects of the restatement described in Note 13 and the reverse stock split described in Note 1), relating to the consolidated
financial statements, which appears in this Annual Report on Form 10-K. Our report contains an explanatory paragraph regarding the
Company’s ability to continue as a going concern.
/s/ BDO USA, LLP
BDO USA, LLP
Salt Lake City, Utah
March 29, 2018
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.2
Amedica Corporation
Salt Lake City, Utah
We hereby consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 333-207289, 333-205545, and 333-
214804), and Form S-8 (No. 333-194977) of Amedica Corporation (the Company) of our report dated March 29, 2018, relating to our audit
of the financial statements, which appears in this Annual Report on Form 10-K of Amedica Corporation for the year ended December 31,
2017. Our report contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.
/s/ Tanner LLC
Tanner LLC
Salt Lake City, Utah
March 29, 2018
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)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) 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
(d) 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 29, 2018
By: /s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL 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)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) 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
(d) 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 29, 2018
By: /s/ B. Sonny Bal
B. Sonny Bal
Principal Financial 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 on Form 10-K for the year ended December 31, 2017 (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/A
fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 29, 2018
By: /s/ B. Sonny Bal
B. Sonny Bal
Chief Executive Officer and Principal Financial Officer