Item 2. | Item 2. | 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 unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of and for the year ended December 31, 20162023 included in our Annual Report on Form 10-K, filed with the SEC on March 21, 2024 (the “2023 Annual Report”).
Executive Summary
We continued to realize significant revenue growth during the three months ended March 31, 2017.2024, as compared to the same periods in 2023. Revenue for the three months ended March 31, 2024, totaled $5.8 million, an increase of 53%, as compared to $3.8 million for the same period of 2023.
OverviewNet loss for the three months ended March 31, 2024, was $4.5 million, or $0.00 per basic and diluted share, compared to a net loss of $13.1 million, or $0.02 per basic and diluted share, for the same period in 2023. The decrease in our net loss for the three months ended March 31, 2024, was primarily related to a decrease in change of fair value of derivative liabilities. For the three months ended March 31, 2024, our operating loss totaled $1.1 million, which is an improvement of $0.9 million compared to 2023.
We areMerger Agreement with SEPA
On August 23, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among SEP Acquisition Corp., a shock wave technologyDelaware corporation (“SEPA”), SEP Acquisition Holdings Inc., a Nevada corporation, and a wholly owned subsidiary of SEPA (“Merger Sub”). Pursuant to the terms of the Merger Agreement, a business combination between the Company and SEPA (the “Merger”) will be affected. More specifically, and as described in greater detail below, at the effective time of the Merger (the “Effective Time”):
Merger Sub will merge with and into the Company, with the Company being the surviving company using a patented systemfollowing the merger.
Each issued and outstanding share of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. Our initial focus is regenerative medicine – utilizing noninvasive, acoustic shock waves to produce a biological response resultingthe Company common stock will automatically be converted into Class A common stock of SEPA, par value $0.0001 per share, at the Conversion Ratio (as defined in the body healing itself throughMerger Agreement); and
Outstanding Company convertible securities of the repairCompany will be assumed by SEPA and regenerationwill be converted into the right to receive Class A Common Stock of tissue, musculoskeletalSEPA.
Pursuant to the terms of the Merger Agreement, the holders of (i) Company common stock, (ii) in-the-money options to purchase Company common stock, (iii) in-the-money warrants to purchase Company common stock, and vascular structures. Our lead regenerative product(iv) convertible promissory notes, collectively will be entitled to receive 7,793,000 shares of Class A Common Stock of SEPA. Out-of-the-money options and out-of-the-money warrants will be assumed by SEPA and converted into options or warrants, respectively, exercisable for shares of Class A Common Stock based on the Conversion Ratio; however, such out-of-the-money options and out-of-the-money warrants shall not be reserved for issuance from the Merger Consideration.
The Merger Agreement contains certain conditions to Closing, including the following:
| • | holders of 80% or more of the Company’s convertible notes with a maturity date occurring after the date of the Closing (the “Closing Date”), measured by number of shares of our common stock into which such convertible notes may be converted, agreeing to convert their convertible notes into shares of common stock immediately prior to the Effective Time. |
holders of 80% or more of the Company’s warrants that would be outstanding on the Closing Date, measured by number of shares of our common stock subject to all such warrants in the aggregate, agreeing to convert their warrants into shares of common stock immediately prior to the Effective Time.
SEPA having, at the Closing, at least $12,000,000 in cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of any redemptions) and the proceeds of any private placement in SEPA.
Non-GAAP Financial Measures
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we present certain financial measures that facilitate management's review of the operational performance of the Company and as a basis for strategic planning; however, such financial measures are not presented in our financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S.) (U.S. GAAP). These financial measures are considered "non-GAAP financial measures" and are intended to supplement, and should not be considered as superior to, or a replacement for, financial measures presented in accordance with U.S. GAAP.
The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA to assess its operating performance. Adjusted EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization adjusted for the dermaPACE® device,change in fair value of derivatives and any significant non-cash or non-recurring one-time charges. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP financial measures are presented in a consistent manner for each period, unless otherwise disclosed. The Company uses these measures for the purpose of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the Company to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of Management, and to better understand its historical and future financial performance. These non-GAAP financial measures are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other U.S. GAAP measures.
EBITDA and Adjusted EBITDA have their limitations as analytical tools, and you should not consider them in isolation or as a substitute for treating diabetic foot ulcers, which was subject to two double-blinded, randomized Phase III clinical studies. Theanalysis of our results as reported under U.S. GAAP. Some of these clinical studies were submittedlimitations are that EBITDA and Adjusted EBITDA:
Do not reflect every expenditure, future requirements for capital expenditures or contractual commitments.
Do not reflect all changes in our working capital needs.
Do not reflect interest expense, or the amount necessary to service our outstanding debt.
As presented in the U.S. FoodGAAP to Non-GAAP Reconciliations section below, our non-GAAP financial measure excludes the impact of certain charges that contribute to our net loss (Non-GAAP Adjustments).
| | | Three months ended March 31, | |
| (in thousands) | | 2024 | | | 2023 | |
| | | | | | | |
| Net (Loss)/Income | | $ | (4,528 | ) | | $ | (13,084 | ) |
| Non-GAAP Adjustments: | | | | | | | | |
| Interest expense | | | 3,560 | | | | 4,278 | |
| Depreciation and amortization | | | 218 | | | | 259 | |
| EBITDA | | | (750 | ) | | | (8,547 | ) |
Non-GAAP Adjustments for Adjusted EBITDA: | | | | | | | | |
| Change in fair value of derivative liabilities | | | 2,501 | | | | 6,797 | |
| Other non-cash or non-recurring charges: | | | | | | | | |
| Loss on extinguishment of debt | | | 105 | | | | - | |
| Severance agreement and legal settlement | | | 585 | | | | - | |
| License and option agreement | | | (2,500 | ) | | | - | |
| Adjusted EBITDA | | $ | (59 | ) | | $ | (1,750 | ) |
Results of Operations
| | | For the Three Months Ended | |
| | | March 31, | | | Change | |
| (in Thousands) | | 2024 | | | 2023 | | | $ | | |
| % | |
| Revenues: | | | | | | | | | | | | | |
| Total Revenue | | $ | 5,786 | | | $ | 3,775 | | | $ | 2,011 | | | | 53 | % |
| Cost of Revenues | | | 1,584 | | | | 1,262 | | | | 322 | | | | 26 | % |
| Gross Margin | | | 4,202 | | | | 2,513 | | | | 1,709 | | | | 68 | % |
| Gross Margin % | | | 73 | % | | | 67 | % | | 600 bps | | | | | |
| Operating Expenses: | | | | | | | | | | | | | | | | |
| General and administrative | | | 3,675 | | | | 2,759 | | | | 916 | | | | 33 | % |
| Selling and marketing | | | 1,232 | | | | 1,412 | | | | (180 | ) | | | -13 | % |
| Research and Development | | | 163 | | | | 131 | | | | 32 | | | | 24 | % |
| Depreciation and amortization | | | 182 | | | | 189 | | | | (7 | ) | | | -4 | % |
| Operating Loss | | | (1,050 | ) | | | (1,978 | ) | | | 928 | | | | 47 | % |
| Other Expense | | | 3,478 | | | | 11,102 | | | | (7,624 | ) | | | -69 | % |
| Net Loss | | $ | (4,528 | ) | | $ | (13,080 | ) | | | 8,552 | | | | 65 | % |
nm - Not Meaningful
Revenues and Drug Administration (FDA)Gross Margin
Revenues for the three month-period ended March 31, 2024, were $5.8 million compared to $3.8 million for the same period of 2023, an increase of $2.0 million, or 53%. The increase was primarily driven by the continued increased sales of our UltraMIST® system. The increase in late July 2016, after our in-person meetingrevenues was due to discuss the submission strategy, for possible approvalan increase in the fourth quarteraverage selling price of 2017 or first quarterour consumables and parts revenue of 2018.
Our portfolio of healthcare products28% year over year, and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration. We intend to apply our Pulsed Acoustic Cellular Expression (PACE) technology in wound healing, orthopedic, plastic/cosmetic and cardiac conditions. We currently do not market any commercial products for sale in the United States. We generate our revenues from salesremainder of the European Conformity Marking (CE Mark) devices and accessoriesgrowth in Europe, Canada, Asia and Asia/Pacific.
We believe we have demonstrated that our patented technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States FDA Class III PMA approved OssaTron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our OssaTron, Evotron®, and orthoPACE® devices in Europe and Asia. Our lead product candidate for the global wound care market, dermaPACE, has received the CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue.
We are focused on developing our Pulsed Acoustic Cellular Expression (PACE) technology to activate healing in:
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wound conditions, including diabetic foot ulcers, venous and arterial ulcers, pressure sores, burns and other skin eruption conditions;
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orthopedic applications, such as eliminating chronic pain in joints from trauma, arthritis or tendons/ligaments inflammation, speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, and other potential sports injury applications;
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plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and
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cardiac applications for removing plaque due to atherosclerosis improving heart muscle performance.
In addition to healthcare uses, our high-energy, acoustic pressure shock waves, due to their powerful pressure gradients and localized cavitational effects, may have applications in secondary and tertiary oil exploitation, for cleaning industrial waters and food liquids and finally for maintenance of industrial installations by disrupting biofilms formation. Our business approach will be through licensing and/or partnership opportunities.
Recent Developments
On September 27, 2017, we entered into a binding term sheet with MundiMed Distribuidora Hospitalar LTDA (“MundiMed”), effective as of September 25, 2017, for a joint venture for the manufacture, sale and distribution of our dermaPACE device. Under the binding term sheet, MundiMed will pay the Company an initial partnership fee, with monthly partnership fees payable thereafter over the following eighteen months. Profits from the joint venture are distributed as follows: 45% to the Company, 45% to MundiMed and 5% each to LHS Latina Health Solutions Gestão Empresarial Ltda. and Universus Global Advisors LLC, who acted as advisors in the transaction. The initial partnership fee was received on October 6, 2017.
Clinical Trials and Marketing
The FDA granted approval of our Investigational Device Exemption (IDE) to conduct two double-blinded, randomized clinical trials utilizing our lead device product for the global wound care market, the dermaPACE device, in the treatment of diabetic foot ulcers.
The dermaPACE system was evaluated using two studies under IDE G070103. The studies were designed as prospective, randomized, double-blind, parallel-group, sham-controlled, multi-center 24-week studies at 39 centers. A total of 336 subjects were enrolled and treated with either dermaPACE plus conventional therapy or conventional therapy (a.k.a. standard of care) alone. Conventional therapy included, but was not limited to, debridement, saline-moistened gauze, and pressure reducing footwear. The objective of the studies was to compare the safety and efficacy of the dermaPACE device to sham-control application. The prospectively defined primary efficacy endpoint for the dermaPACE studies was the incidence of complete wound closure at 12 weeks post-initial application of the dermaPACE system (active or sham). Complete wound closure was defined as skin re-epithelialization without drainage or dressing requirements, confirmed over two consecutive visits within 12-weeks. If the wound was considered closed for the first time at the 12 week visit, then the next visit was used to confirm closure. Investigators continued to follow subjects and evaluate wound closure through 24 weeks.
The dermaPACE device completed its initial Phase III, IDE clinical trial in the United States for the treatment of diabetic foot ulcers in 2011 and a PMA application was filed with the FDA in July 2011. The patient enrollment for the second, supplemental clinical trial began in June 2013. We completed enrollment for the 130 patients in this second trial in November 2014 and suspended further enrollment at that time.
The only significant difference between the two studies was the number of applicationsconsumables and systems sold year over year. Gross margin as a percentage of the dermaPACE device. Study one (DERM01; n=206) prescribed four (4) device applications/treatments over a two-week period, whereas, study two (DERM02; n=130) prescribed uprevenue increased to eight (8) device applications (4 within the first two weeks of randomization, and 1 treatment every two weeks thereafter up to a total of 8 treatments over a 10-week period). If the wound was determined closed by the PI73% during the treatment regimen, any further planned applications were not performed.three months ended March 31, 2024, from 67% in the same period of 2023.
BetweenGeneral and Administrative Expenses
General and administrative expenses increased $0.9 million or 33% for the two studies there were over 336 patients evaluated, with 172 patients treated with dermaPACE and 164 control group subjects with use of a non-functional device (sham). Both treatment groups received wound care consistentthree months ended March 31, 2024, compared with the standard of care in addition to device application. Study subjects were enrolled using pre-determined inclusion/exclusion criteria in order to obtain a homogenous study population with chronic diabetes and a diabetic foot ulcer that has persisted a minimum of 30 days and its area is between 1cm2 and 16cm2, inclusive. Subjects were enrolled at Visit 1 and followed for a run-insame period of two weeks. At two weeks (Visit 2 – Day 0),2023. The increase for the first treatmentthree months ended March 31, 2024, was applied (either dermaPACEprimarily due to severance costs and non-recurring legal settlement.
Selling and Marketing Expenses
Selling and marketing expenses decreased by $0.2 million or Sham Control application). Applications with either dermaPACE or Sham Control were then made at Day 3 (Visit 3), Day 6 (Visit 4), and Day 9 (Visit 5)13% for the three months ended March 31, 2024, as compared with the potentialsame period of 2023. The decrease was primarily due to severance payments in 2023.
Research and Development Expenses
Research and development expenses increased 24% for 4 additional treatments in Study 2. Subject progress including wound size was then observed on a bi-weekly basis for up to 24 weeks at a total of 12 visits (Weeks 2-24; Visits 6-17).
A total of 336 patients were enrolled in the dermaPACE studies at 37 sites. The patients in the studies were followed for a total of 24 weeks. The studies’ primary endpoint, wound closure, was definedthree months ended March 31, 2024, as “successful” if the skin was 100% reepithelialized at 12 weeks without drainage or dressing requirements confirmed at two consecutive study visits.
A summary of the key study findings were as follows:
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Patients treated with dermaPACE showed a strong positive trend in the primary endpoint of 100% wound closure. Treatment with dermaPACE increased the proportion of diabetic foot ulcers that closed within 12 weeks, although the rate of complete wound closure between dermaPACE and sham-control at 12 weeks in the intention-to-treat (ITT) population was not statistically significant at the 95% confidence level used throughout the study (p=0.320). There were 39 out of 172 (22.67%) dermaPACE subjects who achieved complete wound closure at 12 weeks compared with 30 outthe same period of 164 (18.29%) sham-control subjects.
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In addition to2023. Research and development expenses as a percentage of revenue stayed flat at 3% during the originally proposed 12-week efficacy analysis,three months ended March 31, 2024, and in conjunction with the FDA agreement to analyze the efficacy analysis carried over the full 24 weeks of the study, we conducted a series of secondary analyses of the primary endpoint of complete wound closure at 12 weeks and at each subsequent study visit out to 24 weeks. The primary efficacy endpoint of complete wound closure reached statistical significance at 20 weeks in the ITT population with 61 (35.47%) dermaPACE subjects achieving complete wound closure compared with 40 (24.39%) of sham-control subjects (p=0.027). At the 24 week endpoint, the rate of wound closure in the dermaPACE® cohort was 37.8% compared to 26.2% for the control group, resultingsame period in a p-value of 0.023.
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Within 6 weeks followingOther (Expense)/Income, net
| | | For the three months ended March 31, | | | Change | |
| | | 2024 | | | 2023 | | | $ | | |
| % | |
| | | | | | | | | | | | | | |
| Interest expense | | $ | (3,560 | ) | | $ | (4,278 | ) | | $ | 718 | | | | 17 | % |
| Loss on extinguishment of debt | | | (105 | ) | | | - | | | | (105 | )
| | nm | |
| Change in fair value of derivatives | | | (2,501 | ) | | | (6,797 | ) | | | 4,296 | | | | 63 | % |
| Other income / (expense) | | | 2,688 | | | | (27 | ) | | | 2,715 | | | nm | |
| Other (expense)/income, net | | $ | (3,478 | ) | | $ | (11,102 | ) | | $ | 7,624 | | | | 69 | % |
nm - not meaningful
Other expense, net decreased by $7.6 million to $3.5 million for the initial dermaPACE treatment, and consistently throughout the 24-week period, dermaPACE significantly reduced the size of the target ulcer compared with subjects randomized to receive sham-control (p<0.05).
●
The proportion of patients with wound closure indicate a statistically significant difference between the dermaPACE and the control group in the proportion of subjects with the target-ulcer not closed over the course of the study (p-value=0.0346). Approximately 25% of dermaPACE® subjects reached wound closure per the study definition by day 84 (week 12). The same percentage in the control group (25%) did not reach wound closure until day 112 (week 16). These data indicate that in addition to the proportion of subjects reaching wound closure being higher in the dermaPACE® group, subjects are also reaching wound closure at a faster rate when dermaPACE is applied.
●
dermaPACE demonstrated superior results in the prevention of wound expansion (≥ 10% increase in wound size), whenthree months ended March 31, 2024, as compared to the control, oversame period for 2023. The decrease was primarily due to a decrease in change in fair value of derivatives expense of $4.3 million, recognition of a non-recurring loss on extinguishment of debt of $105 thousand and offset by the coursereceipt of the study at 12 weeks (18.0% versus 31.1%; p=0.005, respectively).
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Of the subjects who achieved complete wound closure at 12 weeks, the recurrence rate at 24 weeks was only 7.7% in the dermaPACE group compared with 11.6% in the sham-control group.
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Importantly, there were no meaningful statistical differences in the adverse event rates between the dermaPACE treated patients and the sham-control group. There were no issues regarding the tolerabilitySince inception, we have incurred losses from operations each year. As of the treatment which suggests that a second course of treatment, if needed, is a clinically viable option.
We retained Musculoskeletal Clinical Regulatory Advisers, LLC (MCRA) in January 2015 to lead the Company’s interactions and correspondence with the FDA for the dermaPACE. MCRA has successfully worked with the FDA on numerous Premarket Approvals (PMAs) for various musculoskeletal, restorative and general surgical devices since 2006.
In June 2015, we met with the FDA to discuss analysis strategy for the data for the supplemental clinical trial and for the combined data of the two studies. In addition to the original data analysis plan for wound closure at 12 weeks, we proposed to analyze wound closure data at time points beyond 12 weeks, up to and including 24 weeks asMarch 31, 2024, we had positive results in the first studyan accumulated deficit of 206 patients completed in 2011 at the 20 week endpoint. The FDA agreed to the additional analyses and stressed that their review and eventual decision will be based upon the totality of the data, both for efficacy and safety.
In October 2015 after freezing and locking the data, we performed data analysis. At the 12 week endpoint a total of 39 out of 172 (22.7%) of dermaPACE patients had complete wound closure, compared to 30 out of 164 (18.3%) in the control group. As expected, there was no statistically significant difference in wound closure at the 12 week follow up between the dermaPACE and control group; however, in subsequent visits a trend towards significance was shown resulting in a significant difference by the 20 week endpoint that was maintained through the end of the study. At the 24 week endpoint, the rate of wound closure in the dermaPACE patients was 37.8% compared to 26.2% for the control group, resulting in a p-value of 0.023. Additionally, there were no serious or related adverse events associated with the dermaPACE treatment reported during the course of the two studies and there were no issues regarding the tolerability of the treatment.
In April 2016, we met with FDA to discuss the safety and efficacy results of the trial as well as to discuss various submission strategies. Specifically, we discussed the applicability of the dermaPACE device and the associated clinical trial results in regard to FDA’s de novo review process. We concluded the meeting by informing FDA that we intended to submit the results under the de novo process.
Working with MCRA, we submitted to FDA a de novo petition on July 23, 2016. Due to the strong safety profile of our device and the efficacy of the data showing statistical significance for wound closure for dermaPACE subjects at 20 weeks, we believe that the dermaPACE device should be considered for classification into Class II as there is no legally marketed predicate device and there is not an existing Class III classification regulation or one or more approved PMAs (which would have required a reclassification under Section 513(e) or (f)(3) of the FD&C Act). Should FDA determine that the criteria at section 513(a)(1)(A) of (B) of the FD&C Act are met, FDA will grant the de novo petition, in which case dermaPACE will be classified as Class II and may be marketed immediately.
Finally, our dermaPACE device has received the European CE Mark approval to treat acute and chronic defects of the skin and subcutaneous soft tissue, such as in the treatment of pressure ulcers, diabetic foot ulcers, burns, and traumatic and surgical wounds. The dermaPACE is also licensed for sale in Canada, Australia and New Zealand.
We are actively marketing the dermaPACE to the European Community, Canada and Asia/Pacific, utilizing distributors in select countries.
Financial Overview
Since inception in 2005,$225 million. Historically, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. At September 30, 2017, we had cashThe recurring losses from operations, the events of default on our notes payable, and cash equivalents totaling $40,226. Management expectsdependency upon future issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the cash used in operationsfiling of this Form 10-Q. We expect to devote substantial resources for the Company during 2017 will be devoted to the commercialization of the dermaPACE, assuming FDA approval in late 2017 or early 2018,UltraMIST and will continue to research and develop the non-medical uses of the product, both ofPACE systems which will require additional capital resources.resources to remain a going concern.
The continuation of our business is dependent upon raising additional capital during the fourth quarter of 2017 to fund operations. Management’s plans are to obtain additional capital in 20172024 primarily through investments by strategic partners for market opportunities,the closure of the Merger, which may include strategic partnerships or licensing arrangements, oris expected to add additional capital and funding to the Company. We could alternatively obtain capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. Althoughstockholders. In addition, there can be no assurances canthat our plans to obtain additional capital will be given, management believes that potential additional issuances of equitysuccessful on the terms or other potential financing transactions as discussed above should provide the necessary funding for us. timeline we expect, or at all. If these efforts are unsuccessful, we may be forcedrequired to seek reliefsignificantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
Statement of Cash Flows
| | | For the three months ended March 31, | |
| (in thousands) | | 2024 | | | 2023 | |
| Cash flows provided by (used by) operating activities | | $ | 1,100 | | | $ | (371 | ) |
| Cash flows used by investing activities | | $ | (114 | ) | | $ | (18 | ) |
| Cash flows provided by (used in) financing activities | | $ | 42 | | | $ | (654 | ) |
Cash provided by operating activities during the three months ended March 31, 2024, totaled $1.1 million as compared to cash used in operating activities of $371 thousand in the previous period. This improvement in cash provided by operations is driven by the receipt of $2.5 million related to a filing underlicense agreement and option agreement.
Critical Accounting Estimates
We have used various accounting policies to prepare the U.S. Bankruptcy Code. Ourcondensed consolidated financial statements do not include any adjustments relatingin accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 3 to the recoverability of assetsconsolidated financial statements in Part II Item 8. “Financial Statements and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.
Since our inception, we have incurred losses from operations each year. As of September 30, 2017, we had an accumulated deficit of $102,194,242. Although the size and timing of our future operating losses are subject to significant uncertainty, we expect that operating losses will continue over the next several years as we continue to incur expenses related to seeking FDA approval for our dermaPACE device and then commercialization of the product when approval is received. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing, as discussed above, will provide the necessary funding for us to continue as a going concern for the next year.
We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing products, including the uncertainty of:
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the scope, rate of progress and cost of our clinical trials;
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future clinical trial results;
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the cost and timing of regulatory approvals;
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the establishment of successful marketing, sales and distribution;
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the cost and timing associated with establishing reimbursement for our products;
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the effects of competing technologies and market developments; and
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the industry demand and patient wellness behavior.
Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business”Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 31, 2017.21, 2024.
Critical Accounting Policies and Estimates
The discussion and analysispreparation of our financial condition and results of operations are based on ourthe condensed consolidated financial statements, which have been prepared in accordanceconformity with United States generally accepted accounting principles. The preparation of our consolidated financial statementsU.S. GAAP, requires us to makeuse judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.
On an ongoing basis, we evaluate These estimates reflect our estimatesbest judgment about economic and judgments, including those related tomarket conditions and the recording of the allowances for doubtful accounts, estimated reserves for inventory, estimated useful life of property and equipment, the determination ofpotential effects on the valuation allowance for deferred taxes, the estimated fairand/or carrying value of the warrant liability,assets and the estimated fair value of stock-based compensation.liabilities based upon relevant information available. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying valuevalues of assets and liabilities that are not readily apparent from other sources. Our actual results
The following accounting estimates are deemed critical:
Litigation Contingencies
We may differ frombe involved in legal actions involving product liability, intellectual property and commercial disputes, tax disputes, and governmental proceedings and investigations. The outcomes of these estimates under different assumptions or conditions. The results of our operations for any historical periodlegal actions are not necessarily indicativecompletely within our control and may not be known for prolonged periods of time. In some actions, the results ofenforcement agencies or private claimants seek damages that could require significant expenditures or result in lost revenues or limit our operationsability to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts or legal discovery; involve unsubstantiated or indeterminate claims for any future period.
While our significant accounting policies are more fully describeddamages; potentially involve penalties, fines, or punitive damages; or could result in Note 2 to oura change in business practice. The Company records a liability in the condensed consolidated financial statements filed with our Annual Report on Form 10-K for loss contingencies when a loss is known or considered probable, and the year ended December 31, 2016, filed withamount may be reasonably estimated. If the SEC on March 31, 2017, we believe thatreasonable estimate of a known or probable loss is a range, and no amount within the following accounting policies relating to revenue recognition, researchrange is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and development costs, inventory valuation, liabilities related to warrants issued, stock-based compensation and income taxesmay be reasonably estimated, the estimated loss or range of loss is disclosed. Our significant legal proceedings are significant and; therefore, they are important to aid youdiscussed in fully understanding and evaluating our reported financial results.
Revenue Recognition
Sales of medical devices, including related applicators and applicator kits, are recognized when shippedNote 13 to the customer. Shipments under agreements with distributors are invoiced at a fixed price, are not subjectcondensed consolidated financial statements.
Derivative Liabilities from Embedded Conversion Options and Warrants
The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to return, and payment for these shipments is not contingent on sales by the distributor. We recognize revenue on shipmentsbe separately accounted for. The Company also determined that certain warrants also qualified as derivative financial instruments. Various valuation models were used to distributors in the same manner as with other customers. We recognize fees from services performed when the service is performed.
Research and Development Costs
We expense costs associated with research and development activities as incurred. We evaluate payments made to suppliers, research collaborators and other vendors and determine the appropriate accounting treatment based on the nature of the services provided, the contractual terms, and the timing of the obligation. Research and development costs include payments to third parties that specifically relate to our products in clinical development, such as payments to contract research organizations and collaborators, clinical investigators, clinical monitors, clinical related consultants and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, and research and development departments are classified as research and development costs.
Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review existing inventory quantities and expiration dates of existing inventory to evaluate a provision for excess, expired, obsolete and scrapped inventory based primarily on our historical usage and anticipated future usage. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have an impact on the value of our inventory and our reported operating results.
Inventory is carried at the lower of cost or net realizable value, which is valued using the first in, first out (FIFO) method, and consists primarily of devices and the component material for assembly of finished products, less reserves for obsolescence.
Liabilities related to Warrants Issued
We record certain common stock warrants we issued at fair value and recognize the change in the fair value of such warrants as a gain or loss, which we report in the Other Income (Expense) section in our Condensed Consolidated Statements of Comprehensive Loss. We report the warrants that we record at fair value as liabilities because they contain certain down-round provisions allowing for reduction of their exercise price. We estimate the fair value of these warrants using a binomial options pricing model.
Stock-based Compensation
derivative financial instruments that are classified as derivative liabilities on the consolidated balance sheets. The Stock Incentive Plan providesmodels include subjective input assumptions that stock options, and other equity interests or equity-based incentives, may be granted to key personnel, directors and advisors atcan materially affect the fair value of the common stock at the time the option is granted, which is approved by our board of directors. The maximum term of any option granted pursuantestimates and as such are subject to uncertainty. Our significant input assumptions are discussed in Note 10 to the Stock Incentive Plan is ten years from the date of grant.
In accordance with ASC 718,Compensation – Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The expected terms of options granted represent the period of time that options granted are estimated to be outstanding and are derived from the contractual terms of the options granted. We amortize the fair value of each option over each option’s vesting period.
Income Taxes
We account for income taxes utilizing the asset and liability method prescribed by the provisions of ASC 740,Income Taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the deferred tax assets, including loss carryforwards, when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
We account for uncertain tax positions in accordance with the related provisions of ASC 740, Income Taxes. ASC 740 specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year.
Results of Operations for the Three Months ended September 30, 2017 and 2016 (Unaudited)
Revenues and Cost of Revenues
Revenues for the three months ended September 30, 2017 were $161,585, compared to $255,652 for the same period in 2016, a decrease of $94,067, or 37%. Revenues resulted primarily from sales in Europe, Asia and Asia/Pacific of our orthoPACE device and related applicators. The decrease in revenues for 2017 was due to lower sales of new orthoPACE devices and refurbishment of applicators in Europe and Asia/Pacific in 2017.
Cost of revenues for the three months ended September 30, 2017 were $61,684, compared to $98,678 for the same period in 2016. Gross profit as a percentage of revenues was 62% for the three months ended September 30, 2017, compared to 61% for the same period in 2016. The increase in gross profit as a percentage of revenues in 2017 was due to sale of devices in 2016, which have a lower gross margin than new and refurbishment of applicators.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2017 were $266,837, compared to $266,473 for the same period in 2016, an increase of $364. Research and development costs include payments to third parties that specifically relate to our products in clinical development, such as payments to contract research organizations, clinical investigators, clinical monitors, clinical related consultants and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, and research and development departments are classified as research and development costs.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2017 were $475,377, as compared to $645,863 for the same period in 2016, a decrease of $170,486, or 26%. The decrease in general and administrative expenses was due to lower legal fees, lower salary and benefits as a result of reduced headcount and decrease in bad debt reserve.
Other Income (Expense)
Other income (expense) was a net expense of $203,547 for the three months ended September 30, 2017, as compared to $306,205 for the same period in 2016, a decrease in other expense of $102,658 or 34%. The decrease in other expense for 2017 was due to lower interest expense related to promissory notes in 2016.
Provision for Income Taxes
At September 30, 2017, we had federal net operating loss carryforwards through the year ended December 31, 2016 that will begin to expire in 2025. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. In connection with possible future equity offerings, we may realize a “more than 50% change in ownership” which could further limit our ability to use our net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss carryforwards for federal income tax purposes.
Net Loss
Provision for Income Taxes
At September 30, 2017, we had federal net operating loss carryforwards through the year ended December 31, 2016 that will begin to expire in 2025. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. In connection with possible future equity offerings, we may realize a “more than 50% change in ownership” which could further limit our ability to use our net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss carryforwards for federal income tax purposes.
Net Loss
Net loss for the three months ended September 30, 2017 was $851,325, or ($0.01) per basic and diluted share, compared to a net loss of $1,139,810, or ($0.01) per basic and diluted share, for the same period in 2016, a decrease in the net loss of $288,485, or 25%. The decrease in the net loss for 2017 was primarily due to lower general and administrative expenses as noted above as well as reduction of amortization expense.
We anticipate that our operating losses will continue over the next few years as we continue to incur expenses related to seeking FDA approval for our dermaPACE device for the treatment of diabetic foot ulcers and then commercialization of the product when approval is received. If we obtain such FDA approval and are able to successfully commercialize, market and distribute the dermaPACE device, we hope to partially or completely offset these losses in the future.
Results of Operations for the Nine Months ended September 30, 2017 and 2016 (Unaudited)
Revenues and Cost of Revenues
Revenues for the nine months ended September 30, 2017 were $422,199, compared to $728,382 for the same period in 2016, a decrease of $306,183, or 42%. Revenues resulted primarily from sales in Europe, Asia and Asia/Pacific of our orthoPACE device and related applicators. The decrease in revenues for 2017 was due to lower sales of new orthoPACE devices and applicators and lower applicator refurbishments in Europe and Asia/Pacific in 2017.
Cost of revenues for the nine months ended September 30, 2017 were $141,523, compared to $249,847 for the same period in 2016. Gross profit as a percentage of revenues was 66% for the nine months ended September 30, 2017 and 2016.
Research and Development Expenses
Research and development expenses for the nine months ended September 30, 2017 were $965,084, compared to $1,052,595 for the same period in 2016, a decrease of $87,511, or 8%. Research and development costs include payments to third parties that specifically relate to our products in clinical development, such as payments to contract research organizations, clinical investigators, clinical monitors, clinical related consultants and insurance premiums for clinical studies. In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, and research and development departments are classified as research and development costs. Research and development expenses decreased in 2017 as a result of lower payments to consultants related to the de novo petition submission to the FDA in July 2016.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2017 were $1,875,891, as compared to $1,734,891 for the same period in 2016, an increase of $141,000, or 8%. The increase in general and administrative expenses was due to non-cash stock compensation expense for stock options issued in June 2017 and increase in bad debt reserve which was partially offset by lower legal and investor relations fees.
Other Income (Expense)
Other income (expense) was a net expense of $182,952 for the nine months ended September 30, 2017, as compared to a net expense of $1,445,264 for the same period in 2016, a decrease in other expense of $1,262,312, or 87%. The decrease in other expense for 2017 was due to gain on warrant valuation and lower interest expense related to promissory notes in 2016.
Provision for Income Taxes
At September 30, 2017, we had federal net operating loss carryforwards through the year ended December 31, 2016 that will begin to expire in 2025. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. In connection with possible future equity offerings, we may realize a “more than 50% change in ownership” which could further limit our ability to use our net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss carryforwards for federal income tax purposes.
Net Loss
Provision for Income Taxes
At September 30, 2017, we had federal net operating loss carryforwards through the year ended December 31, 2016 that will begin to expire in 2025. Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations. In connection with possible future equity offerings, we may realize a “more than 50% change in ownership” which could further limit our ability to use our net operating loss carryforwards accumulated to date to reduce future taxable income and tax liabilities. Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss carryforwards for federal income tax purposes.
Net Loss
Net loss for the nine months ended September 30, 2017 was $2,760,794, or ($0.02) per basic and diluted share, compared to a net loss of $3,986,509, or ($0.04) per basic and diluted share, for the same period in 2016, a decrease in the net loss of $1,225,715, or 31%. The decrease in the net loss for 2017 was primarily due to the gain on the warrant valuation and lower operating expenses as noted above.
We anticipate that our operating losses will continue over the next few years as we continue to incur expenses related to seeking FDA approval for our dermaPACE device for the treatment of diabetic foot ulcers and then commercialization of the product when approval is received. If we obtain such FDA approval and are able to successfully commercialize, market and distribute the dermaPACE device, we hope to partially or completely offset these losses in the future.
Liquidity and Capital Resources
Since inception in 2005, our operations have primarily been funded from the sale of capital stock and convertible debt securities. At September 30, 2017, we had cash and cash equivalents totaling $40,226. Management expects the cash used in operations for the Company during 2017 will be devoted to the commercialization of the dermaPACE, assuming FDA approval in 2017, and will continue to research and develop the non-medical uses of the product, both of which will require additional capital resources. At September 30, 2017, the Company’s distributor in South Korea accounted for 78% of the total outstanding accounts receivable. Due to the political climate and uncertainty in South Korea, this distributor has not been able to finalize the expected sales in late 2016 and 2017 and therefore has been unable to pay the Company in a timely manner. The Company has accounted for 48% of their outstanding balance as a bad debt reserve as of September 30, 2017 and continues to work with the distributor on a payment plan to get the distributor’s account current by December 31, 2017.
The continuation of our business is dependent upon raising additional capital during the fourth quarter of 2017 to fund operations. Management’s plans are to obtain additional capital in 2017 through investments by strategic partners for market opportunities, which may include strategic partnerships or licensing arrangements, or through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for us. If these efforts are unsuccessful, we may be forced to seek relief through a filing under the U.S. Bankruptcy Code. Ourcondensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.statements.
We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution and we may be required to use some or all of the net proceeds to repay our indebtedness, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones. Failure to achieve these milestones would harm our future capital position.
Cash and cash equivalents decreased by $93,345 for the nine months ended September 30, 2017 and increased by $351,474 for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, net cash used by operating activities was $944,831 and $2,708,973, respectively, primarily consisting of compensation costs, research and development activities and general corporate operations. The decrease in the use of cash for operating activities for the nine months ended September 30, 2017, as compared to the same period for 2016, of $1,764,142, or 65%, was primarily due to the decreased operating expenses and increased payables in 2017. Net cash provided by financing activities for the nine months ended September 30, 2017 was $93,067 from the exercise of warrants and $751,616 from the advances from related parties for subscription agreements to be executed in the fourth quarter. Net cash provided by financing activities for the nine months ended September 30, 2016 was $3,072,305, which consisted of the net proceeds from the 2016 Public Offering of $1,596,855, net proceeds from the 2016 Private Offering of $1,528,200 and proceeds of $32,000 from exercise of warrants and net payments of $84,750 of convertible debt.
Segment and Geographic Information
We have determined that we are principally engaged inhave one operating segment. Our products are primarily used for the repair and regeneration of tissue, musculoskeletal and vascular structures in wound healing and orthopedic conditions. Our revenues are generated from sales primarily in the United States. International sales include sales in Europe, Canada, the Middle East, Central America, South America, Asia, and Asia/Pacific. All significant expenses are generated in the United States and all significant assets are in the United States.
Contractual Obligations
Our major outstanding contractual obligations relate to our operating lease for our facility, purchase and supplier obligations for product component materials and equipment, and our notes payable, related parties. We have disclosed these obligations in our most recent Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 31, 2017.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.
Effects of Inflation
Due to the fact that ourOur assets are, to an extent, liquid in nature, so they are not significantly affected by inflation. However, the rate of inflation, which has increased, affects expenses such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market.recoverable. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |