UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
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S
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Annual
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December
31, 2008
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£
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from ____________________ to
____________________
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Commission
File Number 0-19437
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SAFESTITCH
MEDICAL, INC.
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(Exact
name of registrant as specified in its charter)
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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4400
Biscayne Blvd., Suite 670, Miami, Florida, 33137
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(Address
of principal executive offices) (Zip
Code)
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Registrant’s
telephone number, including area code: (305)
575-6000
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Securities
registered pursuant to Section 12(b) of the Exchange Act: None
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Securities
registered pursuant to Section 12(g) of the Exchange Act:
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Common
Stock, $0.001 par value per share
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(Title
of
Class)
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Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. ¨
Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
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 See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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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 average bid and asked price of such
common equity, as of June 30, 2008 was: $13.4 million
As of
March 15, 2009 there were 17,962,718 shares of Common Stock, $0.001 par value
outstanding.
SAFESTITCH
MEDICAL, INC.
TABLE
OF CONTENTS FOR FORM 10-K
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6
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Business.
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6
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Item
1A.
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Risk
Factors.
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20
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Item
2.
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Properties.
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35
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Item
3.
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Legal
Proceedings.
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36
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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36
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PART
II
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37
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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37
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Item
6.
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Selected
Financial Data.
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38
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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39
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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42
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Item
8.
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Financial
Statements and Supplementary Data.
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43
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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61
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Item
9A(T).
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Controls
and Procedures.
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61
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Item
9B.
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Other
Information.
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61
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PART
III
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62
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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62
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Item
11.
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Executive
Compensation.
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62
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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62
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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62
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Item
14.
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Principal
Accounting Fees and Services.
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62
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PART
IV
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63
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Exhibits,
Financial Statement Schedules
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63
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SIGNATURES
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65
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
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”), about our expectations, beliefs or intentions regarding, among other
things, our product development efforts, business, financial condition, results
of operations, strategies or prospects. You can identify
forward-looking statements by the fact that these statements do not relate
strictly to historical or current matters. Rather, forward-looking
statements relate to anticipated or expected events, activities, trends or
results as of the date they are made. Because forward-looking
statements relate to matters that have not yet occurred, these statements are
inherently subject to risks and uncertainties that could cause our actual
results to differ materially from any future results expressed or implied by the
forward-looking statements. Many factors could cause our actual
activities or results to differ materially from the activities and results
anticipated in forward-looking statements. These factors include
those set forth below as well as those contained in “Item 1A - Risk Factors” of
this Annual Report on Form 10-K. We do not undertake any obligation
to update forward-looking statements, except as required by applicable
law. We intend that all forward-looking statements be subject to the
safe harbor provisions of the PSLRA. These forward-looking statements
are only predictions and reflect our views as of the date they are made with
respect to future events and financial performance.
Risks and
uncertainties, the occurrence of which could adversely affect our business,
include the following:
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We
have a history of operating losses and we do not expect to become
profitable in the near future.
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The
current worldwide economic crisis and concurrent market instability may
materially and adversely affect the demand for our products and, if and
when approved, our product candidates, as well as our ability to obtain
credit or secure funds through sales of our stock, which may materially
and adversely affect our business, financial condition and ability to fund
our operations.
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We
will require substantial additional funding, which may not be available to
us on acceptable terms, or at all.
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Most
of our technologies are in an early stage of development and are
unproven.
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Our
research and development activities may not result in commercially viable
products.
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The
results of previous clinical experience with devices similar to the
devices that we have licensed and are developing may not be predictive of
results with our licensed products, and any clinical trials that the U.S.
Food and Drug Administration (the “FDA”) may require us to undertake may
not satisfy FDA requirements or the requirements of other non-U.S.
regulatory authorities.
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We
are highly dependent on the success of our product candidates, and we
cannot give any assurance that each of them will receive regulatory
clearance or that any of them will be successfully
commercialized.
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If
our competitors develop and market products that are more effective, safer
or less expensive than our future product candidates, our commercial
opportunities will be negatively
impacted.
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Our
product development activities could be delayed or
stopped.
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The
regulatory clearance or approval process is expensive, time-consuming and
uncertain and may prevent us or our collaboration partners from obtaining
clearance, or approval, if necessary, for the commercialization of some or
all of our product candidates.
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Failure
to recruit and enroll patients for clinical trials may cause the
development of our product candidates to be
delayed.
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Even
if we obtain regulatory clearances or approvals for our product
candidates, the terms thereof and ongoing regulation of our products may
limit how we manufacture and market our product candidates, which could
materially impair our ability to generate anticipated
revenues.
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Even
if we obtain regulatory clearances or approvals to market our product
candidates, the market may not be receptive to our products or third-party
payors, including government payors, such as Medicare, Medicaid or
TriCare, may not provide coverage for our products or for procedures using
our products which could undermine our financial
viability.
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If
we fail to attract and retain key management and scientific personnel, we
may be unable to successfully develop or commercialize our product
candidates.
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As
we are evolving from a company primarily involved in development to a
company also involved in commercialization, we may encounter difficulties
in managing our growth and expanding our operations
successfully.
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If
we fail to acquire and develop other products or product candidates at all
or on commercially reasonable terms, we may be unable to diversify or grow
our business.
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We
will rely on third parties to manufacture and supply our product
candidates.
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We
currently do not have a marketing staff or sales or distribution
organization. If we are unable to develop our sales and
marketing and distribution capability on our own or through collaborations
with marketing partners, we will not be successful in commercializing our
product candidates.
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Independent
clinical investigators and contract research organizations that we engage
to conduct our clinical trials may not be diligent, careful or
timely.
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The
success of our business may be dependent on the actions of our
collaborative partners.
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We
rely heavily on licenses from third
parties.
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Most
of our current product plans are licensed to us by Creighton
University. Any loss of our rights under the agreement with
Creighton University or any failure by Creighton University to properly
maintain or enforce the patents under such licenses would materially
adversely affect our business
prospects.
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Some
jurisdictions may require us or Creighton University to grant licenses to
third parties. Such compulsory licenses could be extended to
include some of our product candidates, which may limit our potential
revenue opportunities.
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An
inability to find additional or other sources for our products could
materially and adversely affect us.
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If
we or Creighton University are unable to obtain and enforce patent
protection for our products and product candidates, our business could be
materially harmed.
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If
we or Creighton University are unable to protect the confidentiality of
our proprietary information and know-how, the value of our technology and
products could be adversely
affected.
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Our
commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third
parties.
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If
we become involved in patent litigation or other proceedings related to a
determination of rights, we could incur substantial costs and expenses,
substantial liability for damages or be required to stop our product
development and commercialization
efforts.
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Medicare
legislation and future legislative or regulatory reform of the health care
system may affect our ability to sell our products
profitably.
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Failure
to obtain regulatory clearance or approval outside the United States will
prevent us from marketing our product candidates
abroad.
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Non-U.S.
governments often impose strict price controls, which may adversely affect
our future profitability.
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Our
business may become subject to economic, political, regulatory and other
risks associated with international
operations.
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The
market price of our common stock may fluctuate
significantly.
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Trading
of our common stock is limited and trading restrictions imposed on us by
applicable regulations and by lockup agreements we have entered into with
our principal stockholders may further reduce our trading, making it
difficult for our stockholders to sell their
shares.
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Because
our common stock may be a “penny stock,” it may be more difficult for
investors to sell shares of our common stock, and the market price of our
common stock may be adversely
affected.
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Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions
that you do not consider to be in your best interests or in the best
interests of our stockholders.
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Compliance
with changing regulations concerning corporate governance and public
disclosure may result in additional
expenses.
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* * * *
*
PART
I
Unless
the context otherwise requires, all references in this Annual Report on Form
10-K to the “Company”, “SafeStitch”, “we”, “our”, “ours”, and “us” refer to
SafeStitch Medical, Inc., a Delaware corporation (formerly Cellular
Technical Services Company, Inc.), including our wholly-owned subsidiaries,
SafeStitch LLC, a Virginia limited liability company, and Isis
Tele-Communications, Inc., a Delaware corporation with no operating
business.
We were
originally incorporated in August 1988 as NCS Ventures Corp. under laws of the
State of Delaware, after which our name changed to Cellular Technical Services
Company, Inc. (“CTS”). On September 4, 2007, we completed our
acquisition of SafeStitch LLC, a privately held Virginia limited liability
company (“LLC”), pursuant to a Share Transfer, Exchange and Contribution
Agreement, dated as of July 25, 2007, referred to as the “Share Exchange
Agreement”, by and among us, LLC and the members of LLC. The Share
Exchange Agreement provided for the exchange of all issued and outstanding
membership interests of LLC for 11,256,369 shares of our common stock (the
“Share Exchange”). We incurred customary acquisition related costs in
connection with this transaction. In January 2008, we changed our
name from Cellular Technical Services Company, Inc. to SafeStitch Medical, Inc.,
and, effective February 11, 2008, our trading symbol on the OTCBB changed from
“CTSC” to “SFES”.
At the
closing of the Share Exchange, we issued an aggregate of 11,256,369 shares of
our common stock to the former members of LLC in exchange for all of their
membership interests in LLC. We also granted warrants to purchase a
total of 805,521 shares of our common stock to The Frost Group, LLC and Jeffrey
G. Spragens in connection with a line of credit of up to $4 million that was
provided to us simultaneously with the closing by The Frost Group, LLC and
Jeffrey G. Spragens. These warrants have a ten year term and an
assumed exercise price of $0.25 per share of common stock. Dr.
Phillip Frost has a controlling interest in The Frost Group LLC and is the
largest beneficial holder of our shares of common stock. Dr. Jane
Hsiao and Steven D. Rubin, two of our directors, also are members of The Frost
Group, LLC. Jeffrey G. Spragens is our Chief Executive Officer and
President and a director. Frost Gamma Investments Trust, Dr. Phillip
Frost, Dr. Jane Hsiao, Steven D. Rubin and Jeffrey G. Spragens were also
beneficial owners of membership interests in LLC.
Accounting
Treatment
The Share
Exchange was accounted for as a recapitalization of LLC, and LLC has been
treated as the continuing reporting entity. Since CTS did not have an
operating business at the time of the Share Exchange, the transaction has not
been accounted for as a business combination. Instead, the
transaction has been accounted for as a recapitalization of LLC and the issuance
of stock by LLC (represented by the outstanding shares of SafeStitch) at the
book values of assets and liabilities of SafeStitch, approximating fair value
with no goodwill or other intangibles recorded.
We are a
developmental stage FDA-registered medical device company focused on the
development of medical devices that manipulate tissues for obesity,
gastroesophageal reflux disease (“GERD”), hernia formation, esophageal
obstructions, Barrett’s Esophagus, upper gastrointestinal bleeding, and other
intraperitoneal abnormalities through endoscopic and minimally invasive
surgery.
We have
utilized our expertise in intraperitoneal surgery to test certain of our devices
in in vivo and ex vivo animal trials and
ex vivo human trials,
and with certain products, in limited in vivo human
trials. Certain of our products did not or may not require clinical
trials, including our SMART DilatorTM,
standard and airway bite blocks and hernia stapler. Where required,
we intend to rapidly, efficiently and safely move into clinical trials for
certain other devices, including those utilized in surgery for the treatment of
obesity, GERD and for the treatment and diagnosis of Barrett’s
Esophagus. Clinical trials for gastroplasty product candidates should
begin in 2010.
Our
devices are designed to accomplish one or more of the following surgical
goals:
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Increased
effectiveness;
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Fewer
complications; and
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We
believe that we can accomplish these goals by developing devices that, among
other things, allow the endoscopic performance of certain types of surgery that
are currently performed through an abdominal incision, including
laparoscopically. Devices such as these are expected to reduce the
need for inpatient hospital stay and decrease the likelihood of complications
and their associated costs.
We plan
to use our endoscopic, laparoscopic and general surgery experience, our internal
product design expertise and our relationships with third-party product
developers to further develop a pipeline of surgical devices to be utilized in
treating intraperitoneal abnormalities such as gallstones, appendicitis, cancer
of the intestinal tract, kidney cancer, trauma, reproductive disease tumors and
liver conditions.
Dr.
Charles Filipi, our Medical Director, has been a pioneer in laparoscopic surgery
and endoluminal surgery at Creighton University (“Creighton”) and has been the
lead physician responsible for the development of our product
candidates. He has relationships with a number of physicians who are
experts in this field and we believe that he will be able to utilize his
expertise and these relationships to facilitate device development and the
opportunities mentioned above. We are also working with leading
hernia surgeons. Many of these experts are part of our medical
advisory board.
We
believe the market for our products and product candidates is driven
by:
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The
aging and heavier population;
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An
active and increased life expectancy among the aging baby-boomer
generation;
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Painful
and expensive surgical procedures with a moderate to high incidence of
complications;
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Emerging
technologies to treat obesity, GERD, Barrett’s Esophagus and other
intraperitoneal abnormalities; and
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An
increased awareness of the benefits of minimally invasive
surgery.
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Our lead
product candidates are designed for use in operations necessitated in large part
by obesity. The incidence of obesity (defined as 100 pounds over
ideal body weight) is increasing, despite increased public awareness of the
health risks associated with obesity and the growth of the diet and fitness
industries. According to recent surveys and medical journal reports,
approximately two thirds of individuals living in the United States are
overweight and as many as 70 million Americans, roughly 25% of the U.S.
population, are currently considered obese. Some estimates project
that 100 million Americans, or approximately 35% of the anticipated U.S.
population, will be obese by the year 2017. The incidence of obesity
is increasing not only in the U.S., but is becoming a problem in industrialized
countries worldwide, including China and India.
Current
treatment options for obesity include exercise and dieting, prescription drugs,
bariatric surgical alternatives and, in the near future, gastric
stimulators. Exercise and dieting are often not successful, and, if
successful, the results are often not permanent. In addition,
although there are a number of drug alternatives currently in the market for
treating obesity, they often result in moderate weight loss (typically no more
than 10% of body weight).
As a
result of the foregoing, bariatric surgery has become more prevalent as an
alternative. Approximately 350,000 – 400,000 bariatric surgical
procedures are performed annually worldwide. Bariatric surgery is
usually recommended for those people with a body mass index (BMI) of 35 or
higher or for those who are approximately 100 pounds
overweight. Currently the most common bariatric surgery methods
include gastric bypass, gastric banding and gastroplasty. The leading
and most successful type of bariatric surgery is gastric bypass, which combines
the creation of a small stomach pouch to restrict food intake and the
construction of bypasses of the duodenum and other segments of the small
intestine, thereby decreasing the body’s ability to absorb nutrients from
food. Other types of bariatric surgery include gastric banding, in
which a small inflatable/dilatable band (which allows adjustment to the size of
the opening between the pouch and the stomach) is placed around the upper part
of the stomach, creating a small pouch, so that patients feel full sooner, and
vertical banding gastroplasty, or stomach stapling, in which a band and staples
are used to create a small stomach pouch. These procedures are
expensive, require significant incisions and have a moderate to high level of
complications.
Our lead
product candidates can also be used to treat GERD and GERD related complications
such as Barrett’s Esophagus. Up to 40% of the adult population in the
United States suffers GERD symptoms monthly. Left untreated for a
prolonged period of time, GERD can lead to complications such as Barrett’s
Esophagus, a precancerous change to the thin layer of tissue lining the
esophagus. Barrett’s Esophagus can develop into a relatively rare,
but often deadly type of cancer of the esophagus. Worldwide, there
are approximately 200,000 – 250,000 GERD or acid reflux surgical or transoral
procedures performed annually. None of the currently available
outpatient endoscopic procedures have proven effective in reversing inflammation
of the esophagus or the amount of acid reflux. Another common GERD
complication is scar tissue in the esophagus that inhibits the movement of
swallowed food and drink. This and other types of esophageal
restrictions are treated by inserting a dilator tube or inflatable balloon at
the stricture and dilating the esophagus. Approximately 2 million
esophageal dilations are performed annually worldwide, and 20 million
endoscopies are performed annually worldwide. All endoscopies require
a bite block to protect both the endoscope and the patient’s teeth.
Additionally,
we are developing our Amid Hernia Stapler for use in both inguinal and ventral
open hernia repairs. Hernias impact approximately 1% of the World’s
population, and roughly 800,000 inguinal hernias are repaired annually in the
United States. Greater than 80% of the surgeries for this most common
form of hernia are performed using the Lichtenstein Hernia Repair, whereby a
surgeon repairs and reinforces the abdominal wall by affixing mesh through an
open incision.
SMART
DilatorTM
Dilators
are used when an endoscopy demonstrates the narrowing of the
esophagus. Narrowing may be treated by administering GERD medication
or by using a dilator to expand the esophagus. Studies have estimated
that approximately 10,000 instances of perforation of the esophagus occur
annually as a result of esophageal dilation. According to
peer-reviewed literature, dilation results in a 0.5-1.0% perforation
rate. Approximately 800,000 dilations are performed in the United
States each year. Untreated perforation of the esophagus is fatal;
usually within two days. Our testing has shown that, during dilation,
the physician should place no greater than two pounds of pressure on the
dilator. Our SMART DilatorTM has a
handle that changes from green to yellow and then to red, providing the
physician a visual indicator of how close he or she is to the recommended two
pound limit. Additionally, the SMART DilatorTM handle
locks in place when the force applied to the dilator exceeds 2.5 pounds of
pressure. While there are numerous dilators on the market, none
include a feedback mechanism similar to that contained in the SMART DilatorTM.
We
received FDA clearance to market the SMART DilatorTM as a
Class II device in February 2009, and we expect to begin commercial sales of the
SMART DilatorTM by the
second half of 2009.
Bite
Blocks
A bite
block is used to protect the endoscope used in transoral gastrointestinal
procedures and is required in all such procedures. A number of bite
blocks are on the market.
Standard Bite
Block. Our Standard Bite Block provides a higher level of
protection as it is less easily expelled from the mouth. The Standard
Bite Block is designed with a bigger lip and slightly different aperture than
other bite blocks on the market. Because this is a Class I device,
significant testing has not been necessary; however, in 2008, Creighton
University Medical Center performed a bite block study. See “-FDA
Regulation of the Design, Manufacture and Distribution of Medical
Devices”. This product candidate was tested for comfort during
endoscopic procedures in in
vivo human patients. We believe this is a Class I
510(k)-exempt device that requires no preclearance from the FDA prior to
marketing, which we expect to commence by the second half of 2009.
Airway Bite
Block. The Airway Bite Block contains a built-in airway that
assists breathing in patients with larger tongues or smaller throats, usually
because of obesity, during an endoscopic procedure. The Airway Bite
Block was also tested following Institutional Review Board (IRB) approval at
Creighton University Medical Center in 2008. The Airway Bite Block
will come in two sizes. We believe this is a Class I 510(k)-exempt
device that requires no preclearance from the FDA prior to marketing, which we
expect to commence by the second half of 2009.
We have
prioritized our product development efforts on those candidates aimed at
opportunities within gastroenterology, in which attractive markets combine with
an emerging understanding of intraluminal surgery. In that regard,
our initial key product candidates focus on obesity and obesity-related
conditions, as well as other intraperitoneal abnormalities, which often may be
treated by bariatric surgery.
Intraluminal
Gastroplasty Device for Obesity and GERD (“Gastroplasty Device”)
Our
Gastroplasty Device consists of a set of instruments designed to perform
incision-less, endoscopic surgery by introduction through the mouth and
esophagus. Bariatric and GERD surgeries are generally performed
through an external abdominal incision, and sometimes
laparoscopically. The traditional surgery has the potential for
significant complications, requires an in-patient hospital stay and is
expensive.
The
Gastroplasty Device is the most tested of our devices, and our testing to date
has established its effectiveness. In animal tests and ex vivo human testing, the
Gastroplasty Device has been successful in obesity surgeries for suturing and
excising tissue and reducing stomach size by approximately 95%. We
presently expect to conduct the first in vivo human testing of this
device in 2010. In GERD patients, the esophageal junction does not
close completely and acid or bile from the stomach enters the
esophagus. Both the hydrochloric acid and bile from the stomach can
damage the esophagus. We have successfully tested a prototype in two
patients with Creighton University Medical Center IRB permission, and we
presently expect to continue in vivo human testing of this
device in 2010. We believe that this device will result in
significantly fewer complications and lower expense for both obesity and GERD
procedures, both because the procedure will be less invasive and because
recuperation time will be reduced. We believe this device to be a
Class II 510k device that will require IDE (investigational device exemption)
clinical data for FDA approval.
The
Amid Hernia Stapler
We are
developing the Amid Hernia Stapler in cooperation with Dr. Parviz Amid,
originator of the Lichtenstein Hernia Repair. This stapler will
utilize non-absorbable titanium staples for the repair of inguinal or groin
hernias. The staples are used to fix mesh in place, which helps
prevent the recurrence of a hernia. We believe our stapler will make
hernia repairs easier and will reduce postoperative pain as compared to
traditional hand suturing techniques and currently available
staplers. We expect to submit a 510(k) premarket approval application
for the Amid Hernia Stapler to the FDA in the second half of
2009.
Barrett’s
Excision and Ablation Device for Treatment and Diagnosis (“Barrett’s
Device”)
The
Barrett’s Device is the only device of which we are aware that is designed to
assist in both the diagnosis of and treatment of Barrett’s
Esophagus. Barrett’s Esophagus, which may be caused by GERD, is a
condition in which the lining of the esophagus imitates the stomach mucosa,
beginning at the esophageal junction and migrating upward. Barrett’s
esophageal tissue is pre-cancerous and can result in difficulty in swallowing,
spreading malignancy and death.
Existing
treatments include medication, laparoscopic surgery and
cauterization. The Barrett’s Device allows the mucosa to be
suctioned, sliced off and tested. The device also allows for
cauterization of the affected area. If the Barrett’s Esophagus covers
all four quadrants of the esophagus, at least two procedures are necessary, each
covering up to one half of the circumference, as a 360° excision would create a
stricture that would cause difficulty swallowing. We expect that the
procedures would be done two months apart. No incision is required,
and the procedure will be an outpatient procedure. We expect this
device to be more effective and less costly than existing
procedures.
In over
ten in vivo and ex vivo animal tests and five
ex vivo human tests,
the Barrett’s Device has been successful in excision width, length, depth and
contour. We presently expect to conduct the first human testing of
the Barrett’s Device by the end of 2010. We believe this device to be
a Class II 510(k) device that will require IDE clinical data to support a
premarket notification for FDA clearance.
T
Fasteners for Upper GI Bleeding (“T Fastener Gun”)
The T
Fastener Gun delivers small metal fasteners at the end of an
endoscope. We believe that our T Fastener Gun can provide
full-thickness stomach wall suturing for control of gastric
bleeding. Existing devices apply energy or clips that are often too
superficial, resulting in rebleeding. The T Fastener suture end is
tightened, and because of its full thickness bite, a larger amount of tissue
will compress the bleeding vessel.
The T
Fastener Gun is in an early stage of development and has undergone in vivo and ex vivo animal
studies. These tests have established the feasibility of the T
Fastener Gun. We believe this device to be a Class II 510(k) device
that will require IDE clinical data to support a premarket notification for FDA
clearance. We have not yet begun significant development of the T
Fastener Gun.
Novel
Devices for Natural Orifice Transluminal Endoscopic Surgery
(“NOTES”)
Natural
Orifice Transluminal Endoscopic Surgery or NOTES is a new method of operating in
the abdominal cavity without making an incision in the abdominal
wall. This surgery is also referred to as NO SCAR
surgery. The natural orifices used in this type of procedure are the
mouth and the rectum and, in females, the vagina. If the mouth is
used, instruments are passed through this natural orifice out of the stomach and
into the abdominal cavity.
NOTES
includes surgeries for gallbladder removal, appendectomy, tubal ligation,
removal of intestinal and reproductive organ cancer and hernia repair, all
through the gastric, rectal or vaginal walls. Surgery
utilizing the NOTES approach requires stabilization of long flexible instruments
and the organs to be operated upon. We have received a license from
Creighton for a patent application for a magnetic gallbladder retractor that
would enable improved operative exposure for gallbladder removal, as well as
other devices to assist in NOTES procedures. We have not yet begun
development of devices utilizing this technology.
Intellectual
Property
We have
exclusively licensed technology, know-how and patent applications from Creighton
for most of our product candidates. These applications include
systems and techniques for minimally invasive gastrointestinal procedures, a
dilator for use with an endoscope, bite blocks for use with an endoscope and for
preserving airways of patients during endoscopy, surgical fasteners, a
T-Fastener Gun and NOTES. In addition, we have certain rights to
other Creighton intellectual property that we have not yet defined as product
candidates. In total, we have eight patent applications pending in
the United States, including seven that are exclusively licensed from
Creighton. Six of the patent applications are also pending
internationally, including five that are exclusively licensed from
Creighton.
Pursuant
to our exclusive license and development agreement with Creighton, we own all
inventions conceived of and reduced to practice solely by our employees and
agents, and all patent applications and patents claiming such inventions
developed without the use of any licensed patent rights or associated know-how,
and Creighton owns all inventions conceived of and reduced to practice solely by
Dr. Filipi, or any university employees or agents who work directly with Dr.
Filipi in the course of performing duties for us, and all patent applications
and patents claiming such inventions, which inventions, patent applications and
all resulting licensed patent rights are subject to the exclusive license and
development agreement. Together with the university we jointly own all
inventions conceived of and reduced to practice jointly by Dr. Filipi, and/or
any university employees or agents who work directly with him and our employees
or agents. Notwithstanding the foregoing, the university owns all
inventions conceived of or reduced to practice under the research and
development budget, and all patent applications and patents claiming such
inventions, even if conceived of solely by our employees or agents, and such
inventions, patent applications and all resulting licensed patent rights are
subject to the exclusive license and development agreement.
Creighton
is obligated to file, prosecute and maintain all licensed patents and all patent
applications and patents disclosing and claiming inventions made in whole or in
part by university employees, agents or contractors resulting from the research
and development the university engages in on our behalf in such countries as we
designate. We have the right, but not the obligation, at our sole
expense, to enforce our licensed patent rights and associated know-how under the
exclusive license and development agreement against any infringer, including the
right to file suit for patent infringement naming Creighton as a party, and the
right to settle such suit with the university’s consent, which shall not be
unreasonably withheld. Creighton is entitled to 1.5% of any amount
collected as a result of such judgment or settlement. In the event
that we choose not to file suit for patent infringement within 180 days after
becoming aware of infringement, Creighton has the right, but not the obligation,
at its sole expense, to enforce the licensed patent rights and associated
know-how against any infringer, including the right to file suit for patent
infringement naming us as a party, and the right to settle such suit with our
consent, which shall not be unreasonably withheld. The university
shall pay us 1.5% of any amount collected as a result of such judgment or
settlement.
We
believe that technological innovation is driving breakthroughs in the surgical
markets that we intend to service. We have adopted a comprehensive
intellectual property strategy that blends our efforts toward focused innovation
with our business development activities designed to strategically in-source
intellectual property rights.
We intend
to develop, protect and defend our own intellectual property rights as dictated
by the developing competitive environment. We value our intellectual
property assets and believe we have benefited from our relationship with
Creighton and Dr. Filipi.
Licenses
and Collaborative Relationships; Research and Development
Our
strategy is to develop a portfolio of product candidates through a combination
of internal development and external partnerships. Collaborations are
key to our strategy, and, on May 26, 2006, we entered into an exclusive
worldwide license and development agreement with Creighton, granting us the
rights to license and sublicense all of our product candidates and associated
know-how, including the exclusive right to manufacture, use and sell the product
candidates. The foregoing license is exclusive even with respect to
Creighton. In addition, for 36 months, we have an option to accept or
reject for continued development any additional devices, materials and methods
used in the practice of bariatric medicine and treatment of GERD, transoral
surgical techniques and all alimentary and gastrointestinal components
associated therewith, including but not limited to the esophagus, stomach,
intestines and digestive tract, as well as such abnormalities as gastric
bleeding, hernias and other medical conditions that may benefit from such
technologies.
Pursuant
to the exclusive license and development agreement we are obligated to pay
Creighton, on a quarterly basis, a royalty of 1.5% of the revenue collected
worldwide from the sale of any product licensed under the agreement, less
certain amounts, including without limitation chargebacks, credits, taxes,
duties and discounts or rebates. The agreement does not provide for
minimum royalties.
Pursuant
to the agreement, Creighton shall provide all necessary facilities, including
animal research laboratories, to accommodate Dr. Filipi’s research and
development of any licensed product and shall be compensated by us for use of
such facilities as provided in the research and development agreement, which is
updated annually. In 2008 and 2007, we recorded an expense of
$177,000 and $322,000, respectively, in satisfaction of the indirect cost
allowance equal to 20% of the direct and personnel costs for services conducted
at the university or company facilities. Pursuant to the agreement,
the university has agreed that Dr. Filipi shall devote at least 90% of his
working time during the four-year period that began May 26, 2006, and at least
50% of his time during the two years thereafter, towards the research and
development of any licensed product under the agreement, including the
development of any such product to a final design and prototype as a
commercially viable product. The agreement further provides that Dr.
Filipi shall assist us with the prosecution of any and all patent applications
related to any such products developed under the agreement.
We have
agreed to invest, in the aggregate, at least $2.5 million over 36 months towards
development of any licensed product, not including the first $150,000 of costs
related to the prosecution of patents, which we have done. Our
failure to do so would have resulted in all rights in the licensed patents and
know-how reverting back to the university. Through December 31, 2008,
we had invested $5.1 million in the licensed products, inclusive of our costs to
date relating to prosecution of patents. Pursuant to the agreement,
we are entitled to exercise our own business judgment and sole and absolute
discretion over the marketing, sale, distribution, promotion, or other
commercial exploitation of any licensed products, provided that if we have not
commercially exploited or commenced development of a licensed patent and its
associated know-how by the seventh anniversary of the later of the date of the
agreement or the date such technology is disclosed to and accepted by us, then
the licensed patent and associated know-how shall revert back to the university,
with no rights retained by us, and the university will have the right to seek a
third party with whom to commercialize such patent and associated know-how,
unless we purchase one or more one-year extensions. In addition to
the expenses in connection with our agreement with Creighton, we have incurred
research and development expenses of $2.5 million and $1.6 million for the years
ended December 31, 2008 and 2007, respectively.
Competition
The
market for our products is highly competitive due to the large number of
products competing for market share and significant levels of commercial
resources being utilized to promote those products. Competitors
include USGI Medical, TOGa devices from Satiety and StomaphyX and EsophyX from
Endo Gastric Solutions, Inc. with respect to our Gastroplasty Device; USGI
Medical and Medigus, Ltd. with respect to our GERD Device, Olympus Medical
Equipment Services America, Inc. and BARRX Medical, Inc. with respect to our
Barrett’s Device, Olympus and Wilson Cook with respect to gastrointestinal
bleeding; Bard, LLC, ConMed Corporation, U.S. Endoscopy, Omni Medical Supply,
Inc. and Olympus with respect to our bite blocks and Boston Scientific
Corporation, Cook Medical Supply, Inc., Miller Medical Specialties, U.S.
Endoscopy and The Rush Incorporated with respect to our dilator. There are also
a significant number of bite blocks on the market. In addition, our
ability to compete may be affected because of the failure to educate physicians
or the level of physician expertise. This may have the effect of
making our product less attractive to buyers. Among the products with
which we will directly compete, we expect to differentiate on the basis of
enhanced safety, effectiveness and efficiency, as well as lower cost, in most
cases. Several medical device companies are actively engaged in
research and development of treatments for gastrointestinal abnormalities
similar to the gastrointestinal abnormalities that are targeted by our product
candidates. We cannot predict the basis upon which we will compete
with new products marketed by others. Many of our competitors have
substantially greater financial, operational, sales and marketing and research
and development resources than we have.
As
indicated, there are also other methods to treat obesity, such as diet, exercise
and medicine. Other competitors have developed products such as
medical implants that occupy volume in the stomach to promote the feeling of
satiety (Helioscopie) or gastric sleeves to reduce food intake.
Government
Regulation of our Medical Device Development Activities
Healthcare
is heavily regulated by the federal government and by state and local
governments. The federal laws and regulations affecting healthcare
change constantly thereby increasing the uncertainty and risk associated with
any healthcare-related venture.
The
federal government regulates healthcare through various agencies, including but
not limited to the following: (i) the FDA which administers the Food,
Drug, and Cosmetic Act (“FD&C Act”), as well as other relevant laws; (ii)
the Centers for Medicare & Medicaid Services (“CMS”) which administers the
Medicare and Medicaid programs; (iii) the Office of Inspector General (“OIG”),
which enforces various laws aimed at curtailing fraudulent or abusive practices
including, by way of example, the Anti-Kickback Law, the Anti-Physician Referral
Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money
Penalty Law, and the laws that authorize the OIG to exclude health care
providers and others from participating in federal healthcare programs; and (iv)
the Office of Civil Rights which administers the privacy aspects of the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”). All
of the aforementioned are agencies within the Department of Health and Human
Services (“HHS”). Healthcare is also provided or regulated, as the
case may be, by the Department of Defense through its TriCare program, the
Department of Veterans Affairs under, among other laws, the Veterans Health Care
Act of 1992, the Public Health Service within HHS under the Public Health
Service Act, the Department of Justice through the Federal False Claims Act and
various criminal statutes, and state governments under the Medicaid program and
their internal laws regulating all healthcare activities.
FDA
Regulation of the Design, Manufacture and Distribution of Medical
Devices
The
testing, manufacture, distribution, advertising and marketing of medical devices
are subject to extensive regulation by federal, state and local governmental
authorities in the United States, including the FDA, and by similar agencies in
other countries. Any product that we develop must receive all
relevant regulatory clearances or approvals, as the case may be, before it may
be marketed in a particular country. Under United States law, a
“medical device” (“device”) is an article, which, among other things, is
intended for use in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, in man or other
animals. See FD&C Act § 201(h). Substantially all of
the devices being developed by SafeStitch are classified as medical devices and
subject to regulation by numerous agencies and legislative bodies, including the
FDA and its foreign counterparts.
Devices
are subject to varying levels of regulatory control, the most comprehensive of
which requires that a clinical evaluation be conducted before a device receives
approval for commercial distribution. The FDA classifies medical
devices into one of three classes. Class I devices are relatively
simple and can be manufactured and distributed with general
controls. Class II devices are somewhat more complex and require
greater scrutiny. Class III devices are new and frequently help
sustain life.
In the
United States, a company generally can obtain permission to distribute a new
device in two ways – through a Section 510(k) premarket notification application
(“510(k) submission”), or through a Section 515 premarket approval (“PMA”)
application. The 510(k) submission applies to any device that is
substantially equivalent to a device first marketed prior to May 1976 or to
another device marketed after that date, but which was substantially equivalent
to a pre-May 1976 device. These devices are either Class I or Class
II devices. Under the 510(k) submission process, the FDA will issue
an order finding substantial equivalence to a predicate device (pre-May 1976 or
post-May 1976 device that was substantially equivalent to a pre-May 1976 device)
and permitting commercial distribution of that device for its intended
use. A 510(k) submission must provide information supporting its
claim of substantial equivalence to the predicate device. FDA permits
certain low risk medical devices to be marketed without requiring the
manufacturer to submit a premarket notification. In other instances,
FDA may require that a premarket notification not only be submitted, but also be
accompanied by clinical data. If clinical data from human experience
are required to support the 510(k) submission, these data must be gathered in
compliance with investigational device exemption (“IDE”) regulations for
investigations performed in the United States. The FDA review process
for premarket notifications submitted pursuant to section 510(k) takes on
average about 90 days, but it can take substantially longer if the agency has
concerns, and there is no guarantee that the agency will “clear” the device for
marketing, in which case the device cannot be distributed in the United
States. Nor is there any guarantee that the agency will deem the
article subject to the 510(k) process, as opposed to the more time-consuming,
resource intensive and problematic PMA process described below.
The more
comprehensive PMA approval process applies to a new device that is not
substantially equivalent to a pre-1976 product or to one that is to be used in
supporting or sustaining life or preventing impairment. These devices
are normally Class III devices and can only be marketed following approval of a
PMA. For example, most implantable devices are subject to the PMA
approval process. Two steps of FDA approval generally are required
before a company can market a product in the U.S. that is subject to Section 515
PMA approval, as compared to a Section 510(k) clearance. First, a
company must comply with IDE regulations in connection with any human clinical
investigation of the device; however those regulations permit a company to
undertake a clinical study of a “non-significant risk” device without formal FDA
approval. Prior express FDA approval is required if the device is a
significant risk device. If there is any doubt as to whether a device
is a “non-significant risk” device, companies normally seek prior approval from
the FDA. Second, the FDA must review a company’s PMA application,
which contains, among other things, clinical information acquired under the
IDE. The FDA will approve the PMA application if it finds there is
reasonable assurance the device is safe and effective for its intended
use. The PMA process takes substantially longer than the 510(k)
process.
We
believe that our Gastroplasty Device and other of the products we have licensed
are “substantially equivalent,” as that term is used by the FDA, to devices that
have been cleared for marketing by the FDA under the 510(k)
process. However, it is uncertain at this time whether the licensed
Gastroplasty Device or any other licensed product that we propose to manufacture
and distribute would be subject to the 510(k) process or the more elaborate PMA
process, and it is also unclear the types of clinical data, if any, that FDA
might require as part of a premarket notification under the 510(k) process or a
PMA application under section 515, as the case may be. It is also
unclear whether the FDA would view the Gastroplasty Device as a “significant
risk device,” requiring prior FDA approval to conduct a clinical study involving
that Device. We have not yet sought FDA approval to conduct any
clinical studies of any of our licensed products in the United States and no
such studies have been conducted domestically. There is no assurance
that the FDA would permit us to conduct such clinical studies and no assurance
that the FDA would agree with our study design, statistical methods or
endpoints.
Even when
a clinical study has been approved by the FDA or deemed approved, the study is
subject to factors beyond a manufacturer’s control, including, but not limited
to the fact that the institutional review board at a given clinical site might
not approve the study, might decline to renew approval which is required
annually, or might suspend or terminate the study before the study has been
completed. Also, the interim results of a study may not be
satisfactory, leading the sponsor to terminate or suspend the study on its own
initiative or the FDA may terminate or suspend the study. There is no
assurance that a clinical study at any given site will progress as anticipated;
there may be an insufficient number of patients who qualify for the study or who
agree to participate in the study, or the investigator at the site may have
priorities other than the study. Also, there can be no assurance that
the clinical study will provide sufficient evidence to assure the FDA that the
product is safe and effective, a prerequisite for FDA approval of a PMA, or
substantially equivalent in terms of safety and effectiveness to a predicate
device, a prerequisite for clearance under 510(k). Even if the FDA
approves or clears a device, it may limit its intended uses in such a way that
manufacturing and distributing the device may not be commercially
feasible.
After
clearance or approval to market is given, the FDA and foreign regulatory
agencies, upon the occurrence of certain events, are authorized under various
circumstances to withdraw the clearance or approval or require changes to a
device, its manufacturing process or its labeling or additional proof that
regulatory requirements have been met.
A
manufacturer of a device approved through the PMA process is not permitted to
make changes to the device which affect its safety or effectiveness without
first submitting a supplement application to its PMA and obtaining FDA approval
for that supplement. In some instances, the FDA may require clinical
trials to support a supplement application. A manufacturer of a
device cleared through a 510(k) submission must submit another premarket
notification if it intends to make a change or modification in the device that
could significantly affect the safety or effectiveness of the device, such as a
significant change or modification in design, material, chemical composition,
energy source or manufacturing process. Any change in the intended
uses of a PMA device or a 510(k) device requires an approval supplement or
cleared premarket notification. Exported devices are subject to the
regulatory requirements of each country to which the device is exported, as well
as certain FDA export requirements.
As a
company that intends to manufacture medical devices, we are required to register
with the FDA before we begin to manufacture devices for commercial
distribution. As a result, we and any entity that manufactures
products on our behalf will be subject to periodic inspection by the FDA for
compliance with the FDA’s Quality System Regulation requirements and other
regulations. In the European Community, we will be required to
maintain certain International Organization for Standardization (“ISO”)
certifications in order to sell products and we or our manufacturers undergo
periodic inspections by notified bodies to obtain and maintain these
certifications. These regulations require us or our manufacturers to
manufacture products and maintain documents in a prescribed manner with respect
to design, manufacturing, testing and control activities. Further, we
are required to comply with various FDA and other agency requirements for
labeling and promotion. The Medical Device Reporting regulations
require that we provide information to the FDA whenever there is evidence to
reasonably suggest that a device may have caused or contributed to a death or
serious injury or, if a malfunction were to occur, could cause or contribute to
a death or serious injury. In addition, the FDA prohibits us from
promoting a medical device for unapproved indications.
The FDA
in the course of enforcing the FD&C Act may subject a company to various
sanctions for violating FDA regulations or provisions of the Act, including
requiring recalls, issuing Warning Letters, seeking to impose civil money
penalties, seizing devices that the agency believes are non-compliant, seeking
to enjoin distribution of a specific type of device or other product, seeking to
revoke a clearance or approval, seeking disgorgement of profits and seeking to
criminally prosecute a company and its officers and other responsible
parties.
Third-Party
Payments, Especially Payments by Medicare and Medicaid
A. Medicare
Coverage
Inasmuch
as a percentage of the projected patient population that could potentially
benefit from our devices is elderly, Medicare would likely be a potential source
of reimbursement. Medicare is a federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over, certain
disabled persons, persons with end-stage renal disease and those suffering from
Lou Gehrig’s Disease. In contrast, Medicaid is a medical assistance
program jointly funded by federal and state governments and administered by each
state pursuant to which benefits are available to certain indigent
patients. The Medicare and Medicaid statutory framework is subject to
administrative rulings, interpretations and discretion that affect the amount
and timing of reimbursement made under Medicare and Medicaid.
Medicare
reimburses for medical devices in a variety of ways depending on where and how
the device is used. However, Medicare only provides reimbursement if
CMS determines that the device should be covered and that the use of the device
is consistent with the coverage criteria. A coverage determination
can be made at the local level (“Local Coverage Determination”) by the Medicare
administrative contractor (formerly called carriers and fiscal intermediaries),
a private contractor that processes and pays claims on behalf of CMS for the
geographic area where the services were rendered, or at the national level by
CMS through a National Coverage Determination. There are statutory
provisions intended to facilitate coverage determinations for new technologies
under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(“MMA”) §§ 731 and 942. Coverage presupposes that the device has been
cleared or approved by the FDA and, further, that the coverage will be no
broader than the FDA approved intended uses of the device (i.e., the device’s
label) as cleared or approved by the FDA, but coverage can be
narrower. In that regard, a narrow Medicare coverage determination
may undermine the commercial viability of a device.
CMS has
issued a National Coverage Determination with respect to bariatric surgery under
which CMS will cover the surgery only for treatment of co-morbidities associated
with morbid obesity, and only under the following conditions:
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Medicare
beneficiary has a body-mass index of 35 or
greater;
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Medicare
beneficiary has at least one co-morbidity related to obesity such as
diabetes or hypertension;
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Medicare
beneficiary has been previously unsuccessful with medical treatment for
obesity; and
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Procedure
is performed in an approved facility listed at
http://www.cms.hhs.gov/MedicareApprovedFacilitie/BSF/list.asp and the
surgical procedure is of a type expressly approved by
CMS.
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It is
unclear whether the type of bariatric surgery that would rely on our primary
device would be covered under the National Coverage Determination noted
above.
Seeking
to modify a coverage determination, whether local or national, is a
time-consuming, expensive and highly uncertain proposition, especially for a new
technology, and inconsistent local determinations are possible. On
average, according to an industry report, Medicare coverage determinations for
medical devices lag 15 months to five years or more behind FDA approval for
respective devices. Moreover, Medicaid programs and private insurers
are frequently influenced by Medicare coverage determinations. Our
inability to obtain a favorable coverage determination may adversely affect our
ability to market our products and thus, the commercial viability of our
products.
B. Medicare
Reimbursement Levels
Even if
Medicare covers the procedure that uses our devices the level of reimbursement
may not be sufficient for commercial success. The Medicare
reimbursement levels for covered procedures are determined annually through two
sets of rulemakings, one for outpatient departments of hospitals under the
Outpatient Prospective Payment System (“OPPS”) and the other, for procedures in
physicians’ offices under the Resource-Based Relative Value Scales (“RBRVS”)
(the Medicare fee schedule). If the use of a device is covered by
Medicare, a physician’s ability to bill a Medicare patient more than the
Medicare allowable amount is significantly constrained by the rules limiting
balance billing. For covered services in a physician’s office,
Medicare normally pays 80% of the Medicare allowable amount and the beneficiary
pays the remaining 20%, assuming that the beneficiary has met his or her annual
Medicare deductible and is not also a Medicaid beneficiary. For
services performed in an outpatient department of a hospital, the patient’s
co-payment under Medicare may exceed 20%, depending on the service and depending
on whether CMS has set the co-payment at greater than 20%. If a
device is used as part of an in-patient procedure, the hospital where the
procedure is performed is reimbursed under the Inpatient Prospective Payment
System (“IPPS”). In general, IPPS provides a single payment to the
hospital based on the diagnosis at discharge and devices are not separately
reimbursed under IPPS.
Usually,
Medicaid pays less than Medicare, assuming that the state covers the
service. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial
risk. Efforts to impose greater discounts and more stringent cost
controls upon healthcare providers by private and public payors are expected to
continue.
Significant
limits on the scope of services covered or on reimbursement rates and fees on
those services that are covered could have a material adverse effect on our
ability to commercialize our devices and therefore, on our liquidity and
financial condition.
Anti-Fraud
and Abuse Rule
There are
extensive federal and state laws and regulations prohibiting fraud and abuse in
the healthcare industry that can result in significant criminal and civil
penalties that can materially affect us. These federal laws include,
by way of example, the following:
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The
anti-kickback statute (Section 1128B(b) of the Social Security Act)
prohibits certain business practices and relationships that might affect
the provision and cost of healthcare services reimbursable under Medicare,
Medicaid and other federal healthcare programs, including the payment or
receipt of remuneration for the referral of patients whose care will be
paid by Medicare or other governmental
programs;
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The
physician self-referral prohibition (Ethics in Patient Referral Act of
1989, as amended, commonly referred to as the Stark Law, Section 1877 of
the Social Security Act), which prohibits referrals by physicians of
Medicare or Medicaid patients to providers of a broad range of designated
healthcare services in which the physicians (or their immediate family
members) have ownership interests or with which they have certain other
financial arrangements.
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The
anti-inducement law (Section 1128A(a)(5) of the Social Security Act),
which prohibits providers from offering anything to a Medicare or Medicaid
beneficiary to induce that beneficiary to use items or services covered by
either program;
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The
False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person
from knowingly presenting or causing to be presented false or fraudulent
claims for payment to the federal government (including the Medicare and
Medicaid programs); and
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The
Civil Monetary Penalties Law (Section 1128A of the Social Security Act),
which authorizes the United States Department of Health and Human Services
to impose civil penalties administratively for fraudulent or abusive
acts.
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Sanctions
for violating these federal laws include criminal and civil penalties that range
from punitive sanctions, damage assessments, monetary penalties, imprisonment,
denial of Medicare and Medicaid payments or exclusion from the Medicare and
Medicaid programs, or both. These laws also impose an affirmative
duty on those receiving Medicare or Medicaid funding to ensure that they do not
employ or contract with persons excluded from the Medicare and other government
programs.
Many
states have adopted or are considering legislative proposals similar to the
federal fraud and abuse laws, some of which extend beyond the Medicare and
Medicaid programs, to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of whether the
service was reimbursed by Medicare or Medicaid. Many states have also
adopted or are considering legislative proposals to increase patient
protections, such as limiting the use and disclosure of patient specific health
information. These state laws also impose criminal and civil
penalties similar to the federal laws.
In the
ordinary course of their business, medical device manufacturers and suppliers
have been and are subject regularly to inquiries, investigations and audits by
federal and state agencies that oversee these laws and
regulations. Recent federal and state legislation has greatly
increased funding for investigations and enforcement actions, which have
increased dramatically over the past several years. This trend is
expected to continue. Private enforcement of healthcare fraud also
has increased due in large part to amendments to the civil False Claims Act in
1986 that were designed to encourage private persons to sue on behalf of the
government. These whistleblower suits by private persons, known as
qui tam relators, may be filed by almost anyone, including present and former
patients or nurses and other employees, as well as
competitors. HIPAA, in addition to its privacy provisions, created a
series of new healthcare-related crimes.
As
federal and state budget pressures continue, federal and state administrative
agencies may also continue to escalate investigation and enforcement efforts to
root out waste and to control fraud and abuse in governmental healthcare
programs. A violation of any of these federal and state fraud and
abuse laws and regulations could have a material adverse effect on a supplier’s
liquidity and financial condition. An investigation into the use of a
device by physicians may dissuade physicians from either purchasing or using the
device. This could have a material adverse effect on our ability to
commercialize our devices.
The
Privacy Provisions of HIPAA
HIPAA,
among other things, protects the privacy and security of individually
identifiable health information by limiting its use and
disclosure. HIPAA directly regulates “covered entities,” such as
healthcare providers, insurers and clearinghouses, and indirectly regulates
“business associates,” with respect to the privacy of patients’ medical
information. All entities that receive and process protected health
information are required to adopt certain procedures to safeguard the security
of that information. It is uncertain whether we would be deemed to be
a covered entity under HIPAA and it is unlikely that we, based on our current
business model, would be a business associate. Nevertheless, we will
likely be contractually required to physically safeguard the integrity and
security of any patient information that we receive, store, create or
transmit. If we fail to adhere to our contractual commitments, then
our physician or hospital customers may be subject to civil monetary penalties,
which could adversely affect our ability to market our
devices. Recent changes in the law wrought by the American Recovery
and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009),
may increase the likelihood that we would be treated as a business associate
thereby subjecting us to direct government regulation, increasing our compliance
costs and our exposure to civil monetary penalties and other government
sanctions.
Manufacturing
We have
no commercial manufacturing facilities and we do not intend to build commercial
manufacturing facilities of our own in the foreseeable future. We
intend to enter into agreements with various third parties for the formulation
and manufacture of our products. We make prototypes of certain of our
product candidates for testing, including for limited use in animal or human
clinical testing, in our Miami, Florida prototype laboratory. We have
also entered into agreements with third party manufacturers for the manufacture
of prototypes for certain of our products. These suppliers and their
manufacturing facilities must comply with FDA regulations, current quality
system regulations (referred to as QSRs), which include current good
manufacturing practices, or cGMPs, and to the extent laboratory analysis is
involved, current good laboratory practices, or cGLPs.
Sales
& Marketing
We do not
have dedicated sales or marketing personnel, and our Chief Operating Officer is
presently leading our current marketing efforts. In order to
commercialize any products that are approved for commercial sale, we must either
build a sales and marketing infrastructure or collaborate with third parties
with sales and marketing experience. We may build our own sales and
marketing infrastructure to market some of our product candidates targeting
gastrointestinal specialists in certain regions or collaborate with companies
established in this industry to market and sell certain of our products, if
cleared or approved, as the case may be. Such collaborations could
take the form of joint ventures or sales, marketing or distribution
agreements. We intend to initially distribute our products, including
our SMART DilatorTM and
bite blocks, through companies with established sales and marketing operations
in the medical device industry. Although we are in discussions with
such companies, there can be no assurance that we will be able to enter into
distribution agreements on terms acceptable to us or at all.
Employees
As of
December 31, 2008, we had fourteen full-time employees, seven of whom hold
advanced degrees. In January 2009, we reduced our research and
development staff by five full-time employees to reduce costs as we completed
development of three products and refocused our development efforts on our most
promising remaining product candidates (See Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations). We plan to add to our headcount in key functional areas
as required to commence commercialization activities and further the development
of our product candidates. None of our employees are represented by a
collective bargaining agreement.
Executive
Officers of the Registrant
Jeffrey G.
Spragens. Mr. Spragens, 67, has served as our President and
Chief Executive Officer and as a member of our Board of Directors since the
Share Exchange in September 2007, and he has served as Business Manager of
SafeStitch LLC, of which he was a founding member, since August
2005. From January 2002 to December 2006 he was a member of Board of
Directors of ETOC, Inc., a privately owned hotel and lodging company based in
Minneapolis, Minnesota. Since April 2002 he has been a Founding Board
of Directors Member and Treasurer of the Foundation for Peace, Washington,
D.C. From 1990 to 1995, he was Managing Partner, Gateway Associates,
Inc., a company that secured full subdivision and planning approval for
properties under its control. Prior to that and from 1987 to 1993, he
was one of three founding board of directors members of North American Vaccine
which was an AMEX company sold to Baxter International in 1999. Mr.
Spragens also has previous experience as a developer and
attorney.
Stewart B. Davis
M.D. Dr. Davis, 29, has served as our Chief Operating Officer and
Secretary since the Share Exchange in September 2007 and had joined SafeStitch
LLC as Chief Operating Officer in June 2007. Prior to that and from
July 2003, Dr. Davis was Assistant Medical Director for Innovia LLC, a
privately-held bio medical device company in Miami, Florida, and its affiliates,
including InnFocus LLC, InnoGraft LLC and InnCardia LLC. Innovia and
its affiliates design implantable medical devices focusing on ophthalmology
implants, vascular grafts and percutaneous heart valves. From 2006 he
has also been managing partner and medical director of Parasol International,
LLC, a privately-owned global healthcare advisory firm. Dr. Davis has
approximately ten peer-reviewed articles and three NIH grants and has published
a book. Dr. Davis graduated from the University of Miami School of
Medicine in 2003.
Charles J. Filipi
M.D. Dr. Filipi, 68, has served as our Medical Director and a
member of our Board of Directors since the Share Exchange in September
2007. Dr. Filipi was a founding member of SafeStitch LLC in August
2005 and has served as its Medical Director since 2006. He is also
Professor of Surgery in the Department of Surgery at Creighton University School
of Medicine in Omaha, Nebraska and has served in this position since
1999. During the last five years, Dr. Filipi served as president of
the American Hernia Society, editor of the Journal Hernia and has published
approximately thirty peer-reviewed articles and ten book chapters. He
has been the inventor of over twenty provisional or utility
patents. His primary areas of interest are intraluminal surgery for
the correction of gastroesophageal reflux disease, obesity, Barrett’s Esophagus,
gastrointestinal bleeding and natural orifice transluminal intraperitoneal
surgery.
Adam S.
Jackson. Mr. Jackson, 46, joined the Company as Vice
President, Finance in March 2008 and was appointed Chief Financial Officer in
April 2008. Mr. Jackson also serves as Chief Financial Officer of
Non-Invasive Monitoring Systems, Inc., a publicly-traded medical device company,
and as Vice President, Finance of Aero Pharmaceuticals, Inc, a privately-held
pharmaceutical distributor. Prior to joining the Company, Mr. Jackson
served as Senior Vice President, Finance for Levitt Corporation (“Levitt”), a
publicly-traded real estate development company, from 2006 to 2008, where he was
responsible for the Levitt’s financial planning and analysis
activities. From 2003 to 2006, Mr. Jackson served as Levitt’s Senior
Vice President, Controller, during which period he supervised Levitt’s
accounting and financial reporting activities. From 2001 to 2003, Mr.
Jackson served as Chief Financial Officer of Romika-USA, Inc., a privately held
consumer goods manufacturing and distribution concern. From 2000 to
2001, Mr. Jackson served as Chief Operating Officer of V-Commex.com Corp., a
privately-held internet company developing an international business-to-business
web portal. From 1998 to 2000, Mr. Jackson served as Director of
Financial Planning and Analysis at Eclipsys Corporation, a publicly-traded
healthcare information technology provider.
“Barrett’s Esophagus” is a
complication of severe chronic GERD involving changes in the cells of the tissue
that line the bottom of the esophagus. These cells become irritated
when the contents of the stomach back up (refluxes), resulting in a small, but
definite, increased risk of cancer of the esophagus. The diagnosis
results upon seeing (through endoscopy) an orange esophageal lining (mucosa)
that extends a short distance (usually less than 2.5 inches) up the esophagus
from the gastroesophageal junction and findings of intestinal type cells (goblet
cells) seen on histological examinations of biopsy tissue.
“Bariatric” relates to the
branch of medicine that deals with the treatment of obesity and allied
diseases.
“Endoscopic” is a procedure
utilizing an illuminated, usually fiber-optic flexible or rigid tubular
instrument, for visualizing the interior of a hollow organ or part (such as the
esophagus) for diagnostic or therapeutic purposes that typically has one or more
channels to enable passage of instruments.
“Ex vivo”
means outside of a living animal or human.
“Gastroplasty” is surgical
treatment of the stomach used to decrease the size of the
stomach.
“GERD” is gastrointestinal
reflux disease, a highly variable chronic condition that is characterized by
periodic episodes of acid reflux usually accompanied by heartburn and that may
result in histopathologic changes in the esophagus.
“Histological” relates to the
tissue changes characteristic of disease or that affect a part of or accompany a
disease.
“Intraluminal” within the lumen
of a hollow organ. Hollow organs include the esophagus, stomach and
small and large intestines, as well as the heart, arteries, veins, ureter and
urethra.
“Intraperitoneal” refers to
within the abdominal cavity.
“In vivo”
means inside of a living animal or human.
“Laparoscopic” is surgery
utilizing a small incision to examine the abdominal cavity.
“Lumen” is the central opening
in a hollow organ.
“Medical device” is an article,
which, among other things, is intended for use in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment or prevention of
disease, in man or other animals.
“Transoral” refers to
procedures originating through the mouth.
“Transluminal” is the egress of
instrumentation through the intestinal wall.
An
investment in our company involves a significant level of
risk. Investors should carefully consider the risk factors described
below together with the other information included in this Annual Report on Form
10-K. If any of the risks described below occurs, or if other risks
not identified below occur, our business, financial condition, and results of
operations could be materially adversely affected.
We
have a history of operating losses and we do not expect to become profitable in
the near future.
We are a
pre-clinical stage medical device company with a limited operating
history. We are not profitable and have incurred losses since our
inception. We do not anticipate that we will generate revenue from
the sale of products until at least the second half of 2009. Only
three of our product candidates may currently be marketed in the United States
without further FDA clearance or approval. We continue to incur
research and development and general and administrative expenses related to our
operations. Our net losses for the years ended December 31, 2008 and
2007 were $5.2 million and $3.0 million, respectively and we had an accumulated
deficit of $9.4 million as of December 31, 2008. We expect to
continue to incur losses for the foreseeable future, and these losses will
likely increase as we prepare for and begin to commercialize any cleared or
approved products. If our product candidates fail in clinical trials
or do not gain regulatory clearance or approval, or if our product candidates do
not achieve market acceptance, we may never become profitable. Even
if we achieve profitability in the future, we may not be able to sustain
profitability in subsequent periods.
The
current worldwide economic crisis and concurrent market instability may
materially and adversely affect the demand for our products and, if and when
approved, our product candidates, as well as our ability to obtain credit or
secure funds through sales of our stock, which may materially and adversely
affect our business, financial condition and ability to fund our
operations.
The
current worldwide economic crisis may reduce the demand for new and innovative
medical devices, resulting in delayed market acceptance of our products and, if
and when approved, our product candidates. Such a delay could have a
material adverse impact on our business, expected cash flows, results of
operations and financial condition.
Additionally,
we have funded our operations to date primarily through private sales of our
common stock and through borrowings under credit facilities available to us from
stockholders and other individuals, including our existing $4.0 million line of
credit. The current economic turmoil and instability in the world’s
equity and credit markets may materially adversely affect our ability to sell
additional shares of our stock and/or borrow cash under existing or new credit
facilities. There can be no assurance that we will be able to raise
additional working capital on acceptable terms or at all, which may materially
adversely affect our ability to continue our operations.
We
will require substantial additional funding, which may not be available to us on
acceptable terms, or at all.
We intend
to advance multiple additional product candidates through clinical and
pre-clinical development. We will need to raise substantial
additional capital to engage in our clinical and pre-clinical development and
commercialization activities.
Our
future funding requirements will depend on many factors, including but not
limited to:
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our
need to expand our research and development
activities;
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the
rate of progress and cost of our clinical
trials;
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the
costs associated with establishing a sales force and commercialization
capabilities;
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the
costs of acquiring, licensing or investing in businesses, products,
product candidates and
technologies;
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the
costs and timing of seeking and obtaining FDA and other non-U.S.
regulatory clearances and
approvals;
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the
economic and other terms and timing of our existing licensing arrangement
and any collaboration, licensing or other arrangements into which we may
enter in the future;
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our
need and ability to hire additional management and scientific and medical
personnel;
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the
effect of competing technological and market
developments;
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our
need to implement additional internal systems and infrastructure,
including financial and reporting systems;
and
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our
ability to maintain, expand and defend the scope of our intellectual
property portfolio.
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Until we
can generate a sufficient amount of product revenue to finance our cash
requirements, which we may never do, we expect to finance future cash needs
primarily through public or private equity offerings, debt financings or
strategic collaborations. We do not know whether additional funding
will be available on acceptable terms, or at all. If we are not able
to secure additional funding when needed, we may have to delay, reduce the scope
of or eliminate one or more of our clinical trials or research and development
programs. To the extent that we raise additional funds by issuing
equity securities, our stockholders may experience significant dilution, and
debt financing, if available, may involve restrictive covenants. To
the extent that we raise additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to our product
candidates or grant licenses on terms that may not be favorable to
us.
Most
of our technologies are in an early stage of development and are
unproven.
We are
engaged in the research and development of intraluminal medical devices that
manipulate tissues for the treatment of intraperitoneal abnormalities, including
obesity, GERD, hernia formation, Barrett’s Esophagus, esophageal obstructions
and upper gastrointestinal bleeding. The effectiveness of our
technologies is not well-known in, or accepted generally by, the clinical
medical community. There can be no assurance that we will be able to
successfully employ our technologies as surgical, therapeutic or diagnostic
solutions for any intraperitoneal abnormalities. Our failure to
establish the efficacy and safety of our technologies would have a material
adverse effect on our business.
Our
product research and development activities may not result in commercially
viable products.
Many of
our product candidates are still in early stages of development and are prone to
the risks of failure inherent in medical device product
development. We will likely be required to undertake significant
clinical trials to demonstrate to the FDA that our licensed devices are safe and
effective for their intended uses or that they are substantially equivalent in
terms of safety and effectiveness to an existing, lawfully marketed non-PMA
device. We may also be required to undertake clinical trials by
non-U.S. regulatory agencies. Clinical trials are expensive and
uncertain processes that may take years to complete. Failure can
occur at any point in the process, and early positive results do not ensure that
the entire clinical trial will be successful. Product candidates in
clinical trials may fail to show desired efficacy and safety traits despite
early promising results. A number of companies in the medical device
industry have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results at earlier points.
The
results of previous animal trials and pre-clinical trials may not be indicative
of future results, and our current and planned clinical trials may not satisfy
the requirements of the FDA or other non-U.S. regulatory
authorities.
Positive
results from limited in
vivo and ex vivo
animal trials we have conducted or from pre-clinical studies and early clinical
experience with similar devices should not be relied upon as evidence that
later-stage or large-scale clinical trials will succeed. We will be
required to demonstrate with substantial evidence through well-controlled
clinical trials that our product candidates either (i) are safe and effective
for their intended uses or (ii) are substantially equivalent in terms of safety
and effectiveness to devices that are already marketed under Section
510(k).
Further,
our product candidates may not be cleared or approved, as the case may be, even
if the clinical data are satisfactory and support, in our view, clearance or
approval. The FDA or other non-U.S. regulatory authorities may
disagree with our trial design and our interpretation of the clinical
data. In addition, any of these regulatory authorities may change
requirements for the clearance or approval of a product candidate even after
reviewing and providing comment on a protocol for a pivotal clinical trial that
has the potential to result in FDA approval. In addition, any of
these regulatory authorities may also clear or approve a product candidate for
fewer or more limited uses than we request or may grant clearance or approval
contingent on the performance of costly post-marketing clinical
trials. In addition, the FDA or other non-U.S. regulatory authorities
may not approve or clear the labeling claims necessary or desirable for the
successful commercialization of our product candidates.
We
are highly dependent on the success of our product candidates, and we cannot
give any assurance that each of them will receive regulatory clearance or that
any of them will be successfully commercialized.
We are
highly dependent on the success of our product candidates, especially the
Gastroplasty Device and the Amid Hernia Stapler. We cannot give any
assurance that the FDA will permit us to clinically test the devices, nor can we
give any assurance that these products will receive regulatory clearance or
approval or be successfully commercialized, for a number of reasons, including
without limitation the potential introduction by our competitors of more
clinically-effective or cost-effective alternatives or failure in our sales and
marketing efforts, or our failure to obtain positive coverage determinations or
reimbursement. Any failure to obtain clearance or approval of our
products or to successfully commercialize them would have a material and adverse
effect on our business.
If
our competitors develop and market products that are more effective, safer or
less expensive than our product candidates, our commercial opportunities will be
negatively impacted.
The life
sciences industry is highly competitive, and we face significant competition
from many medical device companies that are researching and marketing products
designed to address the intraperitoneal abnormalities we are endeavoring to
address. We are currently developing and commercializing medical
devices that will compete with other medical devices that currently exist or are
being developed. Products we may develop in the future are also
likely to face competition from other medical devices and
therapies. Many of our competitors have significantly greater
financial, manufacturing, marketing and product development resources than we
do. Large medical device companies, in particular, have extensive
experience in clinical testing and in obtaining regulatory clearances or
approvals for medical devices. These companies also have
significantly greater research and marketing capabilities than we
do. As indicated, there are also other methods to treat obesity, such
as diet, exercise and medicine. Other competitors have developed
products such as medical implants that occupy volume in the stomach to promote
the feeling of satiety (Helioscopie) or gastric sleeves to reduce food
intake. Some of the medical device companies we expect to compete
with include USGI Medical, TOGa Devices from Satiety, StomaphyX and EsophyX from
EndoGastric Solution, Inc., Medigus, Ltd., Bard, LLC, Olympus Medical Equipment
Services America, Inc., BARRX Medical, Inc., Boston Scientific Corporation,
ConMed Corporation, Cook Medical Supply, Inc., Miller Medical Specialties, U.S.
Endoscopy, The Rush Incorporated and a number of bite block
manufacturers. In addition, many other universities and private and
public research institutions are or may become active in research involving
surgical devices for gastrointestinal abnormalities and minimally invasive
surgery.
We
believe that our ability to successfully compete will depend on, among other
things:
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the
results of our clinical trials;
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our
ability to recruit and enroll patients for our clinical
trials;
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the
efficacy, safety and reliability of our product
candidates;
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the
speed at which we develop our product
candidates;
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our
ability to commercialize and market any of our product candidates that may
receive regulatory clearance or
approval;
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our
ability to design and successfully execute appropriate clinical
trials;
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the
timing and scope of regulatory clearances or
approvals;
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appropriate
coverage and adequate levels of reimbursement under private and
governmental health insurance plans, including
Medicare;
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our
ability to protect intellectual property rights related to our
products;
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our
ability to have our partners manufacture and sell commercial quantities of
any approved products to the market;
and
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acceptance
of future product candidates by physicians and other health care
providers.
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If our
competitors market products that are more effective, safer, easier to use or
less expensive than our future product candidates, if any, or that reach the
market sooner than our future product candidates, if any, we may not achieve
commercial success. In addition, the medical device industry is
characterized by rapid technological change. It may be difficult for
us to stay abreast of the rapid changes in each technology. If we
fail to stay at the forefront of technological change, we may be unable to
compete effectively. Technological advances or products developed by
our competitors may render our technologies or product candidates obsolete or
less competitive.
Our
product development activities could be delayed or stopped.
We do not
know whether our other planned clinical trials will be completed on schedule, or
at all, and we cannot guarantee that our planned clinical trials will begin on
time or at all. The commencement of our planned clinical trials could
be substantially delayed or prevented by several factors,
including:
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limited
number of, and competition for, suitable patients that meet the protocol’s
inclusion criteria and do not meet any of the exclusion
criteria;
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limited
number of, and competition for, suitable sites to conduct our clinical
trials, and delay or failure to obtain FDA approval, if necessary, to
commence a clinical trial;
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delay
or failure to obtain sufficient supplies of the product candidate for our
clinical trials;
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requirements
to provide the medical device required in our clinical trial at cost,
which may require significant expenditures that we are unable or unwilling
to make;
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delay
or failure to reach agreement on acceptable clinical trial agreement terms
or clinical trial protocols with prospective sites or investigators;
and
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delay
or failure to obtain institutional review board, or IRB, approval or
renewal to conduct a clinical trial at a prospective or accruing site,
respectively.
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The
completion of our clinical trials could also be substantially delayed or
prevented by several factors, including:
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slower
than expected rates of patient recruitment and
enrollment;
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failure
of patients to complete the clinical
trial;
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unforeseen
safety issues;
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lack
of efficacy evidenced during clinical
trials;
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termination
of our clinical trials by one or more clinical trial
sites;
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inability
or unwillingness of patients or medical investigators to follow our
clinical trial protocols; and
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inability
to monitor patients adequately during or after
treatment.
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Our
clinical trials may be suspended or terminated at any time by us, the FDA, other
regulatory authorities or the IRB for any given site. Any failure or
significant delay in completing clinical trials for our product candidates could
materially harm our financial results and the commercial prospects for our
product candidates.
The
regulatory approval and clearance processes are expensive, time consuming and
uncertain and may prevent us or our collaboration partners from obtaining
approvals or clearances, as the case may be, for the commercialization of some
or all of our product candidates.
The
research, testing, manufacturing, labeling, approval, clearance, selling,
marketing and distribution of medical devices are subject to extensive
regulation by the FDA and other non-U.S. regulatory authorities, which
regulations differ from country to country. We are not permitted to
market our product candidates in the United States until we receive a clearance
letter under the 510(k) process or approval of a PMA from the FDA, depending on
the nature of the device. To date, we have only received marketing
clearance for our SMART DilatorTM. Obtaining
approval of any PMA can be a lengthy, expensive and uncertain
process. While the FDA normally reviews and clears a premarket
notification in three months, there is no guarantee that our products will
qualify for this more expeditious regulatory process, which is reserved for
Class I and II devices, nor is there any assurance, that even if a device is
reviewed under the 510(k) premarket notification process, that the FDA will
review it expeditiously or determine that the device is substantially equivalent
to a lawfully marketed non-PMA device. If the FDA fails to make this
finding, then we cannot market the device. In lieu of acting on a
premarket notification, the FDA may seek additional information or additional
data which would further delay our ability to market the product. In
addition, failure to comply with FDA, non-U.S. regulatory authorities or other
applicable U.S. and non-U.S. regulatory requirements may, either before or after
product clearance or approval, if any, subject our company to administrative or
judicially imposed sanctions, including:
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restrictions
on the products, manufacturers or manufacturing
process;
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adverse
inspectional observations (Form 483), warning letters or non-warning
letters incorporating inspectional
observations;
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civil
and criminal penalties;
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suspension
or withdrawal of regulatory clearances or
approvals;
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product
seizures, detentions or import
bans;
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voluntary
or mandatory product recalls and publicity
requirements;
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total
or partial suspension of
production;
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imposition
of restrictions on operations, including costly new manufacturing
requirements; and
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refusal
to clear or approve pending applications or premarket
notifications.
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Regulatory
approval of a PMA, PMA supplement or clearance pursuant to a 510(k) premarket
notification is not guaranteed, and the approval or clearance process, as the
case may be, is expensive and, may, especially in the case of the PMA
application, take several years. The FDA also has substantial
discretion in the medical device clearance process or approval
process. Despite the time and expense exerted, failure can occur at
any stage, and we could encounter problems that cause us to abandon clinical
trials or to repeat or perform additional pre-clinical studies and clinical
trials. The number of pre-clinical studies and clinical trials that
will be required for FDA clearance or approval varies depending on the medical
device candidate, the disease or condition that the medical device candidate is
designed to address, and the regulations applicable to any particular medical
device candidate. The FDA can delay, limit or deny clearance or
approval of a medical device candidate for many reasons, including:
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a
medical device candidate may not be deemed safe or effective, in the case
of a PMA application;
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a
medical device candidate may not be deemed to be substantially equivalent
to a lawfully marketed non-PMA device in the case of a 510(k) premarket
notification;
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FDA
officials may not find the data from pre-clinical studies and clinical
trials sufficient;
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the
FDA might not approve our third-party manufacturer’s processes or
facilities; or
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the
FDA may change its clearance or approval policies or adopt new
regulations.
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Failure
to recruit and enroll patients for clinical trials may cause the development of
our product candidates to be delayed.
We may
encounter delays if we are unable to recruit and enroll and retain enough
patients to complete clinical trials. Patient enrollment depends on
many factors, including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the trial. Delays in patient enrollment are not
unusual. Any such delays in planned patient enrollment may result in
increased costs, which could harm our ability to develop products.
Even
if we obtain regulatory clearances or approvals for our product candidates, the
terms of clearances or approvals and ongoing regulation of our products may
limit how we manufacture and market our product candidates, which could
materially impair our ability to generate anticipated revenues.
Once
regulatory clearance or approval has been granted, the cleared or approved
product and its manufacturer are subject to continual review. Any
cleared or approved product may only be promoted for its indicated
uses. In addition, if the FDA or other non-U.S. regulatory
authorities clear or approve any of our product candidates, the labeling,
packaging, adverse event reporting, storage, advertising and promotion for the
product will be subject to extensive regulatory requirements. We and
the manufacturers of our products are also required to comply with the FDA’s
QSR, which include requirements relating to quality control and quality
assurance, as well as the corresponding maintenance of records and
documentation. Moreover, device manufacturers are required to report
adverse events by filing Medical Device Reports with the FDA, which are publicly
available. Further, regulatory agencies must approve our
manufacturing facilities before they can be used to manufacture our products,
and these facilities are subject to ongoing regulatory inspection. If
we fail to comply with the regulatory requirements of the FDA and other non-U.S.
regulatory authorities, or if previously unknown problems with our products,
manufacturers or manufacturing processes are discovered, we could be subject to
administrative or judicially imposed sanctions, including:
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restrictions
on the products, manufacturers or manufacturing
process;
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adverse
inspectional observations (Form 483), warning letters, non-warning letters
incorporating inspectional
observations;
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civil
or criminal penalties or fines;
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product
seizures, detentions or import
bans;
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voluntary
or mandatory product recalls and publicity
requirements;
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suspension
or withdrawal of regulatory clearances or
approvals;
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total
or partial suspension of
production;
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imposition
of restrictions on operations, including costly new manufacturing
requirements; and
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refusal
to clear or approve pending applications or premarket
notifications.
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In
addition, the FDA and other non-U.S. regulatory authorities may change their
policies and additional regulations may be enacted that could prevent or delay
regulatory clearance or approval of our product candidates. We cannot
predict the likelihood, nature or extent of government regulation that may arise
from future legislation or administrative action, either in the United States or
abroad. If we are not able to maintain regulatory compliance, we
would likely not be permitted to market our future product candidates and we may
not achieve or sustain profitability.
Even
if we receive regulatory clearance or approval to market our product candidates,
the market may not be receptive to our products.
Even if
our product candidates obtain regulatory clearance or approval, resulting
products may not gain market acceptance among physicians, patients, health care
payors and/or the medical community. We believe that the degree of
market acceptance will depend on a number of factors, including:
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timing
of market introduction of competitive
products;
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safety
and efficacy of our product;
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prevalence
and severity of any side effects;
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potential
advantages or disadvantages over alternative
treatments;
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strength
of marketing and distribution
support;
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price
of our future product candidates, both in absolute terms and relative to
alternative treatments; and
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availability
of coverage and reimbursement from government and other third-party
payors.
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If our
product candidates fail to achieve market acceptance, we may not be able to
generate significant revenue or achieve or sustain profitability.
The
coverage and reimbursement status of newly cleared or approved medical devices
is uncertain, and failure to obtain adequate coverage and adequate reimbursement
could limit our ability to market any future product candidates we may develop
and decrease our ability to generate revenue from any of our existing and future
product candidates that may be cleared or approved.
There is
significant uncertainty related to the third-party coverage and reimbursement of
newly cleared or approved medical devices. Normally, surgical devices
are not directly covered; instead, the procedure using the device is subject to
a coverage determination by the insurer. The commercial success of
our existing and future product candidates in both domestic and international
markets will depend in part on the availability of coverage and adequate
reimbursement from third-party payors, including government payors, such as the
Medicare and Medicaid programs, managed care organizations and other third-party
payors. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new products and, as a result, they may not cover or
provide adequate payment for our existing and future product
candidates. These payors may conclude that our product candidates are
not as safe or effective as existing devices or that procedures using our
devices are not as safe or effective as the existing procedures using other
devices. These payors may also conclude that the overall cost of the
procedure using one of our devices exceeds the overall cost of the competing
procedure using another type of device, and third-party payors may not approve
our product candidates for coverage and adequate reimbursement. The
failure to obtain coverage and adequate reimbursement for our existing and
future product candidates or health care cost containment initiatives that limit
or restrict reimbursement for our existing and future product candidates may
reduce any future product revenue.
If
we fail to attract and retain key management and scientific personnel, we may be
unable to successfully develop or commercialize our product
candidates.
We will
need to expand and effectively manage our managerial, operational, financial,
development and other resources in order to successfully pursue our research,
development and commercialization efforts for our existing and future product
candidates. Our success depends on our continued ability to attract,
retain and motivate highly qualified management and pre-clinical and clinical
personnel. The loss of the services of any of our senior management,
particularly Jeffrey G. Spragens, Dr. Stewart B. Davis and Dr. Charles Filipi,
could delay or prevent the development or commercialization of our product
candidates. We do not maintain “key man” insurance policies on the
lives of these individuals or the lives of any of our other
employees. We employ these individuals on an at-will basis and their
employment can be terminated by us or them at any time, for any reason and with
or without notice. We will need to hire additional personnel as we
continue to expand our research and development activities and build a sales and
marketing function.
We have
scientific and clinical advisors who assist us in formulating our research,
development and clinical strategies. These advisors are not our
employees and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to us. In addition,
our advisors may have arrangements with other companies to assist those
companies in developing products or technologies that may compete with
ours.
We may
not be able to attract or retain qualified management and scientific personnel
in the future due to the intense competition for qualified personnel among
medical device and other businesses. If we are not able to attract
and retain the necessary personnel to accomplish our business objectives, we may
experience constraints that will impede significantly the achievement of our
research and development objectives, our ability to raise additional capital and
our ability to implement our business strategy. In particular, if we
lose any members of our senior management team, we may not be able to find
suitable replacements in a timely fashion or at all and our business may be
harmed as a result.
As
we are evolving from a company primarily involved in development to a company
also involved in commercialization, we may encounter difficulties in managing
our growth and expanding our operations successfully.
As we
advance our product candidates through research and development, we will need to
expand our development, regulatory, manufacturing, marketing and sales
capabilities or contract with third parties to provide these capabilities for
us. As our operations expand, we expect that we will need to manage
additional relationships with such third parties, as well as additional
collaborators and suppliers. Maintaining these relationships and
managing our future growth will impose significant added responsibilities on
members of our management. We must be able to: manage our development
efforts effectively; manage our clinical trials effectively; hire, train and
integrate additional management, development, administrative and sales and
marketing personnel; improve our managerial, development, operational and
finance systems; and expand our facilities, all of which may impose a strain on
our administrative and operational infrastructure.
Furthermore,
we may acquire additional businesses, products or product candidates that
complement or augment our existing business. Integrating any newly
acquired business or product could be expensive and
time-consuming. We may not be able to integrate any acquired business
or product successfully or operate any acquired business
profitably. Our future financial performance will depend, in part, on
our ability to manage any future growth effectively and our ability to integrate
any acquired businesses. We may not be able to accomplish these
tasks, and our failure to accomplish any of them could prevent us from
successfully growing our company.
If
we fail to acquire and develop other products or product candidates at all or on
commercially reasonable terms, we may be unable to diversify or grow our
business.
We intend
to continue to rely on in-licensing as the source of our products and product
candidates for development and commercialization. The success of this
strategy depends upon our ability to identify, select and acquire medical device
product candidates. Proposing, negotiating and implementing an
economically viable product acquisition or license is a lengthy and complex
process. We compete for partnering arrangements and license
agreements with other medical device companies and academic research
institutions. Our competitors may have stronger relationships with
third parties with whom we are interested in collaborating and/or may have more
established histories of developing and commercializing products. As
a result, our competitors may have a competitive advantage in entering into
partnering arrangements with such third parties. In addition, even if
we find promising product candidates, and generate interest in a partnering or
strategic arrangement to acquire such product candidates, we may not be able to
acquire rights to additional product candidates or approved products on
commercially reasonable terms that we find acceptable, or at all.
We expect
that any product candidate to which we acquire rights will require additional
development efforts prior to commercial sale, including extensive clinical
testing and clearance or approval by the FDA and other non-U.S. regulatory
authorities. All product candidates are subject to the risks of
failure inherent in medical device product development, including the
possibility that the product candidate will not be shown to be sufficiently safe
and effective for approval by regulatory authorities. Even if the
product candidates are cleared or approved, we cannot be sure that they would be
capable of economically feasible production or commercial success.
We
rely on third parties to manufacture and supply our product
candidates.
We do not
own or operate manufacturing facilities for clinical or commercial production of
our product candidates, other than a prototype lab. We have no
experience in medical device manufacturing, and we lack the resources and the
capability to manufacture any of our product candidates on a commercial
scale. If our future manufacturing partners are unable to produce our
products in the amounts that we require, we may not be able to establish a
contract and obtain a sufficient alternative supply from another supplier on a
timely basis and in the quantities we require. We expect to depend on
third-party contract manufacturers for the foreseeable future.
Our
product candidates require precise, high quality manufacturing. Any
of our contract manufacturers will be subject to ongoing periodic unannounced
inspection by the FDA and other non-U.S. regulatory authorities to ensure strict
compliance with QSR, cGMP and other applicable government regulations and
corresponding standards. If our contract manufacturers fail to
achieve and maintain high manufacturing standards in compliance with QSR, we may
experience manufacturing errors resulting in patient injury or death, product
recalls or withdrawals, delays or interruptions of production or failures in
product testing or delivery, delay or prevention of filing or approval of
marketing applications for our products, cost overruns or other problems that
could seriously harm our business.
Any
performance failure on the part of our contract manufacturers could delay
clinical development or regulatory clearance or approval of our product
candidates or commercialization of our future product candidates, depriving us
of potential product revenue and resulting in additional losses. In
addition, our dependence on a third party for manufacturing may adversely affect
our future profit margins. Our ability to replace an existing
manufacturer may be difficult because the number of potential manufacturers is
limited and the FDA must approve any replacement manufacturer before it can
begin manufacturing our product candidates. Such approval would
require additional non-clinical testing and compliance
inspections. It may be difficult or impossible for us to identify and
engage a replacement manufacturer on acceptable terms in a timely manner, or at
all.
We
currently have no dedicated marketing staff and no sales or distribution
organization. If we are unable to develop our sales, marketing and
distribution capability on our own or through collaborations with marketing
partners, we will not be successful in commercializing our product
candidates.
We
currently have minimal marketing, sales or distribution
capabilities. If our product candidates are approved, we intend to
establish our sales and marketing organization with technical expertise and
supporting distribution capabilities to commercialize our product candidates,
which will be expensive and time-consuming. Any failure or delay in
the development of our internal sales, marketing and distribution capabilities
would adversely impact the commercialization of these products. With
respect to our existing and future product candidates, we may choose to
collaborate with third parties that have direct sales forces and established
distribution systems, either to augment our own sales force and distribution
systems or in lieu of our own sales force and distribution
systems. To the extent that we enter into co-promotion or other
licensing arrangements, our product revenue is likely to be lower than if we
directly marketed or sold our products. In addition, any revenue we
receive will depend in whole or in part upon the efforts of such third parties,
which may not be successful and are generally not within our
control. If we are unable to enter into such arrangements on
acceptable terms or at all, we may not be able to successfully commercialize our
existing and future product candidates. If we are not successful in
commercializing our existing and future product candidates, either on our own or
through collaborations with one or more third parties, our future product
revenue will suffer and we may incur significant additional losses.
Independent
clinical investigators and contract research organizations that we engage to
conduct our clinical trials may not be diligent, careful or timely.
We will
depend on independent clinical investigators to conduct our clinical
trials. Contract research organizations may also assist us in the
collection and analysis of data. These investigators and contract
research organizations will not be our employees and we will not be able to
control, other than by contract, the amount of resources, including time that
they devote to products that we develop. If independent investigators
fail to devote sufficient resources to the clinical trials, or if their
performance is substandard, it will delay the approval or clearance and
commercialization of any products that we develop. Further, the FDA
requires that we comply with standards, commonly referred to as good clinical
practice, for conducting, recording and reporting clinical trials to assure that
data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial subjects are protected. If our
independent clinical investigators and contract research organizations fail to
comply with good clinical practice, the results of our clinical trials could be
called into question and the clinical development of our product candidates
could be delayed. Failure of clinical investigators or contract
research organizations to meet their obligations to us or comply with federal
regulations could adversely affect the clinical development of our product
candidates and harm our business.
The
success of our business may be dependent on the actions of our collaborative
partners.
An
element of our strategy may be to enter into collaborative arrangements with
established multinational medical device companies which will finance or
otherwise assist in the development, manufacture and marketing of products
incorporating our technology. We anticipate deriving some revenues
from research and development fees, license fees, milestone payments and
royalties from collaborative partners. Our prospects, therefore, may
depend to some extent upon our ability to attract and retain collaborative
partners and to develop technologies and products that meet the requirements of
prospective collaborative partners. In addition, our collaborative
partners may have the right to abandon research projects and terminate
applicable agreements, including funding obligations, prior to or upon the
expiration of the agreed-upon research terms. There can be no
assurance that we will be successful in establishing collaborative arrangements
on acceptable terms or at all, that collaborative partners will not terminate
funding before completion of projects, that our collaborative arrangements will
result in successful product commercialization or that we will derive any
revenues from such arrangements. To the extent that we are not able
to develop and maintain collaborative arrangements, we would need substantial
additional capital to undertake research, development and commercialization
activities on our own.
If
we are unable to obtain and enforce patent protection for our products, our
business could be materially harmed.
Our
success depends, in part, on our ability to protect proprietary methods and
technologies that we develop or license under the patent and other intellectual
property laws of the United States and other countries, so that we can prevent
others from unlawfully using our inventions and proprietary
information. However, we may not hold proprietary rights to some
patents required for us to commercialize our proposed
products. Although patent applications are in process, we presently
do not hold any issued patents and none of the technology we license has been
patented. Because certain U.S. patent applications are confidential
until patents issue, such as applications filed prior to November 29, 2000, or
applications filed after such date which will not be filed in foreign countries,
third parties may have filed patent applications for technology covered by our
pending patent applications without our being aware of those applications, and
our patent applications may not have priority over those
applications. For this and other reasons, we or our third-party
collaborators may be unable to secure desired patent rights, thereby losing
desired exclusivity. If licenses are not available to us on
acceptable terms, we will not be able to market the affected products or conduct
the desired activities, unless we challenge the validity, enforceability or
infringement of the third party patent or otherwise circumvent the third party
patent.
Our
strategy depends on our ability to rapidly identify and seek patent protection
for our discoveries. In addition, we will rely on third-party
collaborators to file patent applications relating to proprietary technology
that we develop jointly during certain collaborations. The process of
obtaining patent protection is expensive and time-consuming. If our
present or future collaborators fail to file and prosecute all necessary and
desirable patent applications at a reasonable cost and in a timely manner, our
business will be adversely affected. Despite our efforts and the
efforts of our collaborators to protect our proprietary rights, unauthorized
parties may be able to obtain and use information that we regard as
proprietary.
The
issuance of a patent does not guarantee that it is valid or
enforceable. Any patents we have obtained, or obtain in the future,
may be challenged, invalidated, unenforceable or
circumvented. Moreover, the United States Patent and Trademark Office
(the “USPTO”) may commence interference proceedings involving our patents or
patent applications. Any challenge to, finding of unenforceability or
invalidation or circumvention of, our patents or patent applications would be
costly, would require significant time and attention of our management and could
have a material adverse effect on our business. In addition, court
decisions may introduce uncertainty in the enforceability or scope of patents
owned by medical device companies.
Our
pending patent applications may not result in issued patents. The
patent position of medical device companies, including ours, is generally
uncertain and involves complex legal and factual considerations. The
standards that the USPTO and its foreign counterparts use to grant patents are
not always applied predictably or uniformly and can change. There is
also no uniform, worldwide policy regarding the subject matter and scope of
claims granted or allowable in medical device patents. Accordingly,
we do not know the degree of future protection for our proprietary rights or the
breadth of claims that will be allowed in any patents issued to us or to
others. The legal systems of certain countries do not favor the
aggressive enforcement of patents, and the laws of foreign countries may not
protect our rights to the same extent as the laws of the United
States. Therefore, the enforceability or scope of our owned or
licensed patents in the United States or in foreign countries cannot be
predicted with certainty, and, as a result, any patents that we own or license
may not provide sufficient protection against competitors. We may not
be able to obtain or maintain patent protection for our pending patent
applications, those we may file in the future, or those we may license from
third parties, including Creighton.
We cannot
assure you that any patents that will issue, that may issue or that may be
licensed to us will be enforceable or valid or will not expire prior to the
commercialization of our product candidates, thus allowing others to more
effectively compete with us. Therefore, any patents that we own or
license may not adequately protect our product candidates or our future
products.
If
we are unable to protect the confidentiality of our proprietary information and
know-how, the value of our technology and products could be adversely
affected.
In
addition to patent protection, we also rely on other proprietary rights,
including protection of trade secrets, know-how and confidential and proprietary
information. To maintain the confidentiality of trade secrets and
proprietary information, we will seek to enter into confidentiality agreements
with our employees, consultants and collaborators upon the commencement of their
relationships with us. These agreements generally require that all
confidential information developed by the individual or made known to the
individual by us during the course of the individual’s relationship with us be
kept confidential and not disclosed to third parties. Our agreements
with employees also generally provide and will generally provide that any
inventions conceived by the individual in the course of rendering services to us
shall be our exclusive property. However, we may not obtain these
agreements in all circumstances, and individuals with whom we have these
agreements may not comply with their terms. In the event of
unauthorized use or disclosure of our trade secrets or proprietary information,
these agreements, even if obtained, may not provide meaningful protection,
particularly for our trade secrets or other confidential
information. To the extent that our employees, consultants or
contractors use technology or know-how owned by third parties in their work for
us, disputes may arise between us and those third parties as to the rights in
related inventions.
Adequate
remedies may not exist in the event of unauthorized use or disclosure of our
confidential information. The disclosure of our trade secrets would
impair our competitive position and may materially harm our business, financial
condition and results of operations.
We
will rely heavily on licenses from third parties.
Most of
the patent applications in our patent portfolio are not owned by us, but are
licensed from Creighton. Presently, we rely primarily on licensed
technology for our products and may license additional technology from other
third parties in the future. Such license agreements give us rights
for the commercial exploitation of the patents resulting from the patent
applications, subject to certain provisions of the license
agreements. Failure to comply with these provisions could result in
the loss of our rights under these license agreements. Our inability
to rely on these patent applications which are the basis of our technology would
have a material adverse effect on our business.
We
presently license patent rights to most of our technology from one third party
owner. If we or this third party owner does not properly maintain or
enforce the patent applications underlying any such licenses, our competitive
position and business prospects will be harmed.
Our
success will depend in part on the ability of us or our licensors to obtain,
maintain and enforce patent protection for our licensed intellectual property
and, in particular, those patents to which we have secured exclusive rights in
our field. We or our licensors may not successfully prosecute the
patent applications which are licensed to us. Even if patents issue
in respect of these patent applications, we or our licensors may fail to
maintain these patents, may determine not to pursue litigation against other
companies that are infringing these patents, or may pursue such litigation less
aggressively than we would. Without protection for the intellectual
property we have licensed, other companies might be able to offer substantially
identical products for sale, which could adversely affect our competitive
business position and harm our business prospects.
Some
jurisdictions may require us or Creighton to grant licenses to third
parties. Such compulsory licenses could be extended to include some
of our product candidates, which may limit our potential revenue
opportunities.
Many
countries, including certain countries in Europe, have compulsory licensing laws
under which a patent owner may be compelled to grant licenses to third
parties. In addition, most countries limit the enforceability of
patents against government agencies or government contractors. In
these countries, the patent owner may be limited to monetary relief and may be
unable to enjoin infringement, which could materially diminish the value of the
patent. Compulsory licensing of life-saving products is also becoming
increasingly popular in developing countries, either through direct legislation
or international initiatives. Such compulsory licenses could be
extended to include some of our product candidates, which may limit our
potential revenue opportunities.
Our
commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third
parties.
Other
entities may have or obtain patents or proprietary rights that could limit our
ability to manufacture, use, sell, offer for sale or import products or impair
our competitive position. In addition, to the extent that a third
party develops new technology that covers our products, we may be required to
obtain licenses to that technology, which licenses may not be available or may
not be available on commercially reasonable terms, if at all. If
licenses are not available to us on acceptable terms, we will not be able to
market the affected products or conduct the desired activities, unless we
challenge the validity, enforceability or infringement of the third party patent
or circumvent the third party patent, which would be costly and would require
significant time and attention of our management. Third parties may
have or obtain valid and enforceable patents or proprietary rights that could
block us from developing products using our technology. Our failure
to obtain a license to any technology that we require may materially harm our
business, financial condition and results of operations.
If
we become involved in patent litigation or other proceedings related to a
determination of rights, we could incur substantial costs and expenses,
substantial liability for damages or be required to stop our product development
and commercialization efforts.
Third
parties may sue us for infringing their patent rights. Likewise, we
may need to resort to litigation to enforce a patent issued or licensed to us or
to determine the scope and validity of proprietary rights of
others. In addition, a third party may claim that we have improperly
obtained or used its confidential or proprietary
information. Furthermore, in connection with our third-party license
agreements, we generally have agreed to indemnify the licensor for costs
incurred in connection with litigation relating to intellectual property
rights. The cost to us of any litigation or other proceeding relating
to intellectual property rights, even if resolved in our favor, could be
substantial, and the litigation would divert our management’s
efforts. Some of our competitors may be able to sustain the costs of
complex patent litigation more effectively than we can because they have
substantially greater resources. Uncertainties resulting from the
initiation and continuation of any litigation could limit our ability to
continue our operations.
If any
parties successfully claim that our creation or use of proprietary technologies
infringes upon their intellectual property rights, we might be forced to pay
damages, potentially including treble damages, if we are found to have willfully
infringed on such parties’ patent rights. In addition to any damages
we might have to pay, a court could require us to stop the infringing activity
or obtain a license. Any license required under any patent may not be
made available on commercially acceptable terms, if at all. In
addition, such licenses are likely to be non-exclusive and, therefore, our
competitors may have access to the same technology licensed to us. If
we fail to obtain a required license and are unable to design around a patent,
we may be unable to effectively market some of our technology and products,
which could limit our ability to generate revenues or achieve profitability and
possibly prevent us from generating revenue sufficient to sustain our
operations.
Medicare
legislation and future legislative or regulatory reform of the health care
system may affect our ability to sell our products profitably.
In the
United States, there have been a number of legislative and regulatory proposals,
at both the federal and state government levels, to change the healthcare system
in ways that could affect our ability to sell our products profitably, if
approved. To the extent that our products are deemed to be “durable
medical equipment” or DME they may be subject to distribution under the new
Competitive Acquisition regulations, this could adversely affect the amount that
we can seek from payors. Non-DME devices used in surgical procedures
are normally paid directly by the hospital or health care provider and not
reimbursed separately by third-party payors. As a result, these types
of devices are subject to intense price competition that can place a small
manufacturer at a competitive disadvantage.
We are
unable to predict what additional legislation or regulation, if any, relating to
the health care industry or third-party coverage and reimbursement may be
enacted in the future or what effect such legislation or regulation would have
on our business. Any cost containment measures or other health care
system reforms that are adopted could have a material adverse effect on our
ability to commercialize our existing and future product candidates
successfully.
Failure
to obtain regulatory approval outside the United States will prevent us from
marketing our product candidates abroad.
We intend
to market certain of our existing and future product candidates in non-U.S.
markets. In order to market our existing and future product
candidates in the European Union and many other non-U.S. jurisdictions, we must
obtain separate regulatory approvals. We have had limited
interactions with non-U.S. regulatory authorities, the approval procedures vary
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA
approval. Approval or clearance by the FDA does not ensure approval
by regulatory authorities in other countries, and approval by one or more
non-U.S. regulatory authorities does not ensure approval by regulatory
authorities in other countries or by the FDA. The non-U.S. regulatory
approval process may include all of the risks associated with obtaining FDA
approval or clearance. We may not obtain non-U.S. regulatory
approvals on a timely basis, if at all. We may not be able to file
for non-U.S. regulatory approvals and may not receive necessary approvals to
commercialize our existing and future product candidates in any
market.
Non-U.S.
governments often impose strict price controls, which may adversely affect our
future profitability.
We intend
to seek approval to market certain of our existing and future product candidates
in both the U.S. and in non-U.S. jurisdictions. If we obtain approval
in one or more non-U.S. jurisdictions, we will be subject to rules and
regulations in those jurisdictions relating to our product. In some
countries, particularly countries of the European Union, each of which has
developed its own rules and regulations, pricing is subject to governmental
control. In these countries, pricing negotiations with governmental
authorities can take considerable time after the receipt of marketing approval
for a medical device candidate. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that
compares the cost-effectiveness of our existing and future product candidates to
other available products. If reimbursement of our future product
candidates is unavailable or limited in scope or amount, or if pricing is set at
unsatisfactory levels, we may be unable to achieve or sustain
profitability.
Our
business may become subject to economic, political, regulatory and other risks
associated with international operations.
Our
business is subject to risks associated with conducting business
internationally, in part due to a number of our suppliers being located outside
the U.S. Accordingly, our future results could be harmed by a variety
of factors, including:
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difficulties
in compliance with non-U.S. laws and
regulations;
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changes
in non-U.S. regulations and
customs;
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changes
in non-U.S. currency exchange rates and currency
controls;
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changes
in a specific country’s or region’s political or economic
environment;
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trade
protection measures, import or export licensing requirements or other
restrictive actions by U.S. or non-U.S.
governments;
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negative
consequences from changes in tax laws;
and
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difficulties
associated with staffing and managing foreign operations, including
differing labor relations.
|
The
market price of our common stock may fluctuate significantly.
The
market price of our common stock may fluctuate significantly in response to
numerous factors, some of which are beyond our control, such as:
|
·
|
the
announcement of new products or product enhancements by us or our
competitors;
|
|
·
|
developments
concerning intellectual property rights and regulatory
approvals;
|
|
·
|
variations
in our and our competitors’ results of
operations;
|
|
·
|
changes
in earnings estimates or recommendations by securities analysts, if our
common stock is covered by
analysts;
|
|
·
|
developments
in the medical device industry;
|
|
·
|
the
results of product liability or intellectual property
lawsuits;
|
|
·
|
future
issuances of common stock or other
securities;
|
|
·
|
the
addition or departure of key
personnel;
|
|
·
|
announcements
by us or our competitors of acquisitions, investments or strategic
alliances; and
|
|
·
|
general
market conditions and other factors, including factors unrelated to our
operating performance.
|
Further,
the stock market in general, and the market for medical device companies in
particular, has recently experienced extreme price and volume
fluctuations. Continued market fluctuations could result in extreme
volatility in the price of our common stock, which could cause a decline in the
value of our common stock. Price volatility of our common stock might
be worse if the trading volume of our common stock is low.
Some or
all of the “restricted” shares of our common stock issued in connection with the
Share Exchange or held by other of our stockholders may be offered from time to
time in the open market pursuant to an effective registration statement or Rule
144 under the Securities Act, and these sales may have a depressive effect on
the market for our common stock.
Trading
of our common stock is limited and trading restrictions imposed on us by
applicable regulations and by lockup agreements we have entered into with our
principal stockholders may further reduce our trading, making it difficult for
our stockholders to sell their shares.
Trading
of our common stock is currently conducted on the OTCBB. The
liquidity of our common stock is limited, not only in terms of the number of
shares that can be bought and sold at a given price, but also as it may be
adversely affected by delays in the timing of transactions and reduction in
security analysts’ and the media’s coverage of us, if at all.
Approximately
63% of the issued and outstanding shares of our common stock are subject to
lockup agreements which limit sales for a two-year period ending September 4,
2009. These factors may result in lower prices for our common stock
than might otherwise be obtained and could also result in a larger spread
between the bid and ask prices for our common stock. In addition,
without a large float, our common stock is less liquid than the stock of
companies with broader public ownership and, as a result, the trading prices of
our common stock may be more volatile. In the absence of an active
public trading market, an investor may be unable to liquidate his investment in
our common stock. Trading of a relatively small volume of our common
stock may have a greater impact on the trading price of our stock than would be
the case if our public float were larger. We cannot predict the
prices at which our common stock will trade in the future.
Future
sales of common stock could reduce our stock price.
Sales by
stockholders of substantial amounts of our shares of common stock, the issuance
of new shares of common stock by us or the perception that these sales may occur
in the future could materially and adversely affect the market price of our
common stock. As described herein, substantially all of the former
members of SafeStitch LLC, who received an aggregate of 11,256,369 shares of our
common stock in connection with our acquisition of SafeStitch LLC, entered into
lock-up agreements with respect to such shares. Under the lock-up
agreements, these former members of SafeStitch LLC may not directly or
indirectly sell or otherwise transfer the shares of our common stock issued to
them in connection with our acquisition of SafeStitch LLC during the two-year
period ending September 4, 2009.
On
September 4, 2009, the lock-up agreements entered into in connection with our
acquisition of SafeStitch LLC will expire, which will allow an aggregate of
11,256,369 shares of our common stock, or approximately 63% of our currently
outstanding shares of common stock, to be available for sale on the public
market, subject in most cases to the limitations of Rule 144 under the
Securities Act of 1933, as amended.
Because
our common stock may be a “penny stock,” it may be more difficult for investors
to sell shares of our common stock, and the market price of our common stock may
be adversely affected.
Our
common stock may be a “penny stock” if, among other things, the stock price is
below $5.00 per share, it is not listed on a national securities exchange or
approved for quotation on the Nasdaq Stock Market or any other national stock
exchange or it has not met certain net tangible asset or average revenue
requirements. Broker-dealers who sell penny stocks must provide
purchasers of these stocks with a standardized risk-disclosure document prepared
by the Securities and Exchange Commission (“SEC”). This document
provides information about penny stocks and the nature and level of risks
involved in investing in the penny-stock market. A broker must also
give a purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination that
the penny stock is a suitable investment for the purchaser and obtain the
purchaser’s written agreement to the purchase. Broker-dealers must
also provide customers that hold penny stock in their accounts with such
broker-dealer a monthly statement containing price and market information
relating to the penny stock. If a penny stock is sold to an investor
in violation of the penny stock rules, the investor may be able to cancel its
purchase and get its money back.
If
applicable, the penny stock rules may make it difficult for investors to sell
their shares of our common stock. Because of the rules and
restrictions applicable to a penny stock, there is less trading in penny stocks
and the market price of our common stock may be adversely
affected. Also, many brokers choose not to participate in penny stock
transactions. Accordingly, investors may not always be able to resell
their shares of our common stock publicly at times and prices that they feel are
appropriate.
Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that
you do not consider to be in the best interests of our
stockholders.
Our
directors, executive officers, principal stockholders and affiliated entities
beneficially own, in the aggregate, over 75% of our outstanding voting
securities. As a result, if some or all of them acted together, they
would have the ability to exert substantial influence over the election of our
board of directors and the outcome of issues requiring approval by our
stockholders. This concentration of ownership may also have the
effect of delaying or preventing a change in control of our company that may be
favored by other stockholders. This could prevent transactions in
which stockholders might otherwise recover a premium for their shares over
current market prices.
Compliance
with changing regulations concerning corporate governance and public disclosure
may result in additional expenses.
There
have been changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act, new
regulations promulgated by the SEC and rules promulgated by the national
securities exchanges. These new or changed laws, regulations and
standards are subject to varying interpretations in many cases due to their lack
of specificity, and, as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing bodies, which could
result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance
practices. As a result, our efforts to comply with evolving laws,
regulations and standards are likely to continue to result in increased general
and administrative expenses and a diversion of management time and attention
from revenue-generating activities to compliance activities. Our
board of directors members, Chief Executive Officer and Chief Financial Officer
could face an increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty
attracting and retaining qualified board of directors members and executive
officers, which could harm our business. If our efforts to comply
with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies, we could be subject to liability
under applicable laws or our reputation may be harmed.
Our
principal corporate office is located at 4400 Biscayne Blvd., Miami,
Florida. We rent this space from Frost Real Estate Holdings, LLC,
which is a company controlled by Dr. Phillip Frost, our largest beneficial
stockholder. We initially leased approximately 2,900 square feet
under the lease agreement, which is for a five-year term that began on January
1, 2008, and requires annual rent of approximately $91,000, increasing by
approximately 4.5% per year. Pursuant to a lease amendment effective
February 2009, we relocated our corporate office to approximately 3,200 square
feet of alternate space within the same building at an initial annual cost of
approximately $68,000, increasing by approximately 4.5% per year.
We
currently lease approximately 462 square feet of office space in Omaha,
Nebraska. This facility includes one administrative
office. Dr. Filipi, our Medical Director and one of the members of
our Board of Directors, is based in Omaha, Nebraska. We have also
leased a warehouse in Miami, Florida which is used as our prototype
lab. The initial one-year lease term began on January 1, 2008 and has
been extended for a period of six months to June 30, 2009.
Item
3.
|
Legal
Proceedings.
|
We are
presently a plaintiff in securities fraud and appraisal actions in respect of
our ownership of 191,118 shares of common stock of TruePosition, Inc., a
Delaware corporation (referred to as “TruePosition”). The securities
fraud action was filed November 13, 2007 in the United States District Court for
the District of Connecticut, whereby we and other plaintiffs party to the suit
seek damages and other relief totaling $80 million. The related
appraisal action was filed in the Chancery Court of the State of Delaware on
August 31, 2007.
In August
2007, we were informed that that Liberty TP Acquisition, Inc., which held an
aggregate of no less than 90% of TruePosition’s outstanding capital stock, was
being merged into TruePosition. As a result of the merger, all of the
issued and outstanding shares of common stock of TruePosition were cancelled,
and TruePosition’s minority stockholders, including ourselves, became entitled
to receive $3.5116 in cash in exchange for each share held. We and
other minority stockholders considered that the consideration payable in respect
of our shares under the merger was not representative of the true value of our
shares of TruePosition stock.
We have
joined with certain other minority stockholders of TruePosition in bringing the
aforementioned appraisal and securities fraud actions, and, on August 10, 2007,
we entered into a joint shareholder litigation governance and funding agreement
(referred to as the funding agreement) with such stockholders. Under
the funding agreement, we have agreed to fund a portion of the litigation
expenses in connection with the appraisal and securities fraud
action. Through December 31, 2008, we have contributed approximately
$81,000 in cash and have recorded additional liabilities of approximately
$38,000 as of that date. We anticipate that we will be called upon to
contribute additional amounts during our 2009 fiscal year, the extent of which
will be determined in part by the majority vote of those stockholders party to
the funding agreement. We may elect to terminate our participation in
the funding agreement upon ten days’ written notice to the administrative agent
under the agreement. Upon termination, we would no longer be required
to fund any amounts not already paid by us under the funding agreement, but we
would lose all rights to participate under the funding agreement, including
access to any additional work-product created after the date of
termination. Additionally, if we elect to terminate our participation
under the funding agreement, our portion of any proceeds from a favorable
disposition of the litigation may be reduced.
In
February 2009, the United States District Court for the District of Connecticut
granted the defendants’ motion to dismiss the securities fraud
action. In March 2009, we, together with the other plaintiffs filed
an appeal of the District Court’s dismissal with the United States 2nd Circuit
Court of Appeals. The outcomes of the appeal and the appraisal action
are not now known, nor can they be reasonably predicted at this
time.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Our
common stock is quoted on the OTCBB under the symbol “SFES”. The
table below sets forth, for the respective periods indicated, the high and low
bid prices for our common stock in the over-the-counter market as reported on
the OTCBB. The bid prices represent inter-dealer transactions,
without adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Prior to February 11,
2008, our trading symbol on the OTCBB was “CTSC”.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
4.60 |
|
|
$ |
2.60 |
|
Second
Quarter
|
|
|
2.90 |
|
|
|
2.25 |
|
Third
Quarter
|
|
|
2.60 |
|
|
|
1.12 |
|
Fourth
Quarter
|
|
|
1.65 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
1.80 |
|
|
$ |
1.26 |
|
Second
Quarter
|
|
|
2.05 |
|
|
|
1.55 |
|
Third
Quarter
|
|
|
3.20 |
|
|
|
1.60 |
|
Fourth
Quarter
|
|
|
4.43 |
|
|
|
2.95 |
|
As of
March 15, 2009, there were approximately 200 record holders of our common stock,
and we estimate that there are in excess of 1,300 beneficial owners of our
common stock.
We paid
no dividends or made any other distributions in respect of our common stock
during our fiscal years ended December 31, 2008 and 2007, and we have no plans
to pay any dividends or make any other distributions in the future.
In
connection with our acquisition of SafeStitch LLC, we entered into a Note and
Security Agreement with both The Frost Group, LLC, a Florida limited liability
company whose members include Frost Gamma Investments Trust, a trust indirectly
controlled by Dr. Phillip Frost, the largest beneficial holder of our common
stock, as well as Dr. Jane H. Hsiao and Steven D. Rubin, two of our directors,
and Jeffrey G. Spragens, our Chief Executive Officer and President and a
director for $4.0 million in total available borrowings. Under this
credit facility, we may distribute stock dividends in respect of our common
stock, but we may not pay cash dividends in respect of our common
stock.
On
December 30, 2008, we issued 8,197 shares of our common stock to RSLS
Investments, LLC, an entity controlled by Mr. Spragens as repayment in full of a
$10,000 non-interest bearing loan originally made in 2005 by RLSL Investments,
LLC to SafeStitch LLC. The exchange ratio was based upon the average
closing price of our common stock on the OTCBB for the five trading days
immediately preceding the transaction. The issuance of shares in this
transaction was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
EQUITY
COMPENSATION PLAN INFORMATION
Our Board
of Directors and a majority of our stockholders approved the SafeStitch Medical,
Inc. 2007 Incentive Compensation Plan (the “2007 Plan”) on November 13, 2007,
which is our sole equity compensation plan. We have reserved a total
of 2,000,000 shares of our common stock for issuance under the 2007 Plan,
subject to adjustment for a stock split or any future stock dividend or other
similar change in our common stock or our capital structure. As of
December 31, 2008, 168,000 options to purchase shares of common stock have been
granted under the 2007 Plan. A more detailed summary of the 2007 Plan
is contained in Note 5 to our consolidated financial statements set forth under
Item 8 to this Annual Report on Form 10-K. The full text of the 2007
Plan was filed with the SEC on December 7, 2007 as Annex B to our Definitive
Information Statement on Schedule 14C, and is incorporated herein by
reference.
The
following table provides information about our equity compensation plans as of
December 31, 2008:
|
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
|
Equity
compensation plans approved by security holders(1)
|
|
|
168,000 |
|
|
$ |
2.90 |
|
|
|
1,832,000 |
|
Equity
compensation plans not approved by security holders
|
|
|
88,667 |
(2) |
|
$ |
2.60 |
(2) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
256,667 |
(3) |
|
$ |
2.80 |
|
|
|
1,832,000 |
|
(1) |
SafeStitch
Medical, Inc. 2007 Incentive Compensation Plan.
|
(2)
|
On
September 11, 2007, we issued to Dr. Stewart Davis, our COO and Secretary,
an aggregate of 88,667 options (outside the 2007 Plan) to purchase our
common stock at a strike price of $2.60 per share. This grant
was made in accordance with that certain employment letter agreement,
dated May 16, 2007, by and between Dr. Davis and SafeStitch LLC, which we
have since acquired, and in consideration for Dr. Davis’ continued service
as our COO and Secretary. 25% of such options were immediately
exercisable with another 25% becoming exercisable on September 11th of
each of 2008, 2009 and 2010; provided, however, that all options shall
become immediately exercisable in the event of a change of control of
SafeStitch.
|
(3)
|
On
February 11, 2009, we issued an aggregate of 358,500 options to purchase
our common stock under the SafeStitch Medical, Inc. 2007 Incentive
Compensation Plan, each at a strike price of $0.80 per
share. These options were issued as follows: Dr.
Jane Hsiao, chairman of our Board of Directors received 60,000 options;
each of our other independent and non-employee directors, Kevin Wayne,
Kenneth Heithoff, Steven Rubin and Richard Pfenniger, received 5,000
options, except that Mr. Rubin and Mr. Pfenniger each received an
additional 1,000 options for their respective service as chairman of
Compensation Committee and Audit Committee; and the remaining 276,500
options were issued to existing employees and consultants, including
60,000 to Jeffrey G. Spragens, our President and Chief Executive Officer,
85,000 to Dr. Stewart B. Davis, our Chief Operating Officer and Secretary,
40,000 to Adam S. Jackson, our Chief Financial Officer and 10,000 to Dr.
Charles J. Filipi, our Chief Medical
Officer.
|
Item
6.
|
Selected
Financial Data.
|
As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include information otherwise required by this
item.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
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”), about our expectations, beliefs or intentions regarding our product
development efforts, business, financial condition, results of operations,
strategies or prospects. You can identify forward-looking statements
by the fact that these statements do not relate strictly to historical or
current matters. Rather, forward-looking statements relate to
anticipated or expected events, activities, trends or results as of the date
they are made. Because forward-looking statements relate to matters
that have not yet occurred, these statements are inherently subject to risks and
uncertainties that could cause our actual results to differ materially from any
future results expressed or implied by the forward-looking
statements. Many factors could cause our actual activities or results
to differ materially from the activities and results anticipated in
forward-looking statements. These factors include those set forth
below as well as those contained in “Item 1A - Risk Factors” of this Annual
Report on Form 10-K. We do not undertake any obligation to update
forward-looking statements, except as required by applicable law. We
intend that all forward-looking statements be subject to the safe harbor
provisions of the PSLRA. These forward-looking statements are only
predictions and reflect our views as of the date they are made with respect to
future events and financial performance.
Overview
We are a
developmental stage medical device company focused on the development of medical
devices that manipulate tissues for obesity, GERD, hernia formation, esophageal
obstructions, Barrett’s Esophagus, upper gastrointestinal bleeding, and other
intraperitoneal abnormalities through endoscopic and minimally invasive
surgery.
We have
utilized our expertise in intraperitoneal surgery to test certain of our devices
in in vivo and ex vivo animal trials and
ex vivo human trials,
and with certain products, in limited in vivo human
trials. Certain of our products did not or may not require clinical
trials, including our SMART DilatorTM,
standard and airway bite blocks and hernia stapler. Where required,
we intend to rapidly, efficiently and safely move into clinical trials for
certain other devices, including those utilized in surgery for the treatment of
obesity, GERD and for the treatment and diagnosis of Barrett’s
Esophagus. Clinical trials for certain of these product candidates
are anticipated to begin in 2010.
Immediately
prior to our acquisition of SafeStitch LLC, a privately held Virginia limited
liability company, on September 4, 2007, we had no business
operations. Under the name Cellular Technical Services Company, Inc.
(“CTSC”), we had previously developed, marketed, distributed and supported a
diversified mix of products and services for the telecommunications
industry. In 2002, CTSC ceased its product development efforts and
adopted a plan to wind down all operations related to its historical business,
which process it completed in December 2005. Between that time and
the 2007 consummation of our acquisition of SafeStitch LLC described below, all
of CTSC’s staff and administrative positions were eliminated. As
such, CTSC was a company with primarily cash and cash equivalents and no
operations.
On
September 4, 2007, we completed our acquisition of SafeStitch LLC pursuant to a
Share Transfer, Exchange and Contribution Agreement, dated as of July 25, 2007,
by and among us, SafeStitch LLC and the members of SafeStitch
LLC. The acquisition was accounted for as a recapitalization of
SafeStitch, LLC, which has been treated as the continuing reporting
entity.
In
January 2008, we changed our name from Cellular Technical Services Company, Inc.
to SafeStitch Medical, Inc., and, on February 11, 2008, our trading symbol on
the OTCBB changed from “CTSC” to “SFES”. We intend to apply for the
listing of our Common Stock on the NYSE Amex at such time as we meet the initial
listing requirements set by the exchange.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates,
including those related to investments, including the carrying value of our long
term investment, property and equipment, intangible assets, contingencies and
litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. A more detailed discussion on the application of these
and other accounting policies can be found in Note 2 in the Notes to the
Consolidated Financial Statements set forth in Item 8 of this Annual Report on
Form 10-K. Actual results may differ from these estimates under different
assumptions or conditions.
Results
of Operations
Our
losses totaled $9.4 million from September 15, 2005 (inception) through December
31, 2008. Such losses included $5.2 million and $3.0 million for the
years ended December 31, 2008 and 2007, respectively. At December 31,
2008, we had an accumulated deficit of $9.4 million. Since we do not
currently generate revenue from any of our product candidates, including those
already approved for commercial marketing by the FDA, we expect to continue to
generate losses in connection with the initial commercial launch of such
FDA-approved products and the continual development of our other products and
technologies. Our research and development activities are budgeted to
expand over time and will require further resources if we are to be
successful. As a result, we believe our operating losses are likely
to be substantial over the next several years.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Research
and Development costs and expenses were $2.7 million for the year ended December
31, 2008, an increase of approximately $715,000 compared with the same period in
2007, resulting from the operation of our Miami prototype lab and the addition
of engineering staff to perform R&D activities internally. We
expect research and development costs and expenses to decline in 2009 as we
realize the benefit of the staff reductions we implemented in January
2009. R&D expense is anticipated to increase in 2010 and beyond
as we enter into more advanced stages of development for our Gastroplasty Device
and other surgical product candidates, including the commencement of clinical
trials.
General
and Administrative costs and expenses were $1.7 million for year ended December
31, 2008 an increase of approximately $848,000 from the year ended December 31,
2007, primarily related to an increase in accounting and administrative staffing
and related operating costs and a $174,000 increase in stock-based compensation
expense. General and administrative expense consists primarily of
salaries and other related costs, including stock-based compensation
expense. Other general and administrative costs and expenses include
facility-related costs not otherwise included in research and development costs
and expenses, and professional fees for legal and accounting
services. We expect that our general and administrative costs and
expenses will increase during 2009 from the addition of personnel as we commence
commercialization activities for our SMART DilatorTM and
bite block products and the Amid Hernia Stapler, which we expect will be cleared
for marketing before the end of 2009. Additionally, we expect
increased costs to comply with the reporting and other obligations applicable to
public companies.
Interest
Income decreased $10,000 for the year ended December 31, 2008 as compared to
2007, primarily due to lower invested cash balances resulting from the use of
cash in our operating activities. Interest expense increased for the
year ended December 31, 2008 as compared to 2007 due to the drawdown of funds
under the Credit Facility prior to our sale of an aggregate of 1,861,505 shares
of our common stock in a private placement in May 2008, which generated gross
proceeds to us, before expenses, of approximately $4.0 million. We
expect interest expense to increase as we utilize the Credit Facility to fund
operations for the foreseeable future.
Liquidity
and Capital Resources
As a
result of our significant research and development expenditures and the lack,
until February 2009, of any approved products to generate product sales revenue,
we have not been profitable and have generated operating losses since
inception. Additionally, in connection with our involvement as a
plaintiff in the TruePosition litigation, we spent approximately $36,000 during
our 2008 fiscal year, which reduced our available cash and will continue to do
so for so long as we stay involved in the litigation. We do not
expect to have any source of revenues before the second half of 2009, and we
expect to incur losses from operations for the foreseeable
future. Beginning in 2010, we expect to incur increasing research and
development costs and expenses, including expenses related to hiring new
personnel and conducting clinical trials. We expect that general and
administrative costs and expenses will also increase as we expand our finance
and administrative staff, add infrastructure and incur additional costs related
to being a public company, including the costs of directors’ and officers’
insurance, investor relations programs and increased professional
fees.
To
date, we have funded our operations primarily with proceeds from the private
placement of stock and credit facilities available to us. Our ability
to sell additional shares of our stock and/or borrow cash under existing or new
credit facilities could be materially adversely affected by the recent economic
turmoil in the world’s equity and credit markets. There can therefore
be no assurance that we will be able to raise funds on acceptable terms or at
all, which may materially adversely affect our ability to continue our
operations. Additionally, the current economic turmoil could also
reduce the demand for new and innovative medical devices, resulting in delayed
market acceptance of our product candidates. Such delay could have a
material adverse impact on our expected cash flows, liquidity, results of
operations and financial position. In order to address this
uncertainty, our management has taken steps to reduce our near-term cash
requirements by focusing our product development efforts primarily on the
significant product candidates, including the Gastroplasty Device and Amid
Hernia Stapler, which are expected to have the most promising market potential
and the shortest remaining development time.
As a
result of these actions, our management has currently budgeted expenditures of
approximately $2.4 million for our 2009 fiscal year to fund the final
development of our hernia stapler and the initial marketing of the hernia
stapler and the three other product candidates already developed, as well as to
continue research and development of our Gastroplasty Device. Our
management believes that our cash balance as of December 31, 2008 of
approximately $561,000, together with our $4.0 million line of credit, the
maturity date of which has been extended from December 2009 to June 2010, is
sufficient to fund our current cash flow requirements through at least the next
twelve months. We have based this estimate on assumptions that are
subject to change and may prove to be wrong, and we may be required to use our
available capital resources sooner than we currently expect. Because
of the numerous risks and uncertainties associated with the development and
commercialization of our product candidates, we are unable to estimate the
precise amounts of capital outlays and operating expenditures associated with
our current and anticipated clinical trials.
Our
future capital requirements will depend on many factors, including the progress
and results of our clinical trials, the duration and cost of discovery and
preclinical development, and laboratory testing and clinical trials for our
product candidates, the timing and outcome of regulatory review of our product
candidates, the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
the number and development requirements of other product candidates that we
pursue and the costs of commercialization activities, including product
marketing, sales and distribution.
We will
need to finance our future cash needs through public or private equity
offerings, debt financings or corporate collaboration and licensing
arrangements. We currently do not have any commitments for future
external funding. We may need to raise additional funds more quickly
if one or more of our assumptions prove to be incorrect or if we choose to
expand our product development efforts more rapidly than we presently
anticipate. We may also decide to raise additional funds even before
we need them if the conditions for raising capital are favorable. The
sale of additional equity or debt securities will likely result in dilution to
our shareholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants that would
restrict our operations. Additional equity or debt financing, grants
or corporate collaboration and licensing arrangements may not be available on
acceptable terms, if at all. If adequate funds are not available, we
may be required to delay, reduce the scope of or eliminate our research and
development programs, reduce our planned commercialization efforts or obtain
funds through arrangements with collaborators or others that may require us to
relinquish rights to certain product candidates that we might otherwise seek to
develop or commercialize independently.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
As a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are
not required to include the information otherwise required by this
item.
Item
8.
|
Financial
Statements and Supplementary Data.
|
Report of Independent Registered Public Accounting
Firm
|
44
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
45
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008 and 2007
and for the period from September 15, 2005 (inception) through December
31, 2008
|
46
|
|
|
Consolidated
Statements of Stockholders’ Equity for the period from September 15, 2005
(inception) through December 31, 2008
|
47
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and 2007
and for the period from September 15, 2005 (inception) through December
31, 2008
|
48
|
|
|
Notes
to Consolidated Financial Statements
|
49
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
SafeStitch
Medical, Inc.
We have
audited the accompanying consolidated balance sheets of SafeStitch Medical, Inc.
(a development stage company) (the “Company”) as of December 31, 2008 and 2007,
and the related statements of operations, stockholders’ equity, and cash flows
for the years ended December 31, 2008 and 2007 and for the period from September
15, 2005 (inception) through December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits include 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2008 and 2007 and the consolidated result of their operations and
cash flows for years ended December 31, 2008 and 2007 and for the period from
September 15, 2005 (inception) through December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Eisner LLP
New York,
New York
March 27,
2009
SAFESTITCH MEDICAL,
INC.
(A
Developmental Stage Company)
CONSOLIDATED
BALANCE SHEETS
(in 000s,
except share and per share data)
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
561 |
|
|
$ |
631 |
|
Other
receivable – related-party
|
|
|
13 |
|
|
|
– |
|
Prepaid
expenses
|
|
|
151 |
|
|
|
99 |
|
Total
Current Assets
|
|
|
725 |
|
|
|
730 |
|
FIXED
ASSETS
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
168 |
|
|
|
196 |
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Security
deposits
|
|
|
2 |
|
|
|
56 |
|
Deferred
financing costs, net
|
|
|
851 |
|
|
|
1,702 |
|
Total
Other Assets
|
|
|
853 |
|
|
|
1,758 |
|
LONG-TERM
INVESTMENT, net of valuation adjustment of $1,754
|
|
|
– |
|
|
|
– |
|
TOTAL ASSETS (Note
6)
|
|
$ |
1,746 |
|
|
$ |
2,684 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
273 |
|
|
$ |
253 |
|
Total
Current Liabilities
|
|
|
273 |
|
|
|
253 |
|
Stockholder
loans
|
|
|
– |
|
|
|
10 |
|
Commitments
and contingencies (Note 9)
|
|
|
– |
|
|
|
– |
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value per share, 25,000,000 shares authorized, no shares
issued and outstanding
|
|
|
– |
|
|
|
– |
|
Common
stock, $.001 par value per share, 225,000,000 shares authorized,
17,962,718 and 16,093,016 shares issued and outstanding,
respectively
|
|
|
18 |
|
|
|
16 |
|
Additional
paid-in capital
|
|
|
10,817 |
|
|
|
6,582 |
|
Deficit
accumulated during the development stage
|
|
|
(9,362 |
) |
|
|
(4,177 |
) |
Total
Stockholders’ Equity
|
|
|
1,473 |
|
|
|
2,421 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
1,746 |
|
|
$ |
2,684 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SAFESTITCH MEDICAL,
INC.
(A
Developmental Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in 000s,
except share and per share amounts)
|
|
Years
Ended
December
31,
|
|
|
September
15,
2005
(Inception)
to
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
2,682 |
|
|
|
1,967 |
|
|
|
5,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
|
1,652 |
|
|
|
804 |
|
|
|
2,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Costs and Expenses
|
|
|
4,334 |
|
|
|
2,771 |
|
|
|
8,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(4,334 |
) |
|
|
(2,771 |
) |
|
|
(8,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME
|
|
|
24 |
|
|
|
34 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMORTIZATION
OF DEFERRED FINANCING COSTS
|
|
|
(851 |
) |
|
|
(283 |
) |
|
|
(1,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
(24 |
) |
|
|
(21 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX
|
|
|
(5,185 |
) |
|
|
(3,041 |
) |
|
|
(9,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAX
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(5,185 |
) |
|
|
(3,041 |
) |
|
|
(9,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
17,215 |
|
|
|
12,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER BASIC AND DILUTED SHARE
|
|
$ |
(0.30 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SAFESTITCH MEDICAL,
INC.
(A
Developmental Stage Company)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
000’s, except share amounts)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Deficit
Accumulated
During the
Development
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
– September 15, 2005
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contributed
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1 |
|
|
|
– |
|
|
|
1 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(76 |
) |
|
|
(76 |
) |
Balance
at December 31, 2005
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
$ |
1 |
|
|
$ |
(76 |
) |
|
$ |
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contributed
|
|
|
– |
|
|
|
– |
|
|
|
11,256 |
|
|
|
11 |
|
|
|
1,493 |
|
|
|
– |
|
|
|
1,504 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,060 |
) |
|
|
(1,060 |
) |
Balance
at December 31, 2006
|
|
|
– |
|
|
$ |
– |
|
|
|
11,256 |
|
|
$ |
11 |
|
|
$ |
1,494 |
|
|
$ |
(1,136 |
) |
|
$ |
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of options (CTS) –
September
23, 2007 at $0.79 per share
|
|
|
– |
|
|
|
– |
|
|
|
42 |
|
|
|
– |
|
|
|
35 |
|
|
|
– |
|
|
|
35 |
|
Stock-based
compensation-September 4, 2007
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
77 |
|
|
|
– |
|
|
|
77 |
|
Issuance
of common shares in recapitalization - September 4, 2007 at $0.64 per
share
|
|
|
– |
|
|
|
– |
|
|
|
4,795 |
|
|
|
5 |
|
|
|
3,078 |
|
|
|
– |
|
|
|
3,083 |
|
SafeStitch
expenses associated with recapitalization
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(156 |
) |
|
|
– |
|
|
|
(156 |
) |
Stock-based
compensation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
65 |
|
|
|
– |
|
|
|
65 |
|
Warrants
issued in connection with credit facility-September 4, 2007 at $2.46 per
share
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,985 |
|
|
|
– |
|
|
|
1,985 |
|
Rule
16 payment received
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
4 |
|
|
|
– |
|
|
|
4 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(3,041 |
) |
|
|
(3,041 |
) |
Balance
at December 31, 2007
|
|
|
– |
|
|
$ |
– |
|
|
|
16,093 |
|
|
$ |
16 |
|
|
$ |
6,582 |
|
|
$ |
(4,177 |
) |
|
$ |
2,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares in private offering – May 2008 at $2.15 per
share, net of offering costs
|
|
|
– |
|
|
|
– |
|
|
|
1,862 |
|
|
|
2 |
|
|
|
3,986 |
|
|
|
– |
|
|
|
3,988 |
|
Issuance
of common shares as repayment of stockholder note-December 30, 2008
at $1.22 per share
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
– |
|
|
|
10 |
|
|
|
– |
|
|
|
10 |
|
Stock-based
compensation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
239 |
|
|
|
– |
|
|
|
239 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(5,185 |
) |
|
|
(5,185 |
) |
Balance
at December 31, 2008
|
|
|
– |
|
|
$ |
– |
|
|
|
17,963 |
|
|
$ |
18 |
|
|
$ |
10,817 |
|
|
$ |
(9,362 |
) |
|
$ |
1,473 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SAFESTITCH MEDICAL,
INC.
(A
Developmental Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
000’s)
|
|
|
|
|
September
15,
2005
(Inception)
to
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,185 |
) |
|
$ |
(3,041 |
) |
|
$ |
(9,362 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
851 |
|
|
|
283 |
|
|
|
1,134 |
|
Stock-based
compensation expense
|
|
|
239 |
|
|
|
65 |
|
|
|
304 |
|
Stock-based
compensation expense related to Share Exchange
|
|
|
– |
|
|
|
77 |
|
|
|
77 |
|
Depreciation
and amortization
|
|
|
55 |
|
|
|
4 |
|
|
|
59 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in receivables and other current assets
|
|
|
(65 |
) |
|
|
(79 |
) |
|
|
(144 |
) |
Decrease
(Increase) in other assets
|
|
|
54 |
|
|
|
(56 |
) |
|
|
(2 |
) |
Increase
(Decrease) in accounts payable and accrued liabilities
|
|
|
20 |
|
|
|
(199 |
) |
|
|
(12 |
) |
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(4,031 |
) |
|
|
(2,946 |
) |
|
|
(7,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(27 |
) |
|
|
(200 |
) |
|
|
(227 |
) |
Payment
received under Exchange Act Rule 16b
|
|
|
– |
|
|
|
4 |
|
|
|
4 |
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(27 |
) |
|
|
(196 |
) |
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided in connection with the acquisition of SafeStitch
LLC
|
|
|
– |
|
|
|
3,192 |
|
|
|
3,192 |
|
Issuance
of 1,861,505 shares of common stock, net of offering costs
|
|
|
3,988 |
|
|
|
– |
|
|
|
3,988 |
|
Capital
contributions
|
|
|
– |
|
|
|
– |
|
|
|
1,431 |
|
Proceeds
from stockholder loans
|
|
|
1,000 |
|
|
|
876 |
|
|
|
1,960 |
|
Repayment
of stockholder loans
|
|
|
(1,000 |
) |
|
|
(876 |
) |
|
|
(1,876 |
) |
Exercise
of options
|
|
|
– |
|
|
|
35 |
|
|
|
35 |
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
3,988 |
|
|
|
3,227 |
|
|
|
8,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(70 |
) |
|
|
85 |
|
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
631 |
|
|
|
546 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
561 |
|
|
$ |
631 |
|
|
$ |
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
24 |
|
|
$ |
– |
|
|
$ |
45 |
|
Non
cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
loans contributed to capital
|
|
$ |
10 |
|
|
$ |
– |
|
|
$ |
84 |
|
Warrants
issued in connection with credit facility
|
|
$ |
– |
|
|
$ |
1,985 |
|
|
$ |
1,985 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SAFESTITCH MEDICAL,
INC.
(A
Developmental Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION AND LIQUIDITY
SafeStitch
Medical, Inc. (together with its consolidated subsidiaries, “SafeStitch” or the
“Company”) is a developmental stage medical device company focused on the
development of medical devices that manipulate tissues for endoscopic and
minimally invasive surgery for the treatment of obesity, gastroesophageal reflux
disease (“GERD”), Barrett’s Esophagus, esophageal obstructions, upper
gastrointestinal bleeding, hernia formation and other intraperitoneal
abnormalities.
Cellular
Technical Services Company, Inc. (“Cellular”), a non-operating public company,
was incorporated in 1988 as NCS Ventures Corp. under the laws of the State of
Delaware. On July 25, 2007 Cellular entered into a Share Transfer,
Exchange and Contribution Agreement (the “Share Exchange”) with SafeStitch LLC,
a Virginia limited liability company. On September 4, 2007, Cellular
acquired all of the members’ equity interests in SafeStitch LLC in exchange for
11,256,369 shares of Cellular’s common stock, which represented a majority of
Cellular’s outstanding shares immediately following the Share
Exchange. Effective January 8, 2008, Cellular changed its name to
SafeStitch Medical, Inc. and increased the aggregate number of shares of capital
stock that may be issued from 35,000,000 to 250,000,000, comprising 225,000,000
shares of common stock, par value $0.001 per share (the “Common Stock”), and
25,000,000 shares of preferred stock, par value $0.01 per share. For
accounting purposes, the acquisition has been treated as a recapitalization of
SafeStitch LLC, with SafeStitch LLC as the acquirer (reverse
acquisition). The historical financial statements prior to September
4, 2007 are those of SafeStitch LLC, which began operations on September 15,
2005. The accompanying financial statements give retroactive effect
to the recapitalization as if it had occurred on September 15, 2005
(inception). Certain reclassifications have been made to prior
periods’ consolidated financial statements to be consistent with the current
period’s presentation.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. For the period from September
15, 2005 (inception) through December 31, 2008, the Company has
accumulated a deficit of $9.4 million, including a net loss of $5.2 million for
the year ended December 31, 2008, and has not generated revenue or positive cash
flows from operations. The Company has been dependent upon equity
financing and loans from stockholders to meet its obligations and sustain
operations. The Company’s efforts have been principally devoted to
developing its technologies and commercializing its products. Based
upon its current cash position, availability under the extended term of its $4.0
million line of credit from The Frost Group, LLC (the “Frost Group”) and the
Company’s President and CEO, Jeffrey G. Spragens, and by monitoring its
discretionary expenditures, management believes that the Company will be able to
fund operations without revenues or additional financing at least through March
2010. If adequate funds are not available, the Company may be
required to delay, reduce the scope of or eliminate its research and development
programs, reduce its planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require the Company to
relinquish rights to certain product candidates that it might otherwise seek to
develop or commercialize independently. Although the Company plans to
secure additional funds through the issuance of equity and/or debt, no assurance
can be given that additional financing will be available to the Company on
acceptable terms, or at all. The Company’s ability to continue as a
going concern is ultimately dependent upon generating revenues from those
products that do not require further marketing clearance by the U.S. Food and
Drug Administration (“FDA”), obtaining FDA clearance to market its other product
candidates, and achieving profitable operations and generating sufficient cash
flows from operations to meet future obligations.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Isis Tele-Communications, Inc., which has no current
operations, and SafeStitch LLC. All inter-company accounts and
transactions have been eliminated in consolidation.
Use of
estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States (“GAAP”) requires
management to make estimates and assumptions, such as useful lives of property
and equipment, which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those
estimates.
Cash and cash
equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The Company holds cash and cash equivalent balances in
banks and other financial institutions. Balances in excess of FDIC
limitations may not be insured.
Property and
equipment. Property and equipment are carried at cost less
accumulated depreciation. Major additions and improvements are
capitalized, while maintenance and repairs that do not extend the lives of
assets are expensed. Gain or loss, if any, on the disposition of
fixed assets is recognized currently in operations. Depreciation is
calculated primarily on a straight-line basis over estimated useful lives of the
assets.
Research and
development. Research and development costs principally
represent salaries of the Company’s medical and biomechanical engineering
professionals, material and shop costs associated with manufacturing product
prototypes and payments to third parties for clinical trials and additional
product development and testing. All research and development costs
are charged to expense as incurred.
Patent
costs. Costs incurred in connection with acquiring patent
rights and the protection of proprietary technologies are charged to expense as
incurred.
Stock-based
compensation. The Company follows Statement of Financial
Accounting Standards (“SFAS”) No. 123R, “Share Based Payment”, which
requires all share-based payments, including grants of stock options, to be
recognized in the income statement as an operating expense, based on their fair
values on the date of grant. Stock-based compensation is included in
general and administrative expenses for all periods presented.
Fair value of
financial instruments. The Company follows SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value and requires additional disclosures about fair value
measurements. The carrying amounts of cash and cash equivalents,
accounts payable and accrued expenses approximate fair value based on their
short-term maturity. Related party receivables and stockholder loans
are carried at cost.
Long-lived
assets. In accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the Company reviews the carrying values
of its long-lived assets, including long-term investments, for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. Any long-lived
assets held for disposal are reported at the lower of their carrying amounts or
fair value less costs to sell.
Income
taxes. The Company follows the liability method of accounting
for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”
(“SFAS 109”). SFAS 109 prescribes an asset and liability approach,
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of the assets and liabilities. The
Company’s policy is to record a valuation allowance against deferred tax assets,
when the deferred tax asset is not recoverable. The Company considers
estimated future taxable income or loss and other available evidence when
assessing the need for its deferred tax valuation allowance.
Comprehensive
income (loss). SFAS No. 130, “Reporting Comprehensive Income
(Loss),” requires companies to classify items of other comprehensive
income (loss) in a financial statement. Comprehensive income (loss)
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. The Company’s comprehensive net loss is equal to its net
loss for each of the periods presented.
NOTE
3 – PROPERTY AND EQUIPMENT
Machinery
and equipment consist of the following:
|
Estimated Useful lives
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Machinery
and equipment
|
5
years
|
|
$ |
153,000 |
|
|
$ |
160,000 |
|
Furniture
and fixtures
|
3-5
years
|
|
|
37,000 |
|
|
|
40,000 |
|
Software*
|
3-5
years
|
|
|
37,000 |
|
|
|
– |
|
|
|
|
|
227,000 |
|
|
|
200,000 |
|
Accumulated
depreciation and amortization
|
|
|
|
(59,000 |
) |
|
|
(4,000 |
) |
Property
and equipment, net
|
|
|
$ |
168,000 |
|
|
$ |
196,000 |
|
*
Software was included in machinery and equipment or furniture and fixtures, as
appropriate, at December 31, 2007.
Depreciation
of fixed assets utilized in research and development activities is included in
research and development expense. All other depreciation is included
in general and administrative expense. Depreciation and amortization
expense was $55,000 and $4,000, respectively, for the years ended December 31,
2008 and 2007.
NOTE
4 – LONG-TERM INVESTMENT
In
November 1999, Cellular invested in a one-year, $1.0 million 10% convertible
note of KSI, Inc. (“KSI”) and also received warrants to purchase KSI common
stock. All of the outstanding stock of KSI was acquired in August
2000 by TruePosition, Inc. (“TruePosition”), a majority owned subsidiary of
Liberty Media Corporation (“Liberty Media”). Prior to the
acquisition, the convertible note was exchanged for KSI common
stock. Cellular exercised the KSI warrants and purchased additional
KSI common stock for approximately $754,000. Cellular’s investment in
KSI common stock was exchanged for TruePosition common stock on the date of the
acquisition. The Company currently holds 191,118 shares of
TruePosition common stock and accounts for the investment in TruePosition using
the cost method. In December 2002, Cellular received certain
valuation information from TruePosition, indicating a range of values for
TruePosition. Based upon its review of available information and
communications with Liberty Media, Cellular concluded there had been an
other-than-temporary decline in the estimated fair value of its investment and
reduced the recorded carrying value of this investment from its cost basis of
$1,754,000 to zero, representing its best estimate of the then-current fair
value of Cellular’s investment in the net equity of
TruePosition. TruePosition’s operations have been funded by
significant infusions of cash by Liberty Media, and the Company’s investment in
TruePosition common stock has been diluted by these advances, which were
converted to preferred stock in late 2002. In August 2007, the
Company was informed that Liberty TP Acquisition, Inc., which held an aggregate
of no less than 90% of TruePosition’s outstanding capital stock, was being
merged into TruePosition. Pursuant to the terms of the merger,
TruePosition’s minority stockholders, including the Company, were entitled to
receive $3.5116 in cash in exchange for each share held. The Company
has exercised its statutory appraisal rights in respect of this merger, and is
now a party to an appraisal action and a securities fraud litigation (see Notes
9 and 16). The Company may possibly receive proceeds from the merger,
the litigation or other disposition of this investment, but no such amount can
be estimated at this time.
NOTE
5 – STOCK-BASED COMPENSATION
Cellular’s
1996 Stock Option Plan (the “1996 Plan”) authorized the grant of both incentive
(“ISO”) and non-qualified stock options, up to a maximum of 335,000 shares of
Common Stock, to employees of and consultants to the Company. The
exercise price, term and vesting provision of each option grant was fixed by the
compensation committee of the Board of Directors (the “Compensation Committee”)
with the provision that the exercise price of an ISO may not be less than the
fair market value of the Common Stock on the date of grant, and the term of an
ISO may not exceed ten years. The Company has not granted any options
under the 1996 Plan since December 31, 2005. The 1996 Plan has been
terminated and no new options may be granted under the 1996 Plan.
As of the
date of the Share Exchange, all options issued to former officers and directors
under the 1996 Plan with exercise prices in excess of the then-current share
price of the Common Stock were cancelled in exchange for the issuance of 2,000
shares of Common Stock per person, for an aggregate issuance of 6,000 shares of
Common Stock. The Company recognized compensation expense of $77,000
on the date of the Share Exchange relating to the intrinsic value of the options
outstanding on that date.
The
Company granted 88,667 options outside of plans in September 2007 at an exercise
price of $2.60 per share. The Company determined the estimated
aggregate fair value of these options on the grant date to be $196,000, or
approximately $2.21 per option. The stock-based compensation recorded
for these options in the years ended December 31, 2008 and 2007 was $47,000 and
$65,000, respectively, and is included in general and administrative
expense.
On
November 13, 2007, the Board of Directors and a majority of the Company’s
stockholders approved the SafeStitch Medical, Inc. 2007 Incentive Compensation
Plan (the “2007 Plan”). Under the 2007 Plan, which is administered by
the Compensation Committee, the Company may grant stock options, stock
appreciation rights, restricted stock and/or deferred stock to employees,
officers, directors, consultants and vendors up to an aggregate of 2,000,000
shares of Common Stock, which are fully reserved for future
issuance. The exercise price of stock options or stock appreciation
rights may not be less than the fair market value of the Common Stock at the
date of grant and, within any 12 month period, no person may receive stock
options or stock appreciation rights for more than one million shares of Common
Stock. Additionally, no stock options or stock appreciation rights
granted under the 2007 Plan may have a term exceeding ten years.
The
Company granted 168,000 options under the 2007 Plan during the year ended
December 31, 2008. No options were granted under the 2007 Plan during
the year ended December 31, 2007. The exercise prices of these
options ranged from $1.16 to $3.10 per share. The Company determined
the estimated aggregate fair value of these options on the grant dates to be
$318,000, and stock option compensation expense related to these grants was
$192,000 for the year ended December 31, 2008. Total stock-based
compensation recorded for the years ended December 31, 2008 and 2007 was
$239,000 and $65,000, respectively, and is included in general and
administrative expense. The fair values of options granted are
estimated on the date of their grant using the Black-Scholes option pricing
model based on the assumptions included in the table below. The fair
value of the Company’s stock option awards is expensed over the vesting life of
the underlying stock options using the graded vesting method, with each tranche
of vesting options valued separately. Expected volatility is based on
the historical volatility of the Company’s stock. Due to the short
period of time that the Company has been publicly traded since the Share
Exchange, the historical volatilities of similar publicly traded entities are
reviewed to validate the Company’s expected volatility
assumption. The risk-free interest rate for periods within the
contractual life of the stock option award is based on the yield of U.S.
Treasury bonds on the grant date with a maturity equal to the expected term of
the stock option. The expected life of stock option awards is based
upon the “simplified” method for “plain vanilla” options described in the United
States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No.
107, as amended by SEC Staff Accounting Bulletin No. 110. Forfeiture
rates are based on management’s estimates. The fair value of each
option granted during the years ended December 31, 2008 and 2007 was estimated
using the following assumptions.
|
|
Year ended
December 31, 2008
|
|
|
Year ended
December 31, 2007
|
|
Expected
volatility
|
|
|
63.05%
- 94.46%
|
|
|
|
82.00%
|
|
Expected
dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Risk-free
interest rate
|
|
|
0.76%
– 3.35%
|
|
|
|
4.88%
|
|
Expected
life
|
|
3.5
– 5.5 years
|
|
|
10.0 years
|
|
Forfeiture
rate
|
|
|
0%
- 2.50%
|
|
|
|
0%
|
|
The
following summarizes the Company’s stock option activity for the year ended
December 31, 2008:
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2007
|
|
|
88,667 |
|
|
$ |
2.60 |
|
|
|
|
|
|
|
Granted
|
|
|
168,000 |
|
|
$ |
2.90 |
|
|
|
|
|
|
|
Exercised
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
Canceled
or expired
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
256,667 |
|
|
$ |
2.80 |
|
|
|
7.12 |
|
|
$ |
540 |
|
Exercisable
at December 31, 2008
|
|
|
109,834 |
|
|
$ |
2.90 |
|
|
|
7.22 |
|
|
$ |
– |
|
Vested
and expected to vest at December 31, 2008
|
|
|
250,906 |
|
|
$ |
2.80 |
|
|
|
7.14 |
|
|
$ |
527 |
|
Of the
168,000 options granted during the year ended December 31, 2008, 39% of such
options were vested as of December 31, 2008. A summary of the status
of the Company’s non-vested options and changes during the year ended December
31, 2008 is presented below.
|
|
|
|
|
Weighted Average Grant
Date Fair Value
|
|
Non-Vested
at December 31, 2007
|
|
|
66,500 |
|
|
$ |
2.21 |
|
Options
Granted
|
|
|
168,000 |
|
|
|
1.89 |
|
Options
Vested
|
|
|
(87,667 |
) |
|
|
1.96 |
|
Non-Vested
at December 31, 2008
|
|
|
146,833 |
|
|
$ |
2.00 |
|
At
December 31, 2008, there was $197,000 of total unrecognized compensation cost
related to non-vested employee and director share-based compensation
arrangements. That cost is expected to be recognized over a
weighted-average period of 1.90 years.
No
options were exercised during the year ended December 31, 2008.
No tax
benefits were attributed to the stock-based compensation expense because a
valuation allowance was maintained for substantially all net deferred tax
assets. We elected to adopt the alternative method of calculating the
historical pool of windfall tax benefits as permitted by FASB Staff Position
(FSP) No. SFAS 123R-3, “Transition Election Related to Accounting for
the Tax Effects of Share-Based Payment Awards.” This is a simplified
method to determine the pool of windfall tax benefits that is used in
determining the tax effects of stock compensation in the results of operations
and cash flow reporting for awards that were outstanding as of the adoption of
SFAS 123R (See Note 11 - Income Taxes).
Credit
Facility. In connection with the acquisition of SafeStitch
LLC, the Company entered into a Note and Security Agreement (the “Credit
Facility”) with both The Frost Group, LLC (the “Frost Group”) and Jeffrey G.
Spragens, the Company’s Chief Executive Officer and President and a
director. The Frost Group is a Florida limited liability company
whose members include Frost Gamma Investments Trust, a trust controlled by Dr.
Phillip Frost, the largest beneficial holder of the issued and outstanding
shares of the Company’s common stock, Dr. Jane H. Hsiao, the Company’s Chairman
of the Board and Steven D. Rubin, a director. The Credit Facility
provides for $4.0 million in total available borrowings, consisting of $3.9
million from the Frost Group and $100,000 from Mr. Spragens. The
Company has granted a security interest in all present and subsequently acquired
collateral in order to secure prompt, full and complete payment of the amounts
due under the Credit Facility. The collateral includes all assets of
the Company, inclusive of intellectual property (patents, patent rights,
trademarks, service marks, etc.). Outstanding borrowings under the
Credit Facility accrue interest at a 10% annual rate. The Credit
Facility had an initial term of 28 months, expiring in December 2009, and was
amended in March 2009 to extend the Maturity Date to June 2010 (see Note
16).
In
connection with the Credit Facility, the Company granted warrants to purchase an
aggregate of 805,521 shares of its Common Stock to the Frost Group and Mr.
Spragens at an assumed exercise price of $0.25 per share. The fair
value of the warrants was determined to be approximately $2.0 million on the
grant date based on the Black-Scholes valuation model using the following
assumptions: expected volatility of 82%, dividend yield of 0%, risk-free
interest rate of 4.88% and expected life of 10 years. The fair value
of the warrants was recorded as deferred financing costs and will be amortized
over the life of the Credit Facility. The Company recorded
amortization expense of $851,000 and $283,000 related to these deferred
financing costs during the years ended December 31, 2008 and 2007,
respectively.
The
Company borrowed $1.0 million under the Credit Facility during the three months
ended March 31, 2008 and repaid the entire outstanding balance in June 2008
using the proceeds of the private placement described in Note 7. The
Company recognized interest expense related to the outstanding borrowings under
the Credit Facility for the years ended December 31, 2008 and 2007 of $24,000
and $0, respectively. As of December 31, 2008, there was no balance
outstanding under the Credit Facility.
Stockholder
Loans. As of the date of the Share Exchange, SafeStitch LLC
had $10,000 in outstanding loans payable to a member controlled by Mr.
Spragens. This loan was repaid in December 2008 with 8,197 shares of
the Company’s common stock pursuant to resolutions approved by both the Audit
Committee and a majority of the Board of Directors. The exchange
ratio was based upon the average closing price of the Company’s common stock for
the five trading days immediately preceding the transaction. Mr.
Spragens did not participate in the Board vote. As of December 31,
2008, there were no stockholder loans outstanding.
NOTE
7 – CAPITAL TRANSACTIONS
Share Exchange. As
described in Note 1, on September 4, 2007, the Company acquired all of the
members’ equity interests in SafeStitch LLC in exchange for the issuance of
11,256,369 shares of Cellular’s common stock. For accounting
purposes, the transaction has been treated as a recapitalization of SafeStitch
LLC whereby all membership interests in SafeStitch LLC were eliminated, the
ordinary shares received in exchange for those interests were recorded at par
value and the difference between value of the membership interests and the value
of the ordinary shares received was recorded as additional paid-in capital to
give effect to the transaction as of the beginning of
2007. Additionally, as of the date of the transaction, the net assets
of Cellular, its ordinary shares and additional paid-in capital were recorded to
reflect the transaction. SafeStitch LLC incurred $156,000 of
transaction costs, which were recorded as a reduction of additional paid-in
capital.
Private
Placement. During the period beginning May 22, 2008 and ended
May 28, 2008, the Company entered into stock purchase subscription agreements
(the “Subscription Agreements”) with certain private investors (the
“Investors”), pursuant to which the Company agreed to issue an aggregate of
1,861,505 shares (the “Shares”) of its Common Stock at a purchase price of $2.15
per share. The Company’s Board of Directors established the $2.15
purchase price based on an approximately 10% discount to the average closing
price of the Common Stock on the OTCBB during the five trading days beginning
April 23, 2008 and ended April 29, 2008. The Company closed on the
issuance of the Shares during the period beginning May 22, 2008 and ended May
28, 2008. The Company received aggregate consideration for the Shares
of $4,002,000 and has incurred $14,000 of costs related to the offering, which
were recorded as a reduction of paid-in-capital. Among the Investors
acquiring a portion of the Shares were Dr. Hsiao, Jeffrey G. Spragens and some
of his relatives, Dr. Kenneth Heithoff, a director, Kevin Wayne, a director, and
Frost Gamma Investments Trust. The Company issued the Shares in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the “Act”), and Rule 506 of Regulation D
promulgated thereunder. Each Investor represented to the Company that
such person was an “accredited investor” as defined in Rule 501(a) under the Act
and that the Shares were being acquired for investment purposes. The
Shares have not been registered under the Act and are “restricted securities” as
that term is defined by Rule 144 under the Act. The Company has not
undertaken to register the Shares and no registration rights have been granted
to the Investors in respect of the Shares.
NOTE
8 – BASIC AND DILUTED NET LOSS PER SHARE
Basic net
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted net
loss per common share is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Diluted potential
common shares consist of incremental shares issuable upon exercise of stock
options and warrants. In computing diluted net loss per share for the
years ended December 31, 2008 and 2007, no adjustment has been made to the
weighted average outstanding common shares as the assumed exercise of
outstanding options and warrants is anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as
follows:
|
|
|
|
|
|
|
Stock
options
|
|
|
256,667 |
|
|
|
88,667 |
|
Stock
warrants
|
|
|
805,521 |
|
|
|
805,521 |
|
Total
|
|
|
1,062,188 |
|
|
|
894,188 |
|
NOTE
9 – COMMITMENTS AND CONTINGENCIES
The
Company is obligated under various operating lease agreements for office
space. Generally, the lease agreements require the payment of base
rent plus escalations for increases in building operating costs and real estate
taxes. Rental expense under operating leases amounted to $139,000 and
$24,000 for the years ended December 31, 2008 and 2007,
respectively. Giving effect to the lease amendment described in Note
16, at December 31, 2008, the Company was obligated under non-cancellable
operating leases to make future minimum lease payments (excluding sales taxes)
as follows:
|
|
|
|
|
|
|
|
2009
|
|
$ |
80,000 |
|
2010
|
|
|
71,000 |
|
2011
|
|
|
74,000 |
|
2012
|
|
|
77,000 |
|
Thereafter
|
|
|
— |
|
|
|
$ |
302,000 |
|
The
Company is presently a plaintiff in securities fraud and appraisal actions in
respect of its ownership of 191,118 shares of common stock of
TruePosition. The securities fraud action was filed November 13, 2007
in the United States District Court for the District of Connecticut, whereby
SafeStitch and other plaintiffs seek damages and other relief totaling $80
million. The related appraisal action was filed in the Chancery Court
of the State of Delaware on August 31, 2007. In August 2007, the
Company was informed that Liberty TP Acquisition, Inc., which held an aggregate
of no less than 90% of TruePosition’s outstanding capital stock, was being
merged into TruePosition. Pursuant to the terms of the merger,
TruePosition’s minority stockholders, including the Company, became entitled to
receive $3.5116 in cash in exchange for each share held, which the Company and
certain other minority stockholders considered insufficient
compensation. The Company and other minority stockholders brought
forth the aforementioned securities fraud and appraisal action and, on August
10, 2007, the Company entered into a joint stockholder litigation governance and
funding agreement (the “Funding Agreement”) with such other
stockholders. Under the Funding Agreement, the Company has agreed to
fund a portion of the litigation expenses in connection with the appraisal and
securities fraud action. Through December 31, 2008, the Company has
contributed approximately $81,000 in cash and has recorded additional
liabilities of approximately $38,000. Management anticipates that the
Company will be called upon to fund additional amounts during the next twelve
months. The Company may elect to terminate its participation in the
Funding Agreement, whereby the Company would no longer be required to contribute
funds; however, the Company would lose all rights under the Funding Agreement,
including access to any additional work-product created after the date of
termination. Additionally, the Company’s portion of any proceeds from
a favorable disposition of the litigation may be reduced if the Company
terminates its participation. The outcomes of these actions are not
now known, nor can they be reasonably predicted at this time.
NOTE
10 – AGREEMENT WITH CREIGHTON UNIVERSITY
On May
26, 2006, SafeStitch entered into an exclusive license and development agreement
(the “License Agreement”) with Creighton University (“Creighton”), granting the
Company a worldwide exclusive (even as to the university) license, with rights
to sublicense, to all the Company’s product candidates and associated know-how
based on Creighton technology, including the exclusive right to manufacture, use
and sell the product candidates.
Pursuant
to the License Agreement, the Company is obligated to pay Creighton, on a
quarterly basis, a royalty of 1.5% of the revenue collected worldwide from the
sale of any product licensed under the License Agreement, less certain amounts
including, without limitation, chargebacks, credits, taxes, duties and discounts
or rebates. The License Agreement does not provide for minimum
royalties. Also pursuant to the License Agreement, the Company has
agreed to invest, in the aggregate, at least $2.5 million over 36 months,
beginning May 26, 2006, towards development of any licensed
product. This $2.5 million investment obligation excludes the first
$150,000 of costs related to the prosecution of patents, which the Company
invested outside of the License Agreement. The Company is further
obligated to pay to Creighton an amount equal to 20% of certain of the Company’s
research and development expenditures as reimbursement for the use of
Creighton’s facilities. Failure to comply with the payment
obligations above will result in all rights in the licensed patents and know-how
reverting back to Creighton. As of December 31, 2007, the Company had
satisfied the $2.5 million investment obligation described
above. During the years ended December 31, 2008 and 2007, the Company
paid Creighton $177,000 and $322,000, respectively, in satisfaction of the 20%
facility reimbursement obligation.
Pursuant
to the License Agreement, SafeStitch is entitled to exercise its own business
judgment and sole and absolute discretion over the marketing, sale,
distribution, promotion and other commercial exploitation of any licensed
products, provided that, if the Company has not commercially exploited or
commenced development of a licensed patent and its associated know-how by the
seventh anniversary of the later of the date of the License Agreement or the
date such technology is disclosed to and accepted by SafeStitch, then the
licensed patent and associated know-how shall revert back to the university,
with no rights retained by the Company, and the university will have the right
to seek a third party with whom to commercialize such patent and associated
know-how, unless the Company purchases one or more one-year
extensions.
The
Company accounts for income taxes using the asset and liability method described
in SFAS No. 109, “Accounting For Income Taxes,” the objective of which is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting and the tax bases of the Medical’s assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
At
December 31, 2008, we have approximately $4.7 million of net operating loss
carryforwards to offset future taxable income and $1.8 million of certain
operating expenses which have been deferred as start up costs under
Sec. 195 for federal income tax purposes, subject to limitations for
alternative minimum tax. Start-up costs will continue to be
capitalized until the month in which active business begins, at which time the
costs may be amortized over 15 years. In addition, at December 31,
2008 we have approximately $92,000 of research and development tax credit
carryforwards. The net operating loss and research and development
credit carryforwards expire through 2028.
The
difference between income taxes at the statutory federal income tax rate and
income taxes reported in the statements of operations are attributable to the
following:
|
|
|
|
|
|
|
Income
tax benefit at the federal statutory rate
|
|
|
34.00 |
% |
|
|
34.00 |
% |
State
income taxes, net of effect on federal taxes
|
|
|
3.44 |
% |
|
|
3.63 |
% |
Research
and development credit
|
|
|
1.58 |
% |
|
|
– |
|
Other
|
|
|
2.71 |
% |
|
|
– |
|
Increase
in valuation allowance
|
|
|
(41.73 |
)% |
|
|
(37.63 |
)% |
|
|
|
|
|
|
|
|
|
Provision
for income tax
|
|
|
0 |
% |
|
|
0 |
% |
The
deferred tax asset at December 31, 2008 and 2007 consists of the
following:
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$ |
1,750,000 |
|
|
|
202,000 |
|
Deferred
start up costs
|
|
|
669,000 |
|
|
|
221,000 |
|
Research
and development credit carryforward
|
|
|
92,000 |
|
|
|
– |
|
Stock-based
compensation
|
|
|
144,000 |
|
|
|
53,000 |
|
Other
|
|
|
(15,000 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,640,000 |
|
|
|
476,000 |
|
Less:
Valuation allowance
|
|
|
(2,640,000 |
) |
|
|
(476,000 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$ |
– |
|
|
$ |
– |
|
The
change in the valuation allowance from December 31, 2007 to December 31, 2008
amounted to approximately $2.2 million. At December 31, 2006,
Cellular had available for federal income tax purposes, net operating loss
carryforwards of approximately $54.1 million which expire through 2026, and
research and development tax credits of approximately $1.2 million that will
expire through 2024. The Company had provided a valuation allowance
of 100% of the net deferred tax asset related to the operating loss
carryforwards and tax credits. Upon consummation of the share
exchange with SafeStitch LLC, these net deferred tax assets along with net
operating losses for 2007 were forfeited in accordance with Section 382 of the
Internal Revenue Code.
At
December 31, 2006, Cellular had AMT credits of $53,000 to be utilized in future
tax periods to the extent that the regular tax exceeds the AMT
liability. Under Section 383 of the Internal Revenue Code, these AMT
credits were forfeited due to change in control.
The
Company adopted Financial Standards Board Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”) on
January 1, 2007. The adoption of FIN 48 did not have a material
impact on our results or operations and financial position. At the
adoption date of January 1, 2007, we did not have any unrecognized tax
benefits.
The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense. As of December 31, 2008, the
Company has no unrecognized tax benefit, including interest and
penalties.
Tax years
2004-2007 remain open to examination by the major taxing jurisdictions to which
we are subject.
NOTE
12 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The
Company entered into a five year lease for office space in Miami, Florida with a
company controlled by Dr. Phillip Frost, the Company’s largest beneficial
stockholder. The rental payments under the Miami office lease, which
commenced January 1, 2008, are approximately $8,000 per month for the first year
and escalate 4.5% annually over the life of the lease. The Company
recorded $110,000 and $13,000 of rent expense related to the Miami lease for the
years ended December 31, 2008 and 2007, respectively.
Dr. Jane
Hsiao, the Company’s Chairman of the Board, is a director of Great Eastern Bank
of Florida, a bank where the Company maintains a bank account in the normal
course of business. As of December 31, 2008, the Company had
approximately $260,000 on deposit with Great Eastern Bank of
Florida.
Dr.
Hsiao and Dr. Frost are each significant shareholders of Non-Invasive Monitoring
Systems, Inc. (“NIMS”), a publicly-traded medical device company, and of Aero
Pharmaceuticals, Inc. (“Aero”), a privately-held pharmaceutical distribution
company. Commencing in March 2008, the Company’s Chief Financial
Officer also serves as the Chief Financial Officer and supervises the accounting
staffs of NIMS and Aero under a board-approved cost sharing arrangement whereby
the total salaries of the accounting staffs of the three companies are
shared. The Company has recorded reductions to General and
Administrative costs and expenses for the year ended December 31, 2008 of
$33,000 to account for the sharing of costs under this
arrangement. Accounts receivable from NIMS and Aero were
approximately $10,000 and $0, respectively, as of December 31,
2008.
Dr.
Hsiao, Dr. Frost and directors Steven Rubin and Richard Pfenniger are each
significant stockholders, officers and/or directors of OPKO Health, Inc.
(“OPKO”), a publicly-traded specialty healthcare company. Certain of
the Company’s employees have provided consulting services to OPKO on a cost-plus
basis. The Company has recorded reductions to General and
Administrative expense to account for the provision of these services totaling
$49,000 and $0 for the years ended December 31, 2008 and 2007,
respectively. The amounts charged may not be representative of those
that would have been charged in an “arms-length” transaction. These
transactions have been ratified by the Audit Committee of the Board of
Directors. Accounts receivable from OPKO were approximately $4,000 as
of December 31, 2008.
NOTE
13 – EMPLOYEE BENEFIT PLANS
Effective
May 1, 2008, the SafeStitch 401(k) Plan (the “401k Plan”) permits employees
to contribute up to 100% of qualified annual compensation up to annual statutory
limitations. Employee contributions may be made on a pre-tax basis to
a regular 401(k) account, or on an after-tax basis to a “Roth” 401(k)
account. The Company will contribute to the 401k Plan a “safe harbor”
match of 100% of each participant’s contributions to the 401k Plan up to a
maximum of 4% of the participant’s qualified annual earnings. The
Company’s matching contributions to the plan were approximately $32,000 for the
year ended December 31, 2008.
NOTE
14 – RECENT ACCOUNTING PRONOUNCEMENTS
Effective
January 1, 2008, the Company adopted SFAS 157, which defines fair value,
establishes a framework for measuring fair value and requires additional
disclosures about fair value measurements. In accordance with FASB
Staff Position 157-2, “Effective Date of the FASB Statement
No. 157,” the Company will defer the adoption of SFAS 157 for its
nonfinancial assets and nonfinancial liabilities, except those items recognized
or disclosed at fair value on an annual or more recurring basis, until
January 1, 2009. The partial adoption of SFAS 157 did not have a
material impact on the Company’s fair value measurements. SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions. The Company’s financial assets subject to fair value
measurements as of December 31, 2008 consisted of cash and cash equivalents,
which are categorized as level 1. As of December 31, 2008, the
Company does not have any financial liabilities. No gains or losses
resulting from the fair value measurement of financial assets were included in
the Company’s earnings. The adoption of SFAS 157 has not impacted the
Company’s results of operations and financial position.
Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities- including an amendment of FASB Statement
115” (“SFAS 159”). This statement provides companies with an
option to report selected financial assets and liabilities at fair
value. The Company has elected not to use the fair value option
allowed by SFAS 159. Accordingly, the adoption of SFAS 159 has not
impacted the Company’s results of operations and financial
position.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of
ARB No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
will be effective for the Company’s fiscal year beginning January 1, 2009.
The Company is currently evaluating the impact of SFAS 160 on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 R “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for
recognizing and measuring the goodwill acquired in a business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of a business
combination. SFAS 141R will be effective for the Company’s fiscal
year beginning January 1, 2009. While the Company has not yet
evaluated the impact, if any, that SFAS 141R will have on its consolidated
financial statements, the Company will be required to expense costs related to
any acquisitions consummated after December 31, 2008.
In
December 2007, the FASB ratified the consensus reached on Emerging Issues Task
Force Issue No. 07-1, “Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property” (“EITF 07-1”). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 will be effective for the
Company’s fiscal year beginning January 1, 2009. The Company is currently
evaluating the potential impact of this standard on its consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements that are presented in conformity
with GAAP. SFAS 162 will become effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.” The Company does not expect the adoption of SFAS
162 to have a material impact on its consolidated financial
statements.
In April
2008, the FASB issued EITF 07-05, “Determining whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” ("EITF
07-05"). EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of SFAS 133. EITF
07-05 will be effective for the Company’s fiscal year beginning January 1,
2009 and early application is not permitted. The Company is
currently evaluating the potential impact of EITF 07-05 on its consolidated
financial statements.
NOTE
15 – CONCENTRATION OF RISK
The
Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash. The Company maintains its cash at
financial institutions it considers to be of high credit
quality. Cash balances with any one institution may exceed federally
insured amounts.
NOTE
16 – SUBSEQUENT EVENTS
On
February 11, 2009, the Company issued an aggregate of 358,500 options to
purchase the Company’s common stock under the 2007 Plan, each at an exercise
price of $0.80 per share. The options were granted to directors,
officers, existing employees and consultants.
In
February 2009, the United States District Court for the District of Connecticut
granted the defendants’ motion to dismiss the securities fraud action described
in Note 9. In March 2009, SafeStitch, together with the other
plaintiffs filed an appeal of the District Court’s dismissal with the United
States 2nd Circuit
Court of Appeals. The outcomes of the appeal and the appraisal action
are not now known, nor can they be reasonably predicted at this
time.
Pursuant
to a lease amendment effective February 2009, the Company relocated its
corporate office to an alternate space within the same building for annual
payments of approximately $68,000. All other terms and conditions of
the Company’s corporate office lease remain unchanged.
In March
2009, the Company, the Frost Group and Mr. Spragens amended the Credit Facility
discussed in Note 6 above to change the Credit Facility’s Maturity Date from
December 31, 2009 to June 30, 2010. All other terms and conditions of
the Credit Facility remain unchanged.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A(T). Controls
and Procedures.
The
Company’s management, with the participation of its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) or 15d-15(e)) as of December 31, 2008. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of that date, the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this annual
report. This annual report does not include an attestation report of
our registered public accounting firm, Eisner LLP, regarding internal control
over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. 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. Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness 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.
For the
period ended December 31, 2008, pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, management (with the participation of our principal executive
officer and principal financial officer) conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that, as of
December 31, 2008, our internal control over financial reporting was
effective.
Changes
in Internal Controls Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the last quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
Item
9B.
|
Other
Information.
|
None.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2008.
Item
11.
|
Executive
Compensation.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2008.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2008.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2008.
Item
14.
|
Principal
Accounting Fees and Services.
|
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2008.
PART
IV
Item
15.
|
Exhibits,
Financial Statement Schedules
|
(a) List
of documents filed as part of this report:
1.
Financial Statements: The information required by this item is
contained in Item 8 of this Annual Report on Form 10-K.
2.
Financial Statement Schedules: The information required by this item
is included in the consolidated financial statements contained in Item 8 of this
Annual Report on Form 10-K.
3.
Exhibits: The following exhibits are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
|
|
3.1
|
Restated
Certificate of Incorporation of the Registrant, as amended, filed as Annex
A to our Definitive Information Statement on Schedule 14C filed with the
SEC on December 7, 2007 and incorporated by reference
herein.
|
|
|
3.2
|
Amended
and Restated Bylaws of SafeStitch Medical, Inc., filed as Exhibit 3.2 to
our Annual Report on Form 10-KSB, as amended, filed with the SEC on March
26, 2008 and incorporated by reference herein.
|
|
|
4.1
|
Specimen
Certificate for Common Stock of Registrant, filed as Exhibit 4.1 to our
Annual Report on Form 10-KSB, as amended, filed with the SEC on March 26,
2008 and incorporated by reference herein.
|
|
|
4.2
|
Form
of Common Stock Warrant, filed as Exhibit 4.1 to our Current Report on
Form 8-K filed with the SEC on September 10, 2007 and incorporated by
reference herein.
|
|
|
10.1
|
Form
of Lockup Agreement, filed as Exhibit 2.4 to our Current Report on Form
8-K filed with the SEC on July 31, 2007 and incorporated by reference
herein.
|
|
|
10.2
|
Note
and Security Agreement, dated as of September 4, 2008, by and among the
Company, SafeStitch LLC, the Frost Group, LLC and Jeffrey G. Spragens,
filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC
on September 10, 2007 and incorporated by reference
herein.
|
|
|
10.3
|
Exclusive
License and Development Agreement, dated as of May 26, 2006, by and
between Creighton University and SafeStitch LLC, filed as Exhibit 10.5 to
our Annual Report on Form 10-KSB, as amended, filed with the SEC on March
26, 2008 and incorporated by reference herein.
|
|
|
10.4+
|
Letter
Agreement for Terms of Employment between SafeStitch LLC and Stewart B.
Davis, M.D., dated May 16, 2007, filed as Exhibit 10.4 to our Current
Report on Form 8-K filed with the SEC on September 10, 2007 and
incorporated by reference herein.
|
|
|
10.5+
|
SafeStitch
Medical, Inc. 2007 Incentive Compensation Plan, filed as Annex B to our
Definitive Information Statement on Schedule 14C, filed with the SEC on
December 7, 2007 and incorporated by reference herein.
|
|
|
10.6+
|
Offer
Letter from SafeStitch Medical, Inc. to Adam S. Jackson, dated March 11,
2008, filed as Exhibit 10.1 to our Current Report on Form 8-K filed with
the SEC on April 3, 2008 and incorporated by reference
herein.
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10.7
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Form
of Subscription Agreement, filed as Exhibit 10.1 to our Current Report on
Form 8-K filed with the SEC on May 29, 2008 and incorporated by reference
herein.
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10.8*
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Amendment
to Note and Security Agreement, dated March 25, 2009, by and among the
Company, SafeStitch LLC, the Frost Group, LLC and Jeffrey G.
Spragens.
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Exhibits:
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14.1
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Code
of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 filed
as exhibit 14 to our Annual Report on Form 10-K filed with the SEC on
March 30, 2004 and incorporated by reference herein.
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21.1*
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Subsidiaries
of the Registrant
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31.1*
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Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
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31.2*
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Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
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32.1*
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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32.2*
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002
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+
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Compensation
Plan or Arrangement or Management
Contract
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SIGNATURES
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.
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SAFESTITCH
MEDICAL, INC.
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Date: March
27, 2009
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By:
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/s/ Jeffrey G.
Spragens
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Jeffrey G. Spragens
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Chief Executive Officer and
President
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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.
Signature
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Title
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Date
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/s/ Jeffrey G.
Spragens
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Chief
Executive Officer and President (Principal
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March
27, 2009
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Jeffrey
G. Spragens
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Executive
Officer)
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/s/ Jane H. Hsiao,
Ph.D.
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Chairman
of the Board of Directors
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March
27, 2009
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Jane
H. Hsiao, Ph.D.
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/s/ Dr. Charles
Filipi
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Medical
Director and Director
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March
27, 2009
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Dr.
Charles Filipi
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/s/ Dr. Kenneth
Heithoff
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Director
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March
27, 2009
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Dr.
Kenneth Heithoff
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/s/ Steven D.
Rubin
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Director
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March
27, 2009
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Steven
D. Rubin
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/s/ Richard Pfenniger,
Jr.
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Director
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March
27, 2009
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Richard
Pfenniger, Jr.
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/s/ Kevin Wayne
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Director
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March
27, 2009
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Kevin
Wayne
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/s/ Adam S.
Jackson
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Chief
Financial Officer (Principal Financial Officer)
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March
27, 2009
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Adam
S. Jackson
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Exhibit
10.8
FIRST AMENDMENT TO NOTE AND
SECURITY AGREEMENT
THIS FIRST AMENDMENT (THE “FIRST
AMENDMENT”) DATED MARCH
25, 2009 TO THE NOTE AND
SECURITY AGREEMENT (THE
“AGREEMENT”) DATED AS OF
SEPTEMBER 4, 2007 AMONG
SAFESTICH MEDICAL, INC., SAFESTITCH, LLC (COLLECTIVELY THE “BORROWER”) AND THE
UNDERSIGNED LENDERS (“LENDERS”).
RECITALS
WHEREAS, Borrower and Lenders
(collectively, the “Parties”) are parties to the Agreement which became
effective on September 4, 2007; and
WHEREAS, the Borrowers and
Lenders desire to amend the Agreement to extend the Maturity Date (as defined in
the Agreement) from December 31, 2009 until June 30, 2010.
NOW THEREFORE, in
consideration of the mutual covenants and promises contained in the Agreement
and this First Amendment and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Borrower and Lenders agree as
follows:
AMENDMENT
1. Extension of Maturity
Date. Section 3 of the Agreement is hereby amended and
restated in its entirety as follows:
Payments of Obligations,
including Principal and Interest. The
principal amount of the Loan evidenced hereby, together with any accrued and
unpaid interest, and any and all the Obligations, including unpaid costs, fees
and expenses accrued, such as Lender’s Expenses, shall be due and payable in
full on June 30, 2010 (the “Maturity
Date”).
2. Governing Law. This
First Amendment shall be governed by the laws of the State of Florida without
regard to its conflict of laws rules or principles.
3. Amendments. Except
as expressly amended hereby, the Agreement shall remain unmodified and in full
force and effect.
4. Entire
Agreement. This First Amendment and the Agreement and any
schedules or exhibits attached to the Agreement constitute the entire agreement
of the Parties with respect to the subject matter hereof and supersede all prior
understandings and writings between the Parties relating thereto.
5. Interpretation. Any
capitalized terms used in this First Amendment but not otherwise defined shall
have the meaning provided in the Agreement.
6. Counterparts. This
First Amendment may be executed manually, electronically in Adobe® PDF file
format, or by facsimile by the Parties, in any number of counterparts, each of
which shall be considered one and the same amendment and shall become effective
when a counterpart hereof shall have been signed by each of the Parties and
delivered to the other Party.
Exhibit 10.8
IN WITNESS WHEREOF, the
Parties hereto have caused this First Amendment to be executed
in their names as of the date first written above.
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SAFESTITCH
MEDICAL, INC.
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By:
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/s/ Adam S. Jackson
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Name: Adam
S. Jackson
Title:
Chief Financial Officer
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SAFESTITCH
LLC
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By:
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/s/ Adam S. Jackson
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Name: Adam
S. Jackson
Title:
Chief Financial Officer
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THE
FROST GROUP, LLC
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By:
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/s/ Phillip Frost, M.D.
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Name:
Phillip Frost, M.D.
Title:
President
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JEFFREY
G. SPRAGENS
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By:
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/s/ Jeffrey G. Spragens
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Name:
Jeffrey G. Spragens
Title:
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SUBSIDIARIES
Name of Subsidiary
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State of Incorporation
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Name Under Which Subsidiary Is Doing
Business
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Isis
Tele-Communications, Inc.
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Delaware
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Isis
Tele-Communications, Inc.
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SafeStitch
LLC
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Virginia
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SafeStitch
LLC
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CERTIFICATIONS
I,
Jeffrey G. Spragens, certify that:
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(1)
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I have reviewed this Annual
Report on Form 10-K of SafeStitch Medical,
Inc.;
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(2)
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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;
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(3)
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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;
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(4)
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The registrant's other certifying
officer(s) 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:
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(a)
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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;
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(b)
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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;
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(c)
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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
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(d)
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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
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(5)
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The registrant's other certifying
officer(s) 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):
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(a)
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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
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(b)
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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.
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By:
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/s/ Jeffrey G.
Spragens
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Jeffrey
G. Spragens |
Chief
Executive Officer (Principal Executive Officer) |
March
27,
2009 |
CERTIFICATIONS
I, Adam
S. Jackson, certify that:
|
(1)
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I have reviewed this Annual
Report on Form 10-K of SafeStitch Medical,
Inc.;
|
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(2)
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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;
|
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(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(s) 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
|
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(5)
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The registrant's other certifying
officer(s) 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.
|
By:
|
/s/ Adam S.
Jackson
|
Adam
S. Jackson |
Chief
Financial Officer |
March
27,
2009 |
CERTIFICATION
PURSUANT
TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the accompanying Annual Report on Form 10-K of SafeStitch
Medical, Inc. for the fiscal year ended December 31, 2008 (the “Report”), the
undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge and belief, that:
(1)
|
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
(2)
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of SafeStitch
Medical, Inc.
|
By:
|
/s/ Jeffrey G.
Spragens
|
Jeffrey
G. Spragens
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Chief
Executive Officer and President
|
March
27 , 2009
|
The
certification set forth above is being furnished as an Exhibit solely pursuant
to Section 906 of the Sarbanes—Oxley Act of 2002 and is not being filed as part
of the Report or as a separate disclosure document of SafeStitch Medical, Inc.
or the certifying officers
CERTIFICATION
PURSUANT
TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the accompanying Annual Report on Form 10-K of SafeStitch
Medical, Inc. for the fiscal year ended December 31, 2008 (the “Report”), the
undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge and belief, that:
(1)
|
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
(2)
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of SafeStitch
Medical, Inc.
|
By:
|
/s/ Adam S.
Jackson
|
Adam
S. Jackson
|
Chief
Financial Officer
|
March
27 , 2009
|
The
certification set forth above is being furnished as an Exhibit solely pursuant
to Section 906 of the Sarbanes—Oxley Act of 2002 and is not being filed as part
of the Report or as a separate disclosure document of SafeStitch Medical, Inc.
or the certifying officers