Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
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to
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Commission File Number 0-19437
SAFESTITCH MEDICAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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11-2962080 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
4400 Biscayne Blvd., Suite A-100, Miami, Florida, 33137
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (305) 575-4145
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o
Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. o
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data file required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
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 registrants
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. þ
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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
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, 2009, was: $3.7 million.
As of March 15, 2010 there were 17,962,718 shares of Common Stock, $0.001 par value per
share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated by reference to our Definitive
Proxy Statement on Schedule 14A to be filed in respect of our 2010 Annual Meeting of
Stockholders.
SAFESTITCH MEDICAL, INC.
TABLE OF CONTENTS FOR FORM 10-K
2
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 and commercialization 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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Healthcare policy changes, including recently enacted legislation reforming the U.S.
healthcare system, may have a material adverse effect on our financial condition and
results of operations. |
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The continuing 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 our devices and with devices similar to
those that we are developing may not be predictive of results with our products and product
candidates, 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 products and product candidates, and we
cannot give any assurance that our product candidates will receive regulatory clearance or
that any of our products and future products 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 products and future products, 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 and approval processes are expensive, time-consuming and
uncertain and may prevent us or our collaboration partners from obtaining clearances or
approvals, as the case may be, 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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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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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 products and 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, 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 rely on third parties to manufacture and supply our products, and we will rely on
third parties to manufacture and supply our product candidates, and an inability to find
additional or alternate sources for our products could materially and adversely affect our
financial condition and results of operations. |
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We currently have a limited sales, marketing and 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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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, particularly our license with Creighton
University (Creighton), and any loss of our rights under such license agreements could
materially adversely affect our business prospects. |
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Most of our patent rights are licensed to us by Creighton. If we or Creighton do not
properly maintain or enforce the patent applications underlying this license, or if we lose
our rights under this license, our competitive position and results of operations will be
materially adversely affected. |
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If we or our licensors 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 our licensors 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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Some jurisdictions may require us or our licensors to grant licenses to third parties.
Such compulsory licenses could be extended to include some of our products and product
candidates, which may limit our potential revenue opportunities. |
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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, any of which could materially adversely affect our liquidity, business prospects
and results of operations. |
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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 has been, and may continue to be, highly volatile,
and such volatility could cause the market price of our common stock to decrease and could
cause you to lose some or all of your investment in our common stock. |
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Trading of our common stock is limited, and trading restrictions imposed on us by
applicable regulations may further reduce trading in our common stock, making it difficult
for our stockholders to sell their shares, and future sales of our common stock could
reduce our stock price. |
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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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Because our preferred stock accumulates dividends and has preferential liquidation and
conversion features relative to our common 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.
More information about us may be found at our website: www.SafeStitch.com. Information
contained on our website is not incorporated by reference and does not comprise a part of this
Annual Report on Form 10-K. Please refer to page 20 for a glossary of certain medical terms used
in this Annual Report on Form 10-K.
General
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, 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, SafeStitch LLC
and the members of SafeStitch LLC. The Share Exchange Agreement provided for the exchange of all
issued and outstanding membership interests of SafeStitch 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 SafeStitch LLC in exchange for all of their membership
interests in SafeStitch LLC. We also granted warrants to purchase a total of 805,521 shares of our
common stock to The Frost Group, LLC (The Frost Group) 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 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 and is the largest beneficial holder of our shares of common stock. Dr. Jane Hsiao,
our Chairman, and Steven D. Rubin, one of our directors, also are members of The Frost Group.
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 SafeStitch LLC.
Accounting Treatment
The Share Exchange was accounted for as a recapitalization of SafeStitch LLC, and SafeStitch
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
SafeStitch LLC and the issuance of stock by SafeStitch 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.
Company Overview
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, Barretts Esophagus, upper gastrointestinal bleeding,
and other intraperitoneal abnormalities through endoscopic and minimally invasive surgery.
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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 AMID StaplerTM, SMART DilatorTM, and standard and airway bite blocks.
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 Barretts Esophagus. Clinical trials for our gastroplasty product
candidates are anticipated to begin in the second half of 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 |
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 J. Filipi, our Chief Medical Officer, has been a pioneer in laparoscopic surgery
and endoluminal surgery at Creighton and is past president of the American Hernia Society. He has
been the lead physician responsible for the development of our product candidates, and he has
relationships with a number of physicians who are experts in these fields. We believe that Dr.
Filipi will be able to utilize his expertise and these relationships to facilitate device
development and the opportunities mentioned above. Some of these experts are part of our medical
advisory board.
Market Opportunities
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, Barretts Esophagus and other
intraperitoneal abnormalities; and |
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An increased awareness of the benefits of minimally invasive surgery. |
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, roughly
25% of the U.S. population is 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.
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Current treatment options for obesity include exercise and dieting, prescription drugs and
bariatric surgical alternatives. 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.
An estimated 350,000 to 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. Gastric bypass
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 bodys
ability to absorb nutrients from food. 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 Barretts Esophagus. 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. A significant portion 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 Barretts Esophagus, a precancerous change to the thin layer of tissue
lining the esophagus. Barretts 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 patients teeth.
Our AMID StaplerTM is designed for use in open surgical repair of both inguinal
(groin) and ventral (abdominal) hernias. Hernias impact approximately 1% of the Worlds
population, and roughly 800,000 inguinal hernias are repaired annually in the United States.
Greater than 80% of the surgeries worldwide 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. Hernias are also repaired through open incision without
affixing mesh, and laparoscopically either with or without mesh reinforcement.
Products
The AMID StaplerTM
We developed the AMID StaplerTM in cooperation with Dr. Parviz Amid, a pioneer of
and renowned expert in the Lichtenstein Hernia Repair. This stapler utilizes non-absorbable
titanium staples for the repair of inguinal (groin) or ventral (abdominal) 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 to perform and could reduce postoperative pain as compared
to traditional hand suturing techniques and currently available staplers. In November 2009, we
received FDA clearance to market the AMID StaplerTM in the U.S. as a Class II device,
and, in February 2010, we received CE Mark clearance to market the stapler in the European Union
and other countries requiring CE clearance. We commenced production of the AMID
StaplerTM in 2010, and we expect to begin commercial sales of the AMID
StaplerTM before the end of the first half of 2010.
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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.
Research indicates 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.
In February 2009, we received FDA clearance to market the SMART DilatorTM in the
U.S. as a Class II device, and we are currently evaluating commercialization options.
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 to test 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.
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.
We are currently evaluating commercialization options for the Standard and Airway Bite Blocks.
Product Candidates
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 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.
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The Gastroplasty Device is the most tested of our devices, and our testing to date has
demonstrated 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. 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 the second half of 2010, following FDA review of our clinical
trial protocols, as described below. 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 is a Class II 510k device that will require IDE (investigational device exemption) clinical
data for FDA approval. We are preparing our clinical trial protocols for this device and
anticipate submitting the final IDE trial plans to the FDA for review by the end of the first half
of 2010.
Barretts Excision and Ablation Device for Treatment and Diagnosis (Barretts Device)
We believe the Barretts Device is the only device that is designed to assist in both the
diagnosis of and treatment of Barretts Esophagus. Barretts 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. Barretts 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 Barretts
Device allows the mucosa to be suctioned, sliced off and tested. The device also allows for
cauterization of the affected area. No incision will be 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 Barretts
Device has been successful in excision width, length, depth and contour. We presently expect to
conduct the first human testing of the Barretts Device in 2011. 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 is a Class II 510(k) device that will require IDE clinical data to support a premarket
notification for FDA clearance.
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.
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Intellectual Property
We have exclusively licensed technology, know-how and patent applications from Creighton for
most of our products and 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 ten patent applications pending
in the United States, including nine that are exclusively licensed from Creighton. We are also
pursuing several of these patents internationally, and one such international patent has been
issued.
Pursuant to our exclusive license and development agreement with Creighton (the Creighton
Agreement), 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
Creighton 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 Creighton
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 universitys 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 the Creighton Agreement, which grants us the right 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. Pursuant to the Creighton 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 Creighton Agreement does not provide for
minimum royalties.
11
Creighton provides all necessary facilities, including animal research laboratories, to
accommodate Dr. Filipis research and development of licensed products and product candidates, and
we compensate Creighton for the use of such facilities in accordance with the Creighton Agreement.
We recorded expenses during 2009 and 2008
of $41,000 and $177,000, 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. Also 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 or product candidate 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, 2009,
we had invested $6.4 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 incurred in connection with the Creighton
Agreement, we have incurred research and development costs and expenses of $1.2 million and $2.5
million for the years ended December 31, 2009 and 2008, respectively.
In January 2007, we signed a consulting agreement with Dr. Parviz Amid, past president of the
American Hernia Society and a pioneer of and renowned expert in the Lichtenstein hernia repair.
Under this agreement, we have agreed to pay Dr. Amid a 4% royalty based on the worldwide net sales
of any product developed by the Company with his assistance, including the AMID
StaplerTM, for a period of ten years from the first commercial sale of each such
product.
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. The following table sets forth some of the companies whose products we expect to
compete with our products and product candidates:
|
|
|
Product or Product Candidate |
|
Significant Competitor(s) |
|
|
|
Gastroplasty Device
|
|
USGI Medical, Satiety, Endo Gastric
Solutions, Inc. and Medigus, Ltd. |
|
|
|
Barretts Device
|
|
Olympus Medical Equipment Services
America, Inc. and BARRX Medical, Inc. |
|
|
|
AMID StaplerTM
|
|
Covidien and Ethicon, Inc. |
|
|
|
SMART DilatorTM
|
|
Boston Scientific Corporation, Cook
Medical Supply, Inc., Miller Medical
Specialties and U.S. Endoscopy |
|
|
|
Standard and Airway Bite Blocks
|
|
Bard, LLC, ConMed Corporation, U.S.
Endoscopy, Omni Medical Supply, Inc. and
Olympus Medical Equipment Services
America, Inc. |
|
|
|
T Fastener Gun
|
|
Cook Medical Supply, Inc. and Olympus
Medical Equipment Services America, Inc. |
12
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 products
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 Self-Referral Law (commonly referred
to as the Stark Law), 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, by the Department of Veterans Affairs under, among other laws, the Veterans Health Care
Act of 1992, by the Public Health Service within HHS under the Public Health Service Act, by the
Department of Justice through the Federal False Claims Act and various criminal statutes, and by
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.
13
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 Predicate Device (a device first marketed prior to
May 28, 1976 or a device marketed after that
date which was substantially equivalent to a pre-May 28, 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 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. The FDA permits certain low risk medical
devices to be marketed without requiring the manufacturer to submit a premarket notification. In
other instances, the FDA may not only require that a premarket notification be submitted, but also
that such notification 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)
should take about 90 days on average, but it can take substantially longer if the agency has
concerns. Furthermore, 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 (a) not
substantially equivalent to a Predicate Device or (b) 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 companys 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
Gastroplasty Device or any other 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 the 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 or cleared by the FDA or deemed approved, the
study is subject to factors beyond a manufacturers 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. The interim results of a study may also 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 or 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.
14
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
which could affect the devices 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 FDAs Quality System Regulation requirements and other regulations. In the
European Union, we will be required to maintain certain International Organization for
Standardization (ISO) certifications in order to sell products and we and/or our manufacturers
must undergo periodic inspections by notified bodies to obtain and maintain these certifications.
These regulations require us and 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.
Recently Enacted Health Care Reform Legislation
Congress recently passed health care reform legislation that President Obama signed into law
in March 2010. The package signed into law by the President is considered by some to be the most
dramatic change to the countrys health care system in decades.
The principal aim of the law as currently enacted is to expand health insurance coverage to
approximately 32 million Americans who are currently uninsured. The laws most far-reaching
changes do not take effect until 2014, including a requirement that most Americans carry health
insurance. The effect of these significant coverage expansions on the sales of the Companys
products is unknown and speculative at this point.
The enacted legislation contains many provisions designed to generate the revenues necessary
to fund the coverage expansions. The most relevant of these provisions are those that impose fees
or taxes on certain health-related industries, including medical device manufacturers. Beginning
in 2013, each medical device manufacturer will have to pay an excise tax (or sales tax) in an
amount equal to 2.3 percent of the price for which such manufacturer sells its medical devices.
This tax applies to all medical devices, including the Companys products and product candidates.
The legislation as enacted also provides for increased enforcement of the fraud and abuse
regulations discussed below.
15
Third-Party Payments, Especially Payments by Medicare and Medicaid
A. Medicare Coverage
Because some 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
Gehrigs 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
devices 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:
|
|
|
Medicare beneficiary has a body-mass index of 35 or greater; |
|
|
|
Medicare beneficiary has at least one co-morbidity related to obesity such as diabetes
or hypertension; |
|
|
|
Medicare beneficiary has been previously unsuccessful with medical treatment for
obesity; and |
|
|
|
Procedure is performed in an approved facility and the surgical procedure is of a type
expressly approved by CMS. |
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.
16
B. Reimbursement Levels
Even if Medicare and other third-party payor programs cover the procedures that use 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 physicians 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
physicians 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 patients 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:
|
|
|
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; |
|
|
|
The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as
amended, commonly referred to as the Stark Law, Sections 1877 and 1903(s) 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. |
|
|
|
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; |
|
|
|
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 |
|
|
|
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. |
17
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/or Medicaid payments or exclusion from the Medicare and/or Medicaid programs. 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 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 regularly subject 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 suppliers 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 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 HITECH Act provisions of the American
Recovery and Reinvestment Act of 2009 increase the duties of business associates and covered
entities with respect to protected health information, thereby subjecting them to direct government
regulation, increasing their compliance costs and their exposure to civil monetary penalties and
other government sanctions. While the new law does not alter the definition of a business
associate, it makes it more likely that covered entities with whom we are likely to do business
will require us to enter into business associate agreements.
Manufacturing
We have no commercial manufacturing facilities, and we do not intend to build our own
commercial manufacturing facilities in the foreseeable future. We have entered into and intend to
enter into agreements with third parties for the design and manufacture of our products. We make
prototypes of certain of our product candidates in our Miami, Florida prototype laboratory for
testing, including for limited use in animal or human clinical testing. 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.
18
Sales & Marketing
We currently have limited sales, marketing and distribution personnel. In order to
commercialize any products that are approved or cleared for commercial sale, we must either build a
sales and marketing infrastructure, collaborate with third parties possessing sales and marketing
experience or utilize a combination of internal and third party resources. We may build our own
sales and marketing infrastructure to market some of our product candidates, or we may 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 distribute our products, including our
AMID StaplerTM, through our own sales and marketing organization; however there can be
no assurance that we will be able to successfully build such an infrastructure. We are also in
discussions with companies possessing established sales and marketing operations in the medical
device industry, but 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, 2009, we had ten full-time employees, six of whom hold advanced degrees.
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, 68, 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, 30, has served as our Chief Operating Officer 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. Since
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, 69, has served as our Chief Medical Officer (f/k/a 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. Dr.
Filipi has also 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, Barretts
Esophagus, gastrointestinal bleeding and natural orifice transluminal intraperitoneal surgery.
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Adam S. Jackson. Mr. Jackson, 47, 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 Levitts financial planning and
analysis activities. From 2003 to 2006, Mr. Jackson served as Levitts Senior Vice President,
Controller, during which period he supervised Levitts 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.
Glossary of Terms
Barretts 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 the surgical manipulation of gastric (stomach) tissue.
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.
Inguinal refers to the groin area or lower lateral region of the abdomen.
Intraluminal refers to 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.
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Transoral refers to procedures originating through the mouth.
Transluminal is the egress of instrumentation across the intestinal wall.
Ventral refers to the abdominal area.
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.
Risks Related to our Business
We have a history of operating losses and we do not expect to become profitable in the near
future.
We are a 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 quarter of 2010. Only four of our products 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, 2009 and 2008 were $2.4 million and
$5.2 million, respectively, and we had an accumulated deficit of $11.7 million as of December 31,
2009. 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 our 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.
Healthcare policy changes, including recently enacted legislation reforming the U.S.
healthcare system, may have a material adverse effect on our financial condition and results of
operations.
Healthcare costs have risen significantly over the past decade, and there have been and
continue to be proposals by legislators, regulators and third-party payors to keep these costs
down. Congress recently passed health care reform legislation that President Obama signed into law
in March 2010. The package signed into law by the President is considered by some to be the most
dramatic change to the countrys health care system in decades.
The principal aim of the law as currently enacted is to expand health insurance coverage to
approximately 32 million Americans who are currently uninsured. The laws most far-reaching
changes do not take effect until 2014, including a requirement that most Americans carry health
insurance. The effect of these significant coverage expansions on the sales of the Companys
products is unknown and speculative at this point.
The enacted legislation contains many provisions designed to generate the revenues necessary
to fund the coverage expansions. The most relevant of these provisions are those that impose fees
or taxes on certain health-related industries, including medical device manufacturers. Beginning
in 2013, each medical device manufacturer will have to pay an excise tax (or sales tax) in an
amount equal to 2.3 percent of the price for which such manufacturer sells its medical devices.
This tax applies to all medical devices, including the Companys products and product candidates.
In addition to the new legislation discussed above, various healthcare reform proposals have
also emerged at the state level. We cannot predict what additional healthcare initiatives, if any,
will be implemented at the federal or state level, or the effect any such future legislation or
regulation will have on us. In addition to the taxes imposed by the new federal legislation, an
expansion in governments role in the U.S. healthcare industry may lower reimbursements for our
products, reduce medical procedure volumes and materially adversely affect our business, financial
condition and results of operations.
21
The continuing 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 and preferred 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 worlds 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, scientific, medical and sales and
marketing 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, Barretts 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 clinical experience with our devices and devices similar to those that
we are developing 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 early
clinical experience with the test articles or 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.
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We are highly dependent on the success of our products and product candidates, and we cannot
give any assurance that our product candidates will receive regulatory clearance or that any of our
products or future products will be successfully commercialized.
We are highly dependent on the success of our products and product candidates, especially the
Gastroplasty Device and the AMID StaplerTM. We cannot give any assurance that the FDA
will permit us to clinically test or grant regulatory clearance for the Gastroplasty Device, nor
can we give any assurance that these products will 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 products and future products, 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, Satiety, EndoGastric Solutions, Inc., Medigus, Ltd.,
Bard, LLC, Olympus Medical Equipment Services America, Inc., BARRX Medical, Inc., Covidien,
Ethicon, Inc., Boston Scientific Corporation, ConMed Corporation, Cook Medical Supply, Inc., Miller
Medical Specialties, U.S. Endoscopy 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 products or future products, or that reach the market sooner than our product
candidates, 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 protocols
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 (IRB) approval or renewal to
conduct a clinical trial at a prospective or accruing site, respectively. |
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. |
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.
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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 received marketing clearance for only our AMID StaplerTM and
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 future product candidates 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. |
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 manufacturers processes or facilities; or |
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the FDA may change its clearance or approval policies or adopt new regulations. |
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.
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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.
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.
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 products
and 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 FDAs
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. |
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.
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Even if we receive regulatory clearance or approval to market our product candidates, the
market may not be receptive to our products, or third-party payors, including government payors,
may not provide coverage for our products or for procedures using our products, which could
undermine our financial viability.
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
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availability of coverage and reimbursement from government and other third-party payors. |
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, marketing 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 J. 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.
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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 and begin
commercializing our products, 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 utilize in-licensing as a source of 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.
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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 products, and we will rely on third
parties to manufacture and supply our product candidates, and an inability to find additional or
alternate sources for our products could materially and adversely affect our financial condition
and results of operations.
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 products and
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 products and 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 products and future products, 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 products. Such approval may 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 a limited sales, marketing and 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. We intend to
establish our sales and marketing organization with technical expertise and supporting distribution
capabilities to commercialize our products and 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. 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 products and product candidates. If we are not successful in
commercializing our existing and future products, 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.
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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.
We rely heavily on licenses from third parties, particularly our license with Creighton, and
any loss of our rights under such license agreements could materially adversely affect our business
prospects.
Most of the patent applications in our patent portfolio are not owned by us, but are licensed
from Creighton and other third parties. 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.
Most of our patent rights are licensed to us from Creighton. If we or Creighton do not
properly maintain or enforce the patent applications underlying this license, or if we lose our
rights under this license, our competitive position, business prospects and results of operations
will be materially adversely affected.
Our success will depend in part on the ability of us or Creighton to obtain, maintain and
enforce patent protection for our licensed intellectual property and, in particular, those patents
to which we have secured exclusive rights. We or Creighton may not successfully prosecute the
patent applications which are licensed to us. Even if patents issue in respect of these patent
applications, we or Creighton 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 necessary to obtain an acceptable outcome from any such litigation. Without
protection for the intellectual property we have licensed, other companies might be able to offer
substantially identical products for sale, which could materially adversely affect our competitive
business position, business prospects and results of operations.
If we or our licensors are unable to obtain and enforce patent protection for our products and
product candidates, 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 numerous patent applications are in process,
we presently do not hold any U.S.-issued patents and none of the technology we license has been
patented in the U.S. 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.
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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 or our licensors 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 individuals 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.
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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.
Some jurisdictions may require us or our licensors 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, any of which could
materially adversely affect our liquidity, business prospects and results of operations.
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 managements 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.
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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.
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 (DME), they may be subject to distribution under
Medicares Competitive Acquisition regulations, which 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 products and product candidates in non-U.S. markets. In
order to market our existing and future products 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 products 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 some 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 countrys or regions 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. |
Risks Related to Our Common Stock
The market price of our common stock has been, and may continue to be, highly volatile, and
such volatility could cause the market price of our common stock to decrease and could cause you to
lose some or all of your investment in our common stock.
For the two years ended December 31, 2009, the market price of our common stock has fluctuated
from a high of $5.20 per share to a low of $0.40 per share. The market price of our common stock
may continue to fluctuate significantly in response to numerous factors, some of which are beyond
our control, such as:
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the announcement of new products or product enhancements by us or our competitors; |
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developments concerning intellectual property rights and regulatory approvals; |
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variations in our and our competitors results of operations; |
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changes in earnings estimates or recommendations by securities analysts, if our common
stock is covered by analysts; |
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developments in the medical device industry; |
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the results of product liability or intellectual property lawsuits; |
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future issuances of common stock or other securities; |
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the addition or departure of key personnel; |
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announcements by us or our competitors of acquisitions, investments or strategic
alliances; and |
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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. The volatility of our
common stock is further exacerbated due to its low trading volume. 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 and the loss of some or all of your investment.
Some or all of the restricted shares of our common stock issued in connection with the Share
Exchange, our 2008 private placement, shares issuable upon conversion of our Series A Preferred
Stock and shares of restricted common stock held by other of our stockholders may be offered from
time to time in the open market pursuant to an effective registration statement under the
Securities Act or without registration pursuant to Rule 144 promulgated thereunder, and these sales
may have a depressive effect on the market price of our common stock.
Trading of our common stock is limited, and trading restrictions imposed on us by applicable
regulations may further reduce trading in our common stock, making it difficult for our
stockholders to sell their shares; and future sales of common stock could reduce our stock price.
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 medias
coverage of us, if at all. Approximately 73% of the issued and outstanding shares of our
common stock is held by officers, directors and beneficial owners of at least 10% of our
outstanding shares, each of whom is subject to certain restrictions with regard to trading our
common stock.
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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 asked prices for our common stock. In
addition, without a large public 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, if at all.
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, and you may lose all or a
portion of your investment in our common stock.
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 risk-disclosure 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 purchasers 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.
Because our preferred stock accumulates dividends and has preferential liquidation and
conversion features relative to our common 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.
Holders of our 10% Series A Cumulative Convertible Preferred Stock (the Series A Preferred
Stock) are entitled to cumulative dividends at a rate of 10% per annum, which must be paid before
any dividends are paid to holders of our common stock. The Series A Preferred Stock has a
liquidation preference equal to the $1.00 per share original issue price plus all cumulative unpaid
and undeclared dividends, which liquidation preference ranks senior to our common stock and must be
paid in full before the proceeds of any liquidation may be paid to holders of our common stock.
The Series A Preferred Stock is also convertible into common stock at an initial conversion price
of $1.00 per share of common stock, subject to certain adjustments, and any conversion of Series A
Preferred Stock into common stock by the holders thereof or by the Company would result in dilution
to the existing holders of our common stock. These factors may result in lower market prices for
our common stock and could also result in a larger spread between the bid and asked prices for our
common stock.
36
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, 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 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 lease approximately 3,200 square feet under the
lease agreement, which is for a five-year term that began on January 1, 2008.
Additionally, we lease approximately 462 square feet of office space in Omaha, Nebraska. This
facility includes one administrative office used by Dr. Filipi, who is based in Omaha, Nebraska and
is our Chief Medical Officer and one of the members of our Board of Directors. We also lease
approximately 1,200 square feet of warehouse space in Miami, Florida which is used as our prototype
lab.
|
|
|
Item 3. |
|
Legal Proceedings. |
We were 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 (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 sought 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. We and the other plaintiffs terminated both the securities
fraud and appraisal actions in December 2009 pursuant to settlement and release agreements related
to the litigation whereby TruePosition agreed to pay each plaintiff approximately $4.72 per share
of TruePosition common stock owned by such plaintiff. In December 2009, after deducting
approximately $87,000 of legal fees and related administrative costs, we received cash proceeds of
approximately $816,000 from the settlement. Prior to the settlement, we had paid approximately
$81,000 towards legal and administrative costs, and we are obligated to contribute to any remaining
legal and administrative costs based on our pro-rata participation in the litigation and
settlement. We do not anticipate that our pro rata portion of any remaining legal or administrative
costs will be material.
|
|
|
Item 4. |
|
(Removed and Reserved). |
37
PART II
|
|
|
Item 5. |
|
Market for Registrants 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.
|
|
|
|
|
|
|
|
|
|
|
Bid Prices |
|
|
|
High |
|
|
Low |
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.00 |
|
|
$ |
0.45 |
|
Second Quarter |
|
|
1.06 |
|
|
|
0.50 |
|
Third Quarter |
|
|
1.15 |
|
|
|
0.51 |
|
Fourth Quarter |
|
|
1.25 |
|
|
|
0.53 |
|
|
|
|
|
|
|
|
|
|
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 |
|
As of March 15, 2010, 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, 2009 and 2008, 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.
|
|
|
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.
38
|
|
|
Item 7. |
|
Managements 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 and commercialization 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, FDA-registered medical device company focused on the development
of medical devices that manipulate tissues for obesity, GERD, hernia formation, esophageal
obstructions, Barretts 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 AMID StaplerTM, SMART DilatorTM, and standard and airway bite blocks.
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 Barretts Esophagus. Clinical trials for our gastroplasty product
candidates are anticipated to begin in the second half of 2010.
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 $11.7 million from September 15, 2005 (inception) through December 31,
2009. Such losses included $2.4 million and $5.2 million for the years ended December 31, 2009 and
2008, respectively. At December 31, 2009, we had an accumulated deficit of $11.7 million. Since
we do not currently generate revenue from any of our products, including those already cleared for
commercial marketing by the FDA, we expect to continue to generate losses in connection with the
initial commercial launch of such FDA-cleared 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.
39
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Research and Development (R&D) costs and expenses were $1.3 million for the year ended
December 31, 2009, as compared to $2.7 million for the year ended December 31, 2008. This $1.4
million decrease resulted primarily from a reduction in R&D staffing in early 2009 as we completed
development of certain product candidates and focused our development activities on the AMID
StaplerTM and Gastroplasty Device. R&D expense is anticipated to increase significantly
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 $1.4 million for the year ended December
31, 2009 as compared to $1.7 million for the year ended December 31, 2008. This $253,000 decrease
is primarily related to reductions in stock-based compensation expense, accounting and legal fees,
and rent and occupancy costs. General and administrative costs and expenses consist 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 2010 from the
addition of sales and marketing personnel as we commence commercialization activities for our AMID
StaplerTM, which was cleared for U.S. marketing in November 2009 and for European Union
marketing in February 2010. Additionally, we expect increased costs to comply with the reporting
and other obligations applicable to public companies.
Other income of $903,000 for the year ended December 31, 2009 resulted from the gain
recognized upon the disposition of our investment in TruePosition, pursuant to the litigation
settlement described in Item 3 above and in Note 4 of the accompanying audited consolidated
financial statements. Other income was negligible for the year ended December 31, 2008.
Interest income was negligible for the year ended December 31, 2009, as compared to $24,000
for the year ended December 31, 2008. This $24,000 decrease was primarily due to lower invested
cash balances resulting from the use of cash in our operating activities. Interest expense was
$19,000 for the year ended December 31, 2009, as compared to $24,000 for the year ended December
31, 2008. This $5,000 decrease was due to lower outstanding balances under the Credit Facility
during the 2009 fiscal year.
Liquidity and Capital Resources
As a result of our significant R&D expenditures and the lack of any product sales revenue, we
have not been profitable and have generated operating losses since inception. We do not expect to
have any source of revenues before the second half of 2010, and we expect to incur losses from
operations for the foreseeable future. Beginning in 2010, we expect to incur increasing R&D 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
regulatory compliance and administrative staff and add sales and marketing personnel and
infrastructure.
To date, we have funded our operations primarily with proceeds from the private placement of
stock and credit facilities available to us from our stockholders. 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 worlds 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 took steps throughout 2009 to minimize our
near-term cash requirements by focusing our product development efforts primarily on those product
candidates which we believed would have the most
promising market potential and the shortest remaining development time, including the
Gastroplasty Device and AMID StaplerTM.
40
As a result of these actions, we have received FDA and CE Mark clearance to begin marketing
the AMID StaplerTM in the U.S., European Union and certain other countries, and we are
preparing to commence clinical trials of our Gastroplasty Device. Commencing such
commercialization and clinical trial activities are anticipated to significantly increase our cash
requirements throughout 2010 and into the foreseeable future. Our management believes that our
cash balance as of December 31, 2009 of approximately $871,000, together with the $2.0 million of
proceeds from the January 2010 issuance of Series A Preferred Stock and the $4.0 million
availability under our existing line of credit, the maturity date of which has been extended from
June 2010 to June 2011, is sufficient to fund our current cash flow requirements through at least
the end of 2010. 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
commercialization efforts and 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 R&D 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.
41
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
42
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, 2009 and 2008, and the related
consolidated statements of operations, stockholders equity, and cash flows for the years ended December 31,
2009 and 2008 and for the period from September 15, 2005 (inception) through December 31, 2009.
These financial statements are the responsibility of the Companys 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 Companys 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 Companys 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, 2009 and 2008 and
the consolidated results of their operations and cash flows for the years ended December 31, 2009
and 2008 and for the period from September 15, 2005 (inception) through December 31, 2009, in
conformity with accounting principles generally accepted in the United States of America.
/s/ Eisner LLP
New York, New York
March 29, 2010
43
SAFESTITCH MEDICAL, INC.
(A Developmental Stage Company)
CONSOLIDATED BALANCE SHEETS
(in 000s, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
871 |
|
|
$ |
561 |
|
Other receivable related-party |
|
|
21 |
|
|
|
13 |
|
Prepaid expenses |
|
|
131 |
|
|
|
151 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,023 |
|
|
|
725 |
|
FIXED ASSETS |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
147 |
|
|
|
168 |
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Security deposits |
|
|
2 |
|
|
|
2 |
|
Deferred financing costs, net |
|
|
255 |
|
|
|
851 |
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
257 |
|
|
|
853 |
|
|
|
|
|
|
|
|
TOTAL ASSETS (Note 6) |
|
$ |
1,427 |
|
|
$ |
1,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
93 |
|
|
$ |
273 |
|
Notes payable |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
143 |
|
|
|
273 |
|
Stockholder loans |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value per share, 25,000,000 shares authorized
10% Series A Cumulative Convertible Preferred Stock, 4,000,000 shares authorized, 2,000,000 and zero shares issued and outstanding, respectively; liquidation preference $2,088 |
|
|
20 |
|
|
|
|
|
Common stock, $0.001 par value per share, 225,000,000 shares authorized,
17,962,718 shares issued and outstanding |
|
|
18 |
|
|
|
18 |
|
Additional paid-in capital |
|
|
12,974 |
|
|
|
10,817 |
|
Deficit accumulated during the development stage |
|
|
(11,728 |
) |
|
|
(9,362 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
1,284 |
|
|
|
1,473 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,427 |
|
|
$ |
1,746 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
44
SAFESTITCH MEDICAL, INC.
(A Developmental Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in 000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15, |
|
|
|
Years Ended |
|
|
2005 (Inception) |
|
|
|
December 31, |
|
|
to December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,256 |
|
|
|
2,682 |
|
|
|
6,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
1,399 |
|
|
|
1,652 |
|
|
|
4,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,655 |
|
|
|
4,334 |
|
|
|
10,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,655 |
) |
|
|
(4,334 |
) |
|
|
(10,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
903 |
|
|
|
|
|
|
|
903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
24 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
(595 |
) |
|
|
(851 |
) |
|
|
(1,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(19 |
) |
|
|
(24 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other income and (expense) |
|
|
289 |
|
|
|
(851 |
) |
|
|
(813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
|
(2,366 |
) |
|
|
(5,185 |
) |
|
|
(11,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,366 |
) |
|
|
(5,185 |
) |
|
|
(11,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common stockholders and loss per
common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,366 |
) |
|
|
(5,185 |
) |
|
|
(11,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend Series A Preferred Stock |
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Series A Preferred Stock |
|
|
(88 |
) |
|
|
|
|
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common stockholders |
|
|
(2,654 |
) |
|
|
(5,185 |
) |
|
|
(12,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted |
|
|
17,963 |
|
|
|
17,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per basic and diluted share |
|
$ |
(0.15 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
45
SAFESTITCH MEDICAL, INC.
(A Developmental Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in 000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
During the |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A Preferred Stock in July 2009 at $1.00 per share |
|
|
2,000 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
1,962 |
|
|
|
|
|
|
|
1,982 |
|
Fair value of beneficial conversion feature of Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
200 |
|
Deemed dividend to Series A Preferred Stockholders, charged to additional paid-in capital in the
absence of retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
|
|
|
|
195 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,366 |
) |
|
|
(2,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
2,000 |
|
|
$ |
20 |
|
|
|
17,963 |
|
|
$ |
18 |
|
|
$ |
12,974 |
|
|
$ |
(11,728 |
) |
|
$ |
1,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
46
SAFESTITCH MEDICAL, INC.
(A Developmental Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15, |
|
|
|
|
|
|
|
|
|
|
|
2005 (Inception) to |
|
|
|
Years Ended December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,366 |
) |
|
$ |
(5,185 |
) |
|
$ |
(11,728 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred finance costs |
|
|
595 |
|
|
|
851 |
|
|
|
1,729 |
|
Stock-based compensation expense |
|
|
195 |
|
|
|
239 |
|
|
|
499 |
|
Stock-based compensation expense related to Share Exchange |
|
|
|
|
|
|
|
|
|
|
77 |
|
Depreciation and amortization |
|
|
56 |
|
|
|
55 |
|
|
|
115 |
|
Gain on sale of TruePosition investment |
|
|
(903 |
) |
|
|
|
|
|
|
(903 |
) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
12 |
|
|
|
(65 |
) |
|
|
(132 |
) |
Other assets |
|
|
|
|
|
|
54 |
|
|
|
(2 |
) |
Accounts payable and accrued liabilities |
|
|
(179 |
) |
|
|
20 |
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES |
|
|
(2,590 |
) |
|
|
(4,031 |
) |
|
|
(10,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment |
|
|
(35 |
) |
|
|
(27 |
) |
|
|
(262 |
) |
Proceeds from sale of TruePosition investment |
|
|
903 |
|
|
|
|
|
|
|
903 |
|
Payment received under Rule 16b |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
868 |
|
|
|
(27 |
) |
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided in connection with the acquisition of SafeStitch LLC |
|
|
|
|
|
|
|
|
|
|
3,192 |
|
Issuance of Common Stock, net of offering costs |
|
|
|
|
|
|
3,988 |
|
|
|
3,988 |
|
Issuance of Preferred Stock, net of offering costs |
|
|
1,982 |
|
|
|
|
|
|
|
1,982 |
|
Capital Contributions |
|
|
|
|
|
|
|
|
|
|
1,431 |
|
Proceeds from notes payable |
|
|
71 |
|
|
|
|
|
|
|
71 |
|
Repayment of notes payable |
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
Proceeds from stockholder loans |
|
|
900 |
|
|
|
1,000 |
|
|
|
2,860 |
|
Repayment of stockholder loans |
|
|
(900 |
) |
|
|
(1,000 |
) |
|
|
(2,776 |
) |
Exercise of options |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
2,032 |
|
|
|
3,988 |
|
|
|
10,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
310 |
|
|
|
(70 |
) |
|
|
871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
561 |
|
|
|
631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
871 |
|
|
$ |
561 |
|
|
$ |
871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
19 |
|
|
$ |
24 |
|
|
$ |
64 |
|
Non cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder loans contributed to capital |
|
$ |
|
|
|
$ |
10 |
|
|
$ |
84 |
|
Warrants issued in connection with credit
facility |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,985 |
|
The accompanying notes are an integral part of these consolidated financial statements.
47
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), Barretts 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 Cellulars common stock, which represented a majority of Cellulars 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).
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, 2009, the Company has accumulated a deficit of $11.7 million, including a net loss of $2.4
million for the year ended December 31, 2009,
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 Companys efforts have been principally devoted to developing its technologies and
commercializing its products. Based upon its current cash position (including the $2.0 million
proceeds from the January 2010 issuance of Series A Preferred Stock), availability under the
extended term of its $4.0 million line of credit from The Frost Group, LLC (The Frost Group) and
the Companys President and CEO, Jeffrey G. Spragens, management believes that the Company will be
able to fund operations without substantial revenues or additional financing at least through
December 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 Companys 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, that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
48
Cash and cash equivalents. We consider 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, and includes overnight repurchase agreements
collateralizing its depository bank accounts (sweep accounts) in its cash balances. Balances in
excess of Federal Deposit Insurance Corporation (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
Companys 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 accounts for all share-based payments, including grants of
stock options, as operating expenses, based on their grant date fair values. The fair value of the
Companys 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.
Stock-based compensation is included in general and administrative costs and expenses for all
periods presented.
Fair value of financial instruments. 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. 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, 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 Companys 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). 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 Companys comprehensive net loss is equal to its net loss for all periods
presented.
49
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful lives |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Machinery and equipment |
|
5 years |
|
$ |
190,000 |
|
|
$ |
153,000 |
|
Furniture and fixtures |
|
3-5 years |
|
|
35,000 |
|
|
|
37,000 |
|
Software |
|
3-5 years |
|
|
37,000 |
|
|
|
37,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,000 |
|
|
|
227,000 |
|
Accumulated depreciation and amortization |
|
|
|
|
(115,000 |
) |
|
|
(59,000 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
$ |
147,000 |
|
|
$ |
168,000 |
|
|
|
|
|
|
|
|
|
|
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 $56,000 and $55,000,
respectively, for the years ended December 31, 2009 and 2008.
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. Cellulars investment in KSI
common stock was exchanged for 191,118 shares of TruePosition common stock on the date of the
acquisition. The Company accounted for the $1,754,000 investment in TruePosition using the cost
method. In December 2002, 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
Cellulars investment in the net equity of TruePosition. In August 2007, the Company was informed
that Liberty TP Acquisition, Inc. was being merged into TruePosition. Pursuant to the terms of the
merger, TruePositions minority stockholders, including the Company, were entitled to receive
$3.5116 in cash in exchange for each share held. The Company exercised its statutory appraisal
rights in respect of this merger, and became a party to both an appraisal action and a securities
fraud litigation (see Note 9). The appraisal action and securities fraud litigation were
terminated in December 2009 pursuant to settlement agreements under which each litigating
stockholder received a total of $4.7247 in cash for each TruePosition share held. The Company
recorded a $903,000 gain on the disposition of its 191,118 shares, and received cash proceeds of
approximately $816,000, net of estimated litigation-related costs. The Company had previously paid
approximately $81,000 toward such litigation costs and may be obligated to fund additional amounts
if the final costs of the legal actions are higher than estimated.
Management does not anticipate that the Companys pro rata portion of any remaining
legal or administrative costs will be material.
NOTE 5 STOCK-BASED COMPENSATION
Cellulars 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.
50
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, 2009 and 2008 was $49,000 and $47,000,
respectively, and is included in general and administrative expense.
On November 13, 2007, the Board of Directors and a majority of the Companys 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 358,500 and 168,000 stock options under the 2007 Plan during the years
ended December 31, 2009 and 2008, respectively. The options granted during 2009 were issued at an
exercise price of $0.80 per share and had an estimated aggregate grant date fair value of $180,000.
The options granted during 2008 were issued at exercise prices between $1.16 and $3.10 per share
and had an estimated aggregate grant date fair value of $318,000. The weighted average grant date
fair value of the options granted during 2009 and 2008 was $0.50 per share and $1.89 per share,
respectively.
Total stock-based compensation recorded for the years ended December 31, 2009 and 2008 was
$195,000 and $239,000, 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
Companys 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 Companys stock. 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 managements estimates. The fair value of each option granted during the years ended
December 31, 2009 and 2008 was estimated using the following assumptions.
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31,
2009 |
|
December 31,
2008 |
Expected volatility |
|
74.59% 86.43% |
|
63.05% 94.46% |
Expected dividend yield |
|
0.00% |
|
0.00% |
Risk-free interest rate |
|
1.39% 1.79% |
|
0.76% 3.35% |
Expected life |
|
4.0 5.5 years |
|
3.5 5.5 years |
Forfeiture rate |
|
2.50% |
|
0% 2.50% |
The following summarizes the Companys stock option activity for the year ended December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
Outstanding at December 31, 2008 |
|
|
256,667 |
|
|
$ |
2.80 |
|
|
|
7.12 |
|
|
|
|
|
Granted |
|
|
358,500 |
|
|
$ |
0.80 |
|
|
|
5.85 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
615,167 |
|
|
$ |
1.63 |
|
|
|
5.98 |
|
|
$ |
162,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
180,501 |
|
|
$ |
2.76 |
|
|
|
5.71 |
|
|
$ |
1,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009 |
|
|
593,163 |
|
|
$ |
1.65 |
|
|
|
5.98 |
|
|
$ |
154,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
None of the 358,500 options granted during the year ended December 31, 2009, were vested
as of December 31, 2009. At December 31, 2009, there was $142,000 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 1.57 years.
No options were exercised during the years ended December 31, 2009 and 2008. The $195,000 of
stock-based compensation recorded for the year ended December 31, 2009 is net of an approximately
$15,000 credit related to the modification of stock option awards for certain former employees. On
the modification date, the Companys Compensation Committee accelerated and fully vested the former
employees options, which were originally scheduled to vest on various dates through 2012.
Additionally, the Compensation Committee extended the term of these options to one year following
the modification date.
No tax benefits were attributed to the stock-based compensation expense because a valuation
allowance was maintained for substantially all net deferred tax assets.
NOTE 6 DEBT
The $50,000 notes payable balance at December 31, 2009 relates to the third-party financing of
certain of the Companys insurance policies. This note is a self-amortizing, 6.19% installment
loan which matures in August 2010.
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 and Jeffrey G.
Spragens, the Companys 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 Companys common stock, Dr. Jane H. Hsiao, the Companys 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, and was amended again
in March 2010 to extend the Maturity Date to June 2011 (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 is being amortized over the life
of the Credit Facility. The Company recorded amortization expense of $595,000 and $851,000 related
to these deferred financing costs during the years ended December 31, 2009 and 2008, respectively.
The Company borrowed $900,000 under the Credit Facility during the year ended December 31,
2009 and repaid the entire outstanding balance in July 2009, using the proceeds of the Series A
Preferred Stock offering described in Note 7. The Company borrowed $1.0 million under the Credit
Facility during the year ended December 31, 2008 and repaid the entire then-outstanding balance in
June 2008 using the proceeds of the 2008 Private Placement of Common Stock described in Note 7.
The Company recognized interest expense related to the outstanding borrowings under the Credit
Facility for the years ended December 31, 2009 and 2008 of $19,000 and $24,000, respectively. As
of December 31, 2009 and 2008, there was no balance outstanding under the Credit Facility.
52
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 Companys 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 Companys common stock for the five trading days immediately preceding
the transaction. Mr. Spragens did not participate in the Board vote. As of December 31, 2009,
there were no stockholder loans outstanding.
NOTE 7 CAPITAL TRANSACTIONS
2008 Private Placement of Common Stock. 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 Companys 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 approximately $4.0 million and 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, Mr. Spragens and some of his
relatives, Dr. Kenneth Heithoff, a former 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 Securities 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 Securities Act and that the Shares
were being acquired for investment purposes. The Shares have not been registered under the
Securities Act and are restricted securities as that term is defined by Rule 144 promulgated
thereunder. The Company has not undertaken to register the Shares and no registration rights have
been granted to the Investors in respect of the Shares.
2009 Issuance of Series A Preferred Stock. On July 21, 2009, the Company entered into a
securities purchase agreement (the Current Purchase Agreement) with a private investor (the
Current Investor), pursuant to which the Current Investor agreed to purchase an aggregate of up
to 2,000,000 shares (the Current Shares) of the Companys newly-designated 10.0% Series A
Cumulative Convertible Preferred Stock, par value $0.01 per share (Series A Preferred Stock), at
a purchase price of $1.00 per share. On July 22, 2009, the Company closed on the issuance of
2,000,000 Current Shares under the Current Purchase Agreement for aggregate consideration of $2.0
million. A portion of the proceeds from the issuance was used to repay all principal and interest
outstanding under the Credit Facility described in Note 6.
The Company issued the Current Shares in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. The Current Investor represented to the Company that such
person was an accredited investor as defined in Rule 501(a) of the Securities Act and that the
Current Shares were being acquired for investment purposes. The Current Shares have not been
registered under the Securities Act and are restricted securities as that term is defined by Rule
144 promulgated thereunder. The Company has not undertaken to register
the Current Shares, and no registration rights have been granted to the Current Investor in
respect of the Current Shares.
Additionally, on July 21, 2009, the Company entered into a second securities purchase
agreement (the Future Purchase Agreement) with certain other private investors (the Future
Investors), pursuant to which the Future Investors agreed to purchase, at the Companys election
upon ten days written notice delivered to the Future Investors by the Company, an aggregate of up
to 2,000,000 shares of Series A Preferred Stock (the Future Shares) at a purchase price of $1.00
per share. Among the Future Investors who obligated themselves to potentially acquire a portion of
the Future Shares were Hsu Gamma Investment, L.P., an entity of which Dr. Hsiao is general partner,
Mr. Spragens and Frost Gamma Investments Trust (collectively, the Related Party Investors). Each
of the Related Party Investors is the beneficial owner of more than 10% of the Companys Common
Stock. On January 12, 2010, the Company closed on the issuance of 2,000,000 Future Shares pursuant
to the terms of the Future Purchase Agreement for aggregate consideration of $2.0 million (see Note
16).
53
Holders of the Series A Preferred Stock are entitled to receive, when, as and if declared by
the Companys Board of Directors, dividends on each share of Series A Preferred Stock at a rate per
annum equal to 10.0% of the sum of (a) $1.00, plus (b) any and all declared and unpaid and accrued
dividends thereon, subject to adjustment for any stock split, combination, recapitalization or
other similar corporate action (the Liquidation Amount). Upon the occurrence of a Liquidation
Event (as defined in the Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 10.0% Series A Cumulative Convertible Preferred
Stock, and Qualifications, Limitations and Restrictions Thereof), holders of Series A Preferred
Stock are entitled to be paid, subject to applicable law, out of the assets of the Company
available for distribution to its stockholders, an amount in cash (the Liquidation Payment) for
each share of Series A Preferred Stock equal to the greater of (x) the Liquidation Amount for each
share of Series A Preferred Stock outstanding, or (y) the amount for each share of Series A
Preferred Stock the holders would be entitled to receive pursuant to the Liquidation Event if all
of the shares of Series A Preferred Stock had been converted into Common Stock as of the date
immediately prior to the date fixed for determination of stockholders entitled to receive a
distribution in such Liquidation Event. Such Liquidation Payment will be paid before any cash
distribution will be made or any other assets distributed in respect of any class of securities
junior to the Series A Preferred Stock, including, without limitation, the Common Stock.
The Series A Preferred Stock is convertible by the holders at any time into shares of Common
Stock at a conversion rate equal to the quotient obtained by dividing the Liquidation Amount by
$1.00. The Series A Preferred Stock may be converted by the Company at any time at the
then-current conversion rate, but only if the aggregate market value of the Common Stock equals or
exceeds $150 million over a specified period. The holders of Series A Preferred Stock have the
right to receive notice of any meeting of holders of Common Stock or Series A Preferred Stock and
to vote (on an as-converted into Common Stock basis) upon any matter submitted to a vote of the
holders of Common Stock or Series A Preferred Stock. Except as otherwise expressly set forth in
the Companys Restated Certificate of Incorporation, as amended from time to time, the holders of
Series A Preferred Stock will vote on each matter submitted to them, together with the holders of
Common Stock and all other classes and series of the Companys capital stock entitled to vote on
such matter, taken together as a single class. To the extent it is lawfully able to do so, the
Company may redeem all of the then outstanding shares of Series A Preferred Stock by paying in cash
an amount per share equal to $1.00 plus all declared or accrued unpaid dividends on such shares,
subject to adjustment for any stock dividends or distributions, splits, subdivisions, combinations,
reclassifications, stock issuances or similar events with respect to the Common Stock.
On July 22, 2009, the closing price of the Common Stock on the OTCBB was $1.10, resulting in a
beneficial conversion feature of $0.10 per share of Series A Preferred Stock on the issue date.
The $200,000 aggregate beneficial conversion feature of the Series A Preferred Stock on the issue
date was deemed a discount on the issuance of the shares and was recorded as an increase to
additional paid in capital in the consolidated financial statements. Because the Series A
Preferred Stock was immediately convertible to Common Stock, the $200,000 aggregate intrinsic value
is deemed a dividend paid to the investors on such closing date. Such deemed dividend has been
recorded as an increase in losses attributable to common stockholders and, in the absence of
retained earnings, as a reduction of additional paid in capital.
As of December 31, 2009, the 2,000,000 outstanding shares of Series A Preferred Stock had
accumulated undeclared and unpaid dividends totaling approximately $88,000.
NOTE 8 BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss attributable to common
stockholders 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 and conversion of preferred stock. In
computing diluted net loss per share for the years ended December 31, 2009 and 2008, no adjustment
has been made to the weighted average outstanding common shares as the assumed exercise of
outstanding options and warrants and conversion of preferred stock would be anti-dilutive.
54
Potential common shares not included in calculating diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
|
December 31,
2008 |
|
Stock options |
|
|
615,167 |
|
|
|
256,667 |
|
Stock warrants |
|
|
805,521 |
|
|
|
805,521 |
|
Series A Preferred Stock |
|
|
2,088,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,509,021 |
|
|
|
1,062,188 |
|
|
|
|
|
|
|
|
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
$105,000 and $139,000 for the years ended December 31, 2009 and 2008, respectively. At December
31, 2009, the Company was obligated under non-cancellable operating leases to make future minimum
lease payments (excluding sales taxes) as follows:
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
2010 |
|
$ |
78,000 |
|
2011 |
|
|
74,000 |
|
2012 |
|
|
77,000 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
229,000 |
|
|
|
|
|
The Company was 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 sought 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. was being merged into
TruePosition. Pursuant to the terms of the merger, TruePositions 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
actions 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 agreed to fund a portion of the litigation expenses in connection with the
appraisal and securities fraud actions. The appraisal action and securities fraud litigation were
terminated in December 2009 pursuant to settlement agreements under which each litigating
stockholder would receive a total of $4.7247 in cash for each TruePosition share held. The Company
recorded a $903,000 gain on the disposition of its 191,118 shares, and received cash proceeds of
approximately $816,000, net of estimated litigation-related costs. The Company had previously paid
approximately $81,000 toward such litigation costs and may be obligated to fund additional amounts
if the final costs of the legal actions are higher than estimated. Management does not anticipate
that the Companys pro rata portion of any remaining legal or administrative costs will be
material.
The Company is obligated to pay royalties to Creighton University (Creighton) on the sales
of products licensed from Creighton pursuant to an exclusive license and development agreement (see
Note 10). The Company is also obligated under an agreement with Dr. Parviz Amid to pay a 4%
royalty to Dr. Amid on the sales of any product developed with Dr. Amids assistance, including the
AMID StaplerTM, for a period of ten years from the first commercial sale of such
product. No royalties have been incurred or paid in the years ended December 31, 2009 and 2008.
NOTE 10 AGREEMENT WITH CREIGHTON UNIVERSITY
On May 26, 2006, SafeStitch entered into an exclusive license and development agreement (the
Creighton Agreement) with Creighton, granting the Company a worldwide exclusive (even as to the
university) license, with rights to sublicense, to all the Companys product candidates and
associated know-how based on Creighton technology, including the exclusive right to manufacture,
use and sell the product candidates.
55
Pursuant to the Creighton 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 Creighton Agreement, less certain amounts including, without limitation, chargebacks,
credits, taxes, duties and discounts or rebates. The Creighton Agreement does not provide for
minimum royalties. Also pursuant to the Creighton Agreement, the Company 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 excluded the first $150,000 of costs
related to the prosecution of patents, which the Company invested outside of the Creighton
Agreement. The Company is further obligated to pay to Creighton an amount equal to 20% of certain
of the Companys research and development expenditures as reimbursement for the use of Creightons
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, 2009 and 2008, the Company paid Creighton $41,000 and $177,000, respectively, in
satisfaction of the 20% facility reimbursement obligation.
Pursuant to the Creighton 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 Creighton 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.
NOTE 11 INCOME TAXES
The Company accounts for income taxes using the asset and liability method, 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 Companys 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, 2009, we have approximately $5.7 million of net operating loss carryforwards
to offset future taxable income and $3.0 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, 2009 we have approximately $129,000 of research and development tax credit
carryforwards. The net operating loss and research and development credit carryforwards expire
through 2029.
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:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Income tax benefit at the federal statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
State income taxes, net of effect on federal taxes |
|
|
3.51 |
% |
|
|
3.44 |
% |
Research and development credit |
|
|
1.57 |
% |
|
|
1.58 |
% |
Other |
|
|
(0.20 |
%) |
|
|
2.71 |
% |
Increase in valuation allowance |
|
|
(38.88 |
%) |
|
|
(41.73 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
56
The deferred tax asset at December 31, 2009 and 2008 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Net operating loss carryforward |
|
$ |
2,121,000 |
|
|
$ |
1,750,000 |
|
Deferred start up costs |
|
|
1,115,000 |
|
|
|
669,000 |
|
Research and development credit carryforward |
|
|
129,000 |
|
|
|
92,000 |
|
Stock-based compensation |
|
|
217,000 |
|
|
|
144,000 |
|
Other |
|
|
(22,000 |
) |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,560,000 |
|
|
|
2,640,000 |
|
Less: Valuation allowance |
|
|
(3,560,000 |
) |
|
|
(2,640,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The change in the valuation allowance from December 31, 2008 to December 31, 2009 amounted to
approximately $920,000. 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.
The Company recognizes interest and penalties related to uncertain tax positions in general
and administrative expense. As of December 31, 2009, the Company has no unrecognized tax benefit,
including interest and penalties.
Tax years 2005-2008 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 Companys largest beneficial stockholder. The current rental
payments under the Miami office lease, which commenced January 1, 2008, are approximately $6,000
per month and escalate 4.5% annually over the life of the lease. The Company recorded $79,000 and
$110,000 of rent expense related to the Miami lease for the years ended December 31, 2009 and 2008,
respectively.
Dr. Jane Hsiao, the Companys 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, 2009, the Company had approximately $818,000 on deposit with Great Eastern Bank of
Florida.
Dr. Hsiao, Dr. Frost and director Steven Rubin are each significant stockholders and/or
directors of Non-Invasive Monitoring Systems, Inc. (NIMS), a publicly-traded medical device
company, Aero Pharmaceuticals, Inc. (Aero), a privately-held pharmaceutical distribution company,
Cardo Medical, Inc. (Cardo), a publicly-traded medical device company, and SearchMedia Holdings
Limited (SearchMedia), a publicly-traded media company operating primarily in China. Commencing
in March 2008, the Companys 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 years ended December 31, 2009 and 2008 of $73,000 and $33,000, respectively, to account for
the sharing of costs under this arrangement. Commencing in December 2009, the Companys Chief
Legal Officer also serves under a similar board-approved cost sharing arrangement as Corporate
Counsel of SearchMedia and as the Chief Legal Officer of each of NIMS and Cardo. The Company has
recorded $15,000 of reductions to General and Administrative costs and expenses for the year ended
December 31, 2009 to account for the sharing of costs under this arrangement. Aggregate accounts
receivable from NIMS, Aero, Cardo and SearchMedia were approximately $21,000 as of December 31,
2009.
57
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 Companys employees provided consulting services to OPKO on a
cost-plus basis during 2008. The Company has recorded reductions to General and Administrative
expense to account for the provision of these services totaling $0 and $49,000 for the years ended
December 31, 2009 and 2008, respectively. The amounts charged may not be representative of those
that would have been charged in an arms-length transaction. These transactions were ratified by
the Audit Committee of the Board of Directors, and no accounts receivable from OPKO were
outstanding as of December 31, 2009.
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 participants contributions to the 401k Plan up to a maximum of 4% of
the participants qualified annual earnings. The Companys matching contributions to the plan were
approximately $22,000 and $32,000, respectively, for the years ended December 31, 2009 and 2008.
NOTE 14 RECENT ACCOUNTING PRONOUNCEMENTS
Noncontrolling Interests Effective January 1, 2009, the Company adopted authoritative
guidance which established 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. The adoption of this guidance has not
had a material impact on the Companys consolidated financial statements.
Business Combinations Effective January 1, 2009, the Company adopted authoritative guidance
which established 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. This guidance also established principles for
recognizing and measuring the goodwill acquired in a business combination and determining what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination. In April 2009, the Financial Accounting Standards
Board (FASB) amended and clarified this guidance regarding the initial recognition and
measurement, subsequent measurement and accounting, and related disclosures arising from
contingencies in a business combination. Under the amended guidance, assets acquired and
liabilities assumed in a business combination that arise from contingencies should be recognized at
fair value on the acquisition date if fair value can be determined during the measurement period.
If fair value cannot be determined, acquired contingencies should be accounted for using existing
guidance. The adoption of this guidance applies to business combinations for which the acquisition
date is on or after January 1, 2009, and has not had a material impact on the Companys
consolidated financial statements.
Collaborative Arrangements Effective January 1, 2009, the Company adopted authoritative
guidance which defines collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between participants in the
arrangement and third parties. The adoption of this guidance has not had a material impact on the
Companys consolidated financial statements.
Derivatives Effective January 1, 2009, the Company adopted authoritative guidance for
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 previously issued guidance
regarding derivative accounting. The adoption of this guidance has not had a material impact
on the Companys consolidated financial statements.
58
Subsequent Events Effective June 30, 2009, the Company adopted authoritative guidance which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. In February 2010, the FASB issued
additional guidance to remove the requirement for SEC filers to disclose the date through which an
entity has evaluated subsequent events. This change removes potential conflicts with current SEC
guidance. The guidance was effective upon issuance and had no impact on the Companys
consolidated financial statements.
Codification In June 2009, the FASB established the FASB Accounting Standards Codification
(Codification) as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in accordance with
GAAP. All existing accounting standard documents are superseded by the Codification, and any
accounting literature not included in the Codification will not be authoritative; however, rules
and interpretive releases of the SEC issued under the authority of federal securities laws will
continue to be sources of authoritative GAAP for SEC registrants. The Codification became
effective beginning with the Companys third fiscal quarter of 2009. The Codification does not
change or alter existing GAAP and, therefore, has not had any impact on the Companys consolidated
financial statements.
NOTE 15 CONCENTRATION OF RISK
The Companys financial instruments that are exposed to concentrations of credit risk consist
primarily of cash. The Company maintains its cash at banks and financial institutions it considers
to be of high credit quality; however the Companys cash deposits may at times be in excess of the
FDIC limit. The Companys deposits at banks above the FDIC limit are maintained in sweep accounts
that are collateralized by overnight repurchase agreements. The Company has not experienced losses
on these accounts, and management believes that the Company is not exposed to significant risks on
such accounts.
NOTE 16 SUBSEQUENT EVENTS
As discussed in Note 7 above, the Company entered into the Future Purchase Agreement on July
21, 2009 with the Future Investors, pursuant to which the Future Investors agreed to purchase, at a
future closing, an aggregate of up to 2,000,000 Future Shares of the Companys Series A Preferred
Stock, at a purchase price of $1.00 per share, subject to the Company providing the Future
Investors ten days written notice of such future closing date. On December 30, 2009, the Company
provided notice to the Future Investors that the Company intended to consummate the sale of the
Future Shares on January 12, 2010, and on January 12, 2010, the Company closed on the issuance of
2,000,000 Future Shares under the Future Purchase Agreement for aggregate consideration of $2.0
million. Among the Future Investors who purchased a portion of the Future Shares were the Related
Party Investors identified in Note 7, who purchased an aggregate of 995,000 Future Shares. On
January 12, 2010, the closing price of the Common Stock on the OTCBB was $1.25, resulting in a
beneficial conversion feature of $0.25 per share of Series A Preferred Stock on the issue date.
The $500,000 aggregate beneficial conversion feature of the Series A Preferred Stock on the issue
date was deemed a discount on the issuance of the shares and, because the Series A Preferred Stock
was immediately convertible to Common Stock, such $500,000 aggregate intrinsic value was further
deemed a dividend paid to the Future Investors on such closing date. The Company is evaluating appropriate accounting guidance to determine whether the participation of the Related Party Investors will have an impact on the Companys consolidated financial statements.
On February 17, 2010, the Company granted to directors, officers, existing employees and
consultants an aggregate of 559,000 options to purchase the Companys common stock under the 2007
Plan. Each such option was granted at an exercise price of $1.20 per share.
In March 2010, the Company, the Frost Group and Mr. Spragens amended the Credit Facility
discussed in Note 6 above to further extend the Credit Facilitys Maturity Date from June 30, 2010
to June 30, 2011. All other terms and conditions of the Credit Facility remain unchanged.
59
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. |
None.
|
|
|
Item 9A(T). |
|
Controls and Procedures. |
The Companys management, with the participation of its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of
December 31, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of that date, the Companys disclosure controls and procedures were
effective as of the end of the period covered by this annual report.
Managements 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 Companys 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, 2009, 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 ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management concluded that, as of December 31, 2009, our internal control over financial
reporting was effective.
This annual report does not include an attestation report of our registered public accounting
firm, Eisner LLP, regarding internal control over financial reporting. Managements 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 managements report in this
annual report.
Changes in Internal Controls Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the
last quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information. |
None.
60
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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2009.
|
|
|
Item 11. |
|
Executive Compensation. |
The information required by this Item is incorporated by reference to the definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2009.
|
|
|
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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2009.
|
|
|
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 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2009.
|
|
|
Item 14. |
|
Principal Accounting Fees and Services. |
The information required by this Item is incorporated by reference to the definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2009.
61
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.
|
|
|
|
|
|
|
Exhibits: |
|
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 29, 2008 and incorporated by
reference herein. |
|
|
|
|
|
|
3.3 |
|
|
Certificate of Designation of Series A Preferred Stock, filed as Exhibit 3.1 to our Current
Report on Form 8-K filed with the SEC on July 23, 2009 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 29, 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. |
|
|
|
|
|
|
4.3 |
|
|
Specimen Certificate for Series A Preferred Stock, filed as Exhibit 4.2 to our Current Report on
Form 8-K filed with the SEC on July 23, 2009 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, 2007, 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 29, 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. |
62
|
|
|
|
|
|
|
Exhibits: |
|
10.7 |
|
|
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. |
|
|
|
|
|
|
10.8 |
|
|
First 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, filed as Exhibit 10.8 to our Annual
Report on Form 10-K filed with the SEC on March 27, 2009 and incorporated by reference herein. |
|
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10.9 |
|
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Form of Current Securities Purchase Agreement, filed as Exhibit 10.1 to our Current Report on
Form 8-K filed with the SEC on July 23, 2009 and incorporated by reference herein. |
|
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10.10 |
|
|
Form of Future Securities Purchase Agreement, filed as Exhibit 10.2 to our Current Report on Form
8-K filed with the SEC on July 23, 2009 and incorporated by reference herein. |
|
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10.11 |
|
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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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10.12 |
*+ |
|
Form of Employee Stock Option Agreement pursuant to the SafeStitch Medical, Inc. 2007 Incentive
Compensation Plan. |
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|
|
|
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10.13 |
*+ |
|
Form of Non-Employee Stock Option Agreement pursuant to the SafeStitch Medical, Inc. 2007
Incentive Compensation Plan. |
|
|
|
|
|
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10.14 |
* |
|
Second Amendment to Note and Security Agreement, dated March 29, 2010, by and among the Company,
SafeStitch LLC, The Frost Group, LLC and Jeffrey G. Spragens. |
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14.1 |
* |
|
Code of Ethics Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002. |
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21.1 |
* |
|
Subsidiaries of the Registrant |
|
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23.1 |
* |
|
Consent of Eisner LLP |
|
|
|
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31.1 |
* |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
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31.2 |
* |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
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32.1 |
* |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
* |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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* |
|
Filed herewith |
|
+ |
|
Compensation Plan or Arrangement or Management Contract |
63
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 29, 2010 |
By: |
/s/ Jeffrey G. Spragens
|
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Jeffrey G. Spragens |
|
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Chief Executive Officer and President |
|
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.
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Signature |
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Title |
|
Date |
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/s/ Jeffrey G. Spragens
Jeffrey G. Spragens
|
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Chief Executive Officer, President and Director
(Principal Executive Officer)
|
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March 29, 2010 |
|
/s/ Jane H. Hsiao, Ph.D.
Jane H. Hsiao, Ph.D.
|
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Chairman of the Board of Directors
|
|
March 29, 2010 |
|
/s/ Dr. Charles J. Filipi
Dr. Charles J. Filipi
|
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Chief Medical Officer and Director
|
|
March 29, 2010 |
|
/s/ Dr. Chao C. Chen
Dr. Chao C. Chen
|
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Director
|
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March 29, 2010 |
|
/s/ Steven D. Rubin
Steven D. Rubin
|
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Director
|
|
March 29, 2010 |
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/s/ Richard C. Pfenniger, Jr.
Richard C. Pfenniger, Jr.
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Director
|
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March 29, 2010 |
|
/s/ Kevin T. Wayne
Kevin T. Wayne
|
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Director
|
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March 29, 2010 |
|
/s/ Adam S. Jackson
Adam S. Jackson
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
March 29, 2010 |
64
Exhibit 10.12
Exhibit 10.12
SAFESTITCH MEDICAL, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
(EMPLOYEE)
Dated __, 20__
Agreement
1. Grant of Option. SAFESTITCH MEDICAL, INC. (the Company) hereby grants, as of
_____, 20_____
(the Date of Grant), to (the
Optionee) an option (the Option) to purchase up to shares of the
Companys common stock, par value $0.001 per share (the Shares), at an exercise price per
share equal to $ (the Exercise Price). The Option shall be subject to the terms
and conditions set forth in this option agreement (this Option Agreement). The Option is
issued pursuant to the SafeStitch Medical, Inc. 2007 Incentive Compensation Plan (the
Plan), which is incorporated by reference herein for all purposes. The Option is a
Non-Qualified Stock Option, and not an Incentive Stock Option. The Optionee hereby acknowledges
receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and
thereof and all applicable laws and regulations.
2. Definitions. Capitalized terms used herein and not otherwise defined shall have the respective
meanings ascribed thereto in the Plan.
3. Exercise Schedule. Except as otherwise provided in Sections 6 or 9 of this Option Agreement, or
in the Plan, the Option is exercisable in installments as provided below, which shall be
cumulative. To the extent that the Option has become exercisable with respect to a percentage of
Shares as provided below, the Option may thereafter be exercised by the Optionee, in whole or in
part, at any time or from time to time prior to the expiration of the Option as provided herein.
The following table indicates each date (the Vesting Date) on and after which the
Optionee shall be entitled to exercise the Option with respect to the percentage of Shares granted
as indicated beside the date, provided that the Continuous Service of the Optionee continues
through and on the applicable Vesting Date:
|
|
|
Percentage of Shares: |
|
Vesting Date: |
|
|
|
Except as otherwise specifically provided herein, there shall be no proportionate or partial
vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the
appropriate Vesting Date. Upon the termination of the Optionees Continuous Service, any
unvested portion of the Option shall terminate and be null and void.
4. Method of Exercise. The vested portion of this Option shall be exercisable in whole or in part
in accordance with the exercise schedule set forth in Section 3 hereof by written notice, which
shall state the election to exercise the Option, the number of Shares in respect of which the
Option is being exercised, and such other representations and agreements as to the holders
investment intent with respect to such Shares as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered
in person or by certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised after
both (a) receipt by the Company of such written notice accompanied by the Exercise Price and (b)
arrangements that are satisfactory to the Committee in its sole discretion have been made for
Optionees payment to the Company of the amount, if any, that is necessary to be withheld in
accordance with applicable Federal or state withholding requirements. No Shares shall be issued
pursuant to the Option unless and until such issuance and such exercise complies with all relevant
provisions of applicable law, including the requirements of any stock exchange upon which the
Shares may then be traded.
5. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a
combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) to the extent
permitted by the Committee, with Shares owned by the Optionee, or the withholding of Shares that
otherwise would be delivered to the Optionee as a result of the exercise of the Option;
(d) pursuant to a cashless exercise procedure, by delivery of a properly executed exercise notice
together with such other documentation, and subject to such guidelines, as the Committee shall
require to effect an exercise of the Option and delivery to the Company by a licensed broker
acceptable to the Company of proceeds from the sale of Shares or a margin loan (to the extent
available to the Optionee) sufficient to pay the Exercise Price and any applicable income or
employment taxes; or (e) such other consideration or in such other manner as may be determined by
the Committee in its absolute discretion.
6. Termination of Option.
(a) General. Any unexercised portion of the Option shall automatically and without notice
terminate and become null and void at the time of the earliest of the following to occur:
(i) unless the Committee otherwise determines in writing in its sole discretion, three months
after the date on which the Optionees Continuous Service terminates other than by reason of (A) by
the Company or a Related Entity for Cause, (B) a Disability of the Optionee as determined by a
medical doctor satisfactory to the Committee, or (C) the death of the Optionee;
(ii) immediately upon the termination of the Optionees Continuous Service by the Company or a
Related Entity for Cause;
2
(iii) twelve months after the date on which the Optionees Continuous Service is terminated by
reason of a Disability as determined by a medical doctor satisfactory to the Committee;
(iv) (A) twelve months after the date of termination of the Optionees Continuous Service by
reason of the death of the Optionee, or, if later, (B) three months after the date on which the
Optionee shall die if such death shall occur during the one year period specified in Section
6(a)(iii) hereof; or
(v) the seventh (7th) anniversary of the date as of which the Option is granted.
(b) Cancellation. To the extent not previously exercised, (i) the Option shall terminate
immediately in the event of (A) the liquidation or dissolution of the Company, or (B) any
reorganization, merger, consolidation or other form of corporate transaction in which the Company
does not survive or the Shares are exchanged for or converted into securities issued by another
entity, or an affiliate of such successor or acquiring entity, unless the successor or acquiring
entity, or an affiliate thereof, assumes the Option or substitutes an equivalent option or right
pursuant to Section 10(c) of the Plan, and (ii) the Committee in its sole discretion may by written
notice (cancellation notice) cancel, effective upon the consummation of any transaction
that constitutes a Change in Control, the Option (or portion thereof) that remains unexercised on
such date. The Committee shall give written notice of any proposed transaction referred to in this
Section 6(b) a reasonable period of time prior to the closing date for such transaction (which
notice may be given either before or after approval of such transaction), in order that the
Optionee may have a reasonable period of time prior to the closing date of such transaction within
which to exercise the Option if and to the extent that it then is exercisable (including any
portion of the Option that may become exercisable upon the closing date of such transaction). The
Optionee may condition his exercise of the Option upon the consummation of a transaction referred
to in this Section 6(b).
7. Transferability. Unless otherwise determined by the Committee, the Option is not transferable
otherwise than by will or under the applicable laws of descent and distribution, and, during the
lifetime of the Optionee, the Option shall be exercisable only by the Optionee, or the Optionees
guardian or legal representative. In addition, the Option shall not be assigned, negotiated,
pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall
not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason
of any execution, attachment or similar process contrary to the provisions hereof, the Option shall
immediately become null and void. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. No Stockholder Rights. Neither the Optionee nor any personal representative (or
beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the
Company with respect to any Shares issuable upon the exercise of the Option, in whole or in part,
prior to the date on which the Shares are issued.
3
9. Acceleration of Exercisability of Option.
(a) Acceleration upon Certain Terminations or Cancellations of Option. This Option shall
become immediately fully exercisable prior to the termination of the Option pursuant to Section 6
hereof, in the event that, (i) the Option will be terminated pursuant to Section 6(b)(i) hereof, or
(ii) the Company exercises its discretion to provide a cancellation notice with respect to the
Option pursuant to Section 6(b)(ii) hereof.
(b) Acceleration upon Change in Control. This Option shall become immediately fully
exercisable in the event that, prior to the termination of the Option pursuant to Section 6 hereof,
and during the Optionees Continuous Service, there is a Change in Control, as defined in Section
9(b) of the Plan.
(c) Exception to Acceleration upon Change in Control. Notwithstanding the foregoing, if in
the event of a Change in Control the successor company assumes or substitutes for the Option, the
vesting of the Option shall not be accelerated as described in Section 9(b). For the purposes of
this paragraph, the Option shall be considered assumed or substituted for if following the Change
in Control the Option or substituted option confers the right to purchase, for each Share subject
to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or
other securities or property) received in the transaction constituting a Change in Control by
holders of Shares for each Share held on the effective date of such transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares); provided, however, that if such consideration received in the
transaction constituting a Change in Control is not solely common stock of the successor company or
its parent or subsidiary, the Committee may, with the consent of the successor company, or its
parent or subsidiary, provide that the consideration to be received upon the exercise or vesting of
the Option will be solely common stock of the successor company or its parent or subsidiary
substantially equal in Fair Market Value to the per share consideration received by holders of
Shares in the transaction constituting a Change in Control. The determination of such substantial
equality of value of consideration shall be made by the Committee in its sole discretion and its
determination shall be conclusive and binding. Notwithstanding the foregoing, on such terms and
conditions as may be set forth in an Award Agreement, in the event of a termination of the
Optionees employment in such successor company (other than for Cause) within 24 months following
such Change in Control, the option held by the Optionee at the time of the Change in Control shall
be accelerated as described in paragraph (b) of this Section 9.
10. No Right to Continued Employment. Neither the Option nor this Option Agreement shall confer
upon the Optionee any right to continued employment or service with the Company.
11. Governing Law . This Option Agreement shall be governed in accordance with and by the internal
laws of the State of Delaware.
4
12. Interpretation / Provisions of Plan Control. This Option Agreement is subject to all the
terms, conditions and provisions of the Plan, including, without limitation, the amendment
provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted
by the Committee as may be in effect from time to time. If and to the extent that this Option
Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the
Plan shall control, and this Option Agreement shall be deemed to be modified accordingly. The
Optionee accepts the Option subject to all of the terms and provisions of the Plan and this Option
Agreement. The undersigned Optionee hereby accepts as binding, conclusive and final all decisions
or interpretations of the Committee upon any questions arising under the Plan and this Option
Agreement, unless shown to have been made in an arbitrary and capricious manner.
13. Notices. Any notice under this Option Agreement shall be in writing and shall be deemed to
have been duly given when delivered personally or when deposited in the United States mail,
registered, postage prepaid, and addressed, in the case of the Company, to the Companys Secretary
at 4400 Biscayne Blvd., Suite 670, Miami, Florida 33137, or if the Company should move its
principal office, to such principal office, and, in the case of the Optionee, to the Optionees
last permanent address as shown on the Companys records, subject to the right of either party to
designate some other address at any time hereafter in a notice satisfying the requirements of this
Section.
Signatures Follow on Next Page
5
Option Grant No.:_____
IN WITNESS WHEREOF, the undersigned have executed this Option Agreement as of the date first
set forth above.
|
|
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|
|
|
COMPANY:
SAFESTITCH MEDICAL, INC.
|
|
|
By: |
|
|
|
|
Name: |
|
|
|
|
Title: |
|
|
The Optionee acknowledges receipt of a copy of the Plan and represents that he or she has
reviewed the provisions of the Plan and this Option Agreement in their entirety, is familiar with
and understands their terms and provisions, and hereby accepts this Option subject to all of the
terms and provisions of the Plan and this Option Agreement. The Optionee further represents that
he or she has had an opportunity to obtain the advice of counsel prior to executing this Option
Agreement.
|
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|
|
GRANT SUMMARY
|
|
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|
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|
|
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Grant Date:
|
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Expiration Date: |
|
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Grant Type:
|
|
Optionee Class: |
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Number of Shares:
|
|
Exercise Price: |
|
|
|
|
|
|
|
1st Vesting Date:
|
|
Number or % Vesting: |
|
|
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|
2nd Vesting Date:
|
|
Number or % Vesting: |
|
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|
3rd Vesting Date:
|
|
Number or % Vesting: |
|
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4th Vesting Date:
|
|
Number or % Vesting: |
|
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5th Vesting Date:
|
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Number or % Vesting: |
|
|
6
Exhibit 10.13
Exhibit 10.13
SAFESTITCH MEDICAL, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
(NON-EMPLOYEE)
Dated __, 20__
Agreement
1. Grant of Option. SAFESTITCH MEDICAL, INC. (the Company) hereby grants, as of
_____, 20_____
(the Date of Grant), to (the
Optionee) an option (the Option) to purchase up to shares of the
Companys common stock, par value $0.001 per share (the Shares), at an exercise price per
share equal to $ (the Exercise Price). The Option shall be subject to the terms
and conditions set forth in this option agreement (this Option Agreement). The Option is
issued pursuant to the SafeStitch Medical, Inc. 2007 Incentive Compensation Plan (the
Plan), which is incorporated by reference herein for all purposes. The Option is a
Non-Qualified Stock Option, and not an Incentive Stock Option. The Optionee hereby acknowledges
receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and
thereof and all applicable laws and regulations.
2. Definitions. Capitalized terms used herein and not otherwise defined shall have the respective
meanings ascribed thereto in the Plan.
3. Exercise Schedule. Except as otherwise provided in Sections 6 or 9 of this Option Agreement, or
in the Plan, the Option is exercisable in installments as provided below, which shall be
cumulative. To the extent that the Option has become exercisable with respect to a percentage of
Shares as provided below, the Option may thereafter be exercised by the Optionee, in whole or in
part, at any time or from time to time prior to the expiration of the Option as provided herein.
The following table indicates each date (the Vesting Date) on and after which the
Optionee shall be entitled to exercise the Option with respect to the percentage of Shares granted
as indicated beside the date.
|
|
|
Percentage of Shares: |
|
Vesting Date: |
|
|
|
Except as otherwise specifically provided herein, there shall be no proportionate or partial
vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the
appropriate Vesting Date.
4. Method of Exercise. The vested portion of this Option shall be exercisable in whole or in part
in accordance with the exercise schedule set forth in Section 3 hereof by written notice, which
shall state the election to exercise the Option, the number of Shares in respect of which the
Option is being exercised, and such other representations and agreements as to the holders
investment intent with respect to such Shares as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered
in person or by certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised after
both (a) receipt by the Company of such written notice accompanied by the Exercise Price and (b)
arrangements that are satisfactory to the Committee in its sole discretion have been made for
Optionees payment to the Company of the amount, if any, that is necessary to be withheld in
accordance with applicable Federal or state withholding requirements. No Shares shall be issued
pursuant to the Option unless and until such issuance and such exercise complies with all relevant
provisions of applicable law, including the requirements of any stock exchange upon which the
Shares may then be traded.
5. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a
combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) to the extent
permitted by the Committee, with Shares owned by the Optionee, or the withholding of Shares that
otherwise would be delivered to the Optionee as a result of the exercise of the Option;
(d) pursuant to a cashless exercise procedure, by delivery of a properly executed exercise notice
together with such other documentation, and subject to such guidelines, as the Committee shall
require to effect an exercise of the Option and delivery to the Company by a licensed broker
acceptable to the Company of proceeds from the sale of Shares or a margin loan (to the extent
available to the Optionee) sufficient to pay the Exercise Price and any applicable income or
employment taxes; or (e) such other consideration or in such other manner as may be determined by
the Committee in its absolute discretion.
6. Termination of Option.
(a) General. Any unexercised portion of the Option shall automatically and without notice
terminate and become null and void upon the seventh (7th) anniversary of the date as of
which the Option is granted.
(b) Cancellation. To the extent not previously exercised, (i) the Option shall terminate
immediately in the event of (A) the liquidation or dissolution of the Company, or (B) any
reorganization, merger, consolidation or other form of corporate transaction in which the Company
does not survive or the Shares are exchanged for or converted into securities issued by another
entity, or an affiliate of such successor or acquiring entity, unless the successor or acquiring
entity, or an affiliate thereof, assumes the Option or substitutes an equivalent option or right
pursuant to Section 10(c) of the Plan, and (ii) the Committee in its sole discretion may by written
notice (cancellation notice) cancel, effective upon the consummation of any transaction
that constitutes a Change in Control, the Option (or portion thereof) that remains unexercised on
such date. The Committee shall give written notice of any proposed transaction referred to in this
Section 6(b) a reasonable period of time prior to the closing date for such transaction (which
notice may be given either before or after approval of such transaction), in order that the
Optionee may have a reasonable period of time prior to the closing date of such transaction
within which to exercise the Option if and to the extent that it then is exercisable
(including any portion of the Option that may become exercisable upon the closing date of such
transaction). The Optionee may condition his exercise of the Option upon the consummation of a
transaction referred to in this Section 6(b).
2
7. Transferability. Unless otherwise determined by the Committee, the Option is not transferable
otherwise than by will or under the applicable laws of descent and distribution, and, during the
lifetime of the Optionee, the Option shall be exercisable only by the Optionee, or the Optionees
guardian or legal representative. In addition, the Option shall not be assigned, negotiated,
pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall
not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason
of any execution, attachment or similar process contrary to the provisions hereof, the Option shall
immediately become null and void. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. No Stockholder Rights. Neither the Optionee nor any personal representative (or
beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the
Company with respect to any Shares issuable upon the exercise of the Option, in whole or in part,
prior to the date on which the Shares are issued.
9. Acceleration of Exercisability of Option.
(a) Acceleration upon Certain Terminations or Cancellations of Option. This Option shall
become immediately fully exercisable prior to the termination of the Option pursuant to Section 6
hereof, in the event that, (i) the Option will be terminated pursuant to Section 6(b)(i) hereof, or
(ii) the Company exercises its discretion to provide a cancellation notice with respect to the
Option pursuant to Section 6(b)(ii) hereof.
(b) Acceleration upon Change in Control. This Option shall become immediately fully
exercisable in the event that there is a Change in Control, as defined in Section 9(b) of the
Plan.
10. Governing Law. This Option Agreement shall be governed in accordance with and by the internal
laws of the State of Delaware.
11. Interpretation / Provisions of Plan Control. This Option Agreement is subject to all the
terms, conditions and provisions of the Plan, including, without limitation, the amendment
provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted
by the Committee as may be in effect from time to time. If and to the extent that this Option
Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the
Plan shall control, and this Option Agreement shall be deemed to be modified accordingly. The
Optionee accepts the Option subject to all of the terms and provisions of the Plan and this Option
Agreement. The undersigned Optionee hereby accepts as binding, conclusive and final all decisions
or interpretations of the Committee upon any questions arising under the Plan and this Option
Agreement, unless shown to have been made in an arbitrary and capricious manner.
3
12. Notices. Any notice under this Option Agreement shall be in writing and shall be deemed to
have been duly given when delivered personally or when deposited in the United States mail,
registered, postage prepaid, and addressed, in the case of the Company, to the Companys Secretary
at 4400 Biscayne Blvd., Suite 670, Miami, Florida 33137, or if the Company should move its
principal office, to such principal office, and, in the case of the Optionee, to the Optionees
last permanent address as shown on the Companys records, subject to the right of either party to
designate some other address at any time hereafter in a notice satisfying the requirements of this
Section.
Signatures Follow on Next Page
4
Option Grant No.:_____
IN WITNESS WHEREOF, the undersigned have executed this Option Agreement as of the date first
set forth above.
|
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COMPANY:
SAFESTITCH MEDICAL, INC.
|
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By: |
|
|
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|
Name: |
|
|
|
|
Title: |
|
|
The Optionee acknowledges receipt of a copy of the Plan and represents that he or she has
reviewed the provisions of the Plan and this Option Agreement in their entirety, is familiar with
and understands their terms and provisions, and hereby accepts this Option subject to all of the
terms and provisions of the Plan and this Option Agreement. The Optionee further represents that
he or she has had an opportunity to obtain the advice of counsel prior to executing this Option
Agreement.
|
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|
GRANT SUMMARY
|
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Grant Date:
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Expiration Date: |
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Grant Type:
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Optionee Class: |
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Number of Shares:
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Exercise Price: |
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1st Vesting Date:
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Number or % Vesting: |
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2nd Vesting Date:
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Number or % Vesting: |
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3rd Vesting Date:
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5
Exhibit 10.14
Exhibit 10.14
SECOND AMENDMENT TO NOTE AND SECURITY AGREEMENT
THIS SECOND AMENDMENT (THE SECOND AMENDMENT) DATED MARCH 29, 2010 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 previously amended the Agreement to extend the Maturity
Date (as defined in the Agreement) from December 31, 2009 until June 30, 2010, and
WHEREAS, the Borrowers and Lenders desire to again amend the Agreement to extend the Maturity
Date from June 30, 2010 until June 30, 2011.
NOW THEREFORE, in consideration of the mutual covenants and promises contained in the
Agreement and this Second 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 Lenders Expenses, shall be due and payable in full on
June 30, 2011 (the Maturity Date).
2. Governing Law. This Second 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 Second 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 Second Amendment but not otherwise
defined shall have the meaning provided in the Agreement.
6. Counterparts. This Second 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.
IN WITNESS WHEREOF, the Parties hereto have caused this Second 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: |
/s/ Adam S. Jackson
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Name: |
Adam S. Jackson |
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Title: |
Chief Financial Officer |
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SAFESTITCH LLC
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By: |
/s/ Adam S. Jackson
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Name: |
Adam S. Jackson |
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Title: |
Chief Financial Officer |
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THE FROST GROUP, LLC |
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By:
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/s/ Jane H. Hsiao
Name: Jane H. Hsiao
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Title: Vice President |
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JEFFREY G. SPRAGENS |
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By:
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/s/ Jeffrey G. Spragens
Name: Jeffrey G. Spragens
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Title: |
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Page 2 of 2
Exhibit 14.1
Exhibit 14.1
Code of Business Conduct and Ethics
(Adopted April 23, 2009)
1. Policy
SafeStitch Medical, Inc. and its subsidiaries (the Company or SafeStitch) are committed to
maintaining high standards of business conduct and ethics. This Code of Business Conduct and
Ethics (this Code) reflects the business practices and principles of behavior behind that
commitment. We expect employees, officers and directors to read and understand this Code and abide
by it in the performance of his or her business responsibilities. We have established the position
of Compliance Officer (the Compliance Officer) to oversee this program and he can address any of
your questions or concerns. The Compliance Officer, our Chief Financial Officer, can be reached at
305-575-4202. You may also speak with your supervisor or our Chief Executive Officer.
2. Lawful and Ethical Conduct
SafeStitchs policy is to be a good corporate citizen of the countries in which it does
business. A necessary aspect of this policy is the responsibility of the Company and each
director, officer and employee to obey all laws and regulations which are applicable to us. We
must obey not only the letter, but also the spirit of the law. The Code of Conduct discusses each
director, officer and employees obligations with respect to certain laws that directly affect the
way we do business, such as those covering the manufacture, marketing and sale of medical devices,
environmental laws, antitrust laws, laws relating to SafeStitch stock and stock options, and those
governing the Companys relationship with our directors, officers and employees. However, the
policy to obey the laws extends to all laws, not only the ones discussed below.
Another critical aspect of being a good corporate citizen is to promote high standards by
conducting our affairs in a clearly ethical manner. Even the appearance of ethical impropriety is
to be avoided. Integrity is, and must continue to be, the basis of all our corporate
relationships. These policies were established in the firm belief that it is both right and in the
best interest of the Company for directors, officers and employees to act in accordance with them.
The corporate policies that are outlined here should be understood and followed by every director,
officer and employee who acts on behalf of SafeStitch anywhere in the world.
Violation of these policies could, in many instances, subject SafeStitch and the individuals
involved to criminal or civil actions, fines, and lawsuits for damages. Also, violation of these
policies could subject a director, officer and employee to discipline up to and including
termination of director status or employment. Employees can obtain advice concerning these
policies from the persons to whom they report or directly from one of the Companys executive
officers. On doubtful questions, directors, officers and employees should seek and receive advice
in advance of taking action.
3. Conflicts of Interest Are to Be Avoided
The Company respects the rights of its directors, officers and employees to manage their
affairs and investments and does not wish to impinge upon their personal lives. At the same time,
directors, officers and employees should avoid situations that present a potential conflict
between their interests and the interests of the Company. Also, SafeStitch directors,
officers and employees should pay proper attention to the Companys best interests. Employees owe
the Company their loyalty and should avoid any investment or association that interferes with the
independent exercise of sound judgment in the Companys best interests. Accordingly, we must be
careful to avoid situations where our personal interests could conflict or appear to conflict with
the interests of SafeStitch. Where a conflict exists, it must be resolved to the satisfaction of
the Company in order for the director or employment relationship to continue.
Circumstances that may give rise to conflicts of interest are not always obvious. There are
many areas of uncertainty, as well as conflicts, which arise despite the best intentions of a
director, officer or employee. To avoid potentially damaging effects on both the Company and the
individual, the Company asks employees to promptly disclose to their supervisors any facts or
circumstances that may involve, or appear to involve, a conflict of interest. Such disclosure can
assist employees in resolving honest doubts as to the propriety of a particular course of conduct.
Circumstances which could involve conflicts of interest which should be avoided include:
personal or family financial interests in a competitor, supplier, or customer; employment by a
competitor in any capacity; placement of business in a firm owned or controlled by an employee or a
family member; employment of relatives (any person who is related by blood or marriage, or whose
relationship with the director, officer or employee is similar to that of persons who are related
by blood or marriage) in a direct working relationship; acting as a consultant to a customer or
supplier; or acceptance of entertainment, gifts, payments, services or travel which have more than
a nominal value from those seeking to do business with SafeStitch. While business courtesies are to
be encouraged, directors, officers and employees should not accept entertainment, gifts, payments,
services or travel that may reasonably be deemed by others to affect their judgment or actions in
the performance of their duties.
4. Insider Information and Trading
SafeStitchs insider trading policy forbids its directors, officers and employees from using,
for personal advantage, information that they acquire during the course of their director status or
employment with the Company that has not been publicly disclosed (inside information). This
information could be used for personal advantage in a number of ways. One way is associated with
trading in SafeStitch stock or listed options.
The trading of SafeStitch stock or listed options in the market, by an employee based upon
material inside information, or by others who have acquired inside information from the employee,
is forbidden. Such trading, in addition to raising obvious ethical considerations, subjects the
user of such information to legal risks and could prove embarrassing to the individual and to the
Company. All employees must exercise caution not to disclose inside information to outsiders,
either intentionally or inadvertently, under any circumstances, whether at meetings held as part of
the business day or at informal after-hours discussions.
2
Even after information has been publicly disclosed through appropriate channels, a reasonable
time should be allowed to pass before trading in SafeStitch stock or listed options to allow for
public dissemination and evaluation of the information. In addition to the above, none of us
should buy or sell securities in any other company about which we have material inside information
obtained in the performance of our duties at SafeStitch.
Because it is often difficult to determine whether the standards described above have been
satisfied, to prevent inadvertent violation of the Companys policy or of the securities laws,
directors, officers and employees who have questions should consult with the Compliance Officer or
the Companys legal counsel prior to engaging in any transaction involving SafeStitch stock, listed
options or stock options.
5. Companys Assets Should be Preserved
Each director, officer and employee has a responsibility to preserve the Companys assets,
including its property, plants, equipment and resources. Inherent in this responsibility is the
duty to not misuse the assets of the Company. The use of Company assets or the use of the services
of Company personnel for non-Company purposes is improper.
6. Companys Proprietary Information Should be Safeguarded
In addition to preserving and not misusing the tangible assets and resources of the Company,
each director, officer and employee must also protect the Companys intellectual property. Such
property includes scientific and technical knowledge, know-how, and the experience developed in the
course of the Companys activities, including information SafeStitch develops in research,
production, marketing, sales, legal, and finance. Such information is a vital asset of the
Company, essential to our continued success.
This information is highly confidential. It should be protected by all Company directors,
officers and employees and not disclosed to outsiders. Its loss through inadvertent or improper
disclosure could be harmful to the Company. Employees are required to sign agreements reminding
them of their obligation not to disclose the Companys confidential information, both while they
are employed and after they leave the Company. The loyalty, integrity, and sound judgment of
SafeStitch directors, officers and employees both on and off the job are essential to the
protection of the Companys proprietary information.
7. Good Community Relations Should be Maintained
SafeStitch has a commitment to function as a good corporate citizen. SafeStitch recognizes
that constructive interaction with society and a positive relationship with host communities are
important to business success. These goals are achieved by conducting business, whenever possible,
so as to contribute to the overall economic vitality of the host community; by operating our
facilities in accordance with applicable laws; and by supporting and encouraging public policies
that enhance the proper operation of the business and take into account legitimate employee and
community interests. Each director, officer and employee is a representative of the Company in the
community, in which he or she lives and works. Directors, officers and employees should therefore
act in a manner, which enhances the Companys relationships with the communities in which it does
business.
3
8. Good Employee Relations Should be Maintained
SafeStitch seeks to establish and maintain its reputation as an outstanding employer and to
ensure high levels of employee motivation and commitment. It is SafeStitchs policy to treat
applicants and employees without regard to race, color, religion, sex, sexual orientation,
age, national origin, handicap, or veteran status; to provide challenging opportunities for
individual growth and advancement; to ensure open communication throughout the organization in
order to resolve problems or complaints; to strive to protect its employees health and safety; to
provide a work environment free from harassment; and to comply with all laws relating to employees.
Any violations of this policy should be reported to the Compliance Officer. All reported
complaints will be confidentially investigated and resolved. Individual managers and supervisory
personnel have direct responsibility for implementing this policy. However, the support of all our
employees is essential to the policys successful implementation.
9. High Standards of Quality Should be Maintained
A commitment to quality is essential to the Company, especially in the medical device
business. SafeStitch is dedicated to the development, manufacture, and delivery of high quality
products meeting both our own quality standards and our customers requirements. In addition, all
of our products must be manufactured in accordance with laws, including good manufacturing
practices. To ensure compliance with these policies, we have implemented extensive quality control
and testing procedures. All employees are responsible for maintaining the high quality of our
products. Each employee must bring to his or her supervisors attention any lapse in quality
control or testing procedures. If an employee is not satisfied with the actions taken, he should
bring the matter to the attention of any of the executive officers of the Company.
10. Maintenance of Corporate Books, Records, Documents and Accounts; Financial Integrity; Public
Reporting
It has always been the policy of the Company to maintain the integrity of its financial
records and to assure that its financial statements fairly and accurately reflect the financial
condition and results of operations of the Company. All funds and assets of the Company are to be
recorded in its records of account and are not to be hidden. No false or artificial entries shall
be made in the records of the Company for any reason, and no payment on behalf of the Company shall
be approved or made with the intention or understanding that any part of such payment is to be used
for any purpose other than that described by the documents supporting the payment.
Employees who collect, provide or analyze information for or otherwise contribute in any way
in preparing or verifying our internal reports, reports filed with the Securities and Exchange
Commission or press releases issued by the Company should strive to ensure that our financial and
other disclosure is timely, accurate and transparent and that our reports and press releases
contain all of the information about the Company that would be important to enable stockholders and
potential investors to assess the soundness and risks of our business and finances and the quality
and integrity of our accounting and disclosures.
Any employee having information or knowledge of any hidden fund or asset, of any false or
artificial entry in the books and records of the Company, or of any such payment shall promptly
report the matter to the Companys Compliance Officer or the CEO. Additional information dealing
with this subject is contained in published corporate and financial policies.
4
11. Full Disclosure to Physicians Is Required
As a manufacturer of medical devices, SafeStitch intends to keep the medical profession fully
informed of the uses, safety, contraindications, and side effects of our products and, where
appropriate, of their operational requirements and characteristics. This policy will be
implemented by the use of package inserts, mailings to physicians and other health care
professionals, the dissemination of other educational or promotional materials, as well as through
oral presentations by our trained professional service representatives. The Company follows the
rule that the essential information given must be consistent both within the worldwide body of
scientific knowledge pertaining to the products in question and with local requirements of good
medical practice and governmental regulation.
12. The Bribery of Government Officials Is Forbidden
SafeStitch has a policy forbidding bribery of government officials in the conduct of its
business throughout the world. No SafeStitch director, officer and employee anywhere in the world
may engage in bribery of any government official. SafeStitch takes this position not only because
such payment would be in violation of the law but also because of the Companys commitment to good
government and the fair and impartial administration of the laws.
United States law makes it a felony to offer or give anything of value to a government
official because of any official act performed or to be performed. In addition, most government
agencies have strict standards, which their employees must follow regarding the receipt of gifts,
entertainment, meals, or other things of value.
13. Commercial Bribery Is Prohibited
SafeStitchs success in the market is based on the value provided to its customers through the
delivery of quality products and services. The Company does not seek to gain any improper
advantage through the use of entertainment, meals, other business courtesies or gifts.
Accordingly, their use under circumstances which might infer that favorable treatment is being
sought must be avoided. It is imperative that when we meet with customers, we exercise good
judgment and moderation in providing business courtesies and offer them only when appropriate and
in accordance with reasonable and lawful customs in the marketplace.
SafeStitch has a policy of prohibiting any director, officer and employee, consultant,
middleman, or other agent acting on behalf of the Company from directly or indirectly engaging in
commercial bribery. Commercial bribery deals with furnishing something of value to an agent,
without the knowledge of the agents principal, in the hope that the agent will influence the
principals commercial conduct. An example would be paying money or giving a gift to an employee
of a customer, without the knowledge of the customer, in the hope that the employee will influence
the customer to purchase our products. Engaging in commercial bribery is unlawful under the laws
of the United States and the laws of a number of states, as well as under the laws of a number of
countries outside the United States.
5
14. Federal Corporate Political Contributions Are Prohibited
As a corporation, SafeStitch is prohibited by United States law from contributing to
candidates for federal office. Of course, this does not mean that directors, officers and
employees of the Company cannot contribute to candidates or otherwise take part in the political
process. In fact, SafeStitch encourages participation by directors, officers and employees in
public affairs and political activities. Each of us must recognize, however, that our
participation must be on an individual basis, on our own time, and at our own expense. Under no
circumstances will the Company provide reimbursement for contributions to the campaign of any
candidate for federal, state, or local office or to a political party.
15. Competing Fairly and Complying with Antitrust Laws Is Essential
It is SafeStitchs policy to compete fairly and legitimately and to comply with antitrust and
competition laws. The antitrust and competition laws apply to many aspects of business behavior,
and those directors, officers and employees who have responsibility in areas of the business to
which these laws apply must be aware of them and their implications.
The United States antitrust laws and the competition laws of many other countries and
organizations prohibit agreements and activities that may have the effect of reducing competition
without providing counterbalancing benefits to consumers. Agreements and activities which are
prohibited include: agreements with competitors to fix or control prices; agreements with
competitors to allocate products, markets or territories; agreements to boycott certain customers
or suppliers; agreements to refrain from or limit the manufacture, sale or production of any
product; or reciprocal purchase arrangements or tie-ins.
To ensure that the Company avoids these illegal agreements, it continues to be the policy of
the Company that there are to be no discussions or other contacts, direct or indirect, with
competitors regarding (1) prices to be charged by SafeStitch or others or regarding other terms and
conditions of sales, (2) the territories or markets in which products will be sold, (3) persons or
companies to whom products will not be sold. The same applies to the companys suppliers and
customers, except that discussions are permitted regarding the Companys sales to such customers or
purchases from such suppliers.
Because of the complexity of the United States antitrust laws and the competition laws of
other countries and organizations like the European Economic Community, directors, officers and
employees should consult with the Compliance Officer or the Companys legal counsel when any
situations arise which may result in a violation of these laws. In addition, because the United
States antitrust laws and the competition laws of other nations and organizations may be applied to
international operations and transaction, employees should seek the advice of the Companys legal
counsel when questions covering international activities arise.
16. Complying with Environmental Laws is Essential
SafeStitch must fully comply with all federal, state, local and foreign laws relating to the
protection of the environment in the conduct of its business. It is recognized that the use of
hazardous materials is unavoidable. However, we have an obligation to use and store these
materials properly to ensure that contact with the environment is minimized and limited to
established accepted circumstances. All wastes which are generated must be stored as required by
applicable law and must be recycled or disposed of as required by applicable law. Employees must
report, in accordance with applicable Company policies, any circumstances under which hazardous
materials or wastes come in contact with the environment, are improperly handled or disposed of, or
where a potential violation of the environmental laws may exist.
6
17. Observe Restrictions on International Trade and Avoid Illegal Boycotts
U.S. law prohibits the exportation of products and technology to certain countries and trading
partners, and trading restrictions may also be imposed by the laws of other countries in which
SafeStitch companies manufacture products. Since the application of these laws depends on the type
of products and the countries involved, the Companys legal counsel should be informed of any
proposed new business relationships involving international trade.
SafeStitch may receive requests to participate in a boycott imposed by one non-U.S. country
against another country that is friendly to the U.S. Participation in any such boycott violates
U.S. law, and anyone receiving such a request is required to report it. Employees should be alert
to boycott provisions in forms that they receive from other companies, such as contracts, requests
to bid, letters of credit, and purchase orders. If any document contains language that may
potentially be boycott-related, SafeStitch cannot sign the document, and it must be provided
promptly to the Compliance Officer or the Companys legal counsel for proper handling.
18. Waivers
Any waiver of this Code for executive officers including, where required by applicable laws,
our principal executive officer, principal financial officer, principal accounting officer or
controller (or persons performing similar functions) or directors may be authorized only by our
Board or the Audit Committee and will be disclosed to stockholders as required by applicable laws,
rules and regulations.
19. Ethics Hotline
You may contact our Ethics Hotline via toll-free call (1-888-335-9501), email
(safestitch@signius.com) or website (http://www.thecompliancepartners.com/safestitch) if you wish
to report actual or suspected violations of this Code. The Ethics Hotline is administered by an
independent compliance provider to ensure confidentiality. You may make your contact anonymously,
although the Compliance Officer may be unable to obtain follow-up details from you that may be
necessary to investigate the matter. Your contact with the Ethics Hotline will be kept strictly
confidential to the extent reasonably possible within the objectives of this Code.
20. Clarifying Questions and Concerns; Reporting Possible Violations
If you encounter a situation or are considering a course of action and its appropriateness is
unclear, or if you wish to ask questions about the Companys policy, discuss the matter promptly
with your supervisor, the Compliance Officer or our Chief Executive Officer. If you are aware of a
suspected or actual violation of Code standards by others, you have a responsibility to report it.
7
21. Compliance with the Code of Business Conduct and Discipline
SafeStitch strives to serve the overall interests of our customers, suppliers, employees,
communities and shareholders. SafeStitch believes that strict compliance by all directors,
officers and employees with this Code of Conduct by each of us will best serve the interests of the
Company and these constituencies. Accordingly, violations of the Code of Conduct will not
be tolerated and will result in penalties ranging from warnings and reprimands to discharges
as deemed appropriate by the Company. Willful disregard of criminal statutes underlying this Code
of Conduct may require the Company to refer such violation for criminal prosecution or civil
action.
Each supervisor has the responsibility for employees, including agents, consultants, and other
representatives of the Company under his or her direction to: (1) continually stress to all
employees the need for a commitment to the principles of the Code of Conduct; (2) ensure that their
departments operate in accordance with the highest principles of business ethics; and (3) maintain
a workplace environment that encourages open communication regarding the importance of operating
under these principles and to reinforce the lines of communications available to employees to
resolve concerns related to the Code of Conduct.
Each SafeStitch director, officer and employee is charged with the responsibility of
familiarizing himself or herself with the Code of Conduct and reporting each violation or potential
violation of the Code of Conduct of which he or she becomes aware. The Company strongly encourages
employees to work with their supervisors on matters concerning the interpretation and application
of the Code and in making reports. If any employee feels that he or she may not discuss a
particular situation with his or her supervisor, such employee should feel free to discuss the
matter with any of the executive officers of the Company.
We wish to assure each employee who reports a violation or potential violation of the Code of
Conduct that he or she will, to the extent practicable, remain anonymous. Under no circumstances
will any employee be subject to any disciplinary or retaliatory action as the result of filing a
report of a violation or a potential violation. Concerns in this area should be reported to the
head of human resources or to any executive officer.
8
Exhibit 21.1
Exhibit 21.1
SUBSIDIARIES
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Name Under Which Subsidiary Is Doing |
Name of Subsidiary |
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State of Incorporation |
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Business |
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Isis Tele-Communications, Inc.
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Delaware
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Isis Tele-Communications, Inc. |
SafeStitch LLC
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Virginia
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SafeStitch LLC |
Exhibit 23.1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No
333-161291) of our report dated March 29, 2010 with respect to our audits of the consolidated
financial statements of SafeStitch Medical, Inc. (a development stage company) as of December 31,
2009 and 2008 and for the years then ended and for the period from September 15, 2005 (inception)
through December 31, 2009 included in its Annual Report on Form 10-K for the year ended December
31, 2009 filed with the Securities and Exchange Commission.
/s/ Eisner LLP
New York, New York
March 29, 2010
Exhibit 31.1
Exhibit 31.1
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 registrants 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 registrants 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 registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
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(5) |
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The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants 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 registrants 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 registrants internal
control over financial reporting. |
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By: |
/s/ Jeffrey G. Spragens
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Jeffrey G. Spragens |
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Chief Executive Officer (Principal Executive
Officer)
March 29, 2010 |
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Exhibit 31.2
Exhibit 31.2
CERTIFICATIONS
I, Adam S. Jackson, 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 registrants 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 registrants 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 registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
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(5) |
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The registrants other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrants auditors and the audit committee of the
registrants 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 registrants 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 registrants internal
control over financial reporting. |
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By: |
/s/ Adam S. Jackson
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Adam S. Jackson |
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Chief Financial Officer
March 29, 2010 |
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Exhibit 32.1
Exhibit 32.1
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, 2009 (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. |
|
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|
|
|
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By: |
/s/ Jeffrey G. Spragens
|
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Jeffrey G. Spragens |
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Chief Executive Officer and President
March 29, 2010 |
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The certification set forth above is being furnished as an Exhibit solely pursuant to Section
906 of the SarbanesOxley 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
Exhibit 32.2
Exhibit 32.2
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, 2009 (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. |
|
|
|
|
|
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By: |
/s/ Adam S. Jackson
|
|
|
|
Adam S. Jackson |
|
|
|
Chief Financial Officer
March 29, 2010 |
|
The certification set forth above is being furnished as an Exhibit solely pursuant to Section
906 of the SarbanesOxley 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