Item 1A. Risk Factors
Item 1A. Risk Factors.
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. For a discussion of these potential risks and uncertainties, see Part I, Item 1A. “Risk Factors” of our Annual Report. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and the price of our common stock. Except as set forth below, there have been no material changes in our risk factors to those included in our Annual Report.
A substantial portion of our net sales is generated through our commercial partners and independent sales agents, which subjects us to various risks.
We currently rely on the efforts of our commercial partners and independent sales agents to generate a substantial portion of our net sales, and we expect to continue to rely on these third parties to generate a substantial portion of our net sales in the future while we work to grow our direct sales force. For example, we have commercial agreements with major medical device companies, including Boston Scientific, Biotronik, Sientra and LeMaitre Vascular. As a result, the impairment or termination of these relationships for any reason, or the failure of these parties to diligently sell our products and comply with applicable laws and regulations, has and could in the future materially and adversely affect our ability to generate revenue and profits.
One such partner, Surgalign Holdings, Inc. (“Surgalign”) and certain of its direct and indirect subsidiaries commenced voluntary proceedings under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas on June 19, 2023. Total revenues generated by us from Surgalign during the six months ended June 30, 2023 and 2022 were $2.3 million and $2.5 million, respectively. Surgalign is in the process of selling its assets through the chapter 11 process, but our contract with Surgalign is not being assumed by the buyer of the relevant assets. Consequently, future revenues from our Surgalign relationship are highly uncertain.
Because our commercial partners and independent sales agents control the relationships with our end customers, if our relationship with any commercial partner or independent sales agent ends, we will likely also lose our relationship with their customers. Furthermore, our success is partially dependent on the willingness and ability of the sales representatives and other employees of our commercial partners and independent sales agents to diligently sell our products. However, we cannot guarantee that they will be successful in marketing our products. In addition, because our commercial partners and independent sales agents do not sell our products exclusively, they may focus their sales efforts and resources on other products that produce better margins or greater commissions for them or are incorporated into a
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broader strategic relationship with a partner. Because we do not control the sales representatives and other employees of our commercial partners, we cannot guarantee that our sales processes, regulatory compliance and other priorities will be consistently communicated and executed. In addition, we do not have staff in many of the areas covered by our commercial partners and independent sales agents, which makes it particularly difficult for us to monitor their performance. While we may take steps to mitigate the risks associated with noncompliance by our commercial partners and independent sales agents, there remains a risk that they will not comply with regulatory requirements or our requirements and policies. Actions by the sales representatives and other employees of our commercial partners and independent sales agents that are beyond our control could adversely impact sales in that territory or result in harm to the reputation of the Company or our products or legal liability, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition to the risk of losing customers, the operation of local laws and our agreements with our commercial partners and independent sales agents would make it difficult for us to replace a commercial partner or independent sales agent we believe is underperforming.
In order to increase our sales, we intend to develop relationships and arrangements with additional commercial partners and/or independent sales agents, which we may not be able to do on commercially reasonable terms or at all. If we are unable to establish new commercial partner and independent sales agent relationships and maintain our relationships with our existing commercial partners and independent sales agents, in each case, on commercially reasonable terms, we will be unable to increase sales of our products, which, in turn, could materially and adversely affect our business, financial condition and results of operations.
The loss of one or more significant commercial partners, a material reduction in their purchases of our products, such as what we may experience with Surgalign, or their inability to perform their contractual obligations, including, for example, committed purchase requirements, has affected and could continue to adversely affect our business, financial condition and results of operations. We are also subject to the risk that any such commercial partner will experience financial difficulties that prevent them from making payments to us on a timely basis or at all.
The processing of human and porcine tissue for our products is technically complex, requiring high levels of quality control and precision, which subjects us to increased production risks.
We manufacture our human and porcine tissue products using technically complex processes requiring specialized facilities, highly specific raw materials, skill and diligence by our personnel and other production constraints. The complexity of these processes, as well as strict company and government standards for the manufacture and storage of our products, subjects us to production risks. In addition to ongoing production risks, process deviations or unanticipated effects of approved process changes may result in non-compliance with regulatory requirements, including stability requirements or specifications. For example, our bone allograft products, such as ViBone and OsteGro V, must be shipped and maintained within a specified temperature range. If environmental conditions deviate from that range, our products’ remaining shelf-lives could be impaired or their safety and efficacy could be adversely affected, making them unsuitable for use. The occurrence of this or any other actual or suspected production or distribution problem can lead to lost inventory, customer returns and, in some cases, recalls, with consequential damage to our reputation and customer relationships and the risk of product liability.
For example, in July 2023, we announced a voluntary recall of a single lot of a certain viable bone matrix product and the market withdrawal of all of our viable bone matrix (“VBM”) products produced after a specified date (“VBM Matter”). Notice of the voluntary recall was issued to centers after the Company learned of post-surgical Mycobacterium tuberculosis (MTB) infections in two patients treated with a VBM product from a single donor lot. Prior to release, samples from this specific lot had tested negative for MTB by an independent laboratory using a nucleic acid test that is designed to specifically detect the MTB organism.
Furthermore, in June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures. Notice of the voluntary recall was issued to hospitals that received product from this specific lot following our learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for tuberculosis. The lot consisted of 154 units of FiberCel, all derived from a single donor, that were shipped to facilities in 20 states. We have investigated the source of the infections in coordination with our distributor, the FDA and the U.S.
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Centers for Disease Control and Prevention (“CDC”). The FDA inspected our Richmond, California production facility, and this inspection did not result in any Form-483 observations. Additionally, multiple product liability lawsuits have been filed against us in connection with FiberCel. See “We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance” for additional information about these product liability lawsuits.
These product recalls and investigations, as well as others that may occur in the future, and the remediation of any potential or identified problems can cause production delays and result in substantial additional expenses and lost revenue. In addition, we may experience difficulties in scaling up processing and production of our human and porcine tissue products, including problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures and availability of skilled personnel. Furthermore, developing and maintaining our production capabilities has required, and will continue to require, the investment of significant resources, and we cannot guarantee that we will be able to achieve economies of scale. If we are unable to process and produce our human tissue products on a timely basis, at acceptable quality and costs and in sufficient quantities, or if we experience technological problems, delays in production, failure in the storage of our products or other loss of supply, our business would be materially and adversely affected.
We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing, investigating and marketing of medical devices and human and animal tissue products. For example, since the voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix was issued, and since September 2021, we have received notice of 109 separate lawsuits or claims alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations. We have settled 27 of these lawsuits for a total of approximately $7.5 million as of June 30, 2023. Of these settled matters, 26 cases were both settled and paid as of June 30, 2023 for a total cash outlay of $7.3 million. For the remaining 82 cases for which settlements have not been reached, we estimated a probable loss related to each case and have recorded a liability at an estimated amount of $14.3 million for a total estimated liability at June 30, 2023 of $14.5 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying condensed consolidated balance sheets included in this Quarterly Report. See Part II, Item 1, “Legal Proceedings” and Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.
We are, and may in the future be, subject to product liability claims and lawsuits, including claims that may result from the VBM Matter noted above, and potential class actions or mass tort claims, alleging that our products have resulted or could result in an unsafe condition or injury. Product liability claims may be made by patients and their families, healthcare providers or others selling our products. Product liability claims may include, among other things, allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties.
Additionally, we may be subject to product liability claims, proceedings and lawsuits, even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, we rely on physicians and other healthcare providers to properly and correctly use our products. If these physicians or other healthcare providers are not properly trained or are negligent in using our products, the capabilities of our products may be diminished or the patient may suffer critical injury. In addition, we may be subject to product liability claims, as well as a number of other risks, as a result of physicians and other healthcare providers using our products “off-label.” See the risk factor entitled “ The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business ” included in the Annual Report.
Defending any current or future claims, proceedings or lawsuits, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our products in the market. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
● harm to our business reputation;
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● investigations by regulators;
● significant legal costs;
● distraction of management’s attention from our primary business;
● substantial monetary awards to patients or other claimants;
● loss of revenue;
● exhaustion of any available insurance and our capital resources; and
● decreased demand for our products.
Our product liability insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance. As of June 30, 2023, we have recorded insurance receivables of $8.9 million on our balance sheet in respect of our insurance coverage for the FiberCel Litigation product liability losses. However, it is possible that future claims related to the FiberCel Litigation or other product liability claims could exceed the limits of, or be excluded from, coverage under our policies, and claims against us could also increase the cost of maintaining our coverage. If these or other claims are excluded from our coverages, or if we are unable to maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims, or if we underestimate the amount of insurance we need, we could be exposed to significant liabilities, which may harm our business. One or more product liability claims could have a significant adverse effect on our business, financial condition and results of operations.
Defects, failures or quality issues associated with our products could lead to product recalls or safety alerts, adverse regulatory actions, litigation, including product liability claims, and negative publicity, any of which may erode our competitive advantage and market share and have a material adverse effect on our reputation, business, financial condition and results of operations.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Quality and safety issues may occur with respect to any of our products, and our future operating results will depend on our ability to maintain an effective quality control system and effectively train and manage our workforce with respect to our quality system. The development, manufacture and control of our products are subject to extensive and rigorous regulation by numerous government agencies, including the FDA, the competent authorities of the EU member states and similar foreign agencies. Compliance with these regulatory requirements, including but not limited to the FDA’s Quality System Regulation (“QSR”), current Good Manufacturing Practices (“GMPs”) and adverse events/recall reporting requirements in the United States and other applicable regulations worldwide, is subject to continual review and is monitored rigorously through periodic inspections by the FDA and foreign regulatory authorities. If we fail to comply with our reporting obligations, the FDA, the competent authorities of the EU member states or other regulatory authority could take action, including issuance of warning letters and/or untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in the clearance of future products.
The FDA and foreign regulatory authorities may also require post-market testing and surveillance to monitor the performance of approved or certified products. Our facilities and those of our suppliers, commercial partners and independent sales agents are also subject to periodic regulatory inspections. If the FDA or a foreign authority were to conclude that we have failed to comply with any of these requirements, it could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as product recalls or seizures, withdrawals, monetary penalties, consent decrees, injunctive actions to halt the manufacture or distribution of products, import detentions of products made outside the United States, export restrictions, restrictions on operations or other civil or criminal sanctions. Civil or criminal sanctions could be assessed against our officers, employees, or us. Any adverse
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regulatory action, depending on its magnitude, may restrict us from effectively manufacturing, marketing and selling our products.
If our products do not function as designed, or are designed improperly, we or the third-party manufacturer of such products may withdraw such products from the market, whether by choice or as a result of regulatory requirements. In June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures, following our learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for tuberculosis. This recall had a negative effect on our business, financial condition and results of operations and resulted in a number of lawsuits filed against us as discussed under the risk factor “ We face significant litigation related to FiberCel ” included in our Annual Report. Furthermore, in July 2023, we announced a voluntary recall of a single lot of a certain viable bone matrix product and the market withdrawal of all of our viable bone matrix (“VBM”) products produced after a specified date (“VBM Matter”). Notice of the voluntary recall was issued to centers after we learned of post-surgical Mycobacterium tuberculosis (MTB) infections in two patients treated with a VBM product from a single donor lot. Prior to release, samples from this specific lot had tested negative for MTB by an independent laboratory using a nucleic acid test that is designed to specifically detect the MTB organism. The VBM Matter product recall has had and may continue to have, and any product recall we or a third-party manufacturer may conduct in the future, whether voluntary or required, could also have, a negative impact on our business, financial condition and results of operations, and this effect may be material.
In addition, we cannot predict the results of future legislative activity or future court decisions, any of which could increase regulatory requirements, subject us to government investigations or expose us to unexpected litigation. Any regulatory action or litigation, regardless of the merits, may result in substantial costs, divert management’s attention from other business concerns and place additional restrictions on our sales or the use of our products. In addition, negative publicity, including regarding a quality or safety issue, could damage our reputation, reduce market acceptance of our products, cause us to lose customers and decrease demand for our products. Any actual or perceived quality issues may also result in issuances of physician’s advisories against our products or cause us to conduct voluntary recalls. Any product defects or problems, regulatory action, litigation, negative publicity or recalls could disrupt our business and have a material adverse effect on our business, financial condition and results of operations.
We recently received a Nasdaq notice for failing to comply with listing requirements and there is no assurance we will regain compliance or maintain our Nasdaq listing.
On May 4, 2023, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) informing us that, due to our Market Value of Listed Securities (“MVLS”) having been below the minimum of $35 million for 30 consecutive business days, we are not in compliance with the MVLS required for continued listing on the Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(b)(2) (the “Market Value Standard”). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we have a period of 180 calendar days from May 4, 2023, or until October 31, 2023, to regain compliance with the Market Value Standard. If we do not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting.
We intend to monitor our MVLS during the allotted compliance period, and may, if appropriate, evaluate available options to regain compliance by resolving the deficiency under the Market Value Standard, or under Nasdaq’s alternative continued listing requirements. However, there can be no assurance that we will regain compliance with the Market Value Standard during the 180 day compliance period, secure an extension to the 180 calendar day period to regain compliance, or gain or maintain compliance under or with Nasdaq’s other applicable listing requirements.
If we cannot regain compliance with the Market Value Standard or under Nasdaq’s alternative continued listing requirements, and if our common stock is delisted by Nasdaq, it could lead to a number of negative implications, including an adverse effect on the price of our common stock, increased volatility in our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, could result in a loss of current or future coverage by certain sell-side analysts
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and might deter certain institutions and persons from investing in our securities at all. Delisting could also cause a loss of confidence of our collaborators, vendors, suppliers and employees, which could harm our business and future prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.