RISK
FACTORS
An
investment in our common stock is
speculative and involves a high degree of risk. You should carefully
consider the risks described below, together with the other information
contained in this prospectus, before buying our common stock. These
risks could have a material adverse effect on our business, financial condition
and results of operations and the value of our common stock.
Risks
Affecting Our
Business
We
have a limited operating history
on which to evaluate our potential for future success and determine if we will
be able to execute our business plan. This makes it difficult to
evaluate our future prospects and the risk of success or failure of our
business.
We
were
formed in 1989, but had very limited operations until 1998 when we acquired
the
assets utilized by EPI in connection with its medical device business and your
evaluation of our business and prospects will be based partly on our limited
operating history. While we have conducted development and sales and
marketing activities, we have generated limited revenues to
date. Consequently, our historical results of operations may not give
you an accurate indication of our future results of operations or
prospects. You must consider our business and prospects in light of
the risks and difficulties we will encounter as an early-stage company in a
new
and rapidly evolving market. These risks include:
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our
ability to effectively and efficiently market and distribute our
products
through our sales force and third-party
distributors;
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the
ability of ADM Tronics Unlimited, Inc., or ADM, or other manufacturers
utilized by us to effectively and efficiently manufacture our
products;
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our
ability to obtain market acceptance of our current products and future
products that may be developed by
us;
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our
ability to sell our products at competitive prices which exceed our
per
unit costs; and
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our
ability to obtain regulatory approval or clearance of our
products.
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We
may
not be able to address these risks and difficulties, which could materially
and
adversely affect our revenues, operating results and our ability to continue
to
operate our business.
We
have a history of significant and
continued operating losses and a substantial accumulated earnings deficit and
we
may continue to incur significant losses.
We
have
generated only limited revenues from product sales and have incurred net losses
of approximately $7.8 and $10.7 million for the fiscal years ended March 31,
2007 and 2006, respectively. In addition, for the six months ended
September 30, 2007 and 2006, respectively, we had a net loss of approximately
$3.2 million and $4.0 million, respectively. At
September 30, 2007, we had an accumulated deficit of approximately
$26.9 million. We expect to incur additional operating losses, as
well as negative cash flow from operations, for the foreseeable future, as
we
continue to expand our marketing efforts with respect to our products and to
continue our research and development of additional applications for our
products as well as new products utilizing our PEMF technology and other
technologies that we may develop in the future. Our ability to
increase our revenues from sales of our current products and other products
developed by us will depend on:
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increased
market acceptance and sales of our current
products;
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commercialization
and market acceptance of new technologies and products under development;
and
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medical
community awareness.
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We
have had difficulties with our
financial accounting controls in the past. If we are unable to
establish appropriate internal financial reporting controls and procedures,
it
could cause us to fail to meet our reporting obligations, result in the
restatement of our financial statements, harm our operating results, subject
us
to regulatory scrutiny and sanction, cause investors to lose confidence in
our
reported financial information and have a negative effect on the market price
for shares of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. We maintain a system of internal control
over financial reporting, which is defined as a process designed by, or under
the supervision of, our principal executive officer and principal financial
officer, or persons performing similar functions, and effected by our board
of
directors, management and other personnel, 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.
We
have
had difficulties with our financial controls in the past. As a public
company, we have significant requirements for enhanced financial reporting
and
internal controls. We will be required to document and test our
internal control procedures in order to satisfy the requirements of Section
404
of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting and
a
report by our independent registered public accounting firm addressing these
assessments. The process of designing and implementing effective
internal controls is a continuous effort that requires us to anticipate and
react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls
that is adequate to satisfy our reporting obligations as a public
company.
On
or
about March 28, 2006, Stonefield Josephson, Inc., our former independent
auditors, advised us in writing and discussed with us orally its views regarding
certain areas requiring improvement in our internal control over financial
reporting. The areas requiring improvement were generally: (i) lack
of staff with technical accounting expertise to independently apply our
accounting policies in accordance with accounting principles generally accepted
in the United States, (ii) improper cut off procedures and (iii) lack of
adequate back-up and documentation procedures with respect to our inventory
prior to March 31, 2005 and with respect to stock options previously granted
by
us. Our management has determined that, due to the reasons described
above, we had not consistently followed established internal control over
financial reporting procedures related to the analysis, documentation and review
of selection of the appropriate accounting treatment for certain
transactions.
Although
we have assigned the highest priority to the improvement in our internal control
over financial reporting and have taken, and will continue to take, action
in
furtherance of such improvement, we cannot assure you that the above-mentioned
areas will be fully remedied, if ever. Moreover, we cannot assure you
that we will not, in the future, identify further areas requiring improvement
in
our internal control over financial reporting. We cannot assure you
that the measures we have taken or will take to remediate any areas in need
of
improvement or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our rapid
growth. If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to meet our
reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction,
cause investors to lose confidence in our reported financial information and
have a negative effect on the market price for shares of our common
stock.
We
have restated our financial
statements in the past to reflect various corrections. No assurances
can be given that similar restatements will not be required in the
future.
We
restated our financial statements in the past to reflect various corrections
of
certain errors. The impact of the restatement of such financial
statements is included in our financial statements as of and for the year ended
March 31, 2006. In addition, we and our former auditors identified
certain errors requiring correction to our statement of operations for the
year
ended March 31, 2005. While we believe we have put processes in place
to begin to remedy areas in our internal controls, no assurances can be given
that we will not be faced with situations which may require us to restate our
financial statements again. Any such restatements could adversely
effect the credibility of our reported financial results and the price of our
common stock.
We
are currently dependent on our
products which utilize our PEMF technology, and increasing our revenues will
depend on our ability to increase market penetration, as well as our ability
to
develop and commercialize new products and
technologies.
Products
based on non-invasive, electrotherapeutic technologies represent known methods
of treatment that we believe have been under-utilized
clinically. Physicians and other healthcare professionals may not use
products and technologies developed by us unless they determine that the
clinical benefits to the patient are greater than those available from competing
products or therapies or represent equal efficacy with lower
cost. Even if the advantage of our products and technologies is
established as clinically and fiscally significant, physicians and other
healthcare professionals may not elect to use such products and
technologies. The rate of adoption and acceptance of our products and
technologies may also be affected adversely by unexpected side effects or
complications associated with our products, consumers’ reluctance to invest in
new products and technologies, the level of third-party reimbursement and
widespread acceptance of other products and
technologies. Consequently, physicians and other healthcare
professionals, healthcare payors and consumers may not accept products or
technologies developed by us. Broad market acceptance of our current
products and other products and technologies developed by us in the future
may
require the education and training of numerous physicians and other healthcare
professionals, as well as conducting or sponsoring clinical and fiscal studies
to demonstrate the cost efficiency and other benefits of such products and
technologies. The amount of time required to complete such training
and studies could be costly and result in a delay or dampening of such market
acceptance. Moreover, healthcare payors’ approval of use for our
products and technologies in development may be an important factor in
establishing market acceptance.
We
may be
required to undertake time-consuming and costly development activities and
seek
regulatory clearance or approval for new products or
technologies. Although the FDA has cleared our products for the
treatment of edema and pain in soft tissue, we may not be able to obtain
regulatory clearance or approval of new products or technologies or new
treatments through existing products or maintain clearance of our existing
products. In addition, we have not demonstrated an ability to market
and sell our products, much less multiple products simultaneously. If
we are unable to increase market acceptance of our current products or develop
and commercialize new products in the future, we will not be able to increase
our revenues. The completion of the development of any new products
or technologies or new uses of existing products will remain subject to all
the
risks associated with the commercialization of new products based on innovative
technologies, including:
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our
ability to fund and establish research that supports the efficacy
of new
technologies and products;
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our
ability to obtain regulatory approval or clearance of such technologies
and products, if needed;
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our
ability to obtain market acceptance of such new technologies and
products;
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our
ability to effectively and efficiently market and distribute such
new
products;
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the
ability of ADM or other manufacturers utilized by us to effectively
and
efficiently manufacture such new products;
and
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our
ability to sell such new products at competitive prices that exceed
our
per unit costs for such products.
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If
our customers are unable to
receive reimbursement from third parties, including reimbursement from Medicare,
our growth and revenues will be materially and adversely affected in markets
where our customers rely on insurance coverage for
payment.
Some
healthcare providers such as hospitals and physicians that purchase, lease
or
rent medical devices in the United States generally rely on third-party payors,
principally Medicare and private health insurance plans, including health
maintenance organizations, to reimburse all or part of the cost of the treatment
for which the medical device is being used. Commercialization of our
products and technologies in the United States will depend in part upon the
availability of reimbursement for the cost of the treatment from third-party
healthcare payors such as Medicare and private health insurance plans, including
health maintenance organizations, in non-capitated markets, where we rely on
insurance coverage for payment. Such third-party payors are
increasingly challenging the cost of medical products and services, which have
and could continue to have a significant effect on the ratification of such
technologies and services by many healthcare providers. Several
proposals have been made by federal and state government officials that may
lead
to healthcare reforms, including a government directed national healthcare
system and healthcare cost-containment measures. The effect of
changes in the healthcare system or method of reimbursement for our current
products and any other products or technologies that we may market in the United
States cannot be determined.
While
commercial insurance companies make their own decisions regarding which medical
procedures, technologies and services to cover, commercial payors often apply
standards similar to those used adopted by the Centers for Medicare &
Medicaid Services, or CMS, in determining Medicare coverage. The
Medicare statute prohibits payment for any medical procedures, technologies
or
services that are not reasonable and necessary for the diagnosis or treatment
of
illness or injury. In 1997, CMS, which is responsible for
administering the Medicare program, had interpreted this provision to deny
Medicare coverage of procedures that, among other things, are not deemed safe
and effective treatments for the conditions for which they are being used,
or
which are still investigational. However, in July 2004, CMS
reinstated Medicare reimbursement for the use of the technology used in our
products in the treatment of non-healing wounds under certain
conditions.
CMS
has
established a variety of conditions for Medicare coverage of the technology
used
in our products. These conditions depend, in part, on the setting in
which the service is provided. For example, in 2004, CMS added
electromagnetic therapy as a type of service payable in the home health setting,
but subject to Medicare’s consolidated home health billing
provisions. Thus, Medicare will not pay separately for
electromagnetic therapy services if the service is billed under a home health
plan of care provided by a home health agency. Rather, the home
health agency must pay for the electromagnetic therapy as part of the
consolidated payment made to the home health agency for the entire range of
home
health services under the patient’s care plan.
In
December of 2005, we retained a consulting company specializing in CMS
reimbursement and coverage matters to assist us in arranging and preparing
for a
meeting with CMS to request that CMS cover electromagnetic therapy for wound
treatment separately in the home health setting. We continued to
retain this consulting company to assist us with CMS until our termination
of
the relationship in July 2007. In August 2007, we engaged the
services of a new consulting company to assist us with CMS.
In
each
of May 2006 and October 2007, with the assistance of our prior consulting
company and our new consulting company, respectively, we held a meeting with
CMS
and made a presentation in support of reimbursement for the home health use
of
the technology used in our products. Even if CMS were to approve
separate reimbursement of electromagnetic therapy in the home health setting,
the regulatory environment could change and CMS might deny all coverage for
electromagnetic therapy as treatment of chronic wounds, whether for home health
use or otherwise, which could limit the amount of coverage patients or providers
are entitled to receive. Either of these events would materially and
adversely affect our revenues and operating results. See the
discussion below under the caption “Reimbursement.” Medicare does not
cover the cost of the device used for the electromagnetic treatment of
wounds.
We
cannot
predict when, if ever, CMS will allow for reimbursement for the use of the
technology in our products in the home, or what additional legislation or
regulations, if any, may be enacted or adopted in the future relating to our
business or the healthcare industry, including third-party coverage and
reimbursement, or what effect any such legislation or regulations may have
on
us. Furthermore, significant uncertainty exists as to the coverage
status of newly approved healthcare products, and there can be no assurance
that
adequate third-party coverage will be available with respect to any of our
future products or new applications for our present products. In
currently non-capitated markets, failure by physicians, hospitals, nursing
homes
and other users of our products to obtain sufficient reimbursement for
treatments using our technologies would materially and adversely affect our
revenues and operating results. Alternatively, as the U.S. medical
system moves to more fixed-cost models, such as payment based on diagnosis
related groups, prospective payment systems or expanded forms of capitation,
the
market landscape may be altered, and the amount we can charge for our products
may be limited and cause our revenues and operating results to be materially
and
adversely affected.
We
will likely need additional
capital to market our products and to develop and commercialize new technologies
and products and it is uncertain whether such capital will be
available.
Our
business is capital intensive and we will likely require additional financing
in
order to:
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fund
research and development;
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expand
sales and marketing activities;
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develop
new or enhanced technologies or
products;
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maintain
and establish regulatory
compliance;
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respond
to competitive pressures; and
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acquire
complementary technologies or take advantage of unanticipated
opportunities.
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Our
need
for additional capital will depend on:
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the
costs and progress of our research and development
efforts;
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the
preparation of pre-market application submissions to the FDA for
our new
products and technologies and costs associated
therewith;
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the
number and types of product development programs
undertaken;
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the
number of products we have manufactured for sale or
rental;
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the
costs and timing of expansion of sales and marketing
activities;
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the
amount of revenues from sales of our existing and potentially new
products;
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the
cost of obtaining and maintaining, enforcing and defending patents
and
other intellectual property rights;
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competing
technological and market developments;
and
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developments
related to regulatory and third-party coverage
matters.
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Although
we expect that our available funds, along with funds generated from our
operations, will be sufficient to meet our anticipated needs for at least the
next 12 months, we will likely need to obtain additional capital to continue
to
operate and grow our business. Our cash requirements may vary
materially from those currently anticipated due to changes in our operations,
including our marketing and distribution activities, product development,
regulatory requirements, expansion of our personnel and the timing of our
receipt of revenues. Our ability to obtain additional financing in
the future will depend in part upon the prevailing capital market conditions,
as
well as our business performance. There can be no assurance that we
will be successful in our efforts to arrange additional financing on terms
satisfactory to us or at all. If additional financing is raised by
the issuance of common stock you may suffer additional dilution and if
additional financing is raised through debt financing, it may involve
significant restrictive covenants which could affect our ability to operate
our
business. If adequate funds are not available, or are not available
on acceptable terms, we may not be able to continue our operations, grow our
business or take advantage of opportunities or otherwise respond to competitive
pressures and remain in business.
We
outsource the manufacturing of
our products to ADM, our largest shareholder and exclusive manufacturer, and
if
the operations of ADM are interrupted or if our orders exceed the manufacturing
capabilities of ADM, we may not be able to deliver our products to customers
on
time.
Pursuant
to a manufacturing agreement between us and ADM, our largest shareholder, ADM
is
the exclusive manufacturer of our products, and we may rely on ADM to
manufacture other products that we may develop in the future. ADM
operates a single facility and has limited capacity that may be inadequate
if
our customers place orders for unexpectedly large quantities of our products,
or
if ADM’s other customers place large orders of products, which could limit ADM’s
ability to produce our products. In addition, if the operations of
ADM were halted or restricted, even temporarily, or they are unable to fulfill
large orders, we could experience business interruption, increased costs, damage
to our reputation and loss of our customers. Moreover, under our
agreement, ADM may terminate the agreement under certain
circumstances. Although we have the right to utilize other
manufacturers if ADM is unable to perform under our agreement, manufacturers
of
our products need to be licensed with the FDA, and identifying and qualifying
a
new manufacturer to replace ADM as the manufacturer of our products could take
several months during which time, we would likely lose customers and our
revenues could be materially delayed and/or reduced.
Because
of our relationship with ADM
and other affiliates, we may become subject to conflicts of interests that
may
adversely affect our ability to operate our business.
Our
Vice
Chairman of the Board and Co-Chief Executive Officer, Andre’ DiMino, serves as
the President and Chief Executive Officer of ADM; and our President and Co-Chief
Executive Officer, David Saloff, serves as a director of ADM. This
could create, or appear to create, potential conflicts of interest when members
of our senior management are faced with decisions that could have different
implications for us and for ADM. For example, conflicts of interest
could arise between us and ADM in various areas such as fundraising, competing
for new business opportunities, and other areas. In addition, ADM
serves as the exclusive manufacturer of our products and we utilize personnel
at
ADM to provide administrative and other services to us. No assurance
can be given as to how potentially conflicted board members will evaluate their
fiduciary duties to us and ADM, respectively, or how such individuals will
act
under such circumstances. Furthermore, the appearance of conflicts,
even if such conflicts do not materialize, might adversely affect the public’s
perception of us.
Our
ability to execute our business
plan depends on the scope of our intellectual property rights and not infringing
the intellectual property rights of others. The validity,
enforceability and commercial value of these rights are highly
uncertain.
Our
ability to compete effectively with other companies is materially dependent
upon
the proprietary nature of our technologies. We rely primarily on
patents and trade secrets to protect our technologies.
We
have:
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one
patent on our device, which expires in 2019, as well as two other
patents
for certain embodiments of PEMF and other aspects of such
device;
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eight
U.S. non-provisional patent applications pending;
and
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two
provisional U.S. patents pending.
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Third
parties may seek to challenge, invalidate, circumvent or render unenforceable
any patents or proprietary rights owned by us based on, among other
things:
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subsequently
discovered prior art;
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lack
of entitlement to the priority of an earlier, related application;
or
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failure
to comply with the written description, best mode, enablement or
other
applicable requirements.
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In
general, the patent position of medical device companies is highly uncertain,
still evolving and involves complex legal, scientific and factual
questions. We are at risk that:
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other
patents may be granted with respect to the patent applications filed
by
us; and
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any
patents issued to us may not provide commercial benefit to us or
will be
infringed, invalidated or circumvented by
others.
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The
United States Patent and Trademark Office currently has a significant backlog
of
patent applications, and the approval or rejection of patents may take several
years. Prior to actual issuance, the contents of United States patent
applications are generally published 18 months after filing. Once
issued, such a patent would constitute prior art from its filing date, which
might predate the date of a patent application on which we
rely. Conceivably, the issuance of such a prior art patent, or the
discovery of “prior art” of which we are currently unaware, could invalidate a
patent of ours or prevent commercialization of a product claimed
thereby.
Although
we generally conduct a cursory review of issued patents prior to engaging in
research or development activities, we may be required to obtain a license
from
others to commercialize any of our new products under development. If
patents that cover our existing or new products are issued to other companies,
there can be no assurance that any necessary license could be obtained on
favorable terms or at all.
There
can
be no assurance that we will not be required to resort to litigation to protect
our patented technologies and other proprietary rights or that we will not
be
the subject of additional patent litigation to defend our existing and proposed
products and processes against claims of patent infringement or any other
intellectual property claims. Such litigation could result in
substantial costs, diversion of management’s attention, and diversion of our
resources.
We
also
have applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws
concerning proprietary rights between the United States and foreign countries,
the extent of protection provided by patents and proprietary rights granted
to
us by the United States may differ from the protection provided by patents
and
proprietary rights granted to us by foreign countries.
We
attempt to protect our trade secrets, including the processes, concepts, ideas
and documentation associated with our technologies, through the use of
confidentiality agreements and non-competition agreements with our current
employees and with other parties to whom we have divulged such trade
secrets. If our employees or other parties breach our confidentiality
agreements and non-competition agreements or if these agreements are not
sufficient to protect our technology or are found to be unenforceable, our
competitors could acquire and use information that we consider to be our trade
secrets and we may not be able to compete effectively. Most of our
competitors have substantially greater financial, marketing, technical and
manufacturing resources than we have and we may not be profitable if our
competitors are also able to take advantage of our trade secrets.
We
may
decide for business reasons to retain certain knowledge that we consider
proprietary as confidential and elect to protect such information as a trade
secret, as business confidential information or as know-how. In that
event, we must rely upon trade secrets, know-how, confidentiality and
non-disclosure agreements and continuing technological innovation to maintain
our competitive position. There can be no assurance that others will
not independently develop substantially equivalent proprietary information
or
otherwise gain access to or disclose such information.
The
loss of any of our executive
officers or key personnel or consultants may materially and adversely affect
our
operations and our ability to execute our growth
strategy.
Our
ability to execute our business plan depends upon the continued services of
Andre’ DiMino, our Vice Chairman of the Board and Co-Chief Executive Officer and
David Saloff, our President and Co-Chief Executive Officer, as well as our
key
technology, marketing, sales, support and consulting personnel, including Dr.
Arthur Pilla, one of our consultants, our Science Director and the Chairman
of
our Scientific Advisory Board. Although we have entered into
employment or consulting agreements containing non-compete agreements with
Messrs. DiMino and Saloff and certain of our key personnel, including Dr. Pilla,
we may not be able to retain these individuals or enforce such non-compete
agreements under applicable law. Further, our employment agreement
with Mr. DiMino requires him to devote at least a majority of his work-time
toward Ivivi; however, the remaining amount of his work-time may be devoted
elsewhere, including at ADM. As a result, Mr. DiMino’s attention to
our business and operations may be diverted by his obligations elsewhere,
including at ADM, and we may not be able to have access to Mr. DiMino as needed
by us. If we lost the services of these executive officers or our key
personnel, our business may be materially and adversely affected and our stock
price may decline. In addition, our ability to execute our business
plan is dependent on our ability to attract and retain additional highly skilled
personnel. We have key person life insurance in the amount of $2
million for Mr. DiMino, but not for any of our other executive officers or
key
employees.
We
depend on a limited number of
suppliers for our components and raw materials and any interruption in the
availability of these components and raw materials used in our product could
reduce our revenues and materially and adversely affect our operating
results.
We
rely
on a limited number of suppliers for the components and raw materials used
in
our products. Although there are many suppliers for each of our
component parts and raw materials, we are dependent on a single or limited
number of suppliers for many of the significant components and raw
materials. This reliance involves a number of significant risks,
including:
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unavailability
of materials and interruptions in delivery of components and raw
materials
from our suppliers;
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manufacturing
delays caused by such unavailability or interruptions in delivery;
and
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fluctuations
in the quality and the price of components and raw
materials.
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We
do not
have any long-term or exclusive purchase commitments with any of our
suppliers. Our failure to maintain existing relationships with our
suppliers or to establish new relationships in the future could also negatively
affect our ability to obtain our components and raw materials used in our
products in a timely manner. If we are unable to obtain ample supply
of product from our existing suppliers or alternative sources of supply, we
may
be unable to satisfy our customers’ orders which could reduce our revenues and
adversely affect our relationships with our customers and materially and
adversely affect our operating results.
Risks
Related to our
Industry
The
medical products market is
highly competitive and susceptible to rapid change and such changes could render
our existing products and any new products developed by us uneconomical or
obsolete.
The
medical products market is characterized by extensive research and development
activities and significant technological change. Our ability to
execute our business strategy depends in part upon our ability to develop and
commercialize efficient and effective products based on our
technologies. We compete against established companies as well as
numerous independently owned small businesses, including Diapulse Corporation
of
America, Inc., which manufactures and markets devices that are substantially
equivalent to some of our products; Regenesis Biomedical, which manufactures
and
markets devices that are similar to our first generation device; BioElectronics
Corporation, which develops and markets the ActiPatch
TM
,
a medical dermal
patch that delivers PEMF therapy to soft tissue injuries; and KCI Concepts,
Inc., which manufactures and markets negative pressure wound therapy devices
in
the wound care market. We also face competition from companies that
have developed other forms of treatment, such as hyperbaric oxygen chambers,
thermal therapies and hydrotherapy. In addition, companies are
developing or may, in the future, engage in the development of products and/or
technologies competitive with our products. We expect that
technological developments will occur and that competition is likely to
intensify as new technologies are employed. Many of our competitors
are capable of developing products based on similar technology, have developed
and are capable of continuing to develop products based on other technologies,
which are or may be competitive with our products and
technologies. Many of these companies are well-established, and have
substantially greater financial and other resources, research and development
capabilities and more experience in obtaining regulatory approvals,
manufacturing and marketing than we do. Our ability to execute our
business strategy and commercially exploit our technology must be considered
in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the development of new medical
processes, devices and products and their level of acceptance by the medical
community. Our competitors may succeed in developing competing
products and technologies that are more effective than our products and
technologies, or that receive government approvals more quickly than our new
products and technologies, which may render our existing and new products or
technology uncompetitive, uneconomical or obsolete.
We
may be exposed to product
liability claims for which our product liability insurance may be
inadequate.
Our
business exposes us to potential product liability risks, which are inherent
in
the testing, manufacturing and marketing of medical devices. While we
are not aware of any side-effects resulting from the use of our products, there
may be unknown long-term effects that may result in product liability claims
in
the future. Although we maintain $1.0 million of product liability
insurance, we cannot provide any assurance that:
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our
insurance will provide adequate coverage against potential liabilities
if
a product causes harm or fails to perform as
promised;
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adequate
product liability insurance will continue to be available in the
future;
or
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our
insurance can be maintained on acceptable
terms.
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The
obligation to pay any product liability claim in excess of whatever insurance
we
are able to obtain would increase our expenses and could greatly reduce our
assets.
If
the FDA or other state or foreign
agencies impose regulations that affect our products, our development,
manufacturing and marketing costs will be increased.
The
development, testing, production and marketing of our current products is,
and
other products developed by us may be, subject to regulation by the FDA as
devices under the 1976 Medical Device Amendments to the Federal Food, Drug
and
Cosmetic Act. Although the FDA has cleared our SofPulse product for
the adjunctive use in the palliative treatment of post-operative pain and edema
in superficial tissue, use of our current products and any new products
developed by us will be subject to FDA regulation as well. Before a
new medical device, or a new use of, or claim for, an existing product can
be
marketed in the United States, it must first receive either 510(k) clearance
or
pre-market approval from the FDA, unless an exemption applies. Either
process can be expensive and lengthy. The FDA’s 510(k) clearance
process usually takes from three to twelve months, but it can take longer and
is
unpredictable. The process of obtaining pre-market approval is much
more costly and uncertain than the 510(k) clearance process and it generally
takes from one to three years, or even longer, from the time the application
is
filed with the FDA.
In
the
United States, medical devices must be:
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manufactured
in establishments subject to FDA inspection to assess compliance
with the
FDA Quality Systems Regulation, or QSR;
and
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produced
in accordance with the QSR for medical
devices.
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As
a
result, we, as well as ADM, the exclusive manufacturer of our products, are
required to comply with QSR requirements and if we fail to comply with these
requirements, we will need to find another company to manufacture our products
which could delay the shipment of our product to our customers. In
addition, ADM’s manufacturing facility:
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is
required to be registered as a medical device manufacturing site
with the
FDA; and
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is
subject to inspection by the FDA.
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The
FDA requires producers of medical
devices to obtain FDA clearance and, in some cases, approval prior to
commercialization in the United States. Testing, preparation of
necessary applications and the processing of those applications by the FDA
is
expensive and time consuming. We do not know if the FDA will act
favorably or quickly in making such reviews, and significant difficulties or
costs may be encountered by us in our efforts to obtain FDA clearance and
approval. The FDA may also place conditions on clearance and
approvals that could restrict commercial applications of such
products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Delays imposed by the FDA clearance and approval process
may materially reduce the period during which we have the exclusive right to
commercialize patented products.
We
have
made modifications to our devices and may make additional modifications in
the
future that we believe do not or will not require additional clearances or
approvals. Although we believe that our current products are covered
by the FDA clearance provided in 1991 with respect to the original SofPulse
product, in February 2007, in response to inquiries from the FDA, we voluntarily
submitted a 510(k) application for our current products, which are modified
versions of our SofPulse product. We have had discussions with the
FDA regarding our application and, in June 2007, we received a letter from
the
FDA requesting additional information from us. If the FDA does not
grant the 510(k) clearance for the modifications, we may be required to stop
marketing and to recall the modified devices and could be subject to the other
sanctions described below. We also are subject to Medical Device
Reporting regulations, which require us to report to the FDA if our products
cause or contribute to a death or serious injury, or malfunction in a way that
would likely cause or contribute to a death or serious injury. We are
not aware of any death or serious injury caused by or contributed to by our
products, however, we cannot assure you that any such problems will not occur
in
the future with our existing or future products.
Additionally,
our existing and future products may be subject to regulation by similar
agencies in states and foreign countries. While we believe that we
have complied with all applicable laws and regulations, continued compliance
with such laws or regulations, including any new laws or regulations in
connection with our products or any new products developed by us, might impose
additional costs on us or marketing impediments on our products which could
adversely affect our revenues and increase our expenses. The FDA and
state authorities have broad enforcement powers. Our failure to
comply with applicable regulatory requirements could result in enforcement
action by the FDA or state agencies, which may include any of the following
sanctions:
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warning
letters, fines, injunctions and civil
penalties;
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repair,
replacement, refunds, recall or seizure of our
products;
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operating
restrictions or partial suspension or total shutdown of
production;
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refusing
our requests for 510(k) clearance or premarket approval of new products,
new intended uses, or modifications to existing
products;
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withdrawing
510(k) clearance or premarket approvals that have already been granted;
and
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If
any of
these events were to occur, it could harm our business and materially and
adversely affect our results of operations.
The
FDA can impose civil and
criminal enforcement actions and other penalties on us if we or our manufacturer
fails to comply with FDA regulations which are often difficult to comply
with.
Medical
device manufacturing facilities must maintain records, which are available
for
FDA inspectors documenting that the appropriate manufacturing procedures were
followed. The FDA has authority to conduct inspections of our
facility, as well as the facility of our manufacturer. Labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. If the FDA were to
determine that the indication for use of our products has a more narrow meaning
than that which we have historically deemed it to be, our ability to continue
to
market and sell our products could be materially adversely
affected. Any failure by us or the manufacturer of our
products
to take satisfactory corrective action in response to an adverse inspection
or
to comply with applicable FDA regulations could result in enforcement action
against us or our manufacturer, including a public warning letter, a shutdown
of
manufacturing operations, a recall of our products, civil or criminal penalties
or other sanctions. From time to time, the FDA may modify such
requirements, imposing additional or different requirements which may require
us
to alter our business methods which could result in increased expenses and
materially and adversely affect our results of operations. In
addition, if the Federal Trade Commission were to commence an investigation
concerning any of our claims about our products and conclude that our claims
were false, misleading or deceptive in violation of the Federal Trade Commission
Act, we could become subject to significant financial consequences and
compliance measures, including, the repayment of some or all of our gross
profits from such products and the compliance with various reporting
requirements imposed by the Federal Trade Commission.
Risks
Related To Our Common
Stock
Executive
officers, directors and
entities affiliated with them will continue to have substantial control over
us,
which could delay or prevent a change in our corporate control favored by our
other shareholders.
As
of
December 12, 2007, our directors, executive officers and principal shareholders
(including ADM), together with their affiliates, beneficially own, in the
aggregate, approximately 66.4% of our outstanding common stock, assuming
the exercise of all outstanding options and warrants held by such persons that
are exercisable within 60 days of such date. In particular, ADM, of
which Andre’ DiMino, our Vice Chairman of the Board and Co-Chief Executive
Officer, is President and Chief Executive Officer, beneficially owns
approximately 30.5% of our outstanding shares of common stock, and Mr. DiMino,
together with members of the DiMino family, beneficially own
approximately 40.5% of the outstanding shares of ADM.
Under
the
terms of a voting agreement among Mr. DiMino, David Saloff, our President and
Co-Chief Executive Officer, Edward Hammel, our Executive Vice President and
Chief Operating Officer, Sean Hagberg, Ph.D., our Chief Science Officer, Arthur
Pilla, Ph.D., one of our consultants, our Science Director and the Chairman
of
our Scientific Advisory Board, Berish Strauch, M.D., one of our consultants
and
a member of our Medical Advisory Board, and certain other shareholders, Mr.
DiMino shall have the right to vote up to 1,308,125 additional shares of our
common stock (excluding shares underlying options held by such shareholders),
representing approximately 12.2% of shares of our common stock outstanding
as of
December 12, 2007. These figures do not reflect the increased
percentages that the officers and directors may have in the future in the event
that they exercise any additional options granted to them under the 2004 Amended
and Restated Stock Option Plan or if they otherwise acquire additional shares
of
common stock. The interests of our current officer and director
shareholders and our largest shareholder may differ from the interests of other
shareholders.
As
a
result, the current officer and director shareholders and ADM do and will
continue to have the ability to exercise substantial control over all corporate
actions requiring shareholder approval, irrespective of how our other
shareholders including purchasers in this offering may vote, including the
following actions:
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the
election of directors;
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adoption
of stock option plans;
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the
amendment of charter documents; or
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the
approval of certain mergers and other significant corporate transactions,
including a sale of substantially all of our
assets.
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Future
sales of our common stock,
including sales of our common stock acquired upon the exercise of outstanding
options or warrants, may cause the market price of our common stock to
decline.
We
had 10,667,437 shares of common
stock outstanding as of December 12, 2007, of which 4,490,886 shares are freely
transferable without restriction and 6,176,551 shares (including an aggregate
of
1,429,413 shares offered by this prospectus) are restricted as a result of
securities laws. In addition, as of December 12, 2007, options to
purchase 2,724,975 shares of our common stock were issued and outstanding,
of
which 1,709,163 were vested. All remaining options will vest over
various periods ranging up to a five-year period measured from the date of
grant. The weighted-average exercise price of the vested stock
options is $2.84, which is substantially lower than the current market price
of
our common stock. As of December 12, 2007, warrants to purchase
2,657,039 shares of common stock were issued and outstanding. We also
may issue additional shares of stock in connection with our business, including
in connection with acquisitions, and may grant additional stock options to
our
employees, officers, directors and consultants under our stock option plans
or
warrants to third parties. If a significant portion of these shares
were sold in the public market, the market value of our common stock could
be
adversely affected
We
have implemented anti-takeover
provisions which could discourage or prevent a takeover, even if such takeover
would be beneficial to our shareholders.
Our
amended and restated certificate of incorporation and by-laws include provisions
which could make it more difficult for a third-party to acquire us, even if
doing so would be beneficial to our shareholders. These provisions
will include:
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authorizing
the issuance of “blank check” preferred stock that could be issued by our
board of directors to increase the number of outstanding shares or
change
the balance of voting control and resist a takeover
attempt;
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limiting
the ability of shareholders to call special meetings of
shareholders;
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requiring
all shareholder actions to be taken at a meeting of our shareholders
or by
the unanimous written consent of our shareholders;
and
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establishing
advance notice requirements for nominations for election to the board
of
directors and for proposing matters that can be acted upon by shareholders
at shareholder meetings.
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In
addition, provisions of the New Jersey Business Corporation Act, including
the
New Jersey Shareholder Protection Act, and the terms of the employment
agreements with our executive officers may discourage, delay or prevent a change
in our control.
Due
to provisions of our certificate
of incorporation and by-laws, a shareholder may be prevented from calling a
special meeting for shareholder consideration of a proposal over the opposition
of our board of directors and shareholder consideration of a proposal may be
delayed until our next annual meeting.
Our
amended and restated certificate of incorporation and our by-laws provide that
any action required or permitted to be taken by our shareholders must be
effected at an annual or special meeting of shareholders or by the unanimous
written consent of our shareholders. Our amended and restated
certificate of incorporation provides that, subject to certain exceptions,
only
our board of directors, the chairman or vice chairman of our board of directors,
a chief executive officer or a co-chief executive officer, as the case may
be,
or our president or, at the direction of any of them, any vice president or
secretary may call special meetings of our shareholders. Our by-laws
also contain advance notice requirements for proposing matters that can be
acted
on by the shareholders at a shareholder meeting. Accordingly, a
shareholder may be prevented from calling a special meeting for shareholder
consideration of a proposal over the opposition of our board of directors and
shareholder consideration of a proposal may be delayed until the next annual
meeting. As such, any time-sensitive proposals that a shareholder may
have may not be considered in a timely manner.
The
trading price of our common
stock is highly volatile, and you may not be able to resell your shares at
or
above the price at which you purchased your shares, or at
all.
The
trading price of our common stock is highly volatile and subject to wide
fluctuations in price in response to various factors, some of which are beyond
our control. These factors include:
• quarterly
variations in our results of operations or those of our
competitors;
• announcements
by us or our competitors of acquisitions, new products,significant contracts,
commercial relationships or capital commitments;
• disruption
to our operations or those of ADM, our exclusivemanufacturer, or our
suppliers;
• commencement
of, or our involvement in, litigation;
• any
major change in our board or management;
• changes
in governmental regulations or in the status of our regulatory
approvals;and
• general
market conditions and other factors, including factors unrelated to ourown
operating performance.
In
addition, the stock market in general, and the market for medical device
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless
of
our actual operating performance. In addition, in the past,
following periods of volatility in the overall market and the market price
of a
company’s securities, securities class action litigation has often been
instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our
management’s attention and resources.
If
our common stock is delisted from
the American Stock Exchange, you may not be able to resell your shares at or
above the price at which you purchased your shares, or at
all.
In
order
for our common stock to continue to be listed on the American Stock Exchange,
we
must meet the current American Stock Exchange listing
requirements. If we were unable to meet these requirements, our
common stock could be delisted from the American Stock Exchange. If
our common stock were to be delisted from the American Stock Exchange, our
common stock could continue to trade on the NASD’s over-the-counter bulletin
board following any delisting from the American Stock Exchange, or on the Pink
Sheets, as the case may be. Any such delisting of our common stock
could have an adverse effect on the market price of, and the efficiency of
the
trading market for, our common stock, not only in terms of the number of shares
that can be bought and sold at a given price, but also through delays in the
timing of transactions and less coverage of us by securities analysts, if
any. Also, if in the future we were to determine that we need to seek
additional equity capital, it could have an adverse effect on our ability to
raise capital in the public or private equity markets.
Penny
stock regulations may impose
certain restrictions on marketability of our
securities.
If
we
fail to maintain listing for our securities on the American Stock Exchange,
and
no other exclusion from the definition of a “penny stock” under the Securities
Exchange Act of 1934, as amended, is available, then our common stock would
be
subject to “penny stock” regulations. The SEC has adopted regulations
which generally define a “penny stock” to be any equity security that is not
trading on the American Stock Exchange or an exchange that has a market price
(as defined) of less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. As a result, if our
common stock became subject to these regulations, it would be subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser’s written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock,
unless exempt, the rules require the delivery, prior to the transaction, of
a
risk disclosure document mandated by the Securities and Exchange Commission
relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer’s presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny
stocks. Consequently, the “penny stock” rules may restrict the
ability of broker-dealers to sell our common stock and may affect the ability
of
investors to sell our common stock in the secondary market and the price at
which such purchasers can sell any such securities.
We
have not paid dividends in the
past and do not expect to pay dividends in the future, and any return on
investment may be limited to the value of your stock.
We
have
never paid any cash dividends on our common stock and do not anticipate paying
any cash dividends on our common stock in the foreseeable future and any return
on investment may be limited to the value of your stock. We plan to
retain any future earnings to finance growth.