EX-10.1






SAFESTITCH MEDICAL, INC.




Offering of up to




$10,000,000 Aggregate Amount




of




Common Stock, par value $0.001 per share,




of




SafeStitch Medical, Inc.




1




SUBSCRIPTION AGREEMENT




May __, 2008




SafeStitch Medical, Inc.


4400 Biscayne Blvd.


Suite 670


Miami, FL 33137


Attn: Jeffrey G. Spragens, CEO & President




	 	 	 	Re: Subscription Agreement (the “Agreement”) to Purchase Shares of
Common Stock, par value $0.001 per share (“Common Stock”), and
Disclosure for SafeStitch Medical, Inc., a Delaware corporation (the
“Company” or “SFES”).	 






	 	 	 	NOTE TO PURCHASER: Please check the appropriate box:	 





I/We have selected 4.2(a) on Page 5; or



I/We have selected 4.2(b) on Page 5.



Ladies and Gentlemen:



The undersigned (the “Purchaser”) hereby tenders this Agreement, subject to the terms
and conditions set forth herein. If the Agreement is acceptable to you, kindly indicate your
acceptance by executing this instrument in the space provided and returning a fully executed
counterpart to the Company at the address set forth above.




	 	 	NOTICES:





THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR ANY OTHER
JURISDICTION, NOR IS SUCH REGISTRATION CONTEMPLATED, AND ARE BEING OFFERED AND SOLD IN RELIANCE
UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS.



FURTHERMORE, THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OF ANY
OTHER JURISDICTION, NOR HAS ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS DOCUMENT OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.




	 	 	FLORIDA RESIDENTS:





ANY SALE HEREUNDER IN FLORIDA IS VOIDABLE BY THE PURCHASER EITHER WITHIN THREE DAYS AFTER THE
FIRST TENDER OF CONSIDERATION BY SUCH PURCHASER TO THE ISSUER, OR AN AGENT OF THE ISSUER, OR AN
ESCROW AGENT, OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO THE
PURCHASER, WHICHEVER OCCURS LATER.




	 	 	NEW YORK RESIDENTS:





THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.



1. Purchase.



The offering price per share of Common Stock shall be $2.15 (the “Offering Price”).
The Purchaser hereby agrees to purchase from the Company the number of shares (the
“Shares”) of Common Stock equal to $     (the “Investment Amount”)
divided by the Offering Price, rounded down to the nearest whole number. The Investment Amount
shall be paid in full in cash on the date this Agreement is accepted and signed by an officer of
the Company (such date, the “Closing Date”). The Company, in its sole discretion, may
accept additional investments at the Offering Price at a second closing to be held no later than
the thirtieth (30th) day after the Closing Date.



Under the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of
Incorporation”), the Company is authorized to issue up to 225,000,000 Shares of Common Stock
and 25,000,000 shares of Preferred Stock, par value $0.01 per share. A copy of the Certificate of
Incorporation is contained in its Definitive Information Statement on Schedule 14C, filed with the
SEC on December 7, 2007 (the “Information Statement”), which is attached hereto as
Exhibit A, and a copy of Company’s Bylaws is attached as an exhibit to the Company’s Annual
Report on Form 10-KSB for the year ended December 31, 2007, a copy of which is attached hereto as
Exhibit B. The Purchaser understands that the Company will use reasonable efforts to sell
up to an aggregate amount of $10,000,000 of Common Stock during the offering period (the
“Offering Period”), which will end on or about May 15, 2008, but may be extended by the
Company on one or more occasions until as late as June 30, 2008.



As of March 31, 2008, the Company has outstanding 16,093,016 shares of Common Stock.



The Purchaser understands that none of the funds tendered for the Shares will be held in
escrow and, such funds will, in the Company’s sole discretion, be immediately deposited in the
Company’s bank account for immediate use in the Company’s business. There is no required minimum
amount to be raised in this offering for the Company in order to accept any subscriptions. The
Company reserves the right, in its sole discretion, to reject or accept any subscription in whole
or in part.



The expenses of this offering are estimated to be approximately $12,500.



2. Use of Proceeds; Financing.



The Purchaser understands that the proceeds of this offering are to be used by the Company for
working capital and to pay the expenses of this offering.



3. The Company.



The Purchaser acknowledges that he, she or it has been provided with an opportunity to ask any
questions and to conduct any other investigations he, she or it desires about the Company and its
business and its, his or her rights and obligations as a Company stockholder. The Purchaser
acknowledges that he, she or it has received and reviewed the exhibits attached hereto and any
other information Purchaser has requested and has been further advised of the following summary:



3.1. Incorporation by Reference. The information contained (i) in Sections 1 and 2
hereinabove and (ii) in the Company’s filings with the U.S. Securities and Exchange Commission (the
“SEC”) is incorporated herein by reference. The Company’s SEC filings may be obtained at
http://www.sec.gov/edgar/searchedgar/companysearch.html.



3.2. Name Change. Effective January 8, 2008, the Company changed its name to
SafeStitch Medical, Inc. from Cellular Technical Services Company, Inc.



3.3. Corporate Information. The Company’s business address is 4400 Biscayne Blvd.,
Suite 670 Miami, Florida 33137. The Company has one wholly-owned subsidiary, SafeStitch LLC, a
Virginia limited liability company.



3.4. Execution of Existing Agreements. The Purchaser hereunder is required to fund
100% of his, her or its capital contribution to the Company in cash upon the later of the execution
of this Agreement by the Purchaser or the Company. The Company will not be liable for the return
of any part of the capital contributions of the Purchaser.



3.5. Background. The Company is a developmental stage medical device company focused
on the development of medical devices that manipulate tissues for endoscopic and minimally invasive
surgery for the treatment of obesity, gastroesophageal reflux disease (“GERD”), Barrett’s
Esophagus, esophageal obstructions, upper gastrointestinal bleeding, hernia formation and other
intraperitoneal abnormalities.



3.6. Market for Company Products. The Company has not yet fully assessed the market
for the Company’s products. Please see the documents incorporated by reference in Section 3.1.



3.7. Financial Information. The Company is a pre-clinical-stage medical device
company with a limited operating history, and its SafeStitch LLC subsidiary is not profitable and
has incurred losses since its inception. The Company does not anticipate that it will generate
revenue from the sale of products for the foreseeable future, nor has it submitted any products for
clearance or approval by regulatory authorities, and the Company does not currently have rights to
any product candidates that have been cleared or approved for marketing in our territory. The
Company continues to incur research and development and general and administrative expenses related
to its operations. The Company’s net losses for the years ended December 31, 2007 and 2006 and for
the partial year from September 15, 2005 until December 31, 2005 were ($3,041,000), $(1,060,000)
and $(76,000), respectively. As of December 31, 2007, we had an accumulated deficit of
($4,177,000). The Company’s (i) Annual Report on Form 10-KSB for the year ended December 31, 2007;
(ii) Amendment No. 1 to its Annual Report on Form 10-KSB/A; (iii) Current Report on Form 8-K, filed
with the SEC on April 4, 2008; and (iv) Current Report on Form 8-K, filed with the SEC on April 24,
2008 are attached hereto as Exhibit B, Exhibit C, Exhibit D and Exhibit
E, respectively.



3.8. Management. The executive officers and directors of the Company are as follows:



	 	 	 	 	 	 	 
	Name	 	Age	 	Title
	Jane H. Hsiao, Ph.D., MBA

	 	 	61	 	 	Director and Chairman of the Board of Directors
	Jeffrey G. Spragens

	 	 	66	 	 	Chief Executive Officer, President and Director
	Dr. Stewart B. Davis

	 	 	28	 	 	Chief Operating Officer and Secretary
	Dr. Charles Filipi

	 	 	66	 	 	Medical Director and Director
	Adam S. Jackson

	 	 	45	 	 	Vice President, Finance and Chief Financial

Officer
	Dr. Kenneth Heithoff

	 	 	64	 	 	Director
	Richard Pfenniger, Jr.

	 	 	52	 	 	Director
	Steven D. Rubin

	 	 	47	 	 	Director
	Kevin Wayne

	 	 	44	 	 	Director






3.9. Employees3.10. As of March 31, 2008, the Company has twelve (12) full-time
employees.



3.10. Certificate of Incorporation and Bylaws. The Certificate of Incorporation and
the Bylaws of the Company are the governing instruments which contain the rules under which the
Company operates. The Purchaser acknowledges that he, she or it has reviewed the Certificate of
Incorporation and Bylaws in full before executing this Agreement.



3.11. Option Plan. The Company has in place the SafeStitch Medical, Inc. 2007
Incentive Compensation Plan (the “2007 Plan”). Under the 2007 Plan, the Company is
authorized to grant options to purchase an aggregate of up to 2,000,000 shares of Common Stock.
Options may be either incentive stock options or non-qualified options. The price of options under
the 2007 Plan and the number of options granted, as well as any other terms not required by the
2007 Plan, shall be determined by the Company’s Compensation Committee. The Purchaser acknowledges
reviewing the 2007 Plan, a copy of which is contained in the Information Statement attached hereto
as Exhibit A.



3.12. Property. The Company’s principal corporate office is located at 4400 Biscayne
Blvd., Suite 670, Miami, Florida 33137. The Company rents this space, approximately 2,900 square
feet, from Frost Real Estate Holdings, LLC which is a company controlled by Dr. Phillip Frost, the
Company’s largest beneficial stockholder. Additionally, the Company leases approximately 462
square feet of office space in Omaha, Nebraska, which includes one administrative office. Dr.
Filipi is based in Omaha, Nebraska. We also have a prototype lab, which is located in a leased
warehouse in Miami, Florida.



4. Representations of the Purchaser.



	 	 	 
	The Purchaser hereby warrants, covenants and represents as follows:

	4.1.

4.2.

	 	The Purchaser is a U.S. citizen or resident alien.

The Purchaser hereby represents either (a) or (b), below (please select):
	
 
	 	 







(a) or (b)



(a) He, she or it is a sophisticated investor by virtue of his, her or its education, training
and/or numerous prior investments made on the Purchaser’s own behalf or through entities which the
Purchaser, alone or with others, controls. The Purchaser is knowledgeable and experienced in
financial and business matters which have risks similar to those which may be encountered by the
Company. The Purchaser is capable of evaluating the merits and risks of an investment in the
Company. The Purchaser is an accredited investor because he, she or it is (please indicate by
checking the appropriate box at left):




(1) Either (a) a bank as defined in section 3(a)(2) of the Securities
Act of 1933, as amended (the “Securities Act”), or a savings
and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or
fiduciary capacity, (b) any broker or dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”); (c) an insurance company as defined in
Section 2(13) of the Securities Act, (d) an investment company
registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that act, (e) a
Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or 301(d) of the Small Business
Investment Act of 1958, (f) an employee benefit plan within the
meaning of Title I of the Employee Retirement Income Security Act of
1974, if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of such act, which plan fiduciary is either
a bank, savings and loan association, insurance company or registered
investment advisor, or if the employee benefit plan has total assets
in excess of $5,000,000 or if a self-directed plan, with investment
decisions made solely by persons that are accredited investors, or
(g) an employee benefit plan established and maintained by a state
government and their political subdivisions and agencies if the
employee benefit plan has assets in excess of $5,000,000;




(2) A private business development company as defined in Section
202(a)(22) of the Investment Advisors Act of 1940;




(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;




(4) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or any director, executive
officer, or general partner of a general partner of that issuer;




(5) Any natural person whose individual net worth, or joint net worth
with that person’s spouse, at the time of his purchase exceeds
$1,000,000;




(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with
that person’s spouse in excess of $300,000 in each of those years and
has a reasonable expectation of reaching the same income level in
current year;




(7) Any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) under the Securities Act;




(8) Any entity in which all of the equity owners are accredited
investors.



(b) He, she or it, either alone or together with the purchaser representative named below, (x)
is a sophisticated investor by virtue of his, her or its education, training and/or numerous prior
investments made on the Purchaser’s own behalf or through entities which the Purchaser, alone or
with others, controls, (y) is knowledgeable and experienced in financial and business matters which
have risks similar to those which may be encountered by the Company and (z) is capable of
evaluating the merits and risks of an investment in the Company, and has appointed the following
person as his, her or its purchaser representative in connection with the Purchaser’s acquisition
of the Shares under this Agreement:     (If making this
representation instead of the representation set forth in (a), above, then fill in name of
purchaser representative)



4.3. The Purchaser has been furnished or otherwise obtained all information necessary to
enable him to evaluate the merits and risks of his prospective investment in the Company and has
received and reviewed this Agreement and the exhibits hereto. The Purchaser is aware of the risk
factors identified in Section 5 hereof and various other risks inherent in this investment,
including those set forth in the Company’s Form 10-KSB, filed with the SEC on March 26, 2008, as
amended by the Company’s Amendment No. 1 to its Annual Report on Form 10-KSB/A, filed with the SEC
on April 24, 2008.



4.4. The Purchaser has been furnished or has had access to any and all material documents and
information regarding the Company and its intended business that the Purchaser has sought to
review. The Purchaser has had an opportunity to question individuals involved in the management of
the Company. The Purchaser hereby acknowledges that the Company has made available to the
Purchaser prior to any investment in the Company all information (i) requested by the Purchaser and
(ii) reasonably necessary to enable the Purchaser to evaluate the risks and merits of an investment
in the Company. The Purchaser, after a review of this information and other information he has
obtained, is aware of the speculative nature of any investment in the Company.



4.5. The Purchaser has reviewed the Company’s filings with the SEC, which are incorporated by
reference in this Agreement under Section 3.1, above.



4.6. The Purchaser is aware that the Purchaser will have to make the cash payment the number
of Shares set forth above. The Purchaser can bear the economic risk of the investment in the
Company (including the possible loss of his entire investment) without impairing the Purchaser’s
ability to provide for himself and/or his family in the same manner that the Purchaser would have
been able to provide prior to making an investment in the Company. The Purchaser understands that
he must continue to bear the economic risk of the investment in the Company for an indefinite
period of time.



4.7. The Purchaser understands that the Shares have not been registered under the Securities
Act or related laws or regulations or under any other applicable securities laws of any State or
other jurisdiction (collectively, the “Securities Laws”), inasmuch as the Offering is being made to
a limited group of potential investors. The Purchaser understands that he, she or it has no rights
whatsoever to request, and that the Company is under no obligation whatsoever to furnish, a
registration under the Securities Laws of the Shares purchased hereunder.



4.8. The Shares that the Purchaser is acquiring are solely for his, her or its account and are
not being purchased with a view to, or for resale in connection with, any distribution within the
meaning of the Securities Act or any other applicable Securities Laws. The Purchaser will not
resell or offer to resell any Shares except in accordance with the terms of this Agreement and in
compliance with all applicable Securities Laws.



4.9. The Purchaser understands that the Shares being purchased hereunder will be “restricted
securities” as that term is defined in Rule 144 under the Securities Act, and the certificate(s),
if any, representing the Shares will bear restrictive legends thereon as follows:



“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
DIRECTLY OR INDIRECTLY FROM THE ISSUER WITHOUT BEING REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY
OTHER APPLICABLE SECURITIES LAWS, AND ARE RESTRICTED SECURITIES AS
THAT TERM IS DEFINED UNDER RULE 144 PROMULGATED UNDER THE ACT. THESE
SHARES MAY NOT BE SOLD, PLEDGED, TRANSFERRED, DISTRIBUTED OR
OTHERWISE DISPOSED OF IN ANY MANNER (“TRANSFER”) UNLESS THEY ARE
REGISTERED UNDER THE ACT AND ANY APPLICABLE SECURITIES LAWS, OR
UNLESS THE REQUEST FOR TRANSFER IS ACCOMPANIED BY A FAVORABLE
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE ISSUER, STATING
THAT THE TRANSFER WILL NOT RESULT IN A VIOLATION OF THE ACT OR ANY
APPLICABLE SECURITIES LAWS.”



5. Information Regarding Forward-Looking Statements.



This Agreement and other information, if any, provided to Purchaser by the Company, contain
“forward-looking statements,” as that term is defined under Private Securities Litigation Reform
Act of 1995 (the “PSLRA”). Forward-looking statements include statements about our
expectations, beliefs or intentions regarding our product development efforts, business, financial
condition, results of operations, strategies or prospects. You can identify forward-looking
statements by the fact that these statements do not relate strictly to historical or current
matters. Rather, forward-looking statements relate to anticipated or expected events, activities,
trends or results as of the date they are made. Because forward-looking statements relate to
matters that have not yet occurred, these statements are inherently subject to risks and
uncertainties that could cause our actual results to differ materially from any future results
expressed or implied by the forward-looking statements. Many factors could cause our actual
activities or results to differ materially from the activities and results anticipated in
forward-looking statements. These factors include those described under the caption “Risk Factors”
in Section 7, below. We do not undertake any obligation to update forward-looking statements. We
intend that all forward-looking statements be subject to the safe-harbor provisions of 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:




	 	•	 	We have a history of operating losses and we do not expect to become profitable in
the near future.






	 	•	 	Our technologies are in an early stage of development and are unproven.






	 	•	 	Our research and development activities may not result in commercially viable
products.






	 	•	 	We are highly dependent on the success of our product candidates, and we cannot give
any assurance that they will receive regulatory clearance, or approval, if necessary,
or be successfully commercialized.






	 	•	 	The results of previous clinical experience with devices similar to the devices that
we have licensed may not be predictive of results with our licensed products, and any
clinical trials that the U.S. Food and Drug Administration (the “FDA”) may require us
to undertake may not satisfy FDA requirements or the requirements of other non-U.S.
regulatory authorities.






	 	•	 	We will require substantial additional funding, which may not be available to us on
acceptable terms, or at all.






	 	•	 	If our competitors develop and market products that are more effective, safer or
less expensive than our future product candidates, our commercial opportunities will be
negatively impacted.






	 	•	 	Our product development activities could be delayed or stopped.






	 	•	 	The regulatory clearance or approval process is expensive, time-consuming and
uncertain and may prevent us or our collaboration partners from obtaining clearance, or
approval, if necessary, for the commercialization of some or all of our product
candidates.






	 	•	 	Even if we obtain regulatory clearances or approvals for our product candidates, the
terms thereof and ongoing regulation of our products may limit how we manufacture and
market our product candidates, which could materially impair our ability to generate
anticipated revenues.






	 	•	 	Even if we receive regulatory clearances or approvals to market our product
candidates, the market may not be receptive to our products.






	 	•	 	If we fail to attract and retain key management and scientific personnel, we may be
unable to successfully develop or commercialize our product candidates.






	 	•	 	As we evolve 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.






	 	•	 	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 will rely on third parties to manufacture and supply our product candidates.






	 	•	 	We currently do not have a marketing staff or sales or distribution organization. If
we are unable to develop our sales and marketing and distribution capability on our own
or through collaborations with marketing partners, we will not be successful in
commercializing our product candidates.






	 	•	 	Independent clinical investigators and contract research organizations that we
engage to conduct our clinical trials may not be diligent, careful or timely.






	 	•	 	The success of our business may be dependent on the actions of our collaborative
partners.






	 	•	 	All of our current product plans are licensed to us by Creighton University. Any
loss of our rights under the agreement with Creighton University or any failure by
Creighton University to properly maintain or enforce the patents under such licenses
would materially adversely affect our business prospects.






	 	•	 	An inability to find additional or other sources for our products could materially
and adversely affect us.






	 	•	 	If we or Creighton University are unable to obtain and enforce patent protection for
our product candidates, our business could be materially harmed.






	 	•	 	If we or Creighton University are unable to protect the confidentiality of our
proprietary information and know-how, the value of our technology and products could be
adversely affected.






	 	•	 	Our commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third parties.






	 	•	 	Future legislative or regulatory reform of the health care system may affect our
ability to sell our products profitably.






	 	•	 	Failure to obtain regulatory clearance or approval outside the United States will
prevent us from marketing our product candidates abroad.






	 	•	 	Non-U.S. governments often impose strict price controls, which may adversely affect
our future profitability.






	 	•	 	Our business may become subject to economic, political, regulatory and other risks
associated with international operations.






	 	•	 	The market price of our common stock may fluctuate significantly.






	 	•	 	Trading of our common stock is limited and trading restrictions imposed on us by
applicable regulations and by lockup agreements we have entered into with our principal
stockholders may further reduce our trading, making it difficult for our stockholders
to sell their shares.






	 	•	 	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.






	 	•	 	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.






	 	•	 	Compliance with changing regulations concerning corporate governance and public
disclosure may result in additional expenses.





6. Certain Federal Income Tax Considerations.



The following discussion summarizes certain U.S. federal income tax consequences to a
purchaser of a share of Common Stock that is a U.S. Holder, as defined below. This discussion is
based on the Internal Revenue Code of 1986, as amended (the “Code”), the applicable
Treasury regulations promulgated or proposed thereunder, administrative pronouncements of the
Internal Revenue Service (“IRS”) and judicial decisions, in each case as of the date
hereof, all of which are subject to change at any time, possibly retroactively. There can be no
assurance that the IRS will not take a view contrary to that set forth herein which may be upheld
by a court. No ruling from the IRS or opinion of counsel has been or will be sought as to any of
the matters discussed below.



This summary is for general information purposes only and applies only to an initial purchaser
who acquires shares of Common Stock as a capital asset within the meaning of section 1221 of the
Code. It does not purport to address all tax consequences that may be relevant to any particular
investor or to an investor subject to special tax rules (including, for example, a financial
institution, broker-dealer, insurance company, regulated investment company, personal holding
company, S corporation, tax-exempt organization, a person who holds Common Shares in a hedging
transaction or as part of a “straddle”, “conversion transaction” or other risk reduction
transaction or a person subject to the alternative minimum tax). In addition, the discussion does
not address any aspect of state, local or foreign taxation.



EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT THE PURCHASER’S TAX ADVISER
CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO THE PURCHASER OF ACQUIRING, OWNING AND
DISPOSING OF SHARES OF COMMON STOCK, AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS.



As used herein, the term “U.S. Holder” means a beneficial owner of a share of Common Stock
that for U.S. federal income tax purposes is:




	 	•	 	a citizen or individual resident of the United States;






	 	•	 	a corporation, or other entity taxable as a corporation for U.S. federal income tax
purposes, created or organized in or under the law of the United States or of any
political subdivision thereof;






	 	•	 	an estate the income of which is subject to U.S. federal income taxation regardless
of its source; or






	 	•	 	a trust if (i) a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United States persons
have the authority to control all substantial decisions of the trust, or (ii) the trust
was in existence on August 20, 1996 and properly elected to continue to be treated as a
United States person.





Distributions



A distribution on a share of Common Stock will be includible in the gross income of the holder
as ordinary income to the extent the distribution is out of the Company’s current or accumulated
earnings and profits (as computed for U.S. federal income tax purposes). To the extent
distributions with respect to a share of Common Stock in any taxable year are not paid out of
current or accumulated earnings and profits, they will be treated as a non-taxable return (and
reduction) of basis in that share of Common Stock to the extent thereof, and if and to the extent
they exceed earnings and profits and basis, they will be treated as gain from the sale of the share
of Common Stock.



The rate of federal income tax that a non-corporate taxpayer generally pays on dividends is 15
percent for taxable years beginning before January 1, 2011, after which dividends are taxable as
ordinary income. To qualify for the reduced rate, the non-corporate shareholder must satisfy
certain holding period and other requirements. Dividends received by a corporation are generally
eligible for the dividends received deduction, subject to the limitations under section 1059 of the
Code relating to extraordinary dividends.



Disposition of Shares of Common Stock



Upon a sale or other taxable disposition of a share of Common Stock, the holder generally will
recognize capital gain or loss equal to the difference between the amount realized and the holder’s
tax basis in the share of Common Stock. That gain or loss will be long-term capital gain or loss
if the holding period for that share of Common Stock was more than one year on the date of sale or
other disposition. The maximum rate of federal income tax applicable to a long-term capital gain
of a non-corporate taxpayer in a taxable year beginning before January 1, 2011 is generally 15%.
In later taxable years, that 15% reverts to 20%.



Backup Withholding



A U.S. Holder may be subject to backup withholding in respect of dividends on Common Stock and
the proceeds from a sale, exchange or redemption of Common Stock unless the holder (a) is a
corporation or other exempt recipient or (b) provides, when required, the U.S. Holder’s taxpayer
identification number to the payer, certifies that the U.S. Holder is not subject to backup
withholding and otherwise complies with the backup withholding rules. Backup withholding is not an
additional tax; any amount so withheld is creditable against the U.S. Holder’s U.S. federal income
tax liability or is refundable, provided the required information is furnished to the IRS.



7. Risk Factors.



The Purchaser understands that in addition to the various risks ordinarily attendant upon
equity investments in companies, certain unique factors make an investment in the Company subject
to a high degree of risk. The Purchaser has been cautioned that an investment in the Company is
speculative and involves significant risks, and that it is probably not possible to foresee and
describe all of the business, economic and financial risk factors which may affect the Company. The
Purchaser acknowledges that he has been advised to seek independent professional advice in order to
carefully analyze the risks and merits of an investment in the Company.



The specific risks set forth below have been described in detail to the Purchaser. They are
not, however, to be considered exhaustive or definitive of all of the risks involved in an
investment in the Shares.



We have a history of operating losses and we do not expect to become profitable in the near
future.



We are a pre-clinical stage medical device company with a limited operating history. We are
not profitable and have incurred losses since our inception. We do not anticipate that we will
generate revenue from the sale of products for the foreseeable future. We have not yet submitted
any products for clearance or approval by regulatory authorities and we do not currently have
rights to any product candidates that have been cleared or approved for marketing in our territory.
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, 2007 and 2006 and for the partial
year from September 15, 2005 until December 31, 2005 were ($3,041,000), $(1,060,000) and $(76,000),
respectively. As of December 31, 2007, we had an accumulated deficit of ($4,177,000). We expect to
continue to incur losses for the foreseeable future, and we expect these losses to increase as we
continue our research activities and conduct development of, and seek regulatory clearances and
approvals for, our product candidates, and prepare for and begin to commercialize any cleared or
approved products. If our product candidates fail in clinical trials or do not gain regulatory
clearance or approval, or if our product candidates do not achieve market acceptance, we may never
become profitable. Even if we achieve profitability in the future, we may not be able to sustain
profitability in subsequent periods.



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, Barrett’s
Esophagus, esophageal obstructions, upper gastrointestinal bleeding and hernia formation. 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.



Our product candidates are all in very early stages of development and are prone to the risks
of failure inherent in medical device product development; but none of our products has been
studied in clinical trials. We will likely be required to undertake significant clinical trials to
demonstrate to the FDA that our licensed devices are either safe and effective for their intended
uses or are substantially equivalent in terms of safety and effectiveness to an existing, lawfully
marketed non-PMA device. We may also be required to undertake clinical trials by non-U.S.
regulatory agencies. Clinical trials are expensive and uncertain processes that may take years to
complete. Failure can occur at any point in the process, and early positive results do not ensure
that the entire clinical trial will be successful. Product candidates in clinical trials may fail
to show desired efficacy and safety traits despite early promising results. A number of companies
in the medical device industry have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results at earlier points.



The results of previous animal trials and pre-clinical trials may not be indicative of future
results, and our current and planned clinical trials may not satisfy the requirements of the FDA or
other non-U.S. regulatory authorities.



The results of previous animal trials and pre-clinical and clinical trials of similar devices
may not be predictive of future results, and our current and planned clinical trials may not
satisfy the requirements of the FDA or other non-U.S. regulatory authorities.



Positive results from limited in vivo and ex vivo animal trials we have conducted or from
pre-clinical studies and early clinical experience with similar devices should not be relied upon
as evidence that later-stage or large-scale clinical trials will succeed. We will be required to
demonstrate with substantial evidence through well-controlled clinical trials that our product
candidates either (i) are safe and effective for their intended uses or (ii) are substantially
equivalent in terms of safety and effectiveness to devices that are already marketed under Section
510(k).



Further, our product candidates may not be cleared or approved, as the case may be, even if
the clinical data are satisfactory and support, in our view, clearance or approval. The FDA or
other non-U.S. regulatory authorities may disagree with our trial design and our interpretation of
the clinical data. In addition, any of these regulatory authorities may change requirements for the
clearance or approval of a product candidate even after reviewing and providing comment on a
protocol for a pivotal clinical trial that has the potential to result in FDA approval. In
addition, any of these regulatory authorities may also clear or approve a product candidate for
fewer or more limited uses than we request or may grant clearance or approval contingent on the
performance of costly post-marketing clinical trials. In addition, the FDA or other non-U.S.
regulatory authorities may not approve the labeling claims necessary or desirable for the
successful commercialization of our product candidates.



We are highly dependent on the success of our initial product candidates, especially the
Obesity Device, the GERD Device and the Barrett’s Device, and we cannot give any assurance that any
of them will receive regulatory clearance or be successfully commercialized.



We are highly dependent on the success of our initial product candidates, especially the
Obesity Device, the GERD Device and the Barrett’s Device. We cannot give any assurance that the FDA
will permit us to clinically test the devices, nor can we give any assurance that these products
will receive regulatory clearance or approval or be successfully commercialized, for a number of
reasons, including, without limitation, the potential introduction by our competitors of more
clinically-effective or cost-effective alternatives or failure in our sales and marketing efforts,
or our failure to obtain positive coverage determinations or reimbursement. Any failure to obtain
clearance or approval of our products or to successfully commercialize them would have a material
and adverse effect on our business.



We will require substantial additional funding, which may not be available to us on acceptable
terms, or at all.



We intend to advance multiple 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:




	 	•	 	our need to expand our research and development activities;






	 	•	 	the rate of progress and cost of our clinical trials;






	 	•	 	the costs associated with establishing a sales force and commercialization
capabilities;






	 	•	 	the costs of acquiring, licensing or investing in businesses, products, product
candidates and technologies;






	 	•	 	the costs and timing of seeking and obtaining FDA and other non-U.S. regulatory
clearances and approvals;






	 	•	 	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;






	 	•	 	our need and ability to hire additional management and scientific and medical
personnel;






	 	•	 	the effect of competing technological and market developments;






	 	•	 	our need to implement additional internal systems and infrastructure, including
financial and reporting systems; and






	 	•	 	our ability to maintain, expand and defend the scope of our intellectual
property portfolio.





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.



If our competitors develop and market products that are more effective, safer or less
expensive than our future product candidates, our commercial opportunities will be negatively
impacted.



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 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 devices companies, in
particular, have extensive experience in clinical testing and in obtaining regulatory clearances or
approvals for medical devices. These companies also have significantly greater research and
marketing capabilities than we do. As indicated, there are also other methods to treat obesity,
such as diet, exercise and medicine. Other competitors have developed products such as medical
implants that occupy volume in the stomach to promote the feeling of satiety (Helioscopie) or
gastric sleeves to reduce food intake. Some of the medical device companies we expect to compete
with include USGI Medical, TOGa Devices from Satiety, StomaphyX and EsophyX from EndoGastric
Solution, Inc., NDO Surgical, Inc., Medigus, Ltd., Bard, LLC, Olympus Medical Equipment Services
America, Inc., BARRX Medical, Inc., Boston Scientific Corporation, ConMed Corporation, Cook Medical
Supply, Inc., Miller Medical Specialties, U.S. Endoscopy, The Rush Incorporated and a number of
bite block manufacturers. In addition, many other universities and private and public research
institutions are or may become active in research involving surgical devices for gastrointestinal
abnormalities and minimally invasive surgery.



We believe that our ability to successfully compete will depend on, among other things:




	 	•	 	the results of our clinical trials;






	 	•	 	our ability to recruit and enroll patients for our clinical trials;






	 	•	 	the efficacy, safety and reliability of our product candidates;






	 	•	 	the speed at which we develop our product candidates;






	 	•	 	our ability to commercialize and market any of our product candidates that may
receive regulatory clearance or approval;






	 	•	 	our ability to design and successfully execute appropriate clinical trials;






	 	•	 	the timing and scope of regulatory clearances or approvals;






	 	•	 	appropriate coverage and adequate levels of reimbursement under private and
governmental health insurance plans, including Medicare;






	 	•	 	our ability to protect intellectual property rights related to our products;






	 	•	 	our ability to have our partners manufacture and sell commercial quantities of
any approved products to the market; and






	 	•	 	acceptance of future product candidates by physicians and other health care
providers.





If our competitors market products that are more effective, safer, easier to use or less
expensive than our future product candidates, if any, or that reach the market sooner than our
future product candidates, if any, we may not achieve commercial success. In addition, the medical
device industry is characterized by rapid technological change. It may be difficult for us to stay
abreast of the rapid changes in each technology. If we fail to stay at the forefront of
technological change, we may be unable to compete effectively. Technological advances or products
developed by our competitors may render our technologies or product candidates obsolete or less
competitive.



Our product development activities could be delayed or stopped.



We do not know whether our other planned clinical trials will be completed on schedule, or at
all, and we cannot guarantee that our planned clinical trials will begin on time or at all. The
commencement of our planned clinical trials could be substantially delayed or prevented by several
factors, including:




	 	•	 	limited number of, and competition for, suitable patients that meet the
protocol’s inclusion criteria and do not meet any of the exclusion criteria;






	 	•	 	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;






	 	•	 	delay or failure to obtain sufficient supplies of the product candidate for our
clinical trials;






	 	•	 	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;






	 	•	 	delay or failure to reach agreement on acceptable clinical trial agreement terms
or clinical trial protocols with prospective sites or investigators; and






	 	•	 	delay or failure to obtain institutional review board, or IRB, approval or
renewal to conduct a clinical trial at a prospective or accruing site,
respectively.





The completion of our clinical trials could also be substantially delayed or prevented by
several factors, including:




	 	•	 	slower than expected rates of patient recruitment and enrollment;






	 	•	 	failure of patients to complete the clinical trial;






	 	•	 	unforeseen safety issues;






	 	•	 	lack of efficacy evidenced during clinical trials;






	 	•	 	termination of our clinical trials by one or more clinical trial sites;






	 	•	 	inability or unwillingness of patients or medical investigators to follow our
clinical trial protocols; and






	 	•	 	inability to monitor patients adequately during or after treatment.





Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory
authorities, the IRB for any given site, or us. Any failure or significant delay in completing
clinical trials for our product candidates could materially harm our financial results and the
commercial prospects for our product candidates.



The regulatory approval process is expensive, time consuming and uncertain and may prevent us
or our collaboration partners from obtaining approvals for the commercialization of some or all of
our product candidates.



The research, testing, manufacturing, labeling, approval, 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. We have not
submitted an application or premarket notification for or received marketing clearance or approval
for any of our product candidates. Obtaining approval of any PMA can be a lengthy, expensive and
uncertain process. While the FDA normally reviews and clears a premarket notification in three
months, there is no guarantee that our products will qualify for this more expeditious regulatory
process, which is reserved for Class I and II devices, nor is there any assurance, that even if a
device is reviewed under the premarket notification process (510(k) 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:




	 	•	 	restrictions on the products, manufacturers or manufacturing process;






	 	•	 	adverse inspectional observations (Form 483), warning letters or non-warning
letters incorporating inspectional observations;






	 	•	 	civil and criminal penalties;






	 	•	 	injunctions;






	 	•	 	suspension or withdrawal of regulatory clearances or approvals;






	 	•	 	product seizures, detentions or import bans;






	 	•	 	voluntary or mandatory product recalls and publicity requirements;






	 	•	 	total or partial suspension of production;






	 	•	 	imposition of restrictions on operations, including costly new manufacturing
requirements; and






	 	•	 	refusal to clear or approve pending applications or premarket notifications.





Regulatory approval of a PMA, PMA supplement or clearance pursuant to a 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:




	 	•	 	a medical device candidate may not be deemed safe or effective, in the case of a
PMA application;






	 	•	 	a medical device candidate may not be deemed to be substantially equivalent to a
lawfully marketed non-PMA device in the case of a premarket notification;






	 	•	 	FDA officials may not find the data from pre-clinical studies and clinical
trials sufficient;






	 	•	 	the FDA might not approve our third-party manufacturer’s processes or
facilities; or






	 	•	 	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.



Even if we obtain regulatory clearances or approvals for our product candidates, the terms of
clearances or approvals and ongoing regulation of our products may limit how we manufacture and
market our product candidates, which could materially impair our ability to generate anticipated
revenues.



Once regulatory clearance or approval has been granted, the cleared or approved product and
its manufacturer are subject to continual review. Any cleared or approved product may only be
promoted for its indicated uses. In addition, if the FDA or other non-U.S. regulatory authorities
clear or approve any of our product candidates, the labeling, packaging, adverse event reporting,
storage, advertising and promotion for the product will be subject to extensive regulatory
requirements. We and the manufacturers of our products are also required to comply with the FDA’s
Quality System Regulation, 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 with the FDA Medical Device Reports,
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:




	 	•	 	restrictions on the products, manufacturers or manufacturing process;






	 	•	 	adverse inspectional observations (Form 483), warning letters, non-warning
letters incorporating inspectional observations;






	 	•	 	civil or criminal penalties or fines;






	 	•	 	injunctions;






	 	•	 	product seizures, detentions or import bans;






	 	•	 	voluntary or mandatory product recalls and publicity requirements;






	 	•	 	suspension or withdrawal of regulatory clearances or approvals;






	 	•	 	total or partial suspension of production;






	 	•	 	imposition of restrictions on operations, including costly new manufacturing
requirements; and






	 	•	 	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.



Even if we receive regulatory clearance or approval to market our product candidates, the
market may not be receptive to our products.



Even if our product candidates obtain regulatory clearance or approval, resulting products may
not gain market acceptance among physicians, patients, health care payors and/or the medical
community. We believe that the degree of market acceptance will depend on a number of factors,
including:




	 	•	 	timing of market introduction of competitive products;






	 	•	 	safety and efficacy of our product;






	 	•	 	prevalence and severity of any side effects;






	 	•	 	potential advantages or disadvantages over alternative treatments;






	 	•	 	strength of marketing and distribution support;






	 	•	 	price of our future product candidates, both in absolute terms and relative to
alternative treatments; and






	 	•	 	availability of coverage and reimbursement from government and other third-party
payors.





If our future product candidates fail to achieve market acceptance, we may not be able to
generate significant revenue or achieve or sustain profitability.



The coverage and reimbursement status of newly cleared or approved medical devices is
uncertain, and failure to obtain adequate coverage and adequate reimbursement could limit our
ability to market any future product candidates we may develop and decrease our ability to generate
revenue from any of our existing and future product candidates that may be cleared or approved.



There is significant uncertainty related to the third-party coverage and reimbursement of
newly cleared or approved medical devices. Normally, surgical devices are not directly covered;
instead, the procedure using the device is subject to a coverage determination by the insurer. The
commercial success of our existing and future product candidates in both domestic and international
markets will depend in part on the availability of coverage and adequate reimbursement from
third-party payors, including government payors, such as the Medicare and Medicaid programs,
managed care organizations and other third-party payors. Government and other third-party payors
are increasingly attempting to contain health care costs by limiting both coverage and the level of
reimbursement for new products and, as a result, they may not cover or provide adequate payment for
our existing and future product candidates. These payors may conclude that our product candidates
are not as safe or effective as existing devices or that procedures using our devices are not as
safe or effective as the existing procedures using other devices. These payors may also conclude
that the overall cost of the procedure using one of our devices exceeds the overall cost of the
competing procedure using another type of device, and third-party payors may not approve our
product candidates for coverage and adequate reimbursement. The failure to obtain coverage and
adequate reimbursement for our existing and future product candidates or health care cost
containment initiatives that limit or restrict reimbursement for our existing and future product
candidates may reduce any future product revenue.



If we fail to attract and retain key management and scientific personnel, we may be unable to
successfully develop or commercialize our product candidates.



We will need to expand and effectively manage our managerial, operational, financial,
development and other resources in order to successfully pursue our research, development and
commercialization efforts for our existing and future product candidates. Our success depends on
our continued ability to attract, retain and motivate highly qualified management and pre-clinical
and clinical personnel. The loss of the services of any of our senior management, particularly
Jeffrey G. Spragens, Dr. Stewart B. Davis and Dr. Charles Filipi, could delay or prevent the
development or commercialization of our product candidates. We do not maintain “key man” insurance
policies on the lives of these individuals or the lives of any of our other employees. We employ
these individuals on an at- will basis and their employment can be terminated by us or them at any
time, for any reason and with or without notice. We will need to hire additional personnel as we
continue to expand our research and development activities and build a sales and marketing
function.



We have scientific and clinical advisors who assist us in formulating our research,
development and clinical strategies. These advisors are not our employees and may have commitments
to, or consulting or advisory contracts with, other entities that may limit their availability to
us. In addition, our advisors may have arrangements with other companies to assist those companies
in developing products or technologies that may compete with ours.



We may not be able to attract or retain qualified management and scientific personnel in the
future due to the intense competition for qualified personnel among medical device and other
businesses. If we are not able to attract and retain the necessary personnel to accomplish our
business objectives, we may experience constraints that will impede significantly the achievement
of our research and development objectives, our ability to raise additional capital and our ability
to implement our business strategy. In particular, if we lose any members of our senior management
team, we may not be able to find suitable replacements in a timely fashion or at all and our
business may be harmed as a result.



As we evolve from a company primarily involved in development to a company also involved in
commercialization, we may encounter difficulties in managing our growth and expanding our
operations successfully.



As we advance our product candidates through research and development, we will need to expand
our development, regulatory, manufacturing, marketing and sales capabilities or contract with third
parties to provide these capabilities for us. As our operations expand, we expect that we will need
to manage additional relationships with such third parties, as well as additional collaborators and
suppliers. Maintaining these relationships and managing our future growth will impose significant
added responsibilities on members of our management. We must be able to: manage our development
efforts effectively; manage our clinical trials effectively; hire, train and integrate additional
management, development, administrative and sales and marketing personnel; improve our managerial,
development, operational and finance systems; and expand our facilities, all of which may impose a
strain on our administrative and operational infrastructure.



Furthermore, we may acquire additional businesses, products or product candidates that
complement or augment our existing business. Integrating any newly acquired business or product
could be expensive and time-consuming. We may not be able to integrate any acquired business or
product successfully or operate any acquired business profitably. Our future financial performance
will depend, in part, on our ability to manage any future growth effectively and our ability to
integrate any acquired businesses. We may not be able to accomplish these tasks, and our failure to
accomplish any of them could prevent us from successfully growing our company.



If we fail to acquire and develop other products or product candidates at all or on
commercially reasonable terms, we may be unable to diversify or grow our business.



We intend to continue to rely on in-licensing as the source of our products and product
candidates for development and commercialization. The success of this strategy depends upon our
ability to identify, select and acquire medical device product candidates. Proposing, negotiating
and implementing an economically viable product acquisition or license is a lengthy and complex
process. We compete for partnering arrangements and license agreements with other medical device
companies and academic research institutions. Our competitors may have stronger relationships with
third parties with whom we are interested in collaborating and/or may have more established
histories of developing and commercializing products. As a result, our competitors may have a
competitive advantage in entering into partnering arrangements with such third parties. In
addition, even if we find promising product candidates, and generate interest in a partnering or
strategic arrangement to acquire such product candidates, we may not be able to acquire rights to
additional product candidates or approved products on commercially reasonable terms that we find
acceptable, or at all.



We expect that any product candidate to which we acquire rights will require additional
development efforts prior to commercial sale, including extensive clinical testing and clearance or
approval by the FDA and other non-U.S. regulatory authorities. All product candidates are subject
to the risks of failure inherent in medical device product development, including the possibility
that the product candidate will not be shown to be sufficiently safe and effective for approval by
regulatory authorities. Even if the product candidates are cleared or approved, we cannot be sure
that they would be capable of economically feasible production or commercial success.



We rely on third parties to manufacture and supply our product candidates.



We do not own or operate manufacturing facilities for clinical or commercial production of our
product candidates, other than a prototype lab. We have no experience in medical device
manufacturing, and we lack the resources and the capability to manufacture any of our product
candidates on a commercial scale. If our future manufacturing partners are unable to produce our
products in the amounts that we require, we may not be able to establish a contract and obtain a
sufficient alternative supply from another supplier on a timely basis and in the quantities we
require. We expect to depend on third-party contract manufacturers for the foreseeable future.



Our product candidates require precise, high quality manufacturing. Any of our contract
manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and other
non-U.S. regulatory authorities to ensure strict compliance with quality system regulation
(referred to as QSR), including current Good Manufacturing Practice, or cGMP, and other applicable
government regulations and corresponding standards. If our contract manufacturers fail to achieve
and maintain high manufacturing standards in compliance with QSR, we may experience manufacturing
errors resulting in patient injury or death, product recalls or withdrawals, delays or
interruptions of production or failures in product testing or delivery, delay or prevention of
filing or approval of marketing applications for our products, cost overruns or other problems that
could seriously harm our business.



Any performance failure on the part of our contract manufacturers could delay clinical
development or regulatory clearance or approval of our product candidates or commercialization of
our future product candidates, depriving us of potential product revenue and resulting in
additional losses. In addition, our dependence on a third party for manufacturing may adversely
affect our future profit margins. Our ability to replace an existing manufacturer may be difficult
because the number of potential manufacturers is limited and the FDA must approve any replacement
manufacturer before it can begin manufacturing our product candidates. Such approval would require
additional non-clinical testing and compliance inspections. It may be difficult or impossible for
us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at
all.



We currently have no marketing staff and no sales or distribution organization. If we are
unable to develop our sales, marketing and distribution capability on our own or through
collaborations with marketing partners, we will not be successful in commercializing our product
candidates.



We currently have no marketing, sales or distribution capabilities. If our product candidates
are approved, we intend to establish our sales and marketing organization with technical expertise
and supporting distribution capabilities to commercialize our product candidates, which will be
expensive and time-consuming. Any failure or delay in the development of our internal sales,
marketing and distribution capabilities would adversely impact the commercialization of these
products. With respect to our existing and future product candidates, we may choose to collaborate
with third parties that have direct sales forces and established distribution systems, either to
augment our own sales force and distribution systems or in lieu of our own sales force and
distribution systems. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenue is likely to be lower than if we directly marketed or sold our
products. In addition, any revenue we receive will depend in whole or in part upon the efforts of
such third parties, which may not be successful and are generally not within our control. If we are
unable to enter into such arrangements on acceptable terms or at all, we may not be able to
successfully commercialize our existing and future product candidates. If we are not successful in
commercializing our existing and future product candidates, either on our own or through
collaborations with one or more third parties, our future product revenue will suffer and we may
incur significant additional losses.



Independent clinical investigators and contract research organizations that we engage to
conduct our clinical trials may not be diligent, careful or timely.



We will depend on independent clinical investigators to conduct our clinical trials. Contract
research organizations may also assist us in the collection and analysis of data. These
investigators and contract research organizations will not be our employees and we will not be able
to control, other than by contract, the amount of resources, including time that they devote to
products that we develop. If independent investigators fail to devote sufficient resources to the
clinical trials, or if their performance is substandard, it will delay the approval or clearance
and commercialization of any products that we develop. Further, the FDA requires that we comply
with standards, commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible and accurate and
that the rights, integrity and confidentiality of trial subjects are protected. If our independent
clinical investigators and contract research organizations fail to comply with good clinical
practice, the results of our clinical trials could be called into question and the clinical
development of our product candidates could be delayed. Failure of clinical investigators or
contract research organizations to meet their obligations to us or comply with federal regulations
could adversely affect the clinical development of our product candidates and harm our business.



The success of our business may be dependent on the actions of our collaborative partners.



An element of our strategy may be to enter into collaborative arrangements with established
multinational medical device companies which will finance or otherwise assist in the development,
manufacture and marketing of products incorporating our technology. We anticipate deriving some
revenues from research and development fees, license fees, milestone payments and royalties from
collaborative partners. Our prospects, therefore, may depend to some extent upon our ability to
attract and retain collaborative partners and to develop technologies and products that meet the
requirements of prospective collaborative partners. In addition, our collaborative partners may
have the right to abandon research projects and terminate applicable agreements, including funding
obligations, prior to or upon the expiration of the agreed-upon research terms. There can be no
assurance that we will be successful in establishing collaborative arrangements on acceptable terms
or at all, that collaborative partners will not terminate funding before completion of projects,
that our collaborative arrangements will result in successful product commercialization or that we
will derive any revenues from such arrangements. To the extent that we are not able to develop and
maintain collaborative arrangements, we would need substantial additional capital to undertake
research, development and commercialization activities on our own.



If we are unable to obtain and enforce patent protection for our products, our business could
be materially harmed.



Our success depends, in part, on our ability to protect proprietary methods and technologies
that we develop or license under the patent and other intellectual property laws of the United
States and other countries, so that we can prevent others from unlawfully using our inventions and
proprietary information. However, we may not hold proprietary rights to some patents required for
us to commercialize our proposed products. At present, we do not hold any patents and none of the
technology we license has been patented. Because certain U.S. patent applications are confidential
until patents issue, such as applications filed prior to November 29, 2000, or applications filed
after such date which will not be filed in foreign countries, third parties may have filed patent
applications for technology covered by our pending patent applications without our being aware of
those applications, and our patent applications may not have priority over those applications. For
this and other reasons, we or our third-party collaborators may be unable to secure desired patent
rights, thereby losing desired exclusivity. If licenses are not available to us on acceptable
terms, we will not be able to market the affected products or conduct the desired activities,
unless we challenge the validity, enforceability or infringement of the third party patent or
otherwise circumvent the third party patent.



Our strategy depends on our ability to rapidly identify and seek patent protection for our
discoveries. In addition, we will rely on third-party collaborators to file patent applications
relating to proprietary technology that we develop jointly during certain collaborations. The
process of obtaining patent protection is expensive and time-consuming. If our present or future
collaborators fail to file and prosecute all necessary and desirable patent applications at a
reasonable cost and in a timely manner, our business will be adversely affected. Despite our
efforts and the efforts of our collaborators to protect our proprietary rights, unauthorized
parties may be able to obtain and use information that we regard as proprietary.



The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we
have obtained, or obtain in the future, may be challenged, invalidated, unenforceable or
circumvented. Moreover, the United States Patent and Trademark Office ( the “USPTO”) may commence
interference proceedings involving our patents or patent applications. Any challenge to, finding of
unenforceability or invalidation or circumvention of, our patents or patent applications would be
costly, would require significant time and attention of our management and could have a material
adverse effect on our business. In addition, court decisions may introduce uncertainty in the
enforceability or scope of patents owned by medical device companies.



Our pending patent applications may not result in issued patents. The patent position of
medical device companies, including ours, is generally uncertain and involves complex legal and
factual considerations. The standards that the USPTO and its foreign counterparts use to grant
patents are not always applied predictably or uniformly and can change. There is also no uniform,
worldwide policy regarding the subject matter and scope of claims granted or allowable in medical
device patents. Accordingly, we do not know the degree of future protection for our proprietary
rights or the breadth of claims that will be allowed in any patents issued to us or to others. The
legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws
of foreign countries may not protect our rights to the same extent as the laws of the United
States. Therefore, the enforceability or scope of our owned or licensed patents in the United
States or in foreign countries cannot be predicted with certainty, and, as a result, any patents
that we own or license may not provide sufficient protection against competitors. We may not be
able to obtain or maintain patent protection for our pending patent applications, those we may file
in the future, or those we may license from third parties, including Creighton University.



We cannot assure you that any patents that will issue, that may issue or that may be licensed
to us will be enforceable or valid or will not expire prior to the commercialization of our product
candidates, thus allowing others to more effectively compete with us. Therefore, any patents that
we own or license may not adequately protect our product candidates or our future products.



If we are unable to protect the confidentiality of our proprietary information and know-how,
the value of our technology and products could be adversely affected.



In addition to patent protection, we also rely on other proprietary rights, including
protection of trade secrets, know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we will seek to enter into
confidentiality agreements with our employees, consultants and collaborators upon the commencement
of their relationships with us. These agreements generally require that all confidential
information developed by the individual or made known to the individual by us during the course of
the individual’s relationship with us be kept confidential and not disclosed to third parties. Our
agreements with employees also generally provide and will generally provide that any inventions
conceived by the individual in the course of rendering services to us shall be our exclusive
property. However, we may not obtain these agreements in all circumstances, and individuals with
whom we have these agreements may not comply with their terms. In the event of unauthorized use or
disclosure of our trade secrets or proprietary information, these agreements, even if obtained, may
not provide meaningful protection, particularly for our trade secrets or other confidential
information. To the extent that our employees, consultants or contractors use technology or
know-how owned by third parties in their work for us, disputes may arise between us and those third
parties as to the rights in related inventions.



Adequate remedies may not exist in the event of unauthorized use or disclosure of our
confidential information. The disclosure of our trade secrets would impair our competitive position
and may materially harm our business, financial condition and results of operations.



We will rely heavily on licenses from third parties.



All of the patent applications in our patent portfolio are not owned by us, but are licensed
from one third party. Presently, we rely solely on technology licensed from Creighton University
for all of our products and may license additional technology from other third parties in the
future. Such license agreements give us rights for the commercial exploitation of the patents
resulting from the patent applications, subject to certain provisions of the license agreements.
Failure to comply with these provisions could result in the loss of our rights under these license
agreements. Our inability to rely on these patent applications which are the basis of our
technology would have a material adverse effect on our business.



We presently license patent rights to all of our technology from one third party owner. If we
or this third party owner does not properly maintain or enforce the patent applications underlying
any such licenses, our competitive position and business prospects will be harmed.



We have obtained licenses from Creighton University for all of our current products in
development. In addition, we hope to enter into additional licenses of third party intellectual
property in the future.



Our success will depend in part on the ability of us or our licensors to obtain, maintain and
enforce patent protection for our licensed intellectual property and, in particular, those patents
to which we have secured exclusive rights in our field. We or our licensors may not successfully
prosecute the patent applications which are licensed to us. Even if patents issue in respect of
these patent applications, we or our licensors may fail to maintain these patents, may determine
not to pursue litigation against other companies that are infringing these patents, or may pursue
such litigation less aggressively than we would. Without protection for the intellectual property
we have licensed, other companies might be able to offer substantially identical products for sale,
which could adversely affect our competitive business position and harm our business prospects.



Some jurisdictions may require us or Creighton University to grant licenses to third parties.
Such compulsory licenses could be extended to include some of our product candidates, which may
limit our potential revenue opportunities.



Many countries, including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties. In addition, most
countries limit the enforceability of patents against government agencies or government
contractors. In these countries, the patent owner may be limited to monetary relief and may be
unable to enjoin infringement, which could materially diminish the value of the patent. Compulsory
licensing of life-saving products is also becoming increasingly popular in developing countries,
either through direct legislation or international initiatives. Such compulsory licenses could be
extended to include some of our product candidates, which may limit our potential revenue
opportunities.



Our commercial success depends significantly on our ability to operate without infringing the
patents and other proprietary rights of third parties.



Other entities may have or obtain patents or proprietary rights that could limit our ability
to manufacture, use, sell, offer for sale or import products or impair our competitive position. In
addition, to the extent that a third party develops new technology that covers our products, we may
be required to obtain licenses to that technology, which licenses may not be available or may not
be available on commercially reasonable terms, if at all. If licenses are not available to us on
acceptable terms, we will not be able to market the affected products or conduct the desired
activities, unless we challenge the validity, enforceability or infringement of the third party
patent or circumvent the third party patent, which would be costly and would require significant
time and attention of our management. Third parties may have or obtain valid and enforceable
patents or proprietary rights that could block us from developing products using our technology.
Our failure to obtain a license to any technology that we require may materially harm our business,
financial condition and results of operations.



If we become involved in patent litigation or other proceedings related to a determination of
rights, we could incur substantial costs and expenses, substantial liability for damages or be
required to stop our product development and commercialization efforts.



Third parties may sue us for infringing their patent rights. Likewise, we may need to resort
to litigation to enforce a patent issued or licensed to us or to determine the scope and validity
of proprietary rights of others. In addition, a third party may claim that we have improperly
obtained or used its confidential or proprietary information. Furthermore, in connection with our
third-party license agreements, we generally have agreed to indemnify the licensor for costs
incurred in connection with litigation relating to intellectual property rights. The cost to us of
any litigation or other proceeding relating to intellectual property rights, even if resolved in
our favor, could be substantial, and the litigation would divert our management’s efforts. Some of
our competitors may be able to sustain the costs of complex patent litigation more effectively than
we can because they have substantially greater resources. Uncertainties resulting from the
initiation and continuation of any litigation could limit our ability to continue our operations.



If any parties successfully claim that our creation or use of proprietary technologies
infringes upon their intellectual property rights, we might be forced to pay damages, potentially
including treble damages, if we are found to have willfully infringed on such parties’ patent
rights. In addition to any damages we might have to pay, a court could require us to stop the
infringing activity or obtain a license. Any license required under any patent may not be made
available on commercially acceptable terms, if at all. In addition, such licenses are likely to be
non-exclusive and, therefore, our competitors may have access to the same technology licensed to
us. If we fail to obtain a required license and are unable to design around a patent, we may be
unable to effectively market some of our technology and products, which could limit our ability to
generate revenues or achieve profitability and possibly prevent us from generating revenue
sufficient to sustain our operations.



Medicare legislation and future legislative or regulatory reform of the health care system may
affect our ability to sell our products profitably.



In the United States, there have been a number of legislative and regulatory proposals, at
both the federal and state government levels, to change the healthcare system in ways that could
affect our ability to sell our products profitably, if approved. To the extent that our products
are deemed to be “durable medical equipment” or DME they may be subject to distribution under the
new Competitive Acquisition regulations, this could adversely affect the amount that we can seek
from payors. Non-DME devices used in surgical procedures are normally paid directly by the hospital
or health care provider and not reimbursed separately by third-party payors. As a result, these
types of devices are subject to intense price competition that can place a small manufacturer at a
competitive disadvantage.



We are unable to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in the future or what
effect such legislation or regulation would have on our business. Any cost containment measures or
other health care system reforms that are adopted could have a material adverse effect on our
ability to commercialize our existing and future product candidates successfully.



Failure to obtain regulatory approval outside the United States will prevent us from marketing
our product candidates abroad.



We intend to market certain of our existing and future product candidates in non-U.S. markets.
In order to market our existing and future product candidates in the European Union and many other
non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited
interactions with non-U.S. regulatory authorities, the approval procedures vary among countries and
can involve additional testing, and the time required to obtain approval may differ from that
required to obtain FDA approval. Approval or clearance by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one or more non-U.S. regulatory
authorities does not ensure approval by regulatory authorities in other countries or by the FDA.
The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA
approval or clearance. We may not obtain non-U.S. regulatory approvals on a timely basis, if at
all. We may not be able to file for non-U.S. regulatory approvals and may not receive necessary
approvals to commercialize our existing and future product candidates in any market.



Non-U.S. governments often impose strict price controls, which may adversely affect our future
profitability.



We intend to seek approval to market certain of our existing and future product candidates in
both the U.S. and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S.
jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our
product. In some countries, particularly countries of the European Union, each of which has
developed its own rules and regulations, pricing is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take considerable time after the
receipt of marketing approval for a medical device candidate. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a clinical trial that compares the
cost-effectiveness of our existing and future product candidates to other available products. If
reimbursement of our future product candidates is unavailable or limited in scope or amount, or if
pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.



Our business may become subject to economic, political, regulatory and other risks associated
with international operations.



Our business is subject to risks associated with conducting business internationally, in part
due to a number of our suppliers being located outside the U.S. Accordingly, our future results
could be harmed by a variety of factors, including:




	 	•	 	difficulties in compliance with non-U.S. laws and regulations;






	 	•	 	changes in non-U.S. regulations and customs;






	 	•	 	changes in non-U.S. currency exchange rates and currency controls;






	 	•	 	changes in a specific country’s or region’s political or economic environment;






	 	•	 	trade protection measures, import or export licensing requirements or other
restrictive actions by U.S. or non-U.S. governments;






	 	•	 	negative consequences from changes in tax laws; and






	 	•	 	difficulties associated with staffing and managing foreign operations, including
differing labor relations.





The market price of our common stock may fluctuate significantly.



The market price of our common stock may fluctuate significantly in response to numerous
factors, some of which are beyond our control, such as:




	 	•	 	the announcement of new products or product enhancements by us or our
competitors;






	 	•	 	developments concerning intellectual property rights and regulatory approvals;






	 	•	 	variations in our and our competitors’ results of operations;






	 	•	 	changes in earnings estimates or recommendations by securities analysts, if our
common stock is covered by analysts;






	 	•	 	developments in the medical device industry;






	 	•	 	the results of product liability or intellectual property lawsuits;






	 	•	 	future issuances of common stock or other securities;






	 	•	 	the addition or departure of key personnel;






	 	•	 	announcements by us or our competitors of acquisitions, investments or strategic
alliances; and






	 	•	 	general market conditions and other factors, including factors unrelated to our
operating performance.





Further, the stock market in general, and the market for medical device companies in
particular, has recently experienced extreme price and volume fluctuations. Continued market
fluctuations could result in extreme volatility in the price of our common stock, which could cause
a decline in the value of our common stock. Price volatility of our common stock might be worse if
the trading volume of our common stock is low.



Some or all of the “restricted” shares of our common stock issued to former stockholders of
SafeStitch in connection with the Share Exchange or held by other of our stockholders may be
offered from time to time in the open market pursuant to an effective registration statement or
Rule 144, and these sales may have a depressive effect on the market for our common stock.



We have identified material weaknesses in our internal control over financial reporting that
may prevent us from being able to accurately report our financial results or prevent fraud, which
could harm our business and operating results, the trading price of our stock and our access to
capital.



Our management, with the participation of our Chief Executive Officer and our then current,
but now former, Chief Financial Officer evaluated the effectiveness of the design and operation of
the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or
15d-15(e)) as of December 31, 2007. Based upon that evaluation, the Chief Executive Officer and our
former Chief Financial Officer concluded that, as of that date, the Company’s disclosure controls
and procedures were not effective at a reasonable assurance level because of the identification of
the material weakness in our internal control over financial reporting described above and in more
detail in “Item 8A(T) — Controls and Procedures” contained in our Annual Report on Form 10-KSB,
which is attached hereto as Exhibit B, as amended by our Amendment No. 1 to our Annual
Report on Form 10-KSB/A, which is attached hereto as Exhibit C.



Upon identification of the material weakness, management advised our Audit Committee of the
issues encountered and management’s key decisions relating to remediation efforts. Under the
direction of our Chief Executive Officer and former Chief Financial Officer, we developed a plan to
remediate the material weakness. Our Audit Committee reviewed, advised and concurred with
management’s plan of remediation, which includes the addition of employees who are trained in the
preparation of financial statements in accordance with GAAP and who have the experience necessary
to ensure that we have in place appropriate internal control over financial reporting.



Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an
adequate internal control structure and procedures for financial reporting and assess on an
on-going basis the design and operating effectiveness of our internal control structure and
procedures for financial reporting. We are committed to continuously improving our internal control
over financial reporting, in order that we fully satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act.



In connection with the audits of, and the issuance of a report on, our consolidated financial
statements for the years ended December 31, 2007 and 2006, our independent registered public
accounting firm, Eisner LLP, also communicated to our management and Audit Committee that certain
matters involving our internal controls amounted to a “material weakness”, as defined by Rule 12b-2
under the Securities Exchange Act of 1934, as amended (referred to as the Exchange Act). Eisner LLP
was not engaged to perform an audit of our internal control over financial reporting. Eisner LLP’s
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 our internal control over financial reporting. Accordingly,
Eisner LLP did not express such an opinion. This material weakness derived from our failure to
maintain a sufficient complement of personnel with the appropriate level of knowledge, experience
and training in the application of accounting principles generally accepted in the U.S. (referred
to as GAAP) and in internal control over financial reporting commensurate with our financial
reporting obligations under the Exchange Act. We did not maintain effective controls over the
presentation of our consolidated financial statements and related disclosures in preparing our
consolidated financial statements



If we are unable to conclude that our internal control over financial reporting is effective
at any such time that we are required to attest to them, our ability to obtain additional financing
on favorable terms could be materially and adversely affected, which, in turn, could materially and
adversely affect our business, our financial condition and the market value of our securities.



Trading of our common stock is limited and trading restrictions imposed on us by applicable
regulations and by lockup agreements we have entered into with our principal stockholders may
further reduce our trading, making it difficult for our stockholders to sell their shares.



Trading of our common stock is currently conducted on the National Association of Securities
Dealers, Inc.’s, OTC Bulletin Board, or “OTC BB.” The liquidity of our common stock is limited, not
only in terms of the number of shares that can be bought and sold at a given price, but also as it
may be adversely affected by delays in the timing of transactions and reduction in security
analysts’ and the media’s coverage of us, if at all.



Approximately 70% of the outstanding shares of our common stock are subject to lockup
agreements which limit sales for a two-year period ending September 4, 2009. These factors may
result in lower prices for our common stock than might otherwise be obtained and could also result
in a larger spread between the bid and ask prices for our common stock. In addition, without a
large float, our common stock is less liquid than the stock of companies with broader public
ownership and, as a result, the trading prices of our common stock may be more volatile. In the
absence of an active public trading market, an investor may be unable to liquidate his investment
in our common stock. Trading of a relatively small volume of our common stock may have a greater
impact on the trading price of our stock than would be the case if our public float were larger. We
cannot predict the prices at which our common stock will trade in the future.



Future sales of common stock could reduce our stock price.



Sales by stockholders of substantial amounts of our shares of common stock, the issuance of
new shares of common stock by us or the perception that these sales may occur in the future, could
materially and adversely affect the market price of our common stock. As described herein,
substantially all of the former members of SafeStitch LLC, who received an aggregate of 11,256,369
shares of our common stock in connection with our acquisition of SafeStitch LLC, entered into
lock-up agreements with respect to such shares. Under the lock-up agreements, these former members
of SafeStitch LLC may not directly or indirectly sell or otherwise transfer the shares of our
common stock issued to them in connection with our acquisition of SafeStitch LLC during the
two-year period ending September 4, 2009.



On September 4, 2009, the lock-up agreements entered into in connection with our acquisition
of SafeStitch LLC will expire, which will allow an aggregate of 11,256,369 shares of our common
stock, or approximately 70% of our currently outstanding shares of common stock, to be available
for sale on the public market, subject in most cases to the limitations of Rule 144 under the
Securities Act of 1933, as amended.



Because our common stock may be a “penny stock,” it may be more difficult for investors to
sell shares of our common stock, and the market price of our common stock may be adversely
affected.



Our common stock may be a “penny stock” if, among other things, the stock price is below $5.00
per share, it is not listed on a national securities exchange or approved for quotation on the
Nasdaq Stock Market or any other national stock exchange or it has not met certain net tangible
asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers
of these stocks with a standardized risk-disclosure document prepared by the Securities and
Exchange Commission (“SEC”). This document provides information about penny stocks and the nature
and level of risks involved in investing in the penny-stock market. A broker must also give a
purchaser, orally or in writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a suitable
investment for the purchaser and obtain the purchaser’s written agreement to the purchase.
Broker-dealers must also provide customers that hold penny stock in their accounts with such
broker-dealer a monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor
may be able to cancel its purchase and get its money back.



If applicable, the penny stock rules may make it difficult for investors to sell their shares
of our common stock. Because of the rules and restrictions applicable to a penny stock, there is
less trading in penny stocks and the market price of our common stock may be adversely affected.
Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors
may not always be able to resell their shares of our common stock publicly at times and prices that
they feel are appropriate.



Directors, executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that you do not consider
to be in the best interests of our stockholders.



As of the closing of the Share Exchange, our directors, executive officers, principal
stockholders and affiliated entities beneficially owned, in the aggregate, over 80% 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 American Stock Exchange (“AMEX”), the other national securities exchanges
and the NASDAQ. 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 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 of directors members and executive officers, which could harm our business. If our efforts to
comply with new or changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, we could be subject to liability under applicable laws or our
reputation may be harmed.



The Shares being purchased hereunder are not freely transferable.



The Shares being purchased hereunder are “restricted securities”, as defined in Rule 144
promulgated under the Securities Act, and have no registration rights. As such, they are not
freely transferable and will not be transferable for a significant period of time. Purchasers of
the Shares must have the financial capacity to hold such shares for a significant period of time
and should not expect to be able to transfer such shares for the next year and, perhaps longer.



8. Indemnification.



The Purchaser agrees to indemnify, defend and hold harmless the Company and its stockholders,
directors, executive officers and affiliates from and against all liability, damage, losses, costs
and expenses (including reasonable attorneys’ fees) which they may incur by reason of the failure
of the Purchaser to fulfill any of the terms and conditions of this Agreement, or by reason of any
breach of the representations and warranties made by the Purchaser herein or in any document
provided by the Purchaser to any executive officers, directors, the Company or any of their
Affiliates.



9. Miscellaneous.



9.1. Governing Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of Florida.



9.2. Construction. In construing this Agreement, the singular shall be held to
include the plural, the plural shall include the singular, the use of any gender shall include
every other and all genders, and captions and paragraph headings shall be disregarded. All of the
parties to this Agreement have participated fully in the negotiation and preparation hereof; and,
accordingly, this Agreement shall not be more strictly construed against any one of the parties
hereto.



9.3. Severability. The invalidity of any one or more of the words, phrases,
sentences, clauses, sections or subsections contained in this Agreement shall not affect the
enforceability of the remaining portions of this Agreement or any part hereof, all of which are
inserted conditionally on their being valid in law, and, in the event that any one or more of the
words, phrases, sentences, clauses, sections or subsections contained in this Agreement shall be
declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, section or sections, or subsection or
subsections had not been inserted.



9.4. Benefit of Representations, Warranties and Statements. The representations,
warranties and statements of the Purchaser set forth in this Agreement are also being made for the
benefit of successors of the Company, the Company’s stockholders, the Board and the executive
officers of the Company and present and future controlling parties of the Company, and may be
relied upon by them.



9.5. Section Headings. The section and other headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation of any provisions of
this Agreement.



9.6. Counterparts; Facsimile Signatures. This Agreement may be executed in any number
of counterparts and by the several parties hereto in separate counterparts, each of which shall be
deemed to be an original and all of which together shall be deemed to be one and the same
instrument. Facsimile signatures shall be deemed original signatures for all purposes of this
Agreement.



9.7. Entire Agreement; Amendments. This Agreement constitutes the entire agreement
among the parties hereto with respect to the transaction contemplated hereby and supersedes all
prior agreements, understandings, negotiations and discussions, both written and oral, among the
parties hereto with respect to the subject matter hereof. This Agreement may not be amended or
modified in any way except by a written instrument executed by all of the parties hereto.



2




[Signatures follow on next page]




IN WITNESS WHEREOF, The Purchaser hereby subscribes for the purchase of the Shares of the
Company described in this Agreement and is tendering herewith the full amount of the capital
contribution described herein.



Date:      , 2008




Purchaser




Signature




(name)(print)




(street)




(city, state, zip)




(country)



Purchaser Signature Page to Subscription Agreement






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The foregoing Agreement has been accepted this      day of      , 2008.



	 
	SAFESTITCH MEDICAL, INC.







	 
	By:     

Jeffrey G. Spragens

Chief Executive Officer and President







Company Signature Page to Subscription Agreement






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EXHIBIT A




INFORMATION STATEMENT







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EXHIBIT B




ANNUAL REPORT ON FORM 10-KSB




FOR THE YEAR ENDED DECEMBER 31, 2007






6






EXHIBIT C




AMENDMENT NO. 1

TO

ANNUAL REPORT ON FORM 10-KSB/A





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EXHIBIT D




CURRENT REPORT ON FORM 8-K




AS FILED WITH THE SEC ON APRIL 4, 2008





8






EXHIBIT E




CURRENT REPORT ON FORM 8-K




AS FILED WITH THE SEC ON APRIL 24, 2008





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