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As filed with the U.S. Securities and Exchange Commission on January 4, 2021

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CARDIVA MEDICAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   3841   30-0113686

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1615 Wyatt Drive

Santa Clara, CA 95054

(408) 470-7170

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

John Russell

President and Chief Executive Officer

Cardiva Medical, Inc.

1615 Wyatt Drive

Santa Clara, CA 95054

(408) 470-7170

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Mark B. Weeks

Josh Seidenfeld

Milson C. Yu

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

 

Lisa Garrett

Chief Financial Officer

Cardiva Medical, Inc.

1615 Wyatt Drive

Santa Clara, CA 95054

(408) 470-7170

 

Alan F. Denenberg

Emily Roberts

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer                                                Accelerated filer   
Non-accelerated filer      Smaller reporting company   
     Emerging growth company   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities To Be Registered
  Proposed Maximum
Aggregate
Offering Price (1)(2)
  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  $75,000,000   $8,183

 

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated January 4, 2021

                    shares

 

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Common stock

This is our initial public offering of our common stock. We are offering                    shares of common stock. Prior to this offering, there has been no public market for our common stock. We expect that the initial public offering price will be between $                    and $                    per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “                    .”

We are an “emerging growth company” and a “smaller reporting company” as defined under the U.S. federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 19.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     
        Per share      Total

Initial public offering price

     $                  $            

Underwriting discounts and commissions(1)

     $                  $            

Proceeds to Cardiva Medical, Inc., before expenses

     $                  $            

 

 

(1)   See “Underwriting” for additional information regarding compensation payable to the underwriters.

Delivery of the shares of common stock is expected to be made on or about                     , 2021.

We have granted the underwriters an option, for a period of 30 days from the date of this prospectus, to purchase up to an additional                     shares of common stock at the initial public offering price less underwriting discounts and commissions.

 

J.P. Morgan     BofA Securities
Canaccord Genuity     Stifel

Prospectus dated                     , 2021.


Table of Contents

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Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1  

Risk factors

     19  

Special note regarding forward-looking statements

     78  

Market and industry data

     80  

Use of proceeds

     81  

Dividend policy

     82  

Capitalization

     83  

Dilution

     86  

Selected financial data

     90  

Management’s discussion and analysis of financial condition and results of operations

     92  

Business

     115  

Management

     158  

Executive compensation

     166  

Certain relationships and related party transactions

     181  

Principal stockholders

     185  

Description of capital stock

     188  

Shares eligible for future sale

     194  

Material U.S. federal income tax consequences to non-U.S. holders of our common stock

     197  

Underwriting

     201  

Legal matters

     210  

Experts

     210  

Where you can find more information

     210  

Index to financial statements

     F-1  

Through and including                      , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

We and the underwriters have not authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or in any applicable free writing prospectus is accurate only as of the date of this prospectus or any such free writing prospectus, as applicable, regardless of its time of delivery or of any sale of our common stock. Our business, financial condition, results of operations and future growth prospects may have changed since that date.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.


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Prospectus summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “Cardiva Medical,” “we,” “us,” “our” and “our company” refer to Cardiva Medical, Inc.

Overview

We are a medical device company focused on transforming vascular closure for the benefit of patients, hospitals and physicians. Our products address the over 5.6 million catheter-based coronary, peripheral and electrophysiology procedures in the United States that require vascular access site closure each year. We have purposefully built and optimized our VASCADE family of products to address the key clinical and economic challenges of manual compression, the traditional standard of care for vascular closure in these procedures.

Designed around an easy to use, catheter-based delivery system and the natural clot-inducing properties of collagen, our VASCADE device is the only marketed vascular closure device clinically proven to both increase workflow efficiency and reduce access site complications relative to manual compression for coronary and peripheral procedures. Similarly, our VASCADE MVP device is the only marketed vascular closure device clinically proven and labeled to improve workflow relative to manual compression for electrophysiology procedures. Importantly, these improvements drive meaningful cost savings for our customers, which consist of hospitals, ambulatory surgery centers and other treatment facilities. We believe our substantial body of clinical evidence supports the compelling value proposition of our products and will drive their continued adoption in the $1.4 billion annual addressable U.S. market for vascular access site closure in coronary, peripheral and electrophysiology procedures.

Catheter-based, minimally invasive alternatives to open surgery have transformed cardiovascular medicine. The majority of these procedures gain access to the vascular system through the large femoral artery or vein in the patient’s groin, which creates an access site opening in the vessel that requires closure. In 2019 in the United States, there were approximately 5.2 million catheter-based coronary and peripheral procedures, and 400,000 catheter-based electrophysiology procedures, the latter of which generally require two to five access sites per procedure.

Even with the major advances in technology over the last 40 years, the most common complications in coronary and peripheral procedures are still related to the access site. Manual compression, the traditional standard of care, involves the application of pressure in order to facilitate the formation of a blood clot at the access site. Vascular closure devices were introduced in the 1990s to improve upon manual compression by rapidly closing the access site and facilitating more efficient workflow. However, these devices have not been able to demonstrate a statistically significant reduction in access site complications relative to manual compression. Published data from various pivotal trials for competing vascular closure devices show an incidence rate of complications of up to 9.0% of procedures. As such, there remains a significant unmet need for safer vascular closure devices in coronary and peripheral procedures.

According to a 2013 article published in the Journal of American College of Cardiology that reviewed published data from the CATH-PCI registry, access site complications, defined as certain bleeding events, occur in

 

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approximately 5.8% of femoral access procedures. The access site complications observed ranged from large hematomas to more serious events such as vessel blockages and uncontrolled bleeding, which require costly surgical repair or blood transfusion. According to an article published in the American Journal of Cardiology, in 2019, the average cost of vascular complications in general, defined consistently with access site complications in the 2013 article described above, was estimated to be $4,800 per complication. There are approximately 5.2 million coronary and peripheral procedures conducted in the United States in 2019, according to Millennium Research Group, and assuming the incidence rate and average cost of access site complications described above, we estimate that access site complications cost the U.S. healthcare system up to approximately $1.5 billion annually.

Manual compression has also been the standard of care following catheter-based electrophysiology procedures, a category that grew approximately 13% in 2019 driven by improvements in interventional treatments and diagnosis of cardiac arrhythmias such as atrial fibrillation. Despite the tremendous technological advancements in therapeutic tools for catheter-based electrophysiology procedures, manual compression still requires six to eight hours of immobilized bedrest which is costly and inefficient for the hospital and painful for the patient.

We developed our VASCADE technology platform to address the limitations of both manual compression and existing vascular closure devices. Our VASCADE family of products consists of two devices, VASCADE and VASCADE MVP, which share a common, innovative technology that features a simple, catheter-based delivery system and leverages the natural clot-inducing properties of collagen. This novel design significantly reduces access site complications, increases patient satisfaction and improves hospital workflow metrics that, in turn, drive economic benefits and cost savings.

Following a catheter-based cardiovascular procedure, our VASCADE or VASCADE MVP device is inserted through the introducer sheath that was used for the procedure and the disc is deployed and placed against the inside wall of the vessel. Once the disc is in the proper position, a protective sleeve is unlocked and exposes a resorbable collagen plug in the tissue tract against the outside of the vessel wall. As a result of hydration in the presence of moisture in the tissue tract, the collagen implant expands immediately to provide an extravascular seal after which the catheter delivery system is removed so that nothing is left behind in the vessel.

 

 

VASCADE is the only marketed vascular closure device clinically proven to both increase workflow efficiency and reduce access site complications compared to manual compression in coronary and peripheral procedures, and our clinical data supports a lower complication rate relative to currently marketed vascular closure devices. Since we launched VASCADE in 2014, we have sold over 470,000 devices in the United States through September 30, 2020. We reinforce our value proposition with a risk sharing program called the Performance Guarantee that provides customers with a fixed payment to share the cost of a qualifying complication. Since inception of the Performance Guarantee program in April 2016, we have sold over 80,000 devices through the program and our customers have reported qualifying complications that represent a rate of less than 0.1% of VASCADE procedures.

 

 

VASCADE MVP is the only marketed vascular closure device indicated for electrophysiology procedures. VASCADE MVP is also the first and only marketed device to demonstrate a statistically significant improvement in key hospital workflow and patient satisfaction metrics, including time to ambulation, time to discharge eligibility, patient discomfort and usage of pain medication, including opioids, in electrophysiology procedures. Clinical data from our AMBULATE IMPACT study indicate that these workflow improvements, resulting primarily from a reduction in nursing and other staff time, together with reductions in overnight stays and changes in treatment, can potentially save our customers $1,200 to $2,300 per patient relative to manual compression, using cost saving assumptions based on 2018 data from Medicare and peer reviewed literature. See “Business—

 

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VASCADE MVP clinical data—AMBULATE IMPACT.” Since the full commercial launch of VASCADE MVP in January 2019, we have sold over 120,000 devices in the United States through September 30, 2020.

Our target markets for VASCADE and VASCADE MVP are highly synergistic. Our sales and marketing personnel are able to target multiple coronary, peripheral and electrophysiology procedure types at the same time given the general need for vascular closure following these procedures. Further, many of our hospital customers have one value analysis committee approval process before a device may be sold to any department within the hospital. See “Business—Our commercial strategy.” For these hospital customers, once a device receives approval, it may be marketed and sold to multiple hospital departments regardless of specialty area or procedure type and without additional approvals.

Our target markets are also highly concentrated. In 2019, approximately 60% of the total U.S. market for coronary, peripheral and electrophysiology procedures was concentrated in 600 electrophysiology procedure centers. We plan to continue to leverage the concentrated nature of procedure volumes by focusing our efforts on the large volume centers that comprise a majority of our target market.

We currently market and sell VASCADE and VASCADE MVP in the United States through our direct sales organization. We have taken a measured approach to expanding our sales force, with the majority of our territory managers covering accounts in the eastern and central regions of the United States and with more recent expansion beginning in 2020 into the western United States. We believe this model can be replicated as we expand our commercial presence to high volume healthcare centers across the United States, while working to continue penetrating more deeply into existing customer accounts. Importantly, no additional reimbursement mechanisms are required to successfully execute our strategy as we bill our customers directly for the cost of our devices and they, in turn, are reimbursed for the overall therapeutic procedure.

While we have chosen to focus only on the U.S. market to date, both VASCADE and VASCADE MVP have CE Mark approval. We believe their clinical and economic advantages apply to the approximately $1.2 billion market for our products outside the United States. In the future we may take steps to commercialize our devices outside of the United States.

Our current portfolio of clinical evidence consists of data from five trials, including two randomized controlled multi-center trials, which have collectively evaluated more than 1,300 of our closure devices in the United States and Australia. Our RESPECT and AMBULATE pivotal clinical trials were prospective, multi-center, randomized, controlled clinical trials that in aggregate enrolled over 600 patients across over 30 centers and supported FDA pre-market approval, or PMA, of VASCADE in 2013 and VASCADE MVP in 2018, respectively.

We plan to continue to develop and execute clinical studies that we believe will drive market development by increasing the evidence base for VASCADE and VASCADE MVP and supporting our value proposition. In July 2020, we initiated a multi-center, prospective, single arm study to evaluate the clinical benefit of VASCADE MVP to facilitate same day discharge for patients undergoing cardiac ablation procedures for atrial fibrillation. In addition, our research and development efforts are focused on expanding and iterating on our product portfolio to address evolving techniques in interventional procedures that may require closure of different size access sites.

We have built a dedicated manufacturing operation in Guaymas, Mexico in order to create a stable, efficient and quality-focused manufacturing organization to meet our growth needs. From its inception in 2015 through September 30, 2020, our plant has manufactured over 600,000 devices and has been through numerous inspections by the FDA and European notified bodies with no significant findings. We believe our manufacturing capabilities are scalable to continue to supply high quality products and realize operating efficiencies as we grow our customer base.

 

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We have experienced considerable growth since launching our products, including 50% annual growth in revenue from 2015 through 2019. Our revenue was $21.1 million and $32.5 million for the years ended December 31, 2018 and 2019, respectively, representing an increase of 54%, and $22.8 million and $31.0 million for the nine months ended September 30, 2019 and 2020, respectively, representing an increase of 36%. Our gross margin was 71.6%, 71.8% and 73.5% for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, respectively. Our net losses were $14.6 million, $12.9 million and $9.4 million for the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, respectively.

Our competitive strengths

We believe the continued growth of our company will be driven by the following competitive strengths:

 

 

Innovative, transformative solution for vascular closure.

 

 

Compelling clinical advantages relative to competitive products and techniques.

 

 

Attractive economic value proposition for customers.

 

 

Efficient commercial model.

 

 

High quality and scalable manufacturing.

 

 

Sole focus and dedication to vascular closure.

 

 

Industry-experienced senior management team.

Our market opportunity

We are working to establish our VASCADE and VASCADE MVP devices as the preferred solutions for the existing $1.4 billion annual U.S. market for vascular access site closure in coronary, peripheral and electrophysiology procedures.

Coronary and peripheral procedure opportunity

Coronary and peripheral procedures consist of interventions to diagnose and treat vascular diseases. According to a Millennium Research Group analysis, there were approximately 5.2 million coronary and peripheral procedures in the United States in 2019, which we believe reflects the potential addressable market for VASCADE, representing a U.S. target market opportunity of approximately $1.1 billion in 2019.

Electrophysiology procedure opportunity

Electrophysiology procedures consist of catheter-based interventions to diagnose and treat cardiac arrhythmias. Procedure data from Millennium Research Group indicate that there were approximately 400,000 electrophysiology procedures in the United States in 2019. Because two to five access sites are used in each procedure, we believe the potential addressable market for VASCADE MVP in the United States includes approximately 1.3 million closures annually, representing a U.S. market opportunity of approximately $330 million in 2019. In the United States, this procedure category grew approximately 13% in 2019 and is expected to continue to grow based on the increasing incidence and prevalence of cardiac arrhythmias in the United States.

 

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International opportunity

To date, we have chosen to commercialize our devices only in the United States. However, we have obtained regulatory approval for VASCADE and VASCADE MVP in CE Mark countries, and in the future, we may take steps to commercialize our devices outside of the United States. We believe the potential market opportunity for our devices outside the United States is approximately $1.2 billion.

Industry overview

Catheter-based cardiovascular procedures can be categorized according to the type of procedure, which also correlates to the diameter of the access site sheath required to deliver the procedure tools. The three primary categories of procedures include coronary and peripheral procedures, electrophysiology procedures and structural heart procedures. Our VASCADE and VASCADE MVP devices address closures associated with the coronary and peripheral category and the electrophysiology category, respectively.

Coronary and peripheral procedures – standard bore

Coronary and peripheral procedures represent the largest sub-segment of catheter-based cardiovascular procedures. Access to the vasculature through the femoral artery in the groin is the standard of care for coronary and peripheral procedures. Approximately 70% of all coronary and peripheral procedures utilize femoral access. The remaining approximately 30% of procedures are accessed through the radial or other arteries.

There are two primary methods for femoral vascular access site closure: manual compression or the use of a vascular closure device designed to immediately seal the vessel. Even with great advancements in technology, the most common complications in coronary and peripheral procedures are related to the access site. According to a 2013 article published in the Journal of American College of Cardiology that reviewed published data from the CATH-PCI registry, vascular complications in general occur in approximately 5.8% of femoral access procedures.

Limitations of manual compression

Manual compression, which involves the application of pressure in order to facilitate the formation of a blood clot at the access site, has historically been the standard of care. Once the introducer sheath is removed, intense direct pressure is applied until a blood clot is formed. Because any movement could dislodge the newly formed clot and cause serious complications, including bleeding and death, the patient is required to remain immobile under close nursing observation in a coronary care unit for up to an additional eight hours after the procedure. Published data from various closure trials, including from our RESPECT trial, show an incidence rate of complications related to manual compression of up to 7% of procedures. In addition, patients often experience significant pain and discomfort during compression of the artery and during the period in which they are required to be immobile, and may require pain medications, including opioids.

Limitations of vascular closure devices

Vascular closure devices were first introduced in the 1990s to improve upon manual compression by rapidly sealing the vessel and reducing the lengthy and costly period of bedrest following interventional procedures. Vascular closure devices have experienced rapid adoption, but their market penetration has plateaued. In 2019, competing vascular closure devices were used in approximately 50% of coronary and peripheral procedures

 

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using femoral access sites in the United States. We believe our competitors’ vascular closure devices have not achieved full penetration of this market due to the limitations of their marketed devices, including device complexity and complication rates that are undifferentiated relative to manual compression. In clinical trials, most of the currently marketed vascular closure devices have been shown to result in potential major complications requiring surgical repair or blood transfusion and all of these devices have been shown to result in potential minor complications at rates that are not statistically superior to manual compression.

Electrophysiology procedures – mid-bore

Electrophysiology procedures represent a significant and rapidly growing segment of catheter-based interventional procedures. Technological advancements in interventional treatments and improvements in the diagnosis pathway are driving significant growth in the number of people treated with catheter-based electrophysiology procedures, which we define as including cardiac ablation and left atrial appendage closures, which treat electrical or structural abnormalities in the heart.

During electrophysiology procedures, multiple catheters are introduced through multiple femoral vein access sites to facilitate imaging, mapping, recording and ablation of the cardiac tissue causing the arrhythmia. The tools required for these procedures are larger in diameter than those used for coronary and peripheral procedures.

Manual compression is currently the primary method of vascular access site closure for electrophysiology procedures. Existing vascular closure devices are not approved or indicated for use for multiple access sites across multiple limbs. Similarly, the technical and design characteristics of existing marketed vascular closure devices limit the ability of physicians to repurpose them for this procedure category.

Limitations of manual compression for vascular access site closure and post-procedure care in electrophysiology procedures

Manual compression presents significant workflow challenges that are costly for the hospital. Following manual compression, patients are often on bed rest for approximately six to eight hours because any movement could dislodge the clot and cause serious complications. This lengthy time to ambulation is a significant reason for a longer or overnight hospital stay. It also increases the overall cost of the procedure and limits the hospital’s ability to drive throughput in an environment where procedure volume is increasing rapidly and capacity is constrained.

In addition, the lengthy immobilization period following the procedure requires urinary catheters which lead to patient dissatisfaction and an elevated risk of urinary tract infections. Similarly, approximately 50% of patients receive pain medication to manage back pain during bedrest, of which nearly 75% receive opioids.

Our solution

With our VASCADE family of products, we offer innovative, transformative solutions that address the key unmet needs in vascular closure for coronary, peripheral and electrophysiology procedures. Our VASCADE family of products currently consists of two products that use a common technology platform with identical mechanisms of action to deliver a fully resorbable collagen plug that seals the access site.

 

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The VASCADE family of products

VASCADE technology with disc deployed and abbreviated procedure steps*

 

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*   Figure presents procedure steps for VASCADE MVP, which are substantially similar to those for VASCADE.

VASCADE is indicated for both femoral arterial and venous vascular access site closure for patients who have undergone diagnostic or interventional endovascular procedures using a 5F, 6F or 7F procedural sheath, which encompasses coronary and peripheral procedures.

VASCADE MVP is the only marketed vascular closure device clinically proven and labeled for closure of multiple access sites for 6F to 12F inner diameter sheaths (up to 15F outer diameter). This labeling makes VASCADE MVP the only device that is approved for use in electrophysiology procedures that require multiple access sites for mapping and ablating cardiac arrhythmias.

Key advantages of VASCADE

 

 

Reduced access site complications. VASCADE is the only marketed vascular closure device clinically proven to both increase workflow efficiency and reduce access site complications compared to manual compression in coronary and peripheral procedures. We believe the significant reduction in access site complications is a key differentiator for VASCADE given the material cost burden for hospitals associated with these complications.

 

 

Value proposition supported by our performance guarantee. We reinforce our value proposition with the Performance Guarantee that provides customers with a fixed payment to share the cost of a qualifying complication. Despite the fact that our customers have an incentive to report complications, the reported qualifying complication rate has been less than 0.1% since the program’s inception in 2016.

 

 

Improved workflow relative to manual compression. In our RESPECT pivotal study, VASCADE demonstrated a statistically significant reduction relative to manual compression in time to hemostasis, time to ambulation and time to discharge eligibility. We believe these improvements are comparable to those demonstrated in clinical results for other vascular closure devices and support VASCADE’s ability to improve hospital workflow and throughput while also reducing complications.

Key advantages of VASCADE MVP

 

 

Improved hospital workflow. In our AMBULATE pivotal trial, VASCADE MVP demonstrated a statistically significant improvement relative to manual compression across key efficacy endpoints, including time to

 

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ambulation and time to discharge eligibility. We believe this improvement in clinical workflow is particularly valuable in the current environment where electrophysiology procedures in the United States have grown rapidly and hospitals are seeking opportunities to increase capacity and throughput. More recently, the COVID-19 pandemic has amplified the need for same day discharge following electrophysiology procedures, including atrial fibrillation ablation, which we believe has increased adoption of VASCADE MVP by hospitals, ambulatory surgery centers and other treatment facilities and will continue to be preferred by physicians, notwithstanding the impacts on our business from the COVID-19 pandemic described elsewhere in this prospectus.

 

 

Improved patient experience. VASCADE MVP is associated with a statistically significant improvement in pain and discomfort relative to manual compression. Our data also demonstrated a reduction in utilization of pain medication, including reduction in opioid usage, relative to manual compression.

 

 

Significant cost savings relative to manual compression. The AMBULATE IMPACT study utilized 2018 data from Medicare and peer reviewed literature to identify potential average savings of $1,200 to $2,300 per patient relative to manual compression due to shorter procedure and electrophysiology lab time, reduced complications, lower resource utilization (particularly from reduced nursing and other staff time) and reduced length of stay. The demand for same day discharge following electrophysiology procedures, including atrial fibrillation ablation, resulting from the COVID-19 pandemic also creates the conditions for increased savings from use of VASCADE MVP, as modeled in the AMBULATE IMPACT study. See “Business—VASCADE MVP clinical data—AMBULATE IMPACT.”

Our growth strategies

Our vision is to become the global leader in vascular closure. We seek to establish our VASCADE family of products as the standard of care by converting physicians using other vascular closure devices or manual compression to our VASCADE technology platform. Our growth strategies include:

 

 

Strategically expanding our U.S. sales force and marketing activities.

 

 

Increasing penetration in high volume cardiovascular sites in the United States.

 

 

Investing in market development to support VASCADE MVP as the standard of care for electrophysiology procedures.

 

 

Building our clinical evidence base.

 

 

Continuing to innovate our product portfolio to address emerging procedure categories.

 

 

Pursuing international markets.

Impact of the COVID-19 pandemic

Beginning in early March 2020, the COVID-19 pandemic and the measures imposed to contain this pandemic disrupted and are expected to continue to negatively impact our business, financial condition and results of operation. In March 2020, the State of California ordered all individuals in California to shelter in place and follow quarantine and social isolation measures, except as needed to maintain continuity of operations of certain essential businesses and sectors. Government authorities in California began re-opening and lifting or relaxing shelter-in-place restrictions in mid-2020, only to reverse some of these restrictions in the face of increases in the number of COVID-19 cases. Our primary operations are in Santa Clara, California. As a result of

 

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such order, most of our Santa Clara-based employees have been telecommuting during the pandemic, which has impacted and may continue to impact certain of our operations over the near and long term. Moreover, hospitals, ambulatory surgery centers and other treatment facilities reduced many elective procedures, resulting in a significantly reduced volume of procedures using our products, as described below. As a result of the interruptions to our business due to COVID-19, we had initiated a cash conservation program, which included delaying certain non-critical expenditures and other projects as well as implementing a hiring freeze for non-critical personnel, work hour and salary reductions and furloughs. Quarantines, shelter-in-place, and similar government orders have also impacted, and may continue to impact, our suppliers and manufacturing in Mexico, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain and finished goods inventory.

To prioritize treatment of COVID-19 patients and in response to governmental recommendations and requirements to suspend or reduce non-essential patient exposure to medical environments, hospitals, ambulatory surgery centers and other treatment facilities have at times reduced the volume of, and in some cases have suspended, many elective procedures. Many of these hospitals, ambulatory surgery centers and other treatment facilities have also suffered financially and operationally and experienced budgetary constraints as a result of the pandemic. Travel restrictions and social distancing policies, orders and restrictions have also resulted in patients and providers delaying or cancelling procedures that use our products. These and other factors have resulted in significantly reduced utilization of our products. Specifically, beginning in March 2020 and through April 2020, we observed a substantial reduction in the volume of procedures that use our products, resulting in a substantial decline in sales volumes for our products. However, beginning in early May 2020, our sales volumes began increasing compared to COVID-19 related low points in late March 2020 and the month of April 2020 and exceeded pre-COVID-19 levels in the third quarter of 2020, driven primarily by increases in sales of VASCADE MVP. This was due to increased elective procedure volumes as compared to COVID-19 related low points in late March 2020 and the month of April 2020, including as patients began to schedule procedures that use our products again after previous cancellations or postponements due to the pandemic, and the amplified need for same day discharge and other workflow improvements as a result of the COVID-19 pandemic, which we believe has increased adoption of our products by hospitals, ambulatory surgery centers and other treatment facilities. As a result of these trends, during July, we discontinued furloughs and salary reductions and resumed our previously planned growth investments. Although no assurance can be given that these trends will continue, we are encouraged by the signs of recovery of our business in the third quarter of 2020, and we believe the following factors are contributing to the stabilization of our business.

 

 

Continued opening of new accounts and penetration of existing accounts; and

 

 

Hospitals, ambulatory surgery centers and other treatment facilities beginning to accept patients for elective procedures.

In response to the COVID-19 pandemic, we have implemented a variety of measures intended to help us manage through its impact and maintain our operations. These measures include:

 

 

Establishing safety protocols, facility enhancements, and work-from-home strategies to protect our employees;

 

 

Ensuring that our manufacturing and supply chain operations remain intact and operational;

 

 

Initiating cash conservation measures, which were no longer necessary in July 2020 and suspended at that time;

 

 

Keeping our workforce intact and continuing to build our team for critical hires;

 

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Continuing to focus on new accounts and penetration of existing accounts;

 

 

Increasing our capital and liquidity by $44.5 million in net proceeds from a redeemable convertible preferred stock financing from existing and new investors in June 2020; and

 

 

Continuing to invest in research and development activities in order to advance our clinical programs.

Despite the encouraging signs of recovery of our business, we believe the precautionary measures and challenges resulting from COVID-19 will likely continue for the duration of the pandemic, which is uncertain, and will continue to negatively impact our business, financial condition and results of operations while the pandemic continues. As a result, we cannot assure you that our recent increase in revenue relative to COVID-19-related low points earlier this year or our sales levels in the third quarter of 2020 is indicative of future results or that we will not experience additional negative impacts associated with COVID-19, which could be significant. For example, the recent increase in revenue and sales volume, including in the third quarter of 2020, may be driven in part by patient backlog from cancellations or postponement of procedures that use our products due to the pandemic, which would be reduced in future periods. In addition, while we believe that hospitals, ambulatory surgery centers and other treatment facilities are generally more prepared to address COVID-19 cases than at the outset of the pandemic, any future spikes in cases in our target markets could reduce our sales volumes, including if hospitals, ambulatory surgery centers and other treatment facilities curtail elective procedures again and our sales volumes are reduced. Further, coronary and peripheral procedure volumes have not fully recovered to pre-COVID-19 levels notwithstanding recent increases, which will continue to negatively impact our sales of VASCADE. In addition, as certain of the procedures that use our products require patients to pay for the procedures in whole or in part where not covered by insurance, reductions in employment in our target markets have reduced, and may continue to reduce, sales and utilization of our products. The widespread pandemic has also resulted, and may continue to result for an extended period, in significant disruption of global financial markets, reducing our ability to access capital, which would negatively affect our liquidity. The extent to which the COVID-19 pandemic continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

If we fail to successfully address the challenges, risks and variables and other risks that we face, including the factors set forth above, our business, results of operations and prospects may be harmed. See “Risk factors—Risks related to our business and products—Our sales, business, financial condition and results of operations have been and continue to be impacted by the COVID-19 pandemic” and “Special note regarding forward-looking statements” for additional information regarding the challenges and risks we face as a result of the COVID-19 pandemic.

Recent Financial Results (Preliminary and Unaudited)

The data presented below reflect our preliminary estimated unaudited financial results for the three months and year ended December 31, 2020, based upon information available to us as of the date of this prospectus and actual unaudited financial results for the three months ended December 31, 2019. We have provided ranges, rather than specific amounts, for the preliminary estimates of the financial results presented below primarily because our financial closing procedures for the three months and year ended December 31, 2020 are not yet complete. The data are not a comprehensive statement of our results for these periods, and our actual results may differ materially from these preliminary estimated data. Our actual results remain subject to the completion of management’s and our audit committee’s reviews and our other financial closing processes as well as the completion and preparation of our consolidated financial data for the three months and year ended

 

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December 31, 2020. During the course of the preparation of our financial statements and related notes and the completion of the audit for the year ended December 31, 2020, additional adjustments to the preliminary estimated financial information presented below may be identified, and our final results for these periods may vary from these preliminary estimates. This preliminary estimated data should not be considered a substitute for the financial information to be filed with the Securities and Exchange Commission, or the SEC, in our Annual Report on Form 10-K for the year ended December 31, 2020 once it becomes available. See “Risk factors,” “Special note regarding forward-looking statements” and “Management’s discussion and analysis of financial condition and results of operations” for additional information regarding factors that could result in differences between these preliminary estimates and the actual financial results and other data we will report for the three months and year ended December 31, 2020.

The preliminary estimated unaudited financial and other data contained in this prospectus have been prepared in good faith by, and are the responsibility of, management based upon our internal reporting for the three months and year ended December 31, 2020. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to such preliminary data for the three months and year ended December 31, 2020 nor has PricewaterhouseCoopers LLP audited, reviewed, or compiled the financial information for the comparative three-month period ended December 31, 2019. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

 

     
     Three months ended
December 31,
    Year ended
December 31,
 
     2020
Estimated
     2019
Actual
    2020
Estimated
     2019
Actual
 
(in thousands)    Low      High    

Low

     High  

Revenue

   $                $                $ 9,737     $                $                $ 32,509  

Cost of revenue

   $        $        $ 2,650     $        $        $ 9,183  

Loss from operations

   $        $        $ (2,454   $        $        $ (8,928

 

 

Summary risk factors

Our business is subject to numerous risks and uncertainties, including those described in “Risk factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. These risks include, among others, the following:

 

 

Our sales, business, financial condition and results of operations have been and continue to be impacted by the COVID-19 pandemic.

 

 

We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we ever achieve profitability, we may not be able to sustain it.

 

 

Our success depends in large part on VASCADE and VASCADE MVP. If we are unable to successfully market and sell these products, our business prospects will be significantly harmed and we may be unable to achieve revenue growth or profitability.

 

 

We have limited commercial sales experience with VASCADE and VASCADE MVP, which makes it difficult to evaluate our business, predict our future prospects and forecast our financial performance and growth.

 

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Our commercial success will depend upon attaining significant market acceptance of VASCADE and VASCADE MVP among physicians, healthcare providers, hospitals and the medical community. If we are unable to successfully achieve substantial market acceptance and adoption of our products, our business, financial condition and results of operations would be harmed.

 

 

Various factors outside our direct control may negatively impact our manufacturing of VASCADE and VASCADE MVP, which could harm our business, financial condition and results of operations.

 

 

We depend on a limited number of single-source suppliers and vendors in connection with the manufacture our products, which makes us vulnerable to supply shortages and price fluctuations that could harm our business, financial condition and results of operations.

 

 

If we fail to grow or optimize our sales and marketing capabilities and develop widespread brand awareness cost-effectively, our growth will be impeded and our business may suffer.

 

 

We may be unable to compete successfully with larger companies or new technologies or vascular closure methods, including manual compression, in our highly competitive industry, which could harm our business, financial condition and results of operations.

 

 

We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could harm our business and negatively impact the value of our common stock.

 

 

Regulatory compliance is expensive, complex and uncertain, and a failure to comply could lead to enforcement actions against us and other negative consequences for our business.

 

 

If we are unable to obtain and maintain patent or other intellectual property protection for any products we develop or for our technology, or if the scope of the patent and other intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize any products we may develop, and our technology, may be harmed.

 

 

Concentration of ownership of our common stock among our executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

If we are unable to adequately address these and other risks we face, our business may be harmed.

Implications of being an emerging growth company and a smaller reporting company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we are an emerging growth company, we will not be required to comply with certain requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and may also take advantage of the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we may take advantage of certain reduced reporting obligations, including a requirement to have only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations

 

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disclosure in this prospectus. We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of many of these reduced burdens in this prospectus, and intend to do so in future filings. As a result, the information that we provide stockholders may be different than you might get from other public companies in which you hold equity. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to avail ourselves of this exemption.

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; the last day of the fiscal year in which we qualify as a “large accelerated filer;” the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year in which the fifth anniversary of this offering occurs.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million as of the last business day of the second fiscal quarter or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Corporate information

We were incorporated under the laws of the state of California in July 2002 under the name Cardiva Medical, Inc. and were reincorporated under the laws of the state of Delaware in November 2010. Our principal executive offices are located at 1615 Wyatt Drive, Santa Clara, California 95054. Our telephone number is (408) 470-7170. Our website is www.cardivamedical.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

“Cardiva Medical,” “VASCADE,” “VASCADE MVP,” the Cardiva Medical logo and our other registered or common law trade names, trademarks or service marks appearing in this prospectus are our property. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and tradenames referred to in this prospectus appear without the ® and symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

 

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The offering

 

Common stock offered by us

            shares

 

Option to purchase additional shares of common stock from us

            shares

 

Common stock to be outstanding after this offering

            shares (or             shares if the underwriters exercise their option to purchase additional shares in full)

 

Use of proceeds

We estimate that the net proceeds from the sale of             shares of common stock in this offering will be approximately $            million (or approximately $            million if the underwriters exercise their option to purchase additional shares in full), based upon an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering to fund sales and marketing activities to support the ongoing commercialization of our products, to fund research and development activities, to pay scheduled interest on borrowings under our loan and security agreement, as amended, with Solar Capital, Ltd. and Western Alliance Bank, or the Loan Agreement, to pay success fees due to the lenders under the Loan Agreement upon the closing of this offering, and the remainder for working capital and other general corporate purposes. We may also use a portion of the remaining net proceeds, if any, to acquire or invest in complementary businesses, technologies or other assets, although we currently have no agreements or understandings with respect to any such acquisitions or investments. See “Use of proceeds” for additional information.

 

Risk factors

See “Risk factors” and the other information included in this prospectus for a discussion of risks you should carefully consider before investing in our common stock.

 

Proposed New York Stock Exchange trading symbol

“                ”

The number of shares of common stock that will be outstanding after this offering is based on             shares of common stock outstanding as of September 30, 2020 (including our preferred stock on an as-converted basis, the issuance of shares of common stock in lieu of payment of cumulative and undeclared dividends on our preferred stock and shares of common stock issuable upon the net exercise of certain outstanding warrants, each as described below), and excludes:

 

 

16,092,088 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020 with a weighted-average exercise price of $0.30 per share, under our equity incentive plans;

 

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370,306 shares of common stock issuable upon the exercise of stock options granted subsequent to September 30, 2020 through                 , 2021 with a weighted-average exercise price of $0.62 per share, under our 2014 Equity Incentive Plan, or the 2014 Plan;

 

 

2,063,994 additional shares of common stock reserved for future issuance under our 2014 Plan as of September 30, 2020 (after giving effect to the issuance of stock options granted subsequent to September 30, 2020 to purchase 370,306 shares of common stock described above) all of which shares will cease to be available for issuance at the time our 2021 Equity Incentive Plan, or the 2021 Plan, becomes effective upon the execution of the underwriting agreement for this offering;

 

 

263,809 shares of Series 3 and 4 preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2020 with an exercise price of $1.25 per share, which will convert into warrants to purchase common stock upon the closing of this offering;

 

 

                 additional shares of common stock issuable upon the exercise of warrants to purchase 191,689 shares of Series 3 preferred stock outstanding as of September 30, 2020 at anytime following the closing of this offering in connection with their anti-dilution provisions (see “Dividend policy”);

 

 

448,842 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2020 with an exercise price of $0.07 per share;

 

 

                 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

 

                 shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or the ESPP, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

Unless we specifically state otherwise, all information in this prospectus reflects and assumes:

 

 

that our amended and restated certificate of incorporation, which we will file in connection with the closing of this offering, and our amended and restated bylaws adopted in connection with this offering are effective, which will result in, among other things, an increase in the number of authorized shares of our capital stock to 1,010,000,000 shares, including an increase in the number of authorized shares of common stock to 1,000,000,000 shares;

 

 

the conversion of all outstanding shares of preferred stock, of which 117,000,243 shares were outstanding as of September 30, 2020, into                  shares of common stock upon the closing of this offering, together with the concurrent issuance of                  shares of common stock in lieu of $                  million of accumulated and undeclared dividends through the closing of this offering, or the Dividend Share Issuance, based on an assumed closing date of this offering of                 , 2021 and the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus (see “Dividend policy”);

 

 

the net exercise of warrants to purchase 3,741,351 shares of Series 5 preferred stock, with an exercise price of $1.00 per share, outstanding as of September 30, 2020 prior to the closing of this offering that would otherwise expire upon the closing of this offering, which will result in the issuance of                  shares of Series 5 preferred stock that will convert into an equal number of shares of common stock upon the closing

 

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of this offering (based on the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus);

 

 

the conversion of remaining warrants outstanding as of September 30, 2020 to purchase 263,809 shares of Series 3 and 4 preferred stock into warrants to purchase an equal number of shares of common stock upon the closing of this offering;

 

 

no exercise of outstanding options or warrants, other than as provided for above; and

 

 

no exercise of the underwriters’ option to purchase additional shares of common stock.

 

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Summary financial data

The following tables summarize our financial and other data. The summary statements of operations and comprehensive loss data for the years ended December 31, 2018 and 2019 have been derived from our audited financial statements included elsewhere in this prospectus. The summary statements of operations and comprehensive loss data for the nine months ended September 30, 2019 and 2020, and the summary balance sheet data as of September 30, 2020, are derived from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year ending December 31, 2020, or any other period. You should read the financial and other data set forth below in conjunction with our financial statements and the accompanying notes, the information in “Selected financial data” and the information in “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus.

 

     
    Year ended December 31,     Nine months ended
September 30,
 
(in thousands, except share and per share data)   2018     2019    

2019

    2020  

Statements of operations and comprehensive loss data:

       

Revenue

  $ 21,075     $ 32,509     $ 22,772     $ 31,030  

Cost of revenue

    5,992       9,183       6,533       8,222  
 

 

 

   

 

 

 

Gross profit

    15,083       23,326       16,239       22,808  

Operating expenses:

       

Selling, general and administrative

    19,399       26,461       18,627       24,911  

Research and development

    6,556       5,793       4,086       5,492  
 

 

 

   

 

 

 

Total operating expenses

    25,955       32,254       22,713       30,403  
 

 

 

   

 

 

 

Loss from operations

    (10,872     (8,928     (6,474     (7,595

Interest expense

    (2,124     (2,960     (2,118     (3,417

Other (expense) income, net

    (1,525     (938     (414     1,724  
 

 

 

   

 

 

 

Loss before provision for income taxes

    (14,521     (12,826     (9,006     (9,288

Provision for income taxes

    (47     (103     (81     (80
 

 

 

   

 

 

 

Net loss and comprehensive loss

    (14,568     (12,929     (9,087     (9,368

Redeemable convertible preferred stock cumulative and undeclared dividends

    (9,400     (9,400     (7,031     (7,866
 

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (23,968   $ (22,329   $ (16,118   $ (17,234
 

 

 

   

 

 

 

Net loss per share outstanding attributable to common stockholders, basic and diluted(1)

  $ (9.67   $ (5.36   $ (3.87   $ (4.04
 

 

 

   

 

 

 

Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted

    2,478,127       4,169,066       4,160,370       4,270,801  
 

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(1)

       
   

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted

       

 

   

 

 

 

 

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(1)   See Note 11, “Net loss per share attributable to common stockholders,” to our financial statements included elsewhere in this prospectus for further information on the calculation of net loss per share attributable to common stockholders and pro forma net loss per share attributable to common stockholders.

 

   
     As of September 30, 2020  
(in thousands)    Actual     Pro forma(1)      Pro forma
as adjusted(2)(3)
 
        

Balance sheet data:

       

Cash

   $ 53,353     $                            $                            

Working capital

     59,020       

Total assets(4)

     71,278       

Long-term debt(5)

     40,809       

Redeemable convertible preferred stock warrant liability

     2,292       

Total liabilities(4)

     52,962       

Redeemable convertible preferred stock

     154,672       

Accumulated deficit

     (154,240     

Total stockholders’ (deficit) equity

     (136,356     

 

 
(1)   The pro forma balance sheet data give effect to (i) the conversion of all outstanding shares of redeemable convertible preferred stock, of which 117,000,243 shares were outstanding as of September 30, 2020, into                  shares of common stock upon the closing of this offering, together with the concurrent issuance of                  shares of common stock in the Dividend Share Issuance, based on an assumed closing date of this offering of                 , 2021 and the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus (see “Dividend policy”); (ii) the reclassification of the redeemable convertible preferred stock warrant liability to total stockholders’ equity as outstanding warrants to purchase 263,809 shares of Series 3 and 4 redeemable convertible preferred stock will become warrants to purchase an equal number of shares of common stock upon the closing of this offering; (iii) the issuance of                shares of Series 5 redeemable convertible preferred stock upon the net exercise of outstanding warrants as of September 30, 2020 to purchase 3,741,351 shares of Series 5 redeemable convertible preferred stock, with an exercise price of $1.00 per share, prior to the closing of this offering, which warrants would otherwise expire upon the closing of this offering, based on the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, and the conversion of such shares of Series 5 redeemable convertible preferred stock into an equal number of shares of common stock upon the closing of this offering, and the resulting reclassification of the redeemable convertible preferred stock warrant liability relating to such warrants to total stockholders’ equity; and (iv) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering, which will result in (1) an increase in the number of authorized shares of our capital stock to 1,010,000,000 shares, including an increase in the number of authorized shares of common stock to 1,000,000,000 shares and (2) the retirement of our authorized redeemable convertible preferred stock that will convert to common stock as set forth in clause (i) above.
(2)   The pro forma as adjusted balance sheet data give further effect to our receipt of net proceeds from the sale of                shares of common stock at the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds from this offering to pay $1.2 million in success fees under the Loan Agreement upon the closing of this offering.
(3)   Each $1.00 increase (decrease) in the assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease), respectively, the amount of cash, working capital, total assets and total stockholders’ equity by $                million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase (decrease) the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the amount of cash, working capital, total assets and total stockholders’ equity by $                million, assuming the assumed initial public offering price per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. The pro forma as adjusted information is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.
(4)   Balance sheet data as of September 30, 2020 reflect the application of ASC 2016-02, Leases (Topic 842) on January 1, 2018.
(5)   Net of discount and issuance costs of $2.0 million.

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all of the other information contained in this prospectus, including our financial statements and related notes, before investing in our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks related to our business and products

Our sales, business, financial condition and results of operations have been and continue to be impacted by the COVID-19 pandemic.

The global spread of the COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted the global economy. Given the uncertainty around the duration and extent of the COVID-19 pandemic, we expect the evolving COVID-19 pandemic to continue to adversely impact our business, results of operations, and financial condition and liquidity, but cannot accurately predict at this time the extent of the future potential impact on our business, results of operations, financial condition and liquidity.

Multiple states and local jurisdictions, have imposed and continue to maintain “shelter-in-place” and “safer-at-home” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread and ameliorate the impact of COVID-19. Such orders or restrictions, as well as the perceived need by individuals to continue such practices to avoid infection, among other factors, continue to result in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects. The states and countries in which our devices are made, manufactured, distributed or sold are in varying stages of restrictions and re-opening to address the COVID-19 pandemic. Certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases. We continue to monitor our operations and government mandates and may elect or be required to temporarily close our offices to protect our employees, and limit our access to customers. Our primary operations are in Santa Clara, California. As a result of shelter-in-place and quarantine orders issued by the State of California starting in March 2020, most of our Santa Clara-based employees have been telecommuting during the pandemic, which has impacted and may continue to impact certain of our operations over the near and long term. Certain U.S. governmental authorities have recommended, and in certain cases required, that various elective procedures that use our products be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of COVID-19 patients, which have resulted in the limitation of customer use of our products. The disruptions to our activities and operations have negatively impacted and will continue to negatively impact our business, operating results and financial condition. While we began to see signs of a recovery in our sales beginning in June 2020, there can be no assurance that this trend will continue for the reasons set forth below and as the COVID-19 pandemic continues to evolve. There is a risk that government actions will not be effective at containing COVID-19, and that government actions, including the orders and restrictions described above, that are intended to contain the spread of COVID-19 will have a devastating negative impact on the world economy at large, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.

The widespread pandemic has resulted, and may continue to result for an extended period, in significant disruption of global financial markets, reducing our ability to access capital, which would negatively affect our

 

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liquidity. In addition, if the COVID-19 pandemic results in a prolonged economic recession, it would continue to harm our sales and our ability to continue as a going concern. A prolonged economic contraction or recession may also result in employer layoffs of their employees in markets where we conduct business, which could result in lower demand for procedures that use our devices. In particular, as certain procedures that use our devices require patients to pay for the procedures in whole or in part where not covered by insurance, reductions in employment in our target markets have reduced, and may continue to reduce, utilization and sales of our devices.

Restrictions on the ability to travel, social distancing policies, orders and restrictions, including those described above, and recommendations and fears of COVID-19 spreading within medical environments, hospitals, ambulatory surgery centers and other treatment facilities continue to cause both patients and providers to delay or cancel procedures that use our devices, which has harmed and will likely continue to harm our sales, results of operations and financial condition. We are unable to accurately predict when these policies, orders and restrictions will be relaxed or lifted, and there can be no assurances that patients or providers will restart procedures that use our devices upon termination of these policies, orders and restrictions, particularly if there remains any continued community outbreak of COVID-19. Health systems and other healthcare providers in our markets that provide procedures that use our devices have also suffered financially and operationally and may not be able to return to pre-pandemic levels of operations following a slowdown in the pandemic, which would harm the recovery of our sales as well. Further, while we believe health systems and other healthcare providers are generally more prepared to address COVID-19 cases than at the outset of the pandemic, any future spikes in cases in our target markets could further reduce our sales volumes, including if hospitals, ambulatory surgery centers and other treatment facilities curtail elective procedures again. In addition, coronary and peripheral procedure volumes have not fully recovered to pre-COVID-19 levels, and there is no assurance that volumes will return to pre-COVID-19 levels in the near term or at all. Our devices are often perceived as physician preference devices with a relatively higher price point compared to certain vascular closure alternatives such as sutures or manual compression. Due to budgetary constraints resulting from the pandemic, hospitals, ambulatory surgery centers and other treatment facilities may perceive our devices to be too costly compared to certain vascular closure alternatives, including manual compression or sutures (including figure-of-eight sutures), which are relatively lower cost.

Quarantines or government reaction or shutdowns for COVID-19 could disrupt our supply chain. Travel and import restrictions may also disrupt our ability to manufacture or distribute our devices. Any import or export or other cargo restrictions related to our devices or the raw materials used to manufacture our devices would restrict our ability to manufacture and ship devices and harm our business, financial condition and results of operations. In particular, certain components and materials used to manufacture our devices are exported from the United States to our manufacturing facility in Mexico, and we import finished devices into the United States prior to delivery to customers. Any import or export or other cargo restrictions related to Mexico would restrict our ability to manufacture and ship products and harm our business, financial condition and results of operations. Our key personnel and other employees could also be affected by COVID-19, potentially reducing their availability, and an outbreak such as COVID-19 or the procedures we take to mitigate its effect on our workforce, including cost saving measures we have instituted to date, could reduce the efficiency of our operations or prove insufficient. We have delayed and reduced, and may continue to delay or reduce certain capital spending and related projects until the travel and logistical impacts of COVID-19 are lifted, which will delay the completion of such projects.

In addition, the conduct of clinical trials, such as the AMBULATE Same Day Discharge study, may be affected by the COVID-19 pandemic. Site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 outbreak. Some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. COVID-19 restrictions may also delay

 

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the timing of regulatory reviews and approvals as regulators in various jurisdictions may have reduced staffing and capability. Delays in our AMBULATE Same Day Discharge study may harm our sales and marketing efforts for, and market penetration of, VASCADE MVP, which would harm our sales, business and results of operations. While we have suspended our prior cash conservation program, any future capital resource constraints resulting from the effects of the COVID-19 pandemic, including reduced sales levels, could require us to prioritize certain growth and operational projects over others, which may harm our future growth strategies, sales, business and results of operations.

We rely on strong working relationships with physicians and other medical professionals, as well as the support of key opinion leaders, to market our devices. A key aspect of our sales and marketing strategy for physician acceptance of our devices is to have one or more of our devices approved for us by a hospital’s value analysis committee, which requires long-term sponsorship from hospital physicians and initial adoption of our products by one hospital department to increase awareness and familiarity with other departments. Our sales and marketing personnel rely significantly on in-person and onsite access to healthcare providers and hospital value analysis committees, which has been restricted as hospitals reduce access to essential personnel only. The COVID-19 pandemic has restrained, and will likely continue to restrain, access to physicians and healthcare providers by our sales and marketing team, which will harm our ability to obtain approval by hospitals to use our products. These restrictions have harmed our sales and marketing efforts, and continued restrictions would have a negative impact on adoption of our devices and, as a result, our sales, results of operations and financial condition. In addition, an increase of COVID-19-related hospital admissions may overload hospitals with unexpected patients, thereby delaying further procedures that use our devices but that are deemed elective by the hospital. Limited supplies of personal protective equipment and COVID-19 testing supplies may further reduce onsite access for our personnel and may delay the lifting of restrictions on elective procedures, including those that use our devices. In addition, we have previously made reductions to salary and work hour reductions as well as employee furloughs in response to the COVID-19 pandemic, and, while these actions have been eliminated and restored back to pre-COVID-19 practices, we may in the future take similar actions, as a result of potential future negative effects of the COVID-19 pandemic, including reductions to salary and work hours, furloughs, restructuring or layoffs which may negatively impact our workforce and our business.

The global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as a whole. However, these effects have harmed our business, financial condition and results of operations in the near term and could have a continuing negative impact on our operations and sales and potentially our ability to continue as a going concern.

We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we ever achieve profitability, we may not be able to sustain it.

We have incurred losses since our inception, and expect to continue to incur losses for the foreseeable future. For the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, we reported net losses of $14.6 million, $12.9 million and $9.4 million, respectively. As a result of these losses, as of September 30, 2020, we had an accumulated deficit of $154.2 million. We expect to continue to incur significant sales and marketing, research and development and other expenses as we expand our sales and marketing efforts to increase adoption of our products, including through geographic expansion of sales territories, expand existing relationships with our customers, conduct additional clinical trials and studies on our existing products and develop new products or add new features to our existing products. In addition, we expect our selling, general and administrative expenses to increase following this offering due to the additional costs associated with being a public company. The net losses that we incur may fluctuate significantly from period to period. We will need to generate significant additional revenue and maintain or improve our gross margins in

 

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order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time.

Our success depends in large part on VASCADE and VASCADE MVP. If we are unable to successfully market and sell these products, our business prospects will be significantly harmed and we may be unable to achieve revenue growth or profitability.

Our future financial success will depend substantially on our ability to effectively and profitably market and sell VASCADE and VASCADE MVP. In particular, our near term success and revenue growth will depend on our ability to grow sales of, and expand adoption of, VASCADE MVP. There can be no assurance that our products will continue to gain market acceptance across the United States or internationally or maintain current levels of market share.

The commercial success of our products and any of our planned or future products will depend on a number of factors, including the following:

 

 

the actual and perceived effectiveness, safety and reliability, and clinical benefit, of our products, especially relative to alternative vascular closure products and methods, including manual compression or sutures;

 

 

the prevalence and severity of any adverse patient events involving our products;

 

 

the degree to which physicians, healthcare providers and hospitals adopt our products;

 

 

the continued effects of the COVID-19 pandemic;

 

 

the availability, relative cost and perceived advantages and disadvantages of alternative technologies or treatment methods for conditions treated by our products and vascular closure alternatives, including manual compression or sutures;

 

 

the results of additional clinical and other studies relating to the health safety, economic or other benefits of our products;

 

 

whether key thought leaders in the medical community accept that our clinical efficacy and safety results are sufficiently meaningful to influence their decision to adopt our products over vascular closure alternatives, including manual compression, and products offered by our competitors which may be more established or less costly to hospitals or patients;

 

 

the extent to which we are successful in educating physicians and healthcare providers about the benefits of our products;

 

 

our reputation among physicians, healthcare providers and hospitals;

 

 

the strength of our marketing and distribution infrastructure, including our ability to obtain and maintain approval by value analysis committees of existing or potential customers and to identify and target growth opportunities in the eastern and central regions of the United States and efficiently expand our sales territories in the western United States;

 

 

our ability to obtain, maintain, protect and enforce our intellectual property rights in and to our products over vascular closure alternatives;

 

 

our ability to maintain compliance with all regulatory requirements applicable to our products;

 

 

our ability to continue to maintain a commercially viable manufacturing process at our Mexican manufacturing facility that is compliant with current Good Manufacturing Practices, or cGMP, and Quality Systems Regulations, or QSR; and

 

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our ability to maintain our contractual relationships with Offshore International Incorporated (d/b/a Tetakawi), or Tetakawi, through which we lease our manufacturing facility in Mexico, and our vendors and component suppliers, including single-source vendors and suppliers, such as DSM Biomedical, Inc., or DSM, through which we obtain resorbable collagen plugs for our devices.

If we fail to successfully market and sell our products cost-effectively and maintain and expand our market share, we will not be able to achieve profitability, which will harm our business, financial condition and results of operations. Our ability to grow our revenue in future periods will depend on our ability to successfully penetrate our target markets and increase sales of our products, which will, in turn, depend in part on our success in driving physician adoption of our products and driving increased use of our products. In particular, if we fail to continue sales growth and market adoption of VASCADE MVP, our revenue and business will be harmed. If we cannot achieve revenue growth, our business, financial condition and results of operations would be harmed.

We have limited commercial sales experience with VASCADE and VASCADE MVP, which makes it difficult to evaluate our business, predict our future prospects and forecast our financial performance and growth.

We have limited commercial sales experience with VASCADE and VASCADE MVP. We have historically only marketed and sold VASCADE to customers in the eastern and central regions of the United States and only recently began marketing and selling VASCADE in the western United States. In addition, we did not begin commercializing VASCADE MVP until the fourth quarter of 2018, when it received its PMA from the FDA. Prior to that date, substantially all of our revenue has been derived from sales of VASCADE. VASCADE MVP is the only marketed vascular closure device indicated for closure of single or multiple venous access sites in the size range that encompasses electrophysiology procedures. Physician awareness of VASCADE MVP, and clinical experience with VASCADE MVP, is limited. As a result, VASCADE MVP has limited product and brand recognition, particularly as compared to alternative vascular closure methods used in electrophysiology procedures, such as sutures, which may be less costly or more established within the medical community. The novelty of VASCADE MVP for electrophysiology procedures, our limited commercialization experience with VASCADE MVP, and until recently, our lack of commercialization experience with both VASCADE and VASCADE MVP beyond the eastern and central regions of the United States, make it difficult to evaluate our business and predict our future financial performance and growth. While we have observed growth in sales of VASCADE MVP during recent periods notwithstanding the COVID-19 pandemic, there can be no assurance that such growth will continue or be sustained given our limited experience in marketing VASCADE MVP and our dependence on increasing market acceptance of VASCADE MVP, among other factors. If our assumptions regarding the risks and uncertainties we face are incorrect or change due to circumstances in our business or our markets, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ from our expectations and our business could suffer. In addition, we plan to devote significant resources to market VASCADE MVP to customers to increase market awareness, which may assist the acceptance and adoption of VASCADE at the same customers, and expand our sales and marketing efforts across the United States for both VASCADE and VASCADE MVP. As a result, any factors that negatively impact VASCADE MVP, result in a decrease in sales of VASCADE MVP, or impede our expanded sales and marketing efforts could harm our business, financial condition and results of operations.

Our commercial success will depend upon attaining significant market acceptance of VASCADE and VASCADE MVP among physicians, healthcare providers, hospitals and the medical community. If we are unable to successfully achieve substantial market acceptance and adoption of our products, our business, financial condition and results of operations would be harmed.

Our commercial success will depend in large part on the acceptance by physicians, healthcare providers, patients and hospitals of VASCADE and VASCADE MVP as safe, useful and cost-effective. We cannot predict how quickly, if at all, physicians, healthcare providers and hospitals will accept our products over competing

 

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vascular closure devices or methods of vascular closure. For example, physicians may be reluctant to use our products due to familiarity with alternative closure devices that are more established or manual compression, which remains the standard of care for many procedures involving vascular closure. Physicians and healthcare providers, or value analysis committees at their hospitals, may also perceive our products to be too costly compared to other vascular closure products or vascular closure alternatives, including manual compression or sutures (including figure-of-eight sutures), which are highly cost-efficient, or may believe that the benefits of our products as demonstrated in their instructions for use, or IFUs, and results from pivotal clinical trials, such as access site complication rates and relative ease of use, are not sufficiently greater than those for vascular closure alternatives to justify our products’ relatively higher pricing. This perception has been and may continue to be heightened due to the ongoing COVID-19 pandemic and resulting budgetary and financial constraints faced by hospitals and other treatment facilities. Our ability to grow sales of our products and drive market acceptance will depend on successfully educating physicians, healthcare providers and hospitals of the relative benefits of our products and their cost-effectiveness.

Before physicians and healthcare providers can use our products, our products must be approved for use by a hospital’s value analysis committee, which can be a lengthy and uncertain process. In addition, even after one or more of our products obtains value analysis committee approval at a hospital, our products must still be adopted for use by various departments at the hospital. This further requires long-term sponsorship from hospital physicians and initial adoption of our products by one hospital department to increase awareness of and familiarity with our products at other departments. Because we offer physician preference products with a relatively higher price point, we depend on the belief of physicians and healthcare providers that our products offer benefits over manual compression or alternative closure devices and willingness of these physicians and healthcare providers to champion our products in the value analysis committee approval process and later adoption efforts across the target hospital. The COVID-19 pandemic has restrained, and will likely continue to restrain, access to physicians and healthcare providers by our sales and marketing team, which will harm our ability to obtain approval by hospitals to use our products. Failure to obtain such approvals or individual department adoption of our products could deter or delay the use of our products by physicians. We cannot provide assurances that our efforts to obtain such approvals will be successful or increase the use of our products. As a result, our products may never gain broad market acceptance among physicians and the medical community in coronary, peripheral and electrophysiology procedures.

The degree of market acceptance of our products will depend on a number of additional factors, including:

 

 

product labeling or product insert requirements by the FDA or other regulatory authorities;

 

 

limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities;

 

 

pricing or cost of our products in relation to alternative vascular closure products and methods;

 

 

the convenience and ease of use of our products relative to alternative vascular closure methods, including manual compression and sutures;

 

 

efficacy or safety issues associated with vascular closure devices marketed by our competitors;

 

 

the availability of coverage and adequate reimbursement for procedures using our products from third-party payers, including government authorities;

 

 

our ability to provide incremental clinical and economic data that show the safety, clinical efficacy and cost effectiveness of, and patient benefits from, our products; and

 

 

the effectiveness of our sales and marketing efforts for our products.

 

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Manual compression has historically been the standard of care for vascular access site closure for coronary, peripheral and electrophysiology procedures. In particular, manual compression is the primary method of vascular access site closure for electrophysiology procedures, given that existing vascular closure devices (other than VASCADE MVP) are not approved or indicated for use for multiple access sites across multiple limbs. In the United States, approximately 31% of all coronary and peripheral procedures utilized manual compression in 2019. Physicians and healthcare providers, or value analysis committees at their hospitals, may continue to prefer manual compression over vascular closure devices, including our products, due to the relatively lower cost of manual compression and their familiarity with this method, particularly during the COVID-19 pandemic when hospitals and medical centers are seeking to reduce costs even with the benefits of same day discharge associated with VASCADE MVP. If we are unable to successfully achieve substantial market acceptance and adoption of our products over manual compression, our business, financial condition and results of operations would be harmed.

In the United States, approximately 70% of all coronary and peripheral procedures utilize femoral access, for which VASCADE and VASCADE MVP are indicated, with the remaining approximately 30% utilizing radial access or access through other arteries to reach the vasculature. Our continued growth in market share for our products will depend in part on physicians and other healthcare providers switching from radial access to femoral access for these procedure categories. While we intend to continue marketing efforts to educate physicians and other healthcare providers about the clinical benefits and ease of use of our products, we have limited control over physicians’ and other healthcare providers’ preferred methods of access to the vasculature. Moreover, future clinical evidence or research may suggest benefits of radial access over femoral access to the vasculature. If physicians or healthcare providers do not switch from radial access to femoral access, or determine that radial access is preferred over femoral access, our potential market opportunity may be limited, which could harm our business, financial condition and results of operations. Even if our products achieve market acceptance, they may not maintain that market acceptance over time if competing products or technologies, which are more cost effective or received more favorably, are introduced. Further, the growth of the overall U.S. market for these procedures has historically been relatively slow. As a result, our commercial success and revenue growth will be highly dependent on our ability to achieve greater market share of our products within this market. Failure to achieve or maintain market acceptance or market share would limit our ability to generate revenue and would significantly harm our business, financial condition and results of operations.

Various factors outside our direct control, including the COVID-19 pandemic, may negatively impact our manufacturing of VASCADE and VASCADE MVP, which could harm our business, financial condition and results of operations.

We manufacture our products at our leased manufacturing facility in Guaymas, Mexico. This facility supports our production operations, including manufacturing, quality control, raw material and finished goods storage. We are party to a shelter plan service agreement, or the Shelter Agreement, with Tetakawi, pursuant to which we lease our manufacturing facility from Tetakawi. Under the Shelter Agreement, Tetakawi is also responsible for a number of ongoing services related to the facility, including provision of external security and maintenance, manufacturing personnel related human resource matters, recruiting support, government compliance, workforce transportation and cross-border shipping of raw components.

We believe that we currently have adequate manufacturing capacity for our products sufficient to meet our demand forecasts. If demand for our products increases more rapidly than we anticipate, or if we secure regulatory approval to commercialize our products in additional geographies, we will need to either expand our manufacturing capabilities or outsource to other manufacturers. While we have additional production lines undergoing validation at our manufacturing facility to provide additional throughput capacity, there can be no assurances that these additional production lines will be successfully validated or will be sufficient to meet customer demand in the future.

 

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The manufacture of our products in compliance with ISO standards and the FDA’s regulations requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of medical device products often encounter difficulties in production, including difficulties with production costs and yields, quality control, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced FDA requirements, other federal and state regulatory requirements, and foreign regulations. If we fail to manufacture our products in compliance with ISO standards and the FDA’s regulations, or if our manufacturing facility suffers disruptions, machine failures, slowdowns or disrepair, we may not be able to fulfill customer demand and our business would be harmed. Further, we typically do not maintain excess product inventory on hand and manufacture products using near term demand forecasts and customer orders. As a result, deviations from our forecasts or large unexpected customer orders may result in delays in fulfilling customer orders, which would cause customer dissatisfaction and may harm our reputation. Finally, as our manufacturing facility is located in Mexico, failure to comply with local laws, regulations and standards, including failure of Tetakawi to comply, which is outside of our control, may subject us to legal and regulatory scrutiny, proceedings and penalties from Mexican authorities.

Since we produce our products in one manufacturing facility, any contamination of the controlled environment, equipment malfunction or failure to strictly follow procedures can significantly reduce our yield. A drop in yield can increase our cost to manufacture our products or, in more severe cases, require us to halt the manufacture of our products until the problem is resolved. Identifying and resolving the cause of a drop in yield can require substantial time and resources. In addition, if demand for our products shifts such that a manufacturing facility is operated below its capacity for an extended period, we may adjust our manufacturing operations to reduce fixed costs, which could lead to uncertainty and delays in manufacturing times and quality during any transition period.

The manufacturing, sterilization and distribution of VASCADE and VASCADE MVP are technically challenging. Changes that our suppliers may make, or additional requirements from regulatory agencies, outside of our direct control can have an impact on our processes, on quality and on the successful delivery of products to our customers. Mistakes and mishandling are not uncommon and can affect supply and delivery. As a result, our dependence on third-party suppliers subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:

 

 

interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations, including due to the COVID-19 pandemic;

 

 

delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s failure to produce components that consistently meet our quality specifications;

 

 

delays in analytical results or failure of analytical techniques that we depend on for quality control and release of products;

 

 

price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;

 

 

inability to obtain adequate supply in a timely manner or on commercially reasonable terms;

 

 

difficulty identifying and qualifying alternative suppliers for components in a timely manner;

 

 

inability of suppliers to comply with applicable provisions of the QSR or other applicable laws or regulations enforced by the FDA and state regulatory authorities;

 

 

inability to ensure the quality of products manufactured by third parties;

 

 

latent defects that may become apparent after products have been released and that may result in a recall of such products;

 

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inclusion of vendors of raw materials not in compliance with ISO-13485 requirements;

 

 

natural or other disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other forms of disruption to business operations affecting our manufacturer or its suppliers;

 

 

production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

 

 

failure to complete sterilization on time or in compliance with the required regulatory standards; and

 

 

delays in delivery by our suppliers due to changes in demand from us or their other customers.

The occurrence of any of these issues could significantly harm our ability to manufacture our products and maintain sufficient quality standards, which would negatively impact our business and results of operations.

We depend on a limited number of single-source suppliers and vendors in connection with the manufacture of our products, which makes us vulnerable to supply shortages and price fluctuations that could harm our business, financial condition and results of operations.

We rely on single-source suppliers for certain components and materials used in our devices. We obtain the resorbable collagen plugs for our devices from DSM, a single-source supplier, with quality control standards established under a quality agreement with DSM. Our finished products undergo gamma irradiation sterilization by a single service provider, Sterigenics International, Inc., or Sterigenics, pursuant to a processing services agreement.

These components, materials and services are critical and there are no or relatively few alternative sources of supply. We believe our single source suppliers are capable of continuing to meet our specifications and maintaining quality, but any significant problem experienced by one of our sole source suppliers may result in a delay or interruption in the supply of components to us. Our suppliers may experience manufacturing delays or issues, stop producing our components, increase the prices they charge us, or elect to terminate their agreements with us. In any of these cases, we could face a delay of several months to identify and qualify alternative suppliers and service providers with regulatory authorities, as we do not currently have supplier transition plans. In addition, the failure of our third-party suppliers and service providers to maintain acceptable quality requirements could result in the recall of our products. If one of our suppliers fails to maintain acceptable quality requirements, we may have to identify and qualify a new supplier. Although we require our third-party suppliers to supply us with components that meet our specifications and comply with applicable provisions of the FDA’s QSR and other applicable legal and regulatory requirements in our agreements and contracts, and we perform incoming inspection, testing or other acceptance activities to ensure the components meet our requirements, there is a risk that our suppliers will not always act consistent with our best interests, and may not always supply components that meet our requirements or supply components in a timely manner.

We routinely prioritize, evaluate and qualify backup sources, but the number of third-party suppliers with the necessary manufacturing and regulatory expertise and facilities is limited and certification of a new supplier may be complex and time consuming. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. The inclusion of substitute components must meet our product specifications and could require us to qualify the new supplier with the appropriate regulatory authorities, including the FDA. The added time and cost to arrange for alternative suppliers could harm our business. New manufacturers of any planned product would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing the planned product. Obtaining the necessary FDA or international approvals or other qualifications under applicable

 

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regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs that may be passed on to us.

If we fail to grow or optimize our sales and marketing capabilities and develop widespread brand awareness cost-effectively, our growth will be impeded and our business may suffer.

We are actively expanding our presence in the United States through new U.S. sales territories in the western United States and at existing customers where we have value analysis committee approval and seek to drive further adoption of our products at additional departments. We may also expand our presence in international territories. We plan to take a measured approach to expand and optimize our sales infrastructure to grow our customer base and our business. Identifying and recruiting qualified personnel and training them on the use of our products, on applicable federal and state laws and regulations and on our internal policies and procedures, require significant time, expense and attention, particularly given our strategy of having each representative cover a large number of accounts. It can take significant time before our sales representatives are fully trained and productive. Our business may be harmed if our efforts to expand do not generate a corresponding increase in revenue or result in a decrease in our operating margin. In particular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

We plan to dedicate significant financial and other resources to our marketing programs, particularly as we expand our sales territories in the western United States, which may require us to incur significant upfront costs. For example, we will need to conduct additional healthcare provider and physician training seminars and sessions across a greater number of sales territories. Our existing sales force will also need to address additional potential accounts efficiently as we expand across the United States. The COVID-19 pandemic has limited, and will likely continue to limit, the activities of our sales force and progression of our marketing programs. Our business and gross margins would be harmed if our marketing efforts and expenditures do not generate a corresponding increase in revenue.

In addition, we believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving broad acceptance of our products and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and, even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our products.

We may be unable to compete successfully with larger companies or new technologies or vascular closure methods, including manual compression, in our highly competitive industry, which could harm our business, financial condition and results of operations.

There are numerous approved vascular closure devices and methods for coronary and peripheral procedures. Many of these cleared or approved products are well established and are widely accepted by physicians, healthcare providers, hospitals and patients. Third-party payers may encourage the use of competitors’ products or other vascular closure alternatives, including due to lower costs of competing products or alternatives. In addition, many companies are developing products, and we cannot predict what the standard of care will be in the future.

The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. There can be no assurance that other companies or institutions will not succeed in developing or marketing devices and products that are more

 

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effective, safer or easier to use than our products or that would render our products obsolete or noncompetitive. We compete with other manufacturers and distributors of vascular closure devices. Our main competitors in femoral access closure for coronary and peripheral procedures include Terumo (Angio-Seal), Abbott Laboratories (PerClose and StarClose), and Cardinal Health (MYNX and ExoSeal). There are not currently any competing vascular access site closure devices that are labeled for electrophysiology procedures. However, both VASCADE and VASCADE MVP compete with alternative vascular closure methods such as manual compression and sutures. Many of our competitors are large, well-capitalized companies with significantly greater market share and resources than ours. They are able to spend more on product development, marketing, sales and other product initiatives than we can and have greater name recognition. These competitors may also have established relationships with physicians and healthcare providers at our targeted customer health systems and hospitals and may have existing product approvals from hospital value analysis committees at our targeted customers or better relationships with hospital staff and management making those competitors better positioned to obtain approvals in the future. In addition to competing for market share, we also compete against these companies for personnel, including qualified sales and other personnel that are necessary to grow our business. As more companies develop new intellectual property in our market, there is the possibility of a competitor acquiring patents or other rights that may limit our ability to update our technologies and products which may impact demand for our products.

We believe that the clinical advantages of our products and our sole focus on vascular closure will be important factors in our future success. We compete primarily on the basis that our products offer a reduction in access site complications relative to competitive products and manual compression. Our continued success depends on our ability to, among other things:

 

 

maintain our products’ safety profile and continue reducing complication rates;

 

 

improve patient and physician or healthcare provider experience with our products, including ease of use, and time to ambulation and hemostasis;

 

 

continue building clinical evidence for our products, including related to their economic benefits and ability to generate cost savings;

 

 

encourage widespread adoption of our products;

 

 

increase acceptance of our products by physicians, healthcare providers and hospitals, including through physician sponsors at hospitals and health systems;

 

 

continue education of and marketing to patients, physicians, healthcare providers and hospitals; and

 

 

maintain intellectual property protection for our products.

In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or products that could effectively compete with our existing products, which may cause our revenue to decline and would harm our business. Our products may also compete with new vascular closure methods or technologies that may become widely accepted for vascular closure or that render our products obsolete. Further, physicians may use other vascular closure devices off-label, such as for multiple vascular access site closures in competition with VASCADE MVP.

Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, our products. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could harm our ability to commercialize our products, which would harm our business, financial condition and results of operations.

 

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Adoption of our products depends upon positive clinical data and physician acceptance, and negative clinical data or perceptions among physicians would harm our business.

The rate of adoption and sales of our products are heavily influenced by clinical data. Although we have positive clinical data from our pivotal clinical trials for VASCADE and VASCADE MVP, we have not conducted head-to-head clinical trials to compare our products to competing vascular closure devices, which may limit the adoption of our products. Finally, our competitors and third parties may also conduct clinical trials of our products without our participation. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, our competitors or third parties, the interpretation of our clinical data or findings of new or more frequent adverse events, could harm our business, financial condition and results of operations.

The rate of adoption and sales of our products are also influenced by physician perceptions, particularly given that our products are generally physician preference products. Negative physician perceptions of our products, including due to negative clinical data, could result in decreased adoption or use of our products, which would harm our business, financial condition and results of operations. Additionally, if key opinion leaders who support our products cease to recommend our products, our business, financial condition and results of operations will be harmed. Further, if we cannot maintain strong working relationships with physicians and other medical professionals and continue to receive their advice and input, the marketing of our products could suffer, which could harm our business, financial condition and results of operations. The COVID-19 pandemic and related restrictions on access to physicians and other medical professionals have impacted, and will likely continue to impact, our ability to maintain such relationships. Finally, although we have demonstrated the safety, effectiveness and clinical advantages of VASCADE MVP in pivotal clinical trials, VASCADE MVP is still a relatively new product for electrophysiology procedures with single or multiple access sites. The long-term effects of using VASCADE MVP in a large number of patients have not been studied and the results of short-term clinical use of such products do not necessarily predict long-term clinical benefits or reveal long-term adverse effects. We will also depend on the results of our ongoing and future studies, including our AMBULATE Same Day Discharge study, to market VASCADE MVP, given physician focus on same day discharge in electrophysiology procedures. The results of clinical trials of VASCADE MVP and from commercial use do not necessarily predict future results. Any negative long-term results or adverse events from use of VASCADE MVP that arise in the future could harm our business, financial condition and results of operations.

Our future success also depends upon patients having an experience with our products that meets their expectations in order to increase physician demand for our products as a result of positive feedback and word-of-mouth. Patients may be dissatisfied if their expectations of the procedure and results are not met. Patients may be dissatisfied if they experience adverse events such as significant access site bleeding, regardless of the complication rates published in our IFUs. If the results of our products do not meet the expectations of the patients, or the patient experiences adverse events, it could discourage the patient from referring our products to others. Dissatisfied patients may express negative opinions through social media. Any failure to meet patient expectations and any resulting negative publicity could harm our reputation and future sales.

Adequate reimbursement may not be available for the procedures that utilize our products, which could diminish our sales or affect our ability to sell our products profitably.

In both U.S. and non-U.S. markets, our ability to successfully commercialize and achieve market acceptance of our products depends, in significant part, on the availability of adequate financial coverage and reimbursement from third-party payers, including governmental payers (such as the Medicare and Medicaid programs in the United States), managed care organizations and private health insurers. Third-party payers decide which treatments they will cover and establish reimbursement rates for those treatments. We do not bill any third-party payers for our products. Instead, our products are bundled as part of the payment received by providers for the procedures in which our product is used. We expect our products to continue to be purchased by

 

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hospitals and other providers who will then seek reimbursement from third-party payers for the coronary, peripheral and electrophysiology procedures performed using our products. While third-party payers currently cover and provide reimbursement for procedures using our currently cleared or approved products, we can give no assurance that these third-party payers will continue to provide coverage and adequate reimbursement for the procedures using our products, to permit hospitals and doctors to offer procedures using our products to patients requiring treatment, or that current reimbursement levels for procedures using our products will continue. Third-party payers are increasingly examining the cost effectiveness of products, in addition to their safety and efficacy, when making coverage and payment decisions, which may negatively impact use of our products, which may be more expensive than competing products or alternative vascular closure methods such as manual compression or sutures. Furthermore, although we believe there is potential to improve on the current reimbursement profile for procedures that use our devices in the future, the overall amount of reimbursement available for coronary, peripheral and electrophysiology procedures could remain at current levels or decrease in the future. Additionally, we cannot be sure that the coronary, peripheral and electrophysiology procedures reimbursement amounts will not reduce or otherwise negatively impact the demand for our marketed products. Failure by hospitals and other users of our products to obtain coverage and adequate reimbursement for the procedures using our products would cause our business to suffer.

Use of our products requires appropriate physician and healthcare provider training, and inadequate training may lead to negative patient outcomes, which could harm our business.

The successful use of VASCADE and VASCADE MVP depends in part on the training and skill of the physician or healthcare provider performing the procedure and on adherence to appropriate patient selection and proper techniques. Physicians and healthcare providers could experience difficulty with the technique necessary to successfully perform vascular closure using our devices if they do not receive or conduct appropriate training. Moreover, physicians and healthcare providers rely on their previous medical training and experience when using our products, and we cannot guarantee that all such physicians or healthcare providers will have the necessary surgical skills to properly perform the procedure. We do not control which physicians or healthcare providers use our products or how much training they receive, and physicians or healthcare providers who have not completed our training sessions may nonetheless attempt to use our products. If physicians utilize our products incorrectly, or without adhering to or completing our training sessions, their patient outcomes may not be consistent with the outcomes achieved in our clinical trials. Our ability to provide training sessions has also been limited due to the COVID-19 pandemic and related restrictions on physician access. Adverse safety outcomes that arise from such improper or incorrect use of VASCADE may result in increased claims under our Performance Guarantee program. This result may negatively impact the perception of patient benefit and safety of our products, notwithstanding results from our pivotal clinical trials and as presented on IFUs for our products. For example, physicians and healthcare providers may perceive our products as having a worse safety profile due to access site complications caused by improper or incorrect use of our products. Further, physicians and healthcare providers who have experienced access site complications or other adverse events while using competing vascular closure devices may be averse to using any vascular closure devices, including our products, in the future, notwithstanding published access site complication rates in our IFUs and results demonstrated in clinic, instead favoring more traditional methods such as manual compression or sutures. These results could limit adoption of our products in coronary, peripheral or electrophysiology procedures, which will harm our business.

New tariffs and other trade measures could harm our financial results.

The current U.S. administration has expressed strong concerns about imports from countries that it perceives as engaging in unfair trade practices, and it is possible the administration could impose import duties or other restrictions on products, components or raw materials sourced from those countries, which may include Mexico. While we are not aware of any new import duties imposed on our products, any such new import duties

 

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or restrictions could harm our business, results of operations or financial condition. Moreover, these new tariffs, or other changes in U.S. trade policy, could trigger retaliatory actions by affected countries. Certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. Any new tariffs imposed by the U.S. administration could harm our business and results from operations.

Other foreign governments are considering the imposition of sanctions that will deny U.S. companies access to critical raw materials. A “trade war” of this nature or other governmental actions related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, manufacturers, suppliers and/or the economic environments in which we operate and, thus may adversely impact our businesses. In addition, there may be changes to existing trade agreements, like the North American Free Trade Agreement, or NAFTA, and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement, or USMCA, which is still subject to approval by the United States, Mexico and Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. Any changes to NAFTA (or subsequent trade agreements) could impact our operations in Mexico where we manufacture our products, which could harm our operating results and our business.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our products. The expense and potential unavailability of insurance coverage for liabilities resulting from our products could harm our business and our ability to sell our products.

We face an inherent risk of product liability as a result of the marketing and sale of our products. For example, we may be sued if our products cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, we rely on physicians and healthcare providers to properly and correctly use our products on patients. If these physicians or healthcare providers are not properly trained, are negligent in using our products or use our products “off-label,” the capabilities of our products may be diminished or the patient may suffer critical injury. We cannot prevent a physician from using our products for off-label applications. In addition, we cannot guarantee that physicians are trained by us or their peers prior to utilizing our products. Complications resulting from the use of our products off-label or use by physicians who have not been trained appropriately, or at all, may expose us to product liability claims and harm our reputation. In addition, any such complications or adverse safety outcomes following use of VASCADE may result in higher payments to our customers under our Performance Guarantee program, which would harm our business and results of operations. We may also be subject to claims that are caused by the activities of our suppliers and vendors, such as those who provide us with components and sterilization services.

If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt commercialization of our products. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in, among others:

 

 

decreased demand for our products;

 

 

injury to our reputation;

 

 

initiation of investigations by regulators;

 

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costs to defend the related litigation;

 

 

increased insurance premiums;

 

 

a diversion of management’s time and our resources;

 

 

substantial monetary awards to trial participants or patients;

 

 

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

 

loss of revenue;

 

 

exhaustion of any available insurance and our capital resources; and

 

 

the inability to market and sell our products.

We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of products we develop. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would harm our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales.

Some of our customers and prospective customers may also have difficulty in procuring or maintaining liability insurance to cover their operations and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and potential customers may opt against purchasing our products due to the cost or inability to procure insurance coverage.

Litigation and other legal proceedings may harm our business.

We have been involved in, and from time to time in the future we may become involved in, legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have a negative impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. In July 2018, St. Croix Surgical Systems, LLC filed a patent infringement claim against us in the U.S. District Court for the Northern District of California, or the Court, alleging that, among other things, our VASCADE family of products infringe three of St. Croix Surgical Systems, LLC’s issued patents relating to wound closure using blood clotting activation methods and seeking an injunction and damages, including royalties on sales of our VASCADE family of products, among other things. In September 2020, we entered into a settlement agreement with St. Croix Surgical Systems, LLC pursuant to which we paid St. Croix $0.9 million for a mutual release of claims and a covenant not to sue from St. Croix under the patents asserted by St. Croix against us in the litigation as well as certain other patents controlled by St. Croix with respect to our VASCADE family of products.

Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for

 

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monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could harm our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

In order to support our continued operations and the growth of our business, we may need to incur additional indebtedness under our existing Loan Agreement or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects.

Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our continued business operations and growth, respond to business challenges or opportunities, expand our sales territories to new geographic locations and potentially acquire complementary businesses and technologies. For the years ended December 31, 2018 and 2019 and the nine months ended September 30, 2020, our net cash used in operating activities was $14.6 million, $14.3 million and $7.9 million, respectively. As of September 30, 2020, we had $53.4 million of cash and $7.0 million in current liabilities.

We are a party to the Loan Agreement with Solar Capital and Western Alliance Bank, pursuant to which these lenders have made available to us term loans in an aggregate principal amount not to exceed $50.0 million, of which $40.0 million was drawn as of September 30, 2020. The Loan Agreement contains customary affirmative and restrictive covenants, including with respect to our ability to enter into fundamental transactions, incur additional indebtedness, grant liens, pay any dividend or make any distributions to our holders, make investments, merge or consolidate with any other person or engage in transactions with our affiliates, as well as financial maintenance covenants, including a liquidity covenant. If we fail to comply with the covenants or payments specified in the Loan Agreement, the lenders could declare an event of default, which would give it the right to terminate its commitment to provide additional loans and declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, borrowings under the Loan Agreement are secured by substantially all of our properties, rights and assets, including intellectual property.

Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, the expansion of sales and marketing activities, the expansion of sales territories to new geographic locations and the continuing market acceptance of our products. Accordingly, we may need to engage in equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects.

 

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Our operating results may fluctuate across periods, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our quarterly and annual operating results may fluctuate across periods, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to (i) the level of demand for our products, which may vary, including due to outbreaks of disease such as the COVID-19 pandemic; (ii) the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the associated cost and level of investment; (iii) the degree of competition in our industry and any change in the competitive landscape of our industry; (iv) the timing of customer orders or medical procedures using our products and the mix of products sold; (v) the timing and cost of, and level of investment in, research and development activities relating to our products; (vi) the cost of manufacturing our products, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; and (vii) future accounting pronouncements or changes in our accounting policies.

The cumulative effects of these factors could result in fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, it could harm our business, financial condition and results or operations.

We are highly dependent on our senior management team and key personnel, as well as contract employees at our manufacturing facility, and our business could be harmed if we are unable to attract and retain personnel necessary for our success.

We are highly dependent on our senior management and key personnel, as well as contract employees at our manufacturing facility. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, engineers and other highly skilled personnel and to integrate current and additional personnel in all departments. We also depend on employees provided by Tetakawi at our manufacturing facility, particularly plant managers who oversee the daily operation of our manufacturing processes. We are reliant upon Tetakawi to provide these employees and have little control over their availability or expertise. The loss of members of our senior management, sales and marketing professionals and engineers as well as contract employees at our manufacturing facility could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a negative impact on our business, financial condition and results of operations.

Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms, or at all. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.

 

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We have increased the size of our organization and expect to further increase it in the future, and we may experience difficulties in managing this growth. If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be harmed.

As of September 30, 2020, we had 142 full-time employees in the United States, as well as 129 independent contractors at our manufacturing facility in Guaymas, Mexico. As our sales and marketing strategies develop and as we transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

 

identifying, recruiting, integrating, maintaining and motivating additional employees;

 

 

managing our internal development efforts effectively, while complying with our contractual obligations to contractors and other third parties; and

 

 

improving our operational, financial and management controls, reporting systems and procedures.

Our future financial performance and our ability to successfully market and sell our products will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

As demand for VASCADE and VASCADE MVP increases, we will need to continue to scale our capacity at our manufacturing facility, expand customer service, billing and systems processes and enhance our internal quality assurance program. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available to facilitate the growth of our business. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing data or inability to meet increased demand. If we encounter difficulty meeting market demand, quality standards or physician expectations, our reputation will be harmed and our business will suffer.

As a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as a result, the value of our common stock.

We will be required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the date we are no longer an emerging growth company. We have not yet commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation required under Section 404. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. Any failure to maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we

 

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could be subject to sanctions or investigations by the New York Stock Exchange, or the NYSE, the SEC or other regulatory authorities and our access to the capital markets could be restricted in the future.

We have identified material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could harm our business and negatively impact the value of our common stock.

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements as of and for the year ended December 31, 2018, we identified material weaknesses in our internal control over financial reporting. The material weaknesses we identified were as follows: (i) we did not design or maintain an effective control environment commensurate with our financial reporting requirements due to lack of a sufficient number of accounting professionals with the appropriate level of experience and training; (ii) we did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, and monitoring controls maintained at the corporate level were not at a sufficient level of precision to provide for the appropriate level of oversight of activities related to our internal control over financial reporting; (iii) we did not design and maintain effective controls over segregation of duties with respect to creating and posting manual journal entries; and (iv) we did not design and maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions.

These material weaknesses resulted in a prior restatement of previously issued financial statements. Additionally, each of the control deficiencies could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected, and accordingly, we determined that these control deficiencies constitute material weaknesses.

We are in the process of implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including hiring additional accounting personnel and initiating design and implementation of our financial control environment, including the establishment of formal accounting policies and procedures, financial reporting controls and controls to account for and disclose complex transactions.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting because no such evaluation has been previously required. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be negatively impacted, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result.

 

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Our history of recurring losses and anticipated expenditures raise substantial doubts about our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

We have incurred operating losses to date and it is possible we will never generate a profit. We have concluded that substantial doubt exists regarding our ability to continue as a going concern. Our financial statements included elsewhere in this prospectus have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis.

The report of our independent registered public accounting firm on our financial statements as of and for the year ended December 31, 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will be harmed, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our auditors, our lack of cash resources and our potential inability to continue as a going concern may negatively impact our share price and our ability to raise new capital or to enter into critical contractual relations with third parties due to concerns about our ability to meet our contractual obligations.

Consolidation in the medical device industry could harm our revenue and results of operations.

Many medical device companies are consolidating to create new companies with greater market power. As the medical device industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for our products. If we reduce our prices because of consolidation in the medical device industry, our revenue would decrease, which could harm our business, financial condition and results of operations.

We may not be able to achieve or maintain satisfactory pricing and margins for our products, which could harm our business and results of operations.

Manufacturers of medical devices have a history of price competition, and we can give no assurance that we will be able to achieve satisfactory prices for our products or maintain prices at the levels we have historically achieved. The pricing of our products could be impacted by several factors, including pressure to improve margins at our customers from a decline in the amount that third-party payers reimburse our customers for procedures, which incorporate the use of our products, which could make it difficult for customers to continue using, or to adopt, our products. If we are forced to lower the price we charge for our products, our gross margins will decrease, which will harm our ability to invest in and grow our business. If we are unable to maintain our prices, or if our costs increase and we are unable to offset such increase with an increase in our prices, our margins could erode. We may be subject to significant pricing pressure, which could harm our business and results of operations.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other

 

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natural or man-made disasters or business interruptions, for which we are predominantly self-insured. Our ability to obtain components for our products could be disrupted if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. In addition, our corporate headquarters are located in Santa Clara, California, near major earthquake faults and fire zones, so that the ultimate impact on us for being located near earthquake faults and fire zones and being consolidated in a certain geographical area is unknown. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

We lease our manufacturing facility in Guaymas, Mexico, which is situated on or near earthquake fault lines, and we do not have redundant facilities. Should the facilities be significantly damaged or destroyed by natural or man-made disasters, such as earthquakes, fires or other events, it could take months to relocate or rebuild, during which time our manufacturing would cease or be delayed and our products may be unavailable. Moreover, the use of a new facility or new manufacturing, quality control, or environmental control equipment or systems generally requires FDA review and approval of a PMA supplement. Because of the time required to authorize manufacturing in a new facility under FDA and non-U.S. regulatory requirements, we may not be able to resume production on a timely basis even if we are able to replace production capacity in the event we lose manufacturing capacity. While we maintain property and business interruption insurance, such insurance has limits and would only cover the cost of rebuilding and relocating and lost revenue, but not general damage or losses caused by earthquakes or losses we may suffer due to our products being replaced by competitors’ products. The inability to perform our manufacturing activities, combined with our limited inventory of materials and components and manufactured products, may cause physicians to discontinue using our products or harm our reputation, and we may be unable to reestablish relationships with such physicians in the future. Consequently, a catastrophic event at our facility could harm our business, financial condition and results of operations.

If we experience significant disruptions in our information technology systems, our business may be harmed.

We depend on our information technology systems for the efficient functioning of our business, including the manufacture, distribution and maintenance of our products, as well as for accounting, data storage, compliance, purchasing and inventory management. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability use our products for treatments. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and harm our business, financial condition and results of operations. Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. We are increasingly dependent on complex information technology to manage our infrastructure, including at our manufacturing facility. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could harm our business, financial condition and results of operations.

 

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Our results of operations will be harmed if we are unable to accurately forecast customer demand for our products.

We do not maintain large amounts of excess inventory at any given time. To ensure adequate supply, we must forecast inventory needs and manufacture our products based on our estimates of future demand. Our ability to accurately forecast demand for our products could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast customer acceptance of new products, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions, as well as the ongoing COVID-19 pandemic. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our products, our manufacturing team may not be able to deliver products to meet our requirements, and this could result in damage to our reputation and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers or may not be able to allocate sufficient capacity in order to meet our increased requirements, which will negatively affect our business, financial condition and results of operations.

We intend to expand sales of our products internationally in the future, but we may experience difficulties in obtaining regulatory clearance or approval or in successfully marketing our products internationally even if approved. A variety of risks associated with marketing our products internationally could harm our business.

We have obtained regulatory clearance to commercialize VASCADE and VASCADE MVP in CE mark countries, but have not yet started marketing our products internationally. Sales of our products outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. We will incur substantial expenses in connection with our international expansion. Additional risks related to operating in foreign countries include:

 

 

differing regulatory requirements in foreign countries;

 

 

differing reimbursement regimes in foreign countries, including price controls;

 

 

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

 

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

 

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

 

foreign taxes, including withholding of payroll taxes;

 

 

foreign currency fluctuations, which could result in increased operating expenses, reduced revenue and other obligations incident to doing business in another country;

 

 

difficulties staffing and managing foreign operations;

 

 

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

 

potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, or comparable foreign regulations;

 

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challenges enforcing our contractual and intellectual property rights as well as intellectual property theft, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States; and

 

 

business interruptions resulting from geopolitical actions, including war and terrorism.

These and other risks associated with our international operations may harm our ability to attain or maintain profitable operations, which would harm our business, financial condition and results of operations.

In addition, there can be no guarantee that we will receive approval to sell our products in every international market we target, nor can there be any guarantee that any sales would result even if such approval is received. Even though the FDA has granted marketing approval for our products, comparable regulatory authorities of foreign countries must also approve the manufacturing or marketing of the product in those countries. Approval in the United States, or in any other jurisdiction, does not ensure approval in other jurisdictions. Obtaining foreign approvals could result in significant delays, difficulties and costs for us and require additional trials and additional expenses. Regulatory requirements can vary widely from country to country and could delay the introduction of our products in those countries. Clinical trials conducted in one country may not be accepted by other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. If we fail to comply with these regulatory requirements or to obtain and maintain required approvals, our target market will be reduced and our ability to generate revenue will be diminished. Our inability to successfully enter all our desired international markets and manage business on a global scale could harm our business, financial results and results of operations.

There are also international privacy laws that impose restrictions on the collection, use, storage, disclosure, transfer and other processing of personal information, including health information. For example, the European Union General Data Protection Regulation, or GDPR, imposes stringent data protection requirements, including, for example, more robust disclosures to individuals and a strengthened individual data rights regime, shortened timelines for data breach notifications, limitations on retention of information, increased requirements pertaining to special categories of data, such as health data, and additional obligations regarding third-party processors in connection with the processing of the personal data. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain required patient information could significantly impact our business and our future business plans.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As of December 31, 2019, we had $131.8 million of federal net operating loss carryforwards and $99.4 million of state net operating loss carryforwards. The federal net operating loss carryforwards of $23.8 million arising in taxable years beginning after 2017 carry forward indefinitely, but the deduction for these carryforwards is limited to 80% of current-year taxable income for taxable years beginning after 2020. We have not conducted a Section 382 study to determine whether the use of our NOLs is impaired. Our ability to utilize NOLs may be currently subject to limitations due to prior ownership changes. In addition, future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code, further limiting our ability to utilize NOLs arising prior to such ownership change in the future. There is also a risk that due to statutory or regulatory changes, such as suspensions on the use of NOLs (including California legislation enacted in

 

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June 2020 that limits the ability to use California net operating losses to offset California income for tax years beginning after 2019 and before 2023), or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

The estimates of market opportunity and forecasts of market and revenue growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty. Our estimates of the annual total addressable markets for our products are based on a number of internal and third-party estimates and assumptions, including, without limitation, the number of coronary, peripheral and electrophysiology procedures annually in the United States and worldwide, growth in number of procedures, the number of procedures that utilize femoral access over other access sites and whether more procedures will rely on femoral access as opposed to radial access, which our products are not designed for. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, including as a result of the COVID-19 pandemic, thereby reducing the predictive accuracy of these underlying factors. As a result, our estimates of the annual total addressable market for our current or future products may prove to be incorrect. If the actual number of procedures, the price at which we can sell future products, or the annual total addressable market for our products is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business.

Risks related to government regulation and our industry

If we fail to comply with U.S. federal and state fraud and abuse and other healthcare laws and regulations, including those relating to kickbacks and false claims for reimbursement, we could face substantial penalties and our business operations and financial condition could be harmed.

Healthcare providers play a primary role in the distribution, recommendation, ordering and purchasing of any medical device for which we have or obtain marketing clearance or approval. Through our arrangements with healthcare professionals and customers, we are exposed to broadly applicable anti-fraud and abuse, anti-kickback, false claims and other healthcare laws and regulations that may constrain our business, our arrangements and relationships with customers, and how we market, sell and distribute our marketed medical devices. We have a compliance program, code of conduct and associated policies and procedures, but it is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent noncompliance may not be effective in protecting us from governmental investigations for failure to comply with applicable fraud and abuse or other healthcare laws and regulations.

In the United States, we are subject to various state and federal anti-fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal civil False Claims Act, or the FCA. There are similar laws in other countries. Our relationships with physicians, other health care professionals and hospitals are subject to scrutiny under these laws.

The laws that may affect our ability to operate include, among others:

 

 

the Anti-Kickback Statute, which prohibits, among other things, knowingly and willingly soliciting, offering, receiving or paying remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual, or the purchase, order or recommendation of, items or services for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything

 

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of value, and the government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the law or a specific intent to violate. In addition, the government may assert that a claim, including items or services resulting from a violation of the Anti-Kickback Statute, constitutes a false or fraudulent claim for purposes of the FCA. There are a number of statutory exceptions and regulatory safe harbors protecting certain business arrangements from prosecution under the Anti-Kickback Statute; however, those exceptions and safe harbors are drawn narrowly, and there may be limited or no exception or safe harbor for many common business activities. Certain common business activities including, certain reimbursement support programs, educational and research grants or charitable donations, and practices that involve remuneration to those who prescribe, purchase or recommend medical devices, including discounts, providing items or services for free or engaging such individuals as consultants, advisors or speakers, may be subject to scrutiny if they do not fit squarely within an exception or safe harbor and would be subject to a facts and circumstances analysis to determine compliance with the Anti-Kickback Statute. Our business may not in all cases meet all of the criteria for statutory exception or regulatory safe harbor protection from anti-kickback liability;

 

 

federal civil and criminal false claims laws, including the FCA, and civil monetary penalties laws, which prohibits, among other things, persons or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds and knowingly making, using or causing to be made or used, a false record or statement to get a false claim paid or to avoid, decrease or conceal an obligation to pay money to the federal government. A claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Actions under the FCA may be brought by the government or as a qui tam action by a private individual in the name of the government. These individuals, sometimes known as “relators” or, more commonly, as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. Many medical device manufacturers have been investigated and have reached substantial financial settlements with the federal government under the FCA for a variety of alleged improper activities, including causing false claims to be submitted as a result of the marketing of their products for unapproved and thus non-reimbursable uses and interactions with prescribers and other customers, including those that may have affected their billing or coding practices and submission of claims to the federal government. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory monetary penalties for each false or fraudulent claim or statement. Because of the potential for large monetary exposure, healthcare and medical device companies often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages and per claim penalties that may be awarded in litigation proceedings;

 

 

The Health Insurance Portability & Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payers, or knowingly and willfully falsifying, concealing or covering up a material fact or making a materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services;

 

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, and their implementing regulations, also impose obligations, including mandatory contractual terms, on covered entities subject to the rule, such as health plans, healthcare clearinghouses and certain healthcare providers, as well as their business associates and their covered subcontractors that perform certain services for them or on their behalf involving the use or disclosure of individually identifiable health information with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

 

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the federal Physician Payments Sunshine Act, also known as Open Payments, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually, with certain exceptions to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other “transfers of value” made to physicians, defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of value provided, as well as ownership and investment interests held, during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified nurse anesthetists and certified nurse-midwives; and

 

 

analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require medical device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state beneficiary inducement laws, which are state laws that require medical device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

State and federal regulatory and enforcement agencies continue to actively investigate violations of healthcare laws and regulations, and the U.S. Congress continues to strengthen the arsenal of enforcement tools. Most recently, the Bipartisan Budget Act of 2018, or the BBA, increased the criminal and civil penalties that can be imposed for violating certain federal health care laws, including the Anti-Kickback Statute. Enforcement agencies also continue to pursue novel theories of liability under these laws. In particular, government agencies have increased regulatory scrutiny and enforcement activity with respect to manufacturer reimbursement support activities and patient support programs, including bringing criminal charges or civil enforcement actions under the Anti-Kickback Statute, federal civil FCA and HIPAA’s healthcare fraud and privacy provisions.

Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices of VASCADE and VASCADE MVP, and financial arrangements with physicians, other healthcare providers, and other customers, could be subject to challenge under one or more such laws. For example, we support the value proposition of VASCADE by sharing a customer’s cost resulting from qualified access site bleeding complications from use of VASCADE up to $1,000. Therefore, if these arrangements were investigated, they would be subject to a facts and circumstances analysis to determine whether they include prohibited remuneration under the Anti-Kickback Statute. If an arrangement were deemed to violate the Anti-Kickback Statute, it may also subject us to violations under other fraud and abuse laws such as the federal civil FCA and civil monetary penalties laws. Moreover, such arrangements could be found to violate comparable state fraud and abuse laws.

Achieving and sustaining compliance with applicable federal and state anti-fraud and abuse laws may prove costly. If we or our employees are found to have violated any of the above laws we may be subjected to substantial criminal, civil and administrative penalties, including imprisonment, exclusion from participation in federal healthcare programs, such as Medicare and Medicaid, and significant fines, monetary penalties, forfeiture, disgorgement and damages, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which

 

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could adversely affect our ability to operate our business and our financial results. Any action or investigation against us for the violation of these healthcare fraud and abuse laws, even if successfully defended, could result in significant legal expenses and could divert our management’s attention from the operation of our business. Companies settling federal civil FCA, Anti-Kickback Statute or civil monetary penalties law cases also may be required to enter into a Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General, or the OIG, in order to avoid exclusion from participation (such as loss of coverage for their products) in federal healthcare programs such as Medicare and Medicaid. Corporate Integrity Agreements typically impose substantial costs on companies to ensure compliance. Defending against any such actions can be costly, time-consuming and may require significant personnel resources, and may harm our business, financial condition and results of operations.

In addition, the medical device industry’s relationship with physicians is under increasing scrutiny by the OIG, the U.S. Department of Justice, or the DOJ, the state attorney generals and other foreign and domestic government agencies. Our failure to comply with requirements governing the industry’s relationships with physicians or an investigation into our compliance by the OIG, the DOJ, state attorney generals and other government agencies, could harm our business, financial condition and results of operations.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could harm our business, financial condition and results of operations.

We are exposed to the risk that our employees, independent contractors, consultants, commercial partners, distributors and vendors may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or disclosure of unauthorized activities to us that violates: (i) the laws of the FDA and other similar foreign regulatory bodies, including those laws requiring the reporting of true, complete and accurate information to such regulators; (ii) manufacturing standards; (iii) healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws; or (iv) laws that require the true, complete and accurate reporting of financial information or data. These laws may impact, among other things, future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commissions, certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials.

We have adopted a code of conduct, but it is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent these activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, imprisonment, additional integrity reporting and oversight obligations, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against any such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations, which could harm our business, financial condition and results of operations.

 

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Regulatory compliance is expensive, complex and uncertain, and a failure to comply could lead to enforcement actions against us and other negative consequences for our business.

The FDA and similar agencies regulate our products as medical devices. Complying with these regulations is costly, time-consuming, complex and uncertain. For instance, before a new medical device, or a new intended use for, an existing device can be marketed in the United States, a company must first submit and receive either 510(k) clearance or approval of a PMA from the FDA, unless an exemption applies. FDA regulations and regulations of similar agencies are wide-ranging and include, among other things, oversight of:

 

 

product design, development, manufacturing (including suppliers) and testing;

 

 

laboratory, preclinical and clinical studies;

 

 

product safety and effectiveness;

 

 

product labeling;

 

 

product storage and shipping;

 

 

record keeping;

 

 

pre-market clearance or approval;

 

 

marketing, advertising and promotion;

 

 

product sales and distribution;

 

 

product changes;

 

 

product recalls; and

 

 

post-market surveillance and reporting of deaths or serious injuries and certain malfunctions.

Our products are subject to extensive regulation by the FDA and non-U.S. regulatory agencies. Further, improvements of our products and any potential new products will be subject to extensive regulation and will likely require permission from regulatory agencies and ethics boards to conduct clinical trials and clearance or approval from the FDA and non-U.S. regulatory agencies prior to commercial sale and distribution. Failure to comply with applicable U.S. requirements regarding, for example, promoting, manufacturing or labeling our products, may subject us to a variety of administrative or judicial actions and sanctions, such as Form 483 observations, warning letters, untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution. Any enforcement action by the FDA and other comparable non-U.S. regulatory agencies could harm our business, financial condition and results of operations.

Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following actions:

 

 

untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

 

 

unanticipated expenditures to address or defend such actions;

 

 

customer notifications for repair, replacement or refunds;

 

 

recall, detention or seizure of our products;

 

 

operating restrictions or partial suspension or total shutdown of production;

 

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refusing or delaying our requests for 510(k) clearance or PMA of new products or modified products;

 

 

operating restrictions;

 

 

withdrawing 510(k) clearances or PMAs that have already been granted;

 

 

refusal to grant export approval for our products; or

 

 

criminal prosecution.

If any of these events were to occur, it would have a negative impact on our business, financial condition and results of operations.

The FDA also regulates the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory clearances and approvals, that there are adequate and reasonable data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading in any respect. If the FDA determines that any of our advertising or promotional claims are misleading, not substantiated or not permissible, we may be subject to enforcement actions, including warning letters, and we may be required to revise our promotional claims and make other corrections or restitutions.

Our medical device operations are subject to pervasive and continuing FDA regulatory requirements, and failure to comply with these requirements could harm our business, financial condition and results of operations.

Medical devices regulated by the FDA are subject to “general controls” which include: registration with the FDA; listing commercially distributed products with the FDA; complying with cGMPs under QSR; filing reports with the FDA of and keeping records relative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining pre-market notification 510(k) clearance for devices prior to marketing. Some devices known as “510(k)-exempt” devices can be marketed without prior marketing-clearance or approval from the FDA. Our products are designated as Class III products.

The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices and product quality management. Such reviews and investigations may result in civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of warning letters, untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies; and result in our incurring substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may harm our business, financial condition and results of operations, and may result in greater and continuing governmental scrutiny of our business in the future.

Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility and transparency of our interactions with healthcare providers. For example, Open Payments requires us to annually report to CMS payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals, with the reported information made publicly available on a searchable website. Failure to comply with these legal and regulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which could harm our business, financial condition and results of operations.

 

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Material modifications to our products may require new 510(k) clearances or pre-market approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained, which could harm our business, financial condition and results of operations.

Modifications that could significantly affect the safety and effectiveness of our approved or cleared products, such as changes to the intended use or technological characteristics of our products, will require new 510(k) clearances or PMAs or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Based on FDA published guidelines, the FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplemental approval or clearance; however, the FDA can review a manufacturer’s decision. Any modification to an FDA-cleared device that could significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a PMA. For Class III products such as VASCADE and VASCADE MVP, changes that affect safety and effectiveness will require the submission and approval of a PMA supplement. We may not be able to obtain additional 510(k) clearances or PMAs for new products or for modifications to, or additional indications for, our products in a timely fashion, or at all. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made modifications to our products in the past and expect to make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for these modifications, we may be required to recall and to stop selling or marketing such products as modified, which could harm our operating results and require us to redesign such products. In these circumstances, we may be subject to significant enforcement actions. The FDA may also change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may impact our ability to modify our currently approved or cleared products on a timely basis. Any of these actions could harm our business, financial condition and results of operations.

Although we have obtained regulatory clearance for commercialization of VASCADE and VASCADE MVP in the United States and Europe, they will remain subject to extensive regulatory scrutiny. If regulatory sanctions are applied or if regulatory clearance or approval is withdrawn, it would harm our business, financial condition and results of operations.

Although we have obtained regulatory clearance to commercialize VASCADE and VASCADE MVP in the United States and Europe, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies and submission of safety, effectiveness and other post-market information, including both federal and state requirements in the United States and requirements of comparable non-U.S. regulatory authorities.

Our manufacturing facility is required to comply with extensive requirements imposed by the FDA and comparable foreign regulatory authorities, including ensuring that quality control and manufacturing procedures conform to the QSR or similar regulations set by foreign regulatory authorities. As such, we will be subject to continual review and inspections to assess compliance with the QSR and adherence to commitments made in any 510(k) or PMA application. Accordingly, we continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

Any regulatory clearances or approvals that we have received for our products will be subject to limitations on the cleared or approved indicated uses for which the product may be marketed and promoted, will be subject to the conditions of approval, or will contain requirements for potentially costly post-marketing testing. We are required to report certain adverse events and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing product safety issues could result in increased costs to

 

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assure compliance. The FDA and other agencies, including the DOJ, closely regulate and monitor the post-clearance or approval marketing and promotion of products to ensure that they are marketed and distributed only for the cleared or approved indications and in accordance with the provisions of the cleared or approved labeling. We have to comply with requirements concerning advertising and promotion for our products.

Promotional communications with respect to devices are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the products’ cleared or approved labeling. As such, we may not promote our products for indications or uses for which they do not have clearance or approval. For certain changes to a cleared or approved product, including certain changes to product labeling, the holder of a cleared 510(k) or approved PMA application may be required to submit a new application and obtain clearance or approval. We train our marketing and sales force against promoting our products for uses outside of the cleared or approved indications for use, known as off-label uses. However, physicians or healthcare providers may use our products for off-label purposes and are allowed to do so when in the physician’s independent professional medical judgment he or she deems it appropriate. If the FDA determines that our promotional materials or training constitute promotion of an off-label or other improper use, or that our internal policies and procedures are inadequate to prevent such off-label uses, it could subject us to regulatory or enforcement actions as discussed below.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with our facility where the product is manufactured or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

 

subject our facility to an adverse inspectional finding or Form 483, or other compliance or enforcement notice, communication or correspondence;

 

 

issue warning or untitled letters that would result in adverse publicity or may require corrective advertising;

 

 

impose civil or criminal penalties;

 

 

suspend or withdraw regulatory clearances or approvals;

 

 

refuse to clear or approve pending applications or supplements to approved applications submitted by us;

 

 

impose restrictions on our operations, including closing our sub-assembly suppliers’ facilities;

 

 

seize or detain products; or

 

 

require a product recall.

In addition, violations of the Federal Food, Drug and Cosmetic Act, relating to the promotion of approved products may lead to investigations alleging violations of federal and state healthcare fraud and abuse and other laws, as well as state consumer protection laws.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and negatively impact our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory clearance or approval is withdrawn, it would harm our business, financial condition and results of operations.

 

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If we or our suppliers fail to comply with the FDA’s QSR, or any applicable state equivalent, our operations could be interrupted and our potential product sales and operating results could suffer.

Our manufacturing processes and those of our third-party suppliers are required to comply with the FDA’s QSR, which covers the design controls, document controls, purchasing controls, identification and traceability, production and process controls, acceptance activities, nonconforming product requirements, corrective and preventive action requirements, labeling and packaging controls, handling, storage, distribution and installation requirements, complaint handling, records requirements, servicing requirements and statistical techniques potentially applicable to the production of our medical device products. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic announced or unannounced inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. If we experience an unsuccessful Quality System inspection, our operations could be disrupted and our manufacturing could be interrupted. Failure to take adequate corrective action in response to an adverse Quality System inspection could result in, among other things, a shut-down of our manufacturing operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our product and cause our revenue to decline. We have registered with the FDA as a medical device manufacturer. We anticipate that we and certain of our third-party component suppliers will be subject to FDA and local regulatory inspections.

We can provide no assurance that we or our suppliers will continue to remain in compliance with QSR. If our manufacturing facility in Mexico were found to be in noncompliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, the FDA could take legal or regulatory enforcement actions against us and/or our products, including, but not limited to, the cessation of sales or the recall of distributed products, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits. Taking corrective action may be expensive, time-consuming and a distraction for management, and if we experience a shutdown or delay at our manufacturing facilities, we may be unable to produce our products, which would harm our business.

Current regulations depend heavily on administrative interpretation. If the FDA does not believe that we are in compliance with applicable FDA regulations, the agency could take legal or regulatory enforcement actions against us and/or our products. We are also subject to periodic inspections by the FDA and other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA or other regulatory bodies made during the course of these inspections may vary from current interpretations and may adversely affect our business and prospects. The FDA’s and other comparable non-U.S. regulatory agencies’ statutes, regulations or policies may change, and additional government regulation or statutes may be enacted, which could increase post-approval regulatory requirements, or delay, suspend or prevent marketing of any cleared or approved products or necessitate the recall of distributed products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

The medical device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If our operations and activities are found to be in violation of any FDA laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and other legal and/or agency enforcement actions. Any penalties, damages, fines or curtailment or restructuring of our operations or activities could harm our ability to operate our

 

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business and our financial results. The risk of us being found in violation of FDA laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend ourselves against that action and its underlying allegations, could cause us to incur significant legal expenses and divert management’s attention from the operation of our business. Where there is a dispute with a federal or state governmental agency that cannot be resolved to the mutual satisfaction of all relevant parties, we may determine that the costs, both real and contingent, are not justified by the commercial returns to us from maintaining the dispute or the product.

Various claims, design features or performance characteristics of our medical devices that we may regard as permitted by the FDA without marketing clearance or approval may be challenged by the FDA or state or foreign regulators. The FDA or state or foreign regulatory authorities may find that certain claims, design features or performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and possibly unobtainable.

Our products may be subject to recalls after receiving FDA or foreign approval or clearance, which could divert managerial and financial resources and harm our reputation and our business.

The FDA and similar foreign governmental authorities have the authority to require the recall of our products because of any failure to comply with applicable laws and regulations, or defects in design or manufacture. A government mandated or voluntary product recall by us could occur because of, for example, component failures, device malfunctions or other adverse events, such as serious injuries or deaths, or quality-related issues, such as manufacturing errors or design or labeling defects. Any future recalls of our products could divert managerial and financial resources, harm our reputation and negatively impact our business.

If we initiate a correction or removal for one of our devices to reduce a risk to health posed by the device, we would be required to submit a publicly available Correction and Removal report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall, which could lead to increased scrutiny by the FDA, other international regulatory agencies and our customers regarding the quality and safety of our devices. Furthermore, the submission of these reports has been and could be used by competitors against us in competitive situations and cause customers to delay purchase decisions or cancel orders and would harm our reputation.

If any of our products cause or contribute to a death or a serious injury or malfunction in certain ways, we will be required to report under applicable medical device reporting regulations, or MDRs, which can result in voluntary corrective actions or agency enforcement actions and harm our reputation, business, financial condition and results of operations.

Under MDRs, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report events required to be reported to the FDA within the required timeframes, or at all, the FDA could take enforcement action and impose sanctions against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, would require our time and capital, distract management from operating our business and may harm our reputation, business, financial condition and results of operations.

 

 

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From time to time, we engage outside parties to perform services related to certain of our clinical studies and trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to complete our clinical studies and may incur significant additional costs.

From time to time, we engage consultants to help design, monitor and analyze the results of certain of our clinical studies and trials. The consultants we engage interact with clinical investigators to enroll patients in our clinical trials. We depend on these consultants and clinical investigators to conduct clinical studies and trials and monitor and analyze data from these studies and trials under the investigational plan and protocol for the study or trial and in compliance with applicable regulations and standards, such as the FDA’s Good Clinical Practice, or GCP, guidelines and FDA human subject protection regulations. We may face delays in completing our clinical studies if these parties do not perform their obligations in a timely, compliant or competent manner. If these third parties do not successfully carry out their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical trial protocols or for other reasons, our clinical studies or trials may be extended, delayed or terminated or may otherwise prove to be unsuccessful, and we may have to conduct additional studies, which would significantly increase our costs.

Healthcare reform initiatives and other administrative and legislative proposals may harm our business, financial condition, results of operations and cash flows in our key markets.

There have been and continue to be proposals by the federal government, state governments, regulators and third-party payers to control or manage the increased costs of healthcare and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the coverage and reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of proposals to control costs could harm our business, financial condition and results of operations.

For example, in the United States, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together, the Affordable Care Act or the ACA, is a sweeping measure intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals, the provision of subsidies to eligible individuals enrolled in plans offered on the health insurance exchanges and the expansion of the Medicaid program. Implementation of the ACA will impact existing government healthcare programs and will result in the development of new programs.

There have been judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current U.S. presidential administration to repeal or replace certain aspects of the ACA, and we expect such challenges and amendments to continue. For example, since January 2017, President Trump has signed several Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the ACA have been signed into law. Legislation enacted in 2017, informally known as the Tax Cuts and Jobs Act, or the TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Further, the BBA, among other things, amended the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In December 2018, CMS published a new final rule further permitting collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court

 

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litigation regarding the method CMS uses to determine this risk adjustment. In addition, the 2020 federal spending package permanently eliminates, effective January 1, 2020, the ACA-mandated medical device tax and the “Cadillac” tax on high-cost employer-sponsored health coverage and, effective January 1, 2021, also eliminates the health insurer tax. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the TCJA. Additionally, on December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The United States Supreme Court is currently reviewing this case, although it is unclear when a decision will be made. It is also unclear how such litigation and other efforts to repeal and replace the ACA will impact the ACA and our business.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, including the BBA, will remain in effect through 2030 unless additional Congressional action is taken. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which was signed into law in March 2020 and is designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

We cannot assure you that the ACA, as currently enacted or as amended in the future, will not harm our business and financial results, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare, particularly in light of the recent elections. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm:

 

 

our ability to set a price that we believe is fair for our products;

 

 

our ability to generate revenue and achieve or maintain profitability; and

 

 

the availability of capital.

Further, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal legislation designed to bring transparency to product pricing and reduce the cost of products and services under government healthcare programs. Additionally, individual states in the United States have also increasingly passed legislation and implemented regulations designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. Moreover, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what products to purchase and which suppliers will be included in their healthcare programs. Adoption of price controls and other cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures may prevent or limit our ability to generate revenue and attain profitability.

 

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Various new healthcare reform proposals are emerging at the federal and state level. It is also possible that additional governmental action will be taken in response to the COVID-19 pandemic. Any new federal and state healthcare initiatives that may be adopted could limit the amounts that federal and state governments will pay for healthcare products and services, and could harm our business, financial condition and results of operations.

Our collection, use, storage, disclosure, transfer and other processing of personal information, could give rise to significant costs, liabilities and other risks, including as a result of investigations, inquiries, litigation, fines, legislative and regulatory action and negative press about our privacy and data protection practices, which may harm our business, financial conditions, results of operations and prospects.

In the course of our operations, we collect, use, store, disclose, transfer and otherwise process an increasing volume of personal information, including from our employees and third parties with whom we conduct business. The collection, use, storage, disclosure, transfer and other processing of personal information is increasingly subject to a wide array of federal, state and foreign laws and regulations regarding data privacy and security, including comprehensive laws of broad application, such as the EU General Data Protection Regulation, that are intended to protect the privacy of personal information that is collected, used, stored, disclosed, transferred and otherwise processed in or from the governing jurisdiction. As we seek to expand our business, we are, and may increasingly become, subject to various laws, regulations and standards, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. When conducting clinical trials, we face risks associated with collecting trial participants’ data, especially health data, in a manner consistent with applicable laws and regulations, such as GCP guidelines or FDA human subject protection regulations.

In many cases, these laws and regulations apply not only to third-party transactions, but also to transfers of information between or among us, any affiliates and other parties with whom we conduct business. These laws, regulations and standards may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may harm our business, financial condition and results of operations. The regulatory framework for data privacy and security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future.

We are subject to diverse laws and regulations relating to data privacy and security. In the United States, various federal and state regulators have adopted, or are considering adopting, laws and regulations concerning personal information and data security, including HIPAA. This patchwork of legislation and regulation may give rise to conflicts or differing views of personal privacy rights. For example, certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. Additionally, new privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. For example, the California Consumer Privacy Act, or the CCPA, which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA was amended in September 2018 and November 2019, and on November 3, 2020 California voters approved a new privacy law, the California Privacy Rights Act, or the CPRA, which significantly modifies the CCPA, including by expanding consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts. Many of the CPRA’s provisions will become effective on January 1, 2023. It is possible that further amendments will be enacted, but even in its current form it remains unclear how various provisions of the CCPA will be interpreted and enforced. State laws

 

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are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects, and could restrict the way products and services involving data are offered, all of which may harm our business, financial condition and results of operations.

In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. We expect that there will continue to be new proposed laws and regulations concerning data privacy and security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. New laws, amendments to or re-interpretations of existing laws, regulations, standards and other obligations may require us to incur additional costs and restrict our business operations. Because the interpretation and application of laws, regulations, standards and other obligations relating to data privacy and security are still uncertain, it is possible that these laws, regulations, standards and other obligations may be interpreted and applied in a manner that is inconsistent with our data processing practices and policies or the features of our products and services. If so, in addition to the possibility of fines, lawsuits, regulatory investigations, public censure, other claims and penalties, and significant costs for remediation and damage to our reputation, we could be materially and adversely affected if legislation or regulations are expanded to require changes in our data processing practices and policies or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively impact our business, financial condition and results of operations. We may be unable to make such changes and modifications in a commercially reasonable manner, or at all. Any inability to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, harm our reputation and brand, damage our relationships with consumers and harm our business, financial condition and results of operations.

We make public statements about our use and disclosure of personal information through our privacy policies, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policies and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Any concerns about our data privacy and security practices, even if unfounded, could damage the reputation of our business and harm our business, financial condition and results of operations.

Complying with these numerous, complex and often changing regulations is expensive and difficult. Any failure or perceived failure by us or our service providers to comply with our posted privacy policies or with any applicable federal, state or similar foreign laws, regulations, standards, certifications or orders relating to data privacy, security or consumer protection, or any compromise of security that results in the theft, unauthorized access, acquisition, use, disclosure, or misappropriation of personal information or other user data, could result in significant fines or penalties, negative publicity or proceedings or litigation by governmental agencies or consumers, including class action privacy litigation in certain jurisdictions, which would subject us to significant awards, penalties or judgments, one or all of which could require us to change our business practices or increase our costs and could materially and adversely affect our business, financial condition and results of operations. In addition, if our practices are not consistent, or viewed as not consistent, with legal and regulatory requirements, including changes in laws, regulations and standards or new interpretations or applications of existing laws, regulations and standards, we may also become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, criminal or civil sanctions, all of which may harm our business, financial condition and results of operations.

 

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Our operations involve hazardous materials and we and third parties with whom we contract must comply with environmental laws and regulations, which can be expensive and restrict how we do business, and could expose us to liability if our use of such hazardous materials causes injury.

Our manufacturing processes currently require the controlled use of potentially harmful chemicals. We cannot eliminate the risk of accidental contamination or injury to contracted employees from Tetakawi or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, Mexican laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could negatively impact our financial condition, results of operations and cash flows. In the event of an accident or if we otherwise fail to comply with applicable regulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.

We are subject to numerous laws and regulations related to anti-bribery and anti-corruption laws, such as the FCPA and the U.K. Bribery Act, in which violations of these laws could result in substantial penalties and prosecution.

We currently do not market and sell our products outside the United States. However, for our operations outside the United States, we are subject to various heavily-enforced anti-bribery and anti-corruption laws, such as the FCPA and similar laws around the world. These laws generally prohibit U.S. companies and their employees and intermediaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business or gaining any advantage. We face risks if we or our third-party business partners and intermediaries fail to comply with the FCPA or other anti-corruption and anti-bribery laws. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. To that end, while we have adopted and implemented internal control policies and procedures and employee training and compliance programs to deter prohibited practices, such compliance measures ultimately may not be effective in prohibiting our employees, contractors, business partners, intermediaries or agents from violating or circumventing our policies and/or the law.

Responding to any enforcement action or related investigation may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees. Any violation of the FCPA or other applicable anti-bribery, anti-corruption or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could harm our business, financial condition and results of operations.

Clinical trials may be delayed, suspended or terminated for many reasons, which will increase our expenses and delay the time it takes to expand our evidence base for our products.

We plan to continue to develop and execute clinical studies for VASCADE and VASCADE MVP. We may experience delays in ongoing or future clinical studies, and we do not know whether future clinical studies will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. The commencement and completion of clinical trials for future products or indications may be delayed, suspended or terminated as a result of many factors, including:

 

 

the delay or refusal of regulators or Institutional Review Boards, or IRBs, to authorize us to commence a clinical trial at a prospective trial site;

 

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changes in regulatory requirements, policies and guidelines;

 

 

delays or failure to reach agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

 

delays in patient enrollment and variability in the number and types of patients available for clinical trials;

 

 

the inability to enroll a sufficient number of patients in trials to observe statistically significant treatment effects in the trial;

 

 

having clinical sites deviate from the trial protocol or dropping out of a trial;

 

 

safety or tolerability concerns that could cause us to suspend or terminate a trial if we find that the participants are being exposed to unacceptable health risks;

 

 

regulators or IRBs requiring that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or safety concerns, among others;

 

 

lower than anticipated retention rates of patients and volunteers in clinical trials;

 

 

our CROs or clinical trial sites failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, deviating from the protocol or dropping out of a trial;

 

 

delays relating to adding new clinical trial sites; and

 

 

exceeding budgeted costs due to difficulty in accurately predicting costs associated with clinical trials.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or the Ethics Committees of institutions at which such trials are being conducted, by the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements, including GCP regulations, or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate safety and effectiveness, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

In addition, we may encounter delays if the FDA concludes that our financial relationships with investigators result in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data generated at the applicable clinical trial site or the utility of the clinical trial itself. Principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash compensation and/or stock options in connection with such services. If these relationships and any related compensation to or ownership interest by the clinical investigator carrying out the study result in perceived or actual conflicts of interest, or if the FDA concludes that the financial relationship may have affected interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection by the FDA. Any such delay or rejection could prevent us from expanding the evidence base for VASCADE or VASCADE MVP and may harm future sales growth of our products.

 

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Risks related to our intellectual property

If we are unable to obtain and maintain patent or other intellectual property protection for any products we develop or for our technology, or if the scope of the patent and other intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize any products we may develop, and our technology, may be harmed.

As with other medical device companies, our success depends in large part on our ability to obtain, maintain and solidify a proprietary position for our products, which will depend upon our success in obtaining effective patent protection in the United States and other countries that cover, and other intellectual property with respect to, such products, their manufacturing processes and their intended methods of use and enforcing those patent claims once granted as well as our other intellectual property. In some cases, we may not be able to obtain issued claims covering our technologies which are sufficient to prevent third parties, such as our competitors, from utilizing our technology. Any failure to obtain or maintain patent and other intellectual property protection with respect to our products or other aspects of our business could harm our business, financial condition and results of operations.

Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our patents. Additionally, we cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.

The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, the publication of discoveries in scientific literature often lags behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are therefore reliant on our licensors or licensees. Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example, with respect to proper priority claims, inventorship and the like, although we are unaware of any such defects that we believe are of importance. If we or any current or future licensors or licensees fail to establish, maintain, protect or enforce such patents and other intellectual property rights, such rights may be reduced or eliminated. If any current or future licensors or licensees are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. If there are material defects in the form,

 

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preparation or prosecution of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may harm our business.

The strength of patent rights generally, and particularly the patent position of medical device companies, involves complex legal and scientific questions and can be uncertain, and has been the subject of much litigation in recent years. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law or rules in ways affecting the scope or validity of issued patents. Our current or future patent applications may fail to result in issued patents in the United States or foreign countries with claims that cover our products. Even if patents do successfully issue from our patent applications, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or held unenforceable. Any successful challenge to our patents could deprive us of exclusive rights necessary for the successful commercialization of our products. Furthermore, even if they are unchallenged, our patents may not adequately protect our products, provide exclusivity for our products or prevent others from designing around our claims. If the scope of any patent protection we obtain is not sufficiently broad, or if we lose any of our patent protection, our ability to prevent our competitors from commercializing similar or identical technology and products would be adversely affected. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our products is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our products.

Patents have a limited lifespan. In the United States, the natural expiration of a utility patent is generally 20 years after its effective filing date and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is generally 15 years after its issue date. However, the actual protection afforded by a patent varies from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our products and services, we may be open to competition. Further, if we encounter delays in our development efforts, the period of time during which we could market our products and services under patent protection would be reduced and, given the amount of time required for the development, testing and regulatory review of planned or future products, patents protecting such products might expire before or shortly after such products are commercialized. For information regarding the expiration dates of patents in our patent portfolio, see “Business—Intellectual property.” As our patents expire, the scope of our patent protection will be reduced, which may reduce or eliminate any competitive advantage afforded by our patent portfolio. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications we license or own, currently or in the future, issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. Any patents that we own may be challenged, narrowed, circumvented or invalidated by third parties. Consequently, we do not know whether our products or other technologies will be protectable or remain protected by valid and enforceable patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner which could harm our business, financial condition and results of operations.

 

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Some of our patents and patent applications may in the future be co-owned with third parties. If we are unable to obtain an exclusive license to any such third party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could harm our business, financial condition and results of operations.

Additionally, we may find it necessary or prudent to acquire or obtain licenses from third party intellectual property holders. However, we may be unable to acquire or secure such licenses to any intellectual property rights from third parties that we identify as necessary for our products or any future products we may develop. The acquisition or licensing of third party intellectual property rights is a competitive area, and our competitors may pursue strategies to acquire or license third party intellectual property rights that we may consider attractive or necessary. Our competitors may have a competitive advantage over us due to their size, capital resources and greater development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to acquire or license third party intellectual property rights on terms that would allow us to make an appropriate return on our investment or at all. If we are unable to successfully obtain rights to required third party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of the relevant product, which could harm our business, financial condition and results of operations.

Patents covering our products or technologies could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad, which could harm our business, financial condition and results of operations.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad. We may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office, or the USPTO, or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or IPR, or interference proceedings or other similar proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, such patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Moreover, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge our priority of invention or other features of patentability with respect to our patents and patent applications. Such challenges may result in loss of patent rights, in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our products or technologies. Such proceedings also may result in substantial cost and require significant time from our management, even if the eventual outcome is favorable to us.

In addition, if we initiate legal proceedings against a third party to enforce a patent covering our products, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone

 

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connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Defenses of these types of claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. Third parties may also raise claims challenging the validity or enforceability of our patents before administrative bodies in the United States or abroad, even outside the context of litigation, including through re-examination, post-grant review, IPR, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions (such as opposition proceedings). Such proceedings could result in the revocation of, cancellation of or amendment to our patents in such a way that they no longer cover our products or technologies. The outcome for any particular patent following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant or other third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products and technology. Such a loss of patent protection would harm our business, financial condition and results of operations.

The medical device industry is characterized by patent litigation and we have previously been party to, and in the future could become subject to, litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages or prevent us from marketing our existing or future products.

Patent litigation is prevalent in the medical device and diagnostic sectors. Our commercial success depends in part upon our ability and that of our contract manufacturers and suppliers to manufacture, market, to sell our planned products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. We have previously been party to, and may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. Additional third parties may assert infringement claims against us based on existing or future intellectual property rights, regardless of merit. If we are found to infringe a third-party’s intellectual property rights, we could be required to obtain a license from such third-party to continue developing and marketing our products and technology. We may also elect to enter into such a license in order to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us, and could require us to pay significant royalties and other fees. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, which may be significant. If we are found to have willfully infringed a third-party patent, we could be required to pay treble damages and attorneys’ fees. A finding of infringement could prevent us from commercializing our planned products in commercially important territories, or force us to cease some of our business operations, which could harm our business. Many of our employees were previously employed at, and many of our current advisors and consultants are employed by, universities or other biotechnology, medical device or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, advisors and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we, or these employees, have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. These and other claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our business to the infringement claims discussed above.

Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or

 

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investors perceive these results to be negative, it could have a substantial negative impact on the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property related proceedings could harm our business, financial condition and results of operations.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Obtaining and maintaining our patent protection depends on compliance with various procedural measures, document submissions, fee payments and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and applications will be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime of our patents and applications. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in the abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could harm our business, financial condition and results of operations.

We have limited foreign intellectual property rights and may not be able to protect our intellectual property and proprietary rights throughout the world, which could harm our business, financial condition and results of operations.

We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against

 

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us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be harmed.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we were the first to file any patent application related to our products or invent any of the inventions claimed in our patents or patent applications.

The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, IPR and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. In addition, future actions by the U.S. Congress, the federal courts and the USPTO could cause the laws and regulations governing patents to change in unpredictable ways. Any of the foregoing could harm our business, financial condition and results of operations.

In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created

 

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uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. We cannot predict how this and future decisions by the courts, the U.S. Congress or the USPTO may impact the value of our patents. Any similar adverse changes in the patent laws of other jurisdictions could also harm our business, financial condition, results of operations and prospects.

We may be subject to claims challenging the ownership or inventorship of our patents and other intellectual property and, if unsuccessful in any of these proceedings, we may be required to obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, or to cease the development, manufacture and commercialization of one or more of our products.

We may be subject to claims that current or former employees, collaborators or other third parties have an interest in our patents, trade secrets or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our products. Litigation may be necessary to defend against these and other claims challenging inventorship of our patents, trade secrets or other intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our products. If we were to lose exclusive ownership of such intellectual property, other owners may be able to license their rights to other third parties, including our competitors. We also may be required to obtain and maintain licenses from third parties, including parties involved in any such disputes. Such licenses may not be available on commercially reasonable terms, or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture and commercialization of one or more of our products. The loss of exclusivity or the narrowing of our patent claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could harm our business, financial condition and results of operations.

Third-party claims of intellectual property infringement, misappropriation or other violation against us or our collaborators may prevent or delay the sale and marketing of our products.

The medical device industry is highly competitive and dynamic. Due to the focused research and development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscape is in flux, and it may remain uncertain in the future. As such, we could become subject to significant intellectual property-related litigation and proceedings relating to our or third-party intellectual property and proprietary rights.

Our commercial success depends in part on our and any potential future collaborators’ ability to develop, manufacture, market and sell any products that we may develop and use our proprietary technologies without infringing, misappropriating or otherwise violating the patents and other intellectual property or proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us or any potential collaborators to alter our development or commercial strategies, obtain licenses or cease certain activities. The medical device industry is characterized by extensive litigation regarding patents and other intellectual property rights, as well as administrative proceedings for challenging patents, including interference, inter partes or post-grant review, derivation and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions.

Third parties, including our competitors, may currently have patents or obtain patents in the future and claim that the manufacture, use or sale of our products infringes upon these patents. We have not conducted an

 

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extensive search of patents issued or assigned to other parties, including our competitors, and no assurance can be given that patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed or could not be filed or issued. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. As the number of competitors in our market grows and the number of patents issued in this area increases, the possibility of patent infringement claims against us escalates. Moreover, we currently face, and may in the future face, claims from non-practicing entities, or NPEs, which have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect. Third parties, including NPEs, have claimed, and may in the future claim, that our products infringe or violate their patents or other intellectual property rights.

In the event that any third party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed by our products, which could harm our ability to commercialize any product we may develop and any other technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. If we are found to infringe third-party intellectual property rights, including patents, and we are unsuccessful in demonstrating that such patents or other intellectual property rights are invalid or unenforceable, such third parties may be able to block our ability to commercialize the applicable products or technology unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay significant license fees and/or royalties, and the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same technology. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, we may be unable to commercialize our products, or such commercialization efforts may be significantly delayed, which could in turn significantly harm our business.

Defense of infringement claims, regardless of their merit or outcome, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may be enjoined from further developing or commercializing the infringing products and/or have to pay substantial damages for use of the asserted intellectual property, including treble damages and attorneys’ fees were we found to willfully infringe such intellectual property. Claims that we have misappropriated the confidential information or trade secrets of third parties could harm our business, financial condition and results of operations. We also might have to redesign our infringing products or technologies, which may be impossible or require substantial time and monetary expenditure.

Engaging in litigation to defend against third-party infringement claims is very expensive, particularly for a company of our size, and time-consuming. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial negative impact on our common stock price.

 

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Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings against us could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could harm our business, financial condition and results of operations.

We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our patents, or the patents of any future licensing partners, or we may be required to defend against claims of infringement. In addition, our patents or the patents of any such licensing partners also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. In an infringement proceeding, a court may decide that our patent is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial negative impact on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace. Any of the foregoing could harm our business, financial condition and results of operations.

We may be subject to claims that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property. Such claims could harm our business, financial condition and results of operations.

As is common in the medical device industry, our employees, consultants and advisors may be currently or previously employed or engaged at universities or other medical device or healthcare companies, including our competitors and potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may in the future become subject to claims that we or these individuals have, inadvertently or otherwise, used or disclosed intellectual property, including trade secrets or other proprietary information, of their current or former employer. Also, we may in the future be subject to claims that these individuals are violating non-compete agreements with their former employers. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could harm our business, financial condition and results of operations. Even if we are

 

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successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could harm our business, financial condition and results of operations.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be harmed.

Our registered and unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names or other intellectual property may be ineffective, could result in substantial costs and diversion of resources and could harm our business, financial condition and results of operations.

Intellectual property rights do not necessarily address all potential threats, and limitations in intellectual property rights could harm our business, financial condition and results of operations.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

 

others may be able to make products that are similar to our products or utilize similar technology but that are not covered by the claims of our patents or that incorporate certain technology in our products that is in the public domain;

 

 

we, or our future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own now or may own or license in the future;

 

 

we, or our future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions;

 

 

we, or our future licensors or collaborators, may fail to meet our obligations to the U.S. government regarding any future patents and patent applications funded by U.S. government grants, leading to the loss or unenforceability of patent rights;

 

 

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 

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it is possible that our current or future pending patent applications will not lead to issued patents;

 

 

it is possible that there are prior public disclosures that could invalidate our patents, or parts of our patents;

 

 

it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue with claims covering our products or technology similar to ours;

 

 

it is possible that our patents or patent applications omit individuals that should be listed as inventors or include individuals that should not be listed as inventors, which may cause these patents or patents issuing from these patent applications to be held invalid or unenforceable;

 

 

issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;

 

 

the claims of our patents or patent applications, if and when issued, may not cover our products or technologies;

 

 

the laws of foreign countries may not protect our proprietary rights or the rights of future licensors or collaborators to the same extent as the laws of the United States;

 

 

the inventors of our patents or patent applications may become involved with competitors, develop products or processes that design around our patents, or become hostile to us or the patents or patent applications on which they are named as inventors;

 

 

our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

 

we have engaged in scientific collaborations in the past and will continue to do so in the future and our collaborators may develop adjacent or competing products that are outside the scope of our patents;

 

 

we may not develop additional proprietary technologies that are patentable;

 

 

the patents of others may harm our business; or

 

 

we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Any of the foregoing could harm our business, financial condition and results of operations.

If our third-party suppliers or manufacturing partners, such as Tetakawi and DSM, do not respect our intellectual property and trade secrets and produce competitive products using our designs or intellectual property, our business, financial condition and results of operations would be harmed.

We conduct all manufacturing activities at our Mexican facility leased from Tetakawi. Prosecution of intellectual property infringement and trade secret theft is more difficult in Mexico than in the United States. Although our agreements with Tetakawi generally preclude them from misusing our intellectual property and trade secrets, or using our designs to manufacture product for our competitors, we may be unsuccessful in monitoring and enforcing our intellectual property rights and may find counterfeit goods in the market being sold as our products or products similar to ours produced for our competitors using our intellectual property. Although we take steps to stop counterfeits, we may not be successful and network operators who purchase these counterfeit goods may experience product defects or failures, harming our reputation and brand and causing us to lose future sales. Any of the foregoing could harm our business, financial condition and results of operations.

 

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Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patent protection for our products, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position, especially where we do not believe patent protection is appropriate or obtainable. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through non-disclosure and confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties.

We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions.

We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could harm our business, financial condition and results of operations.

Risks related to this offering and ownership of our common stock

Our stock price may be volatile, and the value of our common stock may decline.

The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control or are related in complex ways, including:

 

 

actual or anticipated fluctuations in our financial condition and results of operations;

 

 

variance in our financial performance from expectations of securities analysts or investors;

 

 

changes in the pricing of our products;

 

 

changes in our projected operating and financial results;

 

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changes in laws or regulations applicable to our products;

 

 

announcements by us or our competitors of significant business developments, acquisitions, or new offerings;

 

 

publicity associated with issues related to our products;

 

 

our involvement in litigation;

 

 

future sales of our common stock or other securities, by us or our stockholders, as well as the anticipation of lock-up releases;

 

 

changes in senior management or key personnel;

 

 

the trading volume of our common stock;

 

 

changes in the anticipated future size and growth rate of our market;

 

 

general economic, regulatory, and market conditions, including economic recessions or slowdowns;

 

 

the impact of the COVID-19 pandemic;

 

 

changes in the structure of healthcare payment systems; and

 

 

developments or disputes concerning our intellectual property or other proprietary rights.

Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions, may negatively impact the market price of our common stock. In addition, given the relatively small expected public float of shares of our common stock on the NYSE, the trading market for our shares may be subject to increased volatility. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because medical device companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

There has been no prior market for our common stock. An active market may not develop or be sustainable and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. An active or liquid market in our common stock may not develop after this offering or, if it does develop, it may not be sustainable.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The assumed initial public offering price of our common stock is substantially higher than the pro forma net tangible book deficit per share of our common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will suffer immediate dilution of $                     per share, or $                     per share if the underwriters exercise their option to purchase additional shares in full, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of common stock in this offering and the assumed initial public offering price of $

 

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                     per share, the midpoint of the price range set forth on the cover page of this prospectus. See “Dilution.” If outstanding options or warrants are exercised in the future, you will experience additional dilution.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

We will have broad discretion over the use of proceeds from this offering. Investors may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We currently intend to use the net proceeds from this offering to fund sales and marketing activities to support the ongoing commercialization of our products, to fund research and development activities, to pay scheduled interest on borrowings under the Loan Agreement, to pay success fees due to the lenders under the Loan Agreement upon the closing of this offering, and the remainder for working capital and other general corporate purposes. Our failure to apply the net proceeds of this offering effectively could impair our ability to pursue our growth strategy or could require us to raise additional capital. In addition, pending their use, the proceeds of this offering may be placed in investments that do not produce income or that may lose value.

Future sales of our common stock in the public market could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market following the closing of this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.

Based on                      shares outstanding as of September 30, 2020 (including our preferred stock on an as-converted basis, the Dividend Share Issuance and shares of common stock issuable upon the net exercise of certain outstanding warrants), upon the closing of this offering, we will have outstanding a total of                     shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or other warrants, and after giving effect to the conversion of all outstanding shares of our preferred stock into shares of common stock upon the closing of this offering. All of our executive officers and directors and the holders of substantially all of our equity securities are subject to lock-up agreements that restrict their ability to transfer shares of our common stock, stock options and other securities convertible into, exchangeable for, or exercisable for our common stock during the period ending on, and including, the 180th day after the date of this prospectus, subject to specified exceptions. J.P. Morgan Securities LLC and BofA Securities, Inc. may, in their discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements. As of September 30, 2020, we had                      shares of common stock outstanding. All of these shares will become eligible for sale after the lock-up agreements expire, of which                    shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act, and various vesting agreements.

As of September 30, 2020, there were 16,092,088 shares of common stock subject to outstanding stock options. We intend to register all of the shares of common stock issuable upon exercise of outstanding stock options, and upon exercise of settlement of any options or other equity incentives we may grant in the future, for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the lock-up agreements described above. These shares of common stock will become eligible for sale in the public market to the extent such stock options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.

 

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In addition, holders of                      shares of common stock issuable upon the conversion of outstanding shares of preferred stock, shares of common stock issued in lieu of payment of cumulative and undeclared dividends on our preferred stock and shares issuable upon the exercise of outstanding warrants have rights, subject to some conditions, to require us to file registration statements for the public resale of the common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file on our behalf or for other stockholders. See “Shares eligible for future sale.”

Concentration of ownership of our common stock among our executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Based on the number of shares of common stock outstanding as of September 30, 2020 and including the shares to be sold in this offering, upon the closing of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock will, in the aggregate, beneficially own approximately         % of our common stock (assuming no exercise of the underwriters’ option to purchase an additional                     shares of common stock). These stockholders, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

Some of these persons or entities may have interests different than investors purchasing shares in this offering. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

While we expect to issue shares of common stock in lieu of payment of cumulative and undeclared dividends on our preferred stock prior to this offering, we have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and may be restricted by the terms of any then-current credit facility, including the Loan Agreement. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

We are an emerging growth company and a smaller reporting company, and our compliance with the reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies could make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and we expect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements of Section 404 reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and extended adoption period for accounting pronouncements.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of

 

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Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.

We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Anti-takeover provisions in our charter documents to be in effect upon the closing of this offering and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon the closing of this offering may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

 

provide for a classified board of directors whose members serve staggered terms;

 

 

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

 

 

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

 

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our chief executive officer;

 

 

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

 

prohibit cumulative voting in the election of directors;

 

 

provide that our directors may be removed for cause only upon the vote of the holders of at least 662/3% of our outstanding shares of common stock;

 

 

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

 

require the approval of our board of directors or the holders of at least 662/3% of our outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

 

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Our amended and restated certificate of incorporation to be in effect upon the closing of this offering will provide that the Court of Chancery of the State of Delaware or, under certain circumstances, the federal district courts of the United States of America will be the exclusive forums for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our amended and restated certificate of incorporation to be in effect upon the closing of this offering will provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law for:

 

 

any derivative action or proceeding brought on our behalf;

 

 

any action asserting a breach of fiduciary duty;

 

 

any action arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and

 

 

any action asserting a claim against us that is governed by the internal-affairs doctrine.

These provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any claim for which the federal district courts of the United States of America have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims.

Our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentences.

To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation to be in effect upon the closing of this offering will further provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation to be in effect upon the closing of this offering. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be in effect upon the closing of this offering to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could harm our business.

 

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General risk factors

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We expect such expenses to further increase after we are no longer an emerging growth company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations impose various requirements on public companies. Furthermore, the senior members of our management team do not have significant experience with operating a public company. As a result, our management and other personnel will have to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and harm our results of operations.

As part of our business strategy, we may in the future make acquisitions or investments in complementary companies, products or technologies that we believe fit within our business model and can address the needs of physicians and healthcare providers. In the future, we may not be able to acquire and integrate other companies, products or technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. In addition, the pursuit of potential acquisitions may divert the attention of management and cause us to incur additional expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, including increases in revenue, and any acquisitions we complete could be viewed negatively by our customers, investors and industry analysts.

Future acquisitions may reduce our cash available for operations and other uses and could result in amortization expense related to identifiable assets acquired. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale or issuance of equity to finance any such acquisitions would result in dilution to our stockholders. The incurrence of indebtedness to finance any such acquisition would result in fixed obligations and could also include covenants or other restrictions that could impede our ability to manage our operations. In addition, our future results of operations may be harmed by the dilutive effect of an acquisition, performance earn-outs or contingent bonuses associated with an acquisition. Furthermore, acquisitions may require large, one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expenses and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively affect our future results of operations. We may also incur goodwill impairment charges in the future if we do not realize the expected value of any such acquisitions.

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock price and trading volume could decline.

Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports

 

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about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, our common stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We expect that only a limited number of analysts will cover our company following our initial public offering. If the number of analysts that cover us declines, demand for our common stock could decrease and our common stock price and trading volume may decline.

Even if our common stock is actively covered by analysts, we do not have any control over the analysts or the measures that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular metric to forecast our future results may result in forecasts that differ significantly from our own.

Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline.

Breaches or failures of our systems or website security, the theft, unauthorized access, acquisition, use, disclosure, modification or misappropriation of personal information, the occurrence of fraudulent activity, or other data security-related incidents may have a material and adverse impact on our business, financial condition and results of operations.

We collect, use, store, disclose, transfer and otherwise process a growing volume of personal information and other confidential, proprietary and sensitive data. Breaches or failures of security involving our systems or website or those of any of our service providers may occur, and could result in the theft, unauthorized access, acquisition, use, disclosure, modification or misappropriation of personal information of our trial participants, employees or third parties with whom we conduct business, or other confidential, proprietary and sensitive data, fraudulent activity, or system disruptions or shutdowns. The occurrence of any actual or attempted breach, failure of security or fraudulent activity, the reporting of such an incident, whether accurate or not, or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such event, whether due to delayed discovery or a failure to follow existing protocols, could result in claims made against us or our service providers, which could result in state and/or federal litigation and related financial liabilities, as well as criminal penalties or civil liabilities, regulatory actions from state and/or federal governmental authorities, and significant fines, orders, sanctions, litigation and claims against us by consumers or third parties and related indemnification obligations. Actual or perceived security breaches or failures could also cause financial losses, increased costs, interruptions in the operations of our businesses, misappropriation of assets, significant damage to our brand and reputation with consumers and third parties with whom we do business, and result in adverse publicity, loss of consumer confidence, distraction to our management, and reduced sales and profits, any or all of which could harm our business, financial condition and results of operations.

Such breaches, failures and fraudulent activity may take many forms, including check fraud, fraudulent inducement, electronic fraud, wire fraud, computer viruses, phishing, social engineering, denial or degradation of service attacks, malware, ransomware or other cyber-attacks, and other dishonest acts, any of which could be the result of a circumvention or failure of our data security processes, procedures, tools, and controls. Our systems are also subject to compromise from internal threats, such as theft, misuse, unauthorized access or other improper actions by employees, service providers and other third parties with otherwise legitimate access to our systems and website. Data security-related incidents and fraudulent activity are increasing in

 

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frequency and evolving in nature. We rely on a framework of security, processes, procedures, tools, and controls designed to protect our information and assets but, given the unpredictability of the timing, nature and scope of data security-related incidents and fraudulent activity, there can be no assurance that any security procedures and controls that we or our service providers have implemented will be sufficient to prevent data security-related incidents or other fraudulent activity from occurring. Furthermore, because the methods of attack and deception change frequently, are increasingly complex and sophisticated, and can originate from a wide variety of sources, including third parties such as service providers and even nation-state actors, despite our reasonable efforts to ensure the integrity of our systems and website, it is possible that we may not be able to anticipate, detect, appropriately react and respond to, or implement effective preventative measures against, all security breaches and failures and fraudulent activity. Any of the foregoing could harm our business, financial condition and results of operations.

We also face risks associated with security breaches affecting third parties with whom we are affiliated or otherwise conduct business. Due to applicable laws and regulations or contractual obligations, we may be held responsible for any breach, failure or fraudulent activity attributed to our service providers as they relate to the information we share with them. In addition, because we do not control our service providers and our ability to monitor their data security is limited, we cannot ensure the security measures they take will be sufficient to protect our information. We may be required to expend significant capital and other resources to protect against, respond to, and recover from any potential, attempted, or existing security breaches or failures and their consequences. As data security-related threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, our remediation efforts may not be successful. The inability to implement, maintain and upgrade adequate safeguards could have a material and adverse impact on our business, financial condition and results of operations. Moreover, there could be public announcements regarding any data security-related incidents and any steps we take to respond to or remediate such incidents, and if securities analysts or investors perceive these announcements to be negative, it could, among other things, have a substantial adverse effect on the price of our common stock. Any of the foregoing could harm our business, financial condition and results of operations.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations, financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors and assumptions described in “Risk factors” and elsewhere in this prospectus, regarding, among other things:

 

 

our expectations regarding the impact of the COVID-19 pandemic on our business, results of operations and demand for our products;

 

 

our expected future growth;

 

 

the size and growth potential of the markets for our products, and our ability to serve those markets;

 

 

our ability to accurately forecast demand for our products;

 

 

the rate and degree of market acceptance of our products;

 

 

coverage and reimbursement for procedures performed using our products;

 

 

the performance of third parties in connection with the development of our products, including single-source suppliers;

 

 

regulatory developments in the United States and foreign countries;

 

 

our ability to maintain regulatory approval for our products;

 

 

our research and development for existing products and new product candidates;

 

 

the expected future growth of our sales and marketing organization;

 

 

our reliance on third-party suppliers for product components, some of which are single source suppliers;

 

 

our ability to manufacture our products in conformity with FDA requirements;

 

 

our ability to scale our organizational culture;

 

 

the development, regulatory approval, efficacy and commercialization of competing products;

 

 

our ability to retain and hire our senior management and operational personnel;

 

 

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act and as a smaller reporting company under the federal securities laws;

 

 

our ability to develop and maintain our corporate infrastructure, including our internal controls;

 

 

our use of the proceeds from this offering;

 

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our financial performance and capital requirements; and

 

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others.

These risks are not exhaustive. Other sections of this prospectus may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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Market and industry data

This prospectus contains estimates and information concerning our industry and our business, including estimated market size, and projected growth rates of the markets in which we participate. Unless otherwise expressly stated, we obtained this industry, business, market, medical and other information from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources.

Some data and statistical information are based on independent reports from third parties, including Millennium Research Group, Inc., which we also refer to as Millennium Research Group. Millennium Research Group makes no representation or warranty as to the accuracy or completeness of the data and information from Millennium Research Group’s independent reports, or the MR Materials, set forth herein and shall have, and accept, no liability of any kind, whether in contract, tort (including negligence) or otherwise, to any third party arising from or related to use of the MR Materials by us. Any use which we or a third party makes of the MR Materials, or any reliance on it, or decisions to be made based on it, are the sole responsibilities of us and such third party. In no way shall any data appearing in the MR Materials amount to any form of prediction of future events or circumstances and no such reliance may be inferred or implied.

This information involves a number of assumptions and limitations. Although we are responsible for all of the disclosure contained in this prospectus and we believe the market position, market opportunity and market size in this prospectus is reliable, we have not independently verified the accuracy or completeness of this third-party data. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

 

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Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $                 million (or approximately $                 million if the underwriters exercise their option to purchase an additional                  shares in full), based on the assumed initial public offering price of $        per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $                million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1,000,000 shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $                 million, assuming the assumed initial public offering price of $                  per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

We intend to use our net proceeds from this offering, together with our existing cash, as follows:

 

 

approximately $                 million to $                 million for sales and marketing activities to support the ongoing commercialization of VASCADE and VASCADE MVP, including the expansion of our sales force and continued marketing and professional education efforts;

 

 

approximately $                 million to $                 million for research and development, including the ongoing registry study to evaluate procedural outcomes using VASCADE MVP after catheter-based atrial fibrillation interventions (see “Business—Ongoing and future clinical studies”);

 

 

approximately $                 million for scheduled interest payments due on amounts borrowed under the Loan Agreement;

 

 

$1,150,000 in success fees due to the lenders under the Loan Agreement upon the closing of this offering; and

 

 

the remaining net proceeds, if any, for working capital and general corporate purposes.

As of September 30, 2020, the outstanding principal amount under the Loan Agreement was $40.0 million. Borrowings under the Loan Agreement bear interest at a rate per annum equal to the sum of (i) the greater of the one-month London Inter-Bank Offered Rate or 1.76% per annum, plus (ii) 7.95%, which is due and payable in arrears on a monthly basis. All unpaid principal, and accrued and unpaid interest, is due and payable in full on December 1, 2023.

We may use a portion of the net proceeds for acquisitions or strategic investments in complementary businesses, services, products or technologies. However, we do not have agreements or commitments to enter into any such acquisitions or investments at this time.

We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have broad discretion in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade investments, certificates of deposit or guaranteed obligations of the U.S. government.

 

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Dividend policy

Holders of our Series 3, Series 4, Series 5 and Series 6 preferred stock are entitled to an accumulating annual dividend, at a rate of 10.0% per annum of the applicable original issue price of each such series of preferred stock. Our certificate of incorporation provides for the Dividend Share Issuance, in which holders of preferred stock are entitled to receive upon the closing of this offering shares of common stock in lieu of payment of accumulated and undeclared dividends on our preferred stock accumulated through the closing of this offering based on the initial public offering price in this offering. Based on an assumed closing date of this offering of                     , 2021 and the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, holders of preferred stock will be entitled to receive              shares of common stock in lieu of $         million of accumulated and undeclared dividends through the assuming closing date of this offering. In addition, we also amended outstanding Series 3 preferred stock warrants, of which 191,689 were outstanding as of September 30, 2020, to provide for the issuance of shares of common stock to holders of such warrants upon exercise at any time following the closing of this offering pursuant to the anti-dilution provisions of those warrants triggered by the Dividend Share Issuance.

We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, we have entered into, and may enter into agreements in the future, that contain restrictions on payments of cash dividends, including the Loan Agreement.

 

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Capitalization

The following table sets forth our cash and our capitalization as of September 30, 2020, on:

 

 

an actual basis;

 

 

a pro forma basis to give effect to (i) the conversion of all outstanding shares of redeemable convertible preferred stock, of which 117,000,243 shares were outstanding as of September 30, 2020, into                      shares of common stock upon the closing of this offering, together with the concurrent issuance of                     shares of common stock in the Dividend Share Issuance, based on an assumed closing date of this offering of                     , 2021 and the assumed initial public offering price of $              per share, the midpoint of the price range set forth on the cover page of this prospectus (see “Dividend policy”); (ii) the reclassification of the redeemable convertible preferred stock warrant liability to total stockholders’ equity as outstanding warrants to purchase 263,809 shares of Series 3 and 4 redeemable convertible preferred stock will become warrants to purchase an equal number of shares of common stock upon the closing of this offering; (iii) the issuance of                      shares of Series 5 redeemable convertible preferred stock upon the net exercise of outstanding warrants as of September 30, 2020 to purchase 3,741,351 shares of Series 5 redeemable convertible preferred stock, with an exercise price of $1.00 per share, prior to the closing of this offering, which warrants would otherwise expire upon the closing of this offering, based on the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, and the conversion of such shares of Series 5 redeemable convertible preferred stock into an equal number of shares of common stock upon the closing of this offering, and the resulting reclassification of the redeemable convertible preferred stock warrant liability relating to such warrants to total stockholders’ equity; and (iv) the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering, which will result in (1) an increase in the number of authorized shares of our capital stock to 1,010,000,000, including an increase in the number of authorized shares of common stock to 1,000,000,000 and (2) the retirement of our authorized redeemable convertible preferred stock that will convert to common stock as set forth in clause (i) above; and

 

 

a pro forma as adjusted basis to give further effect to the issuance and sale of                      shares of common stock in this offering at the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the payment of $1.2 million in success fees to the lenders under the Loan Agreement upon the closing of this offering.

 

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You should read this information in conjunction with our financial statements and the related notes included elsewhere in this prospectus, the information set forth in “Management’s discussion and analysis of financial condition and results of operations” and other financial information contained elsewhere in this prospectus.

 

   
     As of September 30, 2020
(in thousands, except share data)    Actual     Pro
forma
   Pro forma as
adjusted(1)

Cash

   $ 53,353     $                $                    
  

 

 

Long-term debt(2)

   $ 40,809     $    $

Redeemable convertible preferred stock warrant liability

     2,292       

Redeemable convertible preferred stock, $0.001 par value—121,005,403 shares authorized, 117,000,243 shares issued and outstanding, actual; no shares authorized, issued, or outstanding, pro forma and pro forma as adjusted

     154,672       

Stockholders’ (deficit) equity:

       

Preferred stock, $0.001 par value—no shares authorized, issued, or outstanding, actual;              shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

       

Common stock, $0.001 par value—146,000,000 shares authorized, 4,548,906 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted

     4       

Additional paid-in capital

     17,880       

Accumulated deficit

     (154,240     
  

 

 

Total stockholders’ (deficit) equity

     (136,356     
  

 

 

Total capitalization

   $ 61,417     $    $

 

(1)   Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1,000,000 shares of common stock offered by us would increase (decrease) each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by $             million, assuming the assumed initial public offering price of $             per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. The pro forma as adjusted information is illustrative only, and will depend on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing.

 

(2)   Net of discount and issuance costs of $2.0 million.

The outstanding share information in the table above is based on                      shares of common stock outstanding as of September 30, 2020 (including our preferred stock on an as-converted basis, the issuance of shares of common stock in lieu of payment of cumulative and undeclared dividends on our preferred stock and shares of common stock issuable upon the net exercise of certain outstanding warrants), and excludes:

 

 

16,092,088 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020, with a weighted-average exercise price of $0.30 per share, under our equity incentive plans;

 

 

370,306 shares of common stock issuable upon the exercise of stock options granted subsequent to September 30, 2020 through                     , 2021, with a weighted-average exercise price of $0.62 per share, under our 2014 Plan;

 

 

2,063,994 additional shares of common stock reserved for future issuance under our 2014 Plan as of September 30, 2020 (after giving effect to the issuance of stock options granted subsequent to

 

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September 30, 2020 to purchase 370,306 shares of common stock described above), all of which shares will cease to be available for issuance at the time our 2021 Plan becomes effective upon the execution of the underwriting agreement for this offering;

 

 

263,809 shares of Series 3 and 4 preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2020, with an exercise price of $1.25 per share, which will convert into warrants to purchase common stock upon the closing of this offering;

 

 

                     additional shares of common stock issuable upon the exercise of warrants to purchase 191,689 shares of Series 3 preferred stock outstanding as of September 30, 2020 at any time following the closing of this offering in connection with their anti-dilution provisions (see “Dividend policy”);

 

 

448,842 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2020, with an exercise price of $0.07 per share;

 

 

                     shares of common stock reserved for future issuance under our 2021 Plan, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

 

                     shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or the ESPP, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

 

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Dilution

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

As of September 30, 2020, our historical net tangible book deficit was $(138.6) million, or $(30.48) per share of common stock. Historical net tangible book value represents our total tangible assets (total assets less deferred offering costs) less total liabilities and redeemable convertible preferred stock, divided by the number of shares of common stock outstanding as of September 30, 2020.

As of September 30, 2020, our pro forma net tangible book value was $             million, or $             per share of common stock. Pro forma net tangible book deficit per share represents our total tangible assets (total assets less deferred offering costs) less total liabilities, divided by the number of shares of common stock outstanding as of September 30, 2020, after giving effect to (i) the conversion of all outstanding shares of redeemable convertible preferred stock, of which 117,000,243 shares were outstanding as of September 30, 2020, into                     shares of common stock upon the closing of this offering, together with the concurrent issuance of                     shares of common stock in the Dividend Share Issuance, based on an assumed closing date of this offering of                     , 2021 and the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus (see “Dividend policy”); (ii) the reclassification of the redeemable convertible preferred stock warrant liability to total stockholders’ equity as outstanding warrants to purchase 263,809 shares of Series 3 and 4 redeemable convertible preferred stock will become warrants to purchase an equal number of shares of common stock upon the closing of this offering; and (iii) the issuance of                      shares of Series 5 redeemable convertible preferred stock upon the net exercise of outstanding warrants as of September 30, 2020 to purchase 3,741,351 shares of Series 5 redeemable convertible preferred stock, with an exercise price of $1.00 per share, prior to the closing of this offering, which warrants would otherwise expire upon the closing of this offering, based on the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, and the conversion of such shares of Series 5 redeemable convertible preferred stock into an equal number of shares of common stock upon the closing of this offering, and the resulting reclassification of the redeemable convertible preferred stock warrant liability relating to such warrants to total stockholders’ equity.

After giving further effect to the receipt of the net proceeds from our sale of                      shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the payment of $1.2 million in success fees to the lenders under the Loan Agreement upon the closing of this offering, our pro forma as adjusted net tangible book value as of September 30, 2020, was $             million, or $             per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and immediate dilution of $             per share to investors purchasing common stock in this offering.

 

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The following table illustrates this dilution on a per share basis to investors in this offering:

 

 

 

Assumed initial public offering price per share

     $                

Historical net tangible book deficit per share as of September 30, 2020

   $ (30.48  

Increase per share attributable to the pro forma adjustments described above

    

Pro forma net tangible book deficit per share as of September 30, 2020

    
  

 

 

   

Increase in pro forma net tangible book value per share attributed to investors purchasing shares in this offering

    

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

     $                
    

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $             and dilution to investors in this offering by $             per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. An increase of 1,000,000 shares in the number of shares of common stock offered by us would increase the pro forma as adjusted net tangible book value by $             per share and the dilution to investors in this offering would decrease by $             per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions. A decrease of 1,000,000 shares in the number of shares of common stock offered by us would decrease the pro forma as adjusted net tangible book value by $             per share and the dilution to investors in this offering would increase by $             per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions.

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value after the offering would be $             per share, the increase in pro forma net tangible book value per share to existing stockholders would be $             per share and the dilution per share to investors in this offering would be $             per share, in each case assuming an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus.

The dilution information above is for illustration purposes only. Our pro forma as adjusted net tangible book value following the closing of this offering will depend on the actual initial public offering price and other terms of this offering determined at pricing.

The following table summarizes, as of September 30, 2020, on a pro forma basis:

 

 

the total number of shares of common stock purchased from us by our existing stockholders and by investors purchasing shares in this offering;

 

 

the total consideration paid to us by our existing stockholders and by investors purchasing shares in this offering, assuming an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering; and

 

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the average price per share paid by existing stockholders and by investors purchasing shares in this offering.

 

       
     Shares purchased      Total
consideration
     Average
price

per share
 
      Number      Percent      Amount      Percent  

Existing stockholders

  
 

            

 
             %      $                          %        $                

New investors

              
  

 

 

    

Total

        100%      $          100%     
  

 

 

    

 

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase an additional                      shares in full, our existing stockholders would own         % and investors in this offering would own          % of the total number of shares of common stock outstanding upon the closing of this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease), respectively, the total consideration paid by investors in this offering by $             million and increase (decrease), respectively, the total consideration paid by investors in this offering by          %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions.

The outstanding share information in the tables above is based on                      shares of common stock outstanding as of September 30, 2020 (including our preferred stock on an as-converted basis, the issuance of shares of common stock in lieu of payment of cumulative and undeclared dividends on our preferred stock and shares of common stock issuable upon the net exercise of certain outstanding warrants), and excludes:

 

 

16,092,088 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2020, with a weighted-average exercise price of $0.30 per share, under our equity incentive plans;

 

 

370,306 shares of common stock issuable upon the exercise of stock options granted subsequent to September 30, 2020 through                     , 2021, with a weighted-average exercise price of $0.62 per share, under our 2014 Plan;

 

 

2,063,994 additional shares of common stock reserved for future issuance under our 2014 Plan as of September 30, 2020 (after giving effect to the issuance of stock options granted subsequent to September 30, 2020 to purchase 370,306 shares of common stock described above), all of which shares will cease to be available for issuance at the time our 2021 Plan becomes effective upon the execution of the underwriting agreement for this offering;

 

 

263,809 shares of Series 3 and 4 preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2020, with an exercise price of $1.25 per share, which will convert into warrants to purchase common stock upon the closing of this offering;

 

 

                     additional shares of common stock issuable upon the exercise of warrants to purchase 191,689 shares of Series 3 preferred stock outstanding as of September 30, 2020 at any time following the closing of this offering in connection with their anti-dilution provisions (see “Dividend policy”);

 

 

448,842 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2020, with an exercise price of $0.07 per share;

 

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                     shares of common stock reserved for future issuance under our 2021 Plan, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

 

                     shares of common stock reserved for future issuance under our ESPP, which will become effective upon the execution of the underwriting agreement for this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

 

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Selected financial data

The statements of operations and comprehensive loss data for the years ended December 31, 2018 and 2019 and balance sheet data as of December 31, 2018 and 2019 have been derived from our audited financial statements included elsewhere in this prospectus. The summary statements of operations and comprehensive loss data for the nine months ended September 30, 2019 and 2020, and the summary balance sheet data as of September 30, 2020, are derived from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year ending December 31, 2020, or any other period. You should read the selected financial data set forth below in conjunction with our financial statements and the accompanying notes and the information in “Management’s discussion and analysis of financial condition and results of operations” contained elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus.

 

     
    Year ended December 31,     Nine months ended September 30,  
(in thousands, except share and per share data)   2018     2019     2019     2020  

Statements of operations and comprehensive loss data:

       

Revenue

  $ 21,075     $ 32,509     $ 22,772     $ 31,030  
 

 

 

   

 

 

 

Cost of revenue

    5,992       9,183       6,533       8,222  
 

 

 

   

 

 

 

Gross profit

    15,083       23,326       16,239       22,808  

Operating expenses:

       

Selling, general and administrative

    19,399       26,461       18,627       24,911  

Research and development

    6,556       5,793       4,086       5,492  
 

 

 

   

 

 

 

Total operating expenses

    25,955       32,254       22,713       30,403  
 

 

 

   

 

 

 

Loss from operations

    (10,872     (8,928     (6,474     (7,595

Interest expense

    (2,124     (2,960     (2,118     (3,417

Other (expense) income, net

    (1,525     (938     (414     1,724  
 

 

 

   

 

 

 

Loss before provision for income taxes

    (14,521     (12,826     (9,006     (9,288

Provision for income taxes

    (47     (103     (81     (80
 

 

 

   

 

 

 

Net loss and comprehensive loss

    (14,568     (12,929     (9,087     (9,368

Redeemable convertible preferred stock cumulative dividends

    (9,400     (9,400     (7,031     (7,866
 

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (23,968   $ (22,329   $ (16,118   $ (17,234
 

 

 

   

 

 

 

Net loss per share outstanding attributable to common stockholders, basic and diluted(1)

  $ (9.67   $ (5.36   $ (3.87   $ (4.04
 

 

 

   

 

 

 

Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted

    2,478,127       4,169,066       4,160,370       4,270,801  
 

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted(1)

       
   

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted

       

 

 

 

(1)   See Note 11, “Net loss per share attributable to common stockholders,” to our financial statements included elsewhere in this prospectus for further information on the calculation of net loss per share attributable to common stockholders and pro forma net loss per share attributable to common stockholders.

 

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     As of December 31,     As of September 30,  
(in thousands)    2018     2019     2020  

Balance sheet data:

      

Cash

   $ 13,325     $ 13,612     $ 53,353  

Working capital

     17,688       20,671       59,020  

Total assets(2)

     25,347       29,731       71,278  

Long-term debt(1)

     19,797       35,267       40,809  

Redeemable convertible preferred stock warrant liability

     4,012       3,989       2,292  

Total liabilities(2)

     29,799       46,965       52,962  

Redeemable convertible preferred stock

     110,162       110,162       154,672  

Accumulated deficit

     (131,943     (144,872     (154,240

Total stockholders’ deficit

     (114,614     (127,396     (136,356

 

 

 

(1)   Net of discount and issuance costs of $1.3 million, $2.3 million and $2.0 million as of December 31, 2018, December 31, 2019 and September 30, 2020, respectively.
(2)   Balance sheet data as of December 31, 2018, December 31, 2019 and September 30, 2020 reflect the application of ASC 2016-02, Leases (Topic 842) on January 1, 2018.

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected financial data” and our financial statements and related notes thereto included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this prospectus titled “Risk factors.”

Overview

We are a medical device company focused on transforming vascular closure for the benefit of patients, hospitals and physicians. We address the over 5.6 million catheter-based coronary, peripheral and electrophysiology procedures in the United States that require vascular access site closure each year.

Designed around an easy to use, catheter-based system and the natural clot-inducing properties of collagen, our VASCADE device is the only marketed vascular closure device clinically proven to both increase workflow efficiency and reduce access site complications relative to manual compression for coronary and peripheral procedures. VASCADE received PMA from the FDA in February 2013 for femoral arterial closure. In April 2018, its labeling was expanded to include venous closure. Similarly, our VASCADE MVP device is the only marketed vascular closure device clinically proven and labeled to improve workflow relative to manual compression for electrophysiology procedures. Importantly, these improvements drive meaningful cost savings for our customers. We believe our substantial body of clinical evidence supports the compelling value proposition of our products and will drive their continued adoption in the $1.4 billion annual addressable U.S. market for vascular access site closure in coronary, peripheral and electrophysiology procedures.

We manufacture VASCADE and VASCADE MVP at our manufacturing facility in Guaymas, Mexico, using components and sub-assemblies manufactured both in-house and by third party manufacturers and suppliers. Some of these third-party manufacturers and outside vendors are sole-source suppliers. From its inception in 2015 through September 30, 2020, our manufacturing facility has manufactured over 600,000 devices and has been through numerous inspections by the FDA and European notified bodies with no significant findings. We expect that our existing manufacturing facility will be sufficient to meet our anticipated near-term growth.

Our target market is highly concentrated, with 600 large cardiovascular centers that account for approximately 57% of coronary and peripheral procedures and approximately 86% of electrophysiology procedures in the United States. We market and sell VASCADE and VASCADE MVP in the United States through our direct sales organization. We have taken a measured approach to expanding our sales force, with the majority of our territory managers covering accounts in the eastern and central regions of the United States and more recent expansion beginning in 2020 into the western United States. Our sales, marketing and education efforts are focused on opening new accounts and driving adoption of our products by a variety of physicians across cardiovascular specialties. As of September 30, 2020, our direct sales organization consisted of 37 territory managers, supported by clinical specialists. In 2019 and 2018, we had 26 and 24 average sales territories, respectively. We believe this is a model that can be replicated as we expand our commercial presence to high-volume healthcare centers across the United States, while working to continue penetrating more deeply into existing customer accounts. Importantly, no additional reimbursement mechanisms are required to successfully

 

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execute our strategy as we bill our customers directly for the cost of our devices, and they, in turn, are reimbursed for the overall therapeutic procedure.

In 2019, we generated revenue of $32.5 million, which represents a 54% increase over 2018, and a $8.9 million loss from operations as compared to a loss from operations of $10.9 million in 2018. In 2019, 68% of our revenue was generated from sales of VASCADE and 32% was generated from sales of VASCADE MVP. During the nine months ended September 30, 2020, we generated revenue of $31.0 million, which represents a 36% increase over the same period in 2019, and a $7.6 million loss from operations compared to a loss from operations of $6.5 million in the same period in 2019. During the nine months ended September 30, 2020, 43% of our revenue was generated from sales of VASCADE and 57% was generated from sales of VASCADE MVP.

To date, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future, and our primary sources of capital have been private placements of redeemable convertible preferred stock and debt financing arrangements, including the completion of a redeemable convertible preferred stock financing in June 2020 for net proceeds to us of $44.5 million. As of September 30, 2020, we had cash of $53.4 million, long-term debt of $40.8 million, net of discounts and issuance costs, and an accumulated deficit of $154.2 million.

We intend to continue to make significant investments in our sales and marketing organization to help facilitate further adoption among existing customers as well as broaden awareness of our products to new customer accounts. We also intend to continue to make investments in our clinical programs to support market adoption as well as additional research and development efforts. We expect to incur additional expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations and other expenses. Because of these and other factors, we expect to continue to incur substantial net losses and negative cash flows from operations for the foreseeable future. Our cash balance as of September 30, 2020 was $53.4 million, which, together with the net proceeds from this offering and additional borrowing available under the Loan Agreement, we believe will be sufficient to meet our capital requirements and fund operations for at least the next 12 months. In addition, we may require additional financing to fund working capital and pay our obligations after the closing of this offering or may also opportunistically seek to raise additional capital. We may seek to raise any necessary additional capital through a combination of public or private equity offerings and debt financings.

Key factors affecting our performance

There are a number of factors that have impacted, and we believe will continue to impact, our business, results of operations and growth. These factors include:

 

 

Market acceptance and customer penetration. The growth of our business and revenue depends on broad market acceptance of VASCADE and VASCADE MVP by physicians, healthcare providers, patients and hospitals. Our ability to gain broad market acceptance depends on making physicians and other healthcare providers aware of the clinical benefits, ease of use and economic value proposition of VASCADE and VASCADE MVP over vascular closure alternatives and new technologies. In particular, we intend to continue sales and marketing efforts to increase awareness of our products at existing customers and obtain value analysis committee approval to market our products at new customers. Our sales growth will also depend on continued expansion of our customer base in new markets, including potential customers across the United States. In particular, we intend to focus on increasing awareness and adoption of VASCADE MVP in the growing electrophysiology procedure market, which has historically relied primarily on manual compression for vascular closure. We intend to invest in continued education, marketing and clinical evidence to accelerate adoption of VASCADE MVP in this market. We also intend to leverage the compelling value proposition of VASCADE MVP to target new electrophysiology accounts within customers where we can also

 

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drive utilization of VASCADE, given the significant overlap across coronary, peripheral and electrophysiology centers. As a result, we expect sales of VASCADE MVP to represent an increasing portion of our product revenue. These efforts to increase market acceptance require significant investment in our sales force and vary depending in part on physician practice specializations, geographic location of customers and physicians’ personal preferences on vascular closure methods.

 

 

Growth and effectiveness of our sales force. Our sales, marketing and physician education efforts are focused on opening new customer accounts, increasing penetration at existing customer accounts and driving adoption of our products by a variety of physicians across cardiovascular specialties. We have taken a measured approach to expanding our sales force, with the majority of our territory managers covering accounts in the eastern and central regions of the United States and more recent expansion beginning in 2020 into the western United States. Our sales and marketing personnel are trained to market both VASCADE and VASCADE MVP. We intend to continue to make significant investments in our sales and marketing organization to facilitate further adoption within existing customer accounts as well as broaden awareness of our products to new customers as we expand our sales efforts across the United States. The rate at which we grow our sales force, increased investments in our existing sales organization and the speed at which newly hired salespeople become effective can impact our revenue growth or costs incurred in anticipation of our geographic expansion and potential sales growth.

 

 

Leveraging manufacturing capacity to improve gross margin. We believe our manufacturing capabilities are scalable to support our ability to continue to supply high quality products and realize operating efficiencies as we grow our customer base. If we increase sales of our products, our fixed manufacturing costs will be spread over more units, which we believe will reduce our manufacturing costs on a per-unit basis and in turn improve our gross margin. In addition, we intend to continue investing in manufacturing efficiencies in order to reduce our overall manufacturing costs. However, other factors will continue to impact our gross margins such as cost of product components and potentially higher near-term manufacturing costs related to any new product launches.

 

 

Clinical Results. Publications of clinical results by us, our competitors and other third parties can have a significant influence on whether, and the degree to which, our products are used by physicians and other healthcare providers. The strength of our clinical data has been critical in driving early adoption of VASCADE and VASCADE MVP. We intend to continue to build our clinical evidence base with publication of recently completed studies such as AMBULATE IMPACT and AMBULATE CAP, as well as new studies designed to accelerate VASCADE MVP as a standard of care in electrophysiology procedures. While research and development and clinical studies are time consuming and costly, we believe that a robust clinical evidence base, including to support the economic value proposition of our products, and product enhancements that improve efficacy, safety and cost effectiveness are critical to increasing market acceptance and adoption of our products.

Impact of the COVID-19 pandemic

Beginning in early March 2020, the COVID-19 pandemic and the measures imposed to contain this pandemic disrupted and are expected to continue to negatively impact our business, financial condition, and results of operation. In March 2020, the State of California ordered all individuals in California to shelter in place and follow quarantine and social isolation measures, except as needed to maintain continuity of operations of certain essential businesses and sectors. Government authorities in California began re-opening and lifting or relaxing shelter-in-place restrictions in mid-2020, only to reverse some of these restrictions in the face of increases in the number of COVID-19 cases. Our primary operations are in Santa Clara, California. As a result of such order, most of our Santa Clara-based employees have been telecommuting during the pandemic, which has impacted and may continue to impact certain of our operations over the near and long term. Moreover,

 

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hospitals, ambulatory surgery centers and other treatment facilities reduced many elective procedures, resulting in a significantly reduced volume of procedures using our products, as described below. As a result of the interruptions to our business due to COVID-19, we had initiated a cash conservation program, which included delaying certain non-critical expenditures and other projects as well as implementing a hiring freeze for non-critical personnel, work hour and salary reductions and furloughs. Quarantines, shelter-in-place, and similar government orders have also impacted, and may continue to impact, our suppliers and manufacturing in Mexico, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain and finished goods inventory.

To prioritize treatment of COVID-19 patients and in response to governmental recommendations and requirements to suspend or reduce non-essential patient exposure to medical environments, hospitals, ambulatory surgery centers and other treatment facilities have at times reduced the volume of, and in some cases have suspended, many elective procedures. Many of these hospitals, ambulatory surgery centers and other treatment facilities have also suffered financially and operationally and experienced budgetary constraints as a result of the pandemic. Travel restrictions and social distancing policies, orders and restrictions have also resulted in patients and providers delaying or cancelling procedures that use our products. These and other factors have resulted in significantly reduced utilization of our products. Specifically, beginning in March 2020 and through April 2020, we observed a substantial reduction in the volume of procedures that use our products, resulting in a substantial decline in sales volumes for our products. However, beginning in early May 2020, our sales volumes began increasing compared to COVID-19 related low points in late March 2020 and the month of April 2020 and exceeded pre-COVID-19 levels in the third quarter of 2020, driven primarily by increases in sales of VASCADE MVP. This was due to increased elective procedure volumes as compared to COVID-19 related low points in late March 2020 and the month of April 2020, including as patients began to schedule procedures that use our products again after previous cancellations or postponements due to the pandemic, and the amplified need for same day discharge and other workflow improvements as a result of the COVID-19 pandemic, which we believe has increased adoption of our products by hospitals, ambulatory surgery centers and other treatment facilities. As a result of these trends, during July, we discontinued furloughs and salary reductions and resumed our previously planned growth investments. Although no assurance can be given that these trends will continue, we are encouraged by the signs of recovery of our business in the third quarter of 2020, and we believe the following factors are contributing to the stabilization of our business.

 

 

Continued opening of new accounts and penetration of existing accounts; and

 

 

Hospitals, ambulatory surgery centers and other treatment facilities beginning to accept patients for elective procedures.

In response to the COVID-19 pandemic, we have implemented a variety of measures intended to help us manage through its impact and maintain our operations. These measures include:

 

 

Establishing safety protocols, facility enhancements, and work-from-home strategies to protect our employees;

 

 

Ensuring that our manufacturing and supply chain operations remain intact and operational;

 

 

Initiating cash conservation measures, which were no longer necessary in July 2020 and suspended at that time;

 

 

Keeping our workforce intact and continuing to build our team for critical hires;

 

 

Continuing to focus on new accounts and penetration of existing accounts;

 

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Increasing our capital and liquidity by $44.5 million in net proceeds from a redeemable convertible preferred stock financing from existing and new investors in June 2020; and

 

 

Continuing to invest in research and development activities in order to advance our clinical programs.

Despite the encouraging signs of recovery of our business, we believe the precautionary measures and challenges resulting from COVID-19 will likely continue for the duration of the pandemic, which is uncertain, and will continue to negatively impact our business, financial condition and results of operations while the pandemic continues. As a result, we cannot assure you that our recent increase in revenue relative to COVID-19-related low points earlier this year or our sales levels in the third quarter of 2020 is indicative of future results or that we will not experience additional negative impacts associated with COVID-19, which could be significant. For example, the recent increase in revenue and sales volume, including in the third quarter of 2020, may be driven in part by patient backlog from cancellations or postponement of procedures that use our products due to the pandemic, which would be reduced in future periods. In addition, while we believe that hospitals, ambulatory surgery centers and other treatment facilities are generally more prepared to address COVID-19 cases than at the outset of the pandemic, any future spikes in cases in our target markets could reduce our sales volumes, including if hospitals, ambulatory surgery centers and other treatment facilities curtail elective procedures again and our sales volumes are reduced. Further, coronary and peripheral procedure volumes have not fully recovered to pre-COVID-19 levels notwithstanding recent increases, which will continue to negatively impact our sales of VASCADE. In addition, as certain of the procedures that use our devices require patients to pay for the procedures in whole or in part where not covered by insurance, reductions in employment in our target markets have reduced, and may continue to reduce, sales and utilization of our devices. The widespread pandemic has also resulted, and may continue to result for an extended period, in significant disruption of global financial markets, reducing our ability to access capital, which would negatively affect our liquidity. The extent to which the COVID-19 pandemic continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

If we fail to successfully address the challenges, risks and variables and other risks that we face, including the factors set forth above, our business, results of operations and prospects may be harmed. See “Risk factors—Risks related to our business and products—Our sales, business, financial condition and results of operations have been and continue to be impacted by the COVID-19 pandemic” and “Special note regarding forward-looking statements” for additional information regarding the challenges and risks we face as a result of the COVID-19 pandemic.

Components of our results of operations

Revenue

We derive revenue from the sale of VASCADE and VASCADE MVP to hospitals, ambulatory surgery centers and other treatment facilities in the United States through direct sales representatives. We ship products upon receipt of a written purchase order from our customer and do not sell on consignment. We recognize revenue for our products at the time when the customer takes title and risk of loss. We do not accept returns, other than at our discretion or due to product deficiencies. Our customers typically purchase an initial stocking order of our products and then reorder as needed.

We expect our revenue to fluctuate from quarter-to-quarter due to a variety of factors, including as a result of the continued COVID-19 pandemic. For example, other than in 2020 due to the effects of the COVID-19 pandemic, the number of elective cardiovascular procedures nationwide is historically lower in the third

 

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quarter than other quarters throughout the year, which we believe is due to summer vacation schedules, resulting in fewer procedures.

Cost of revenue

Cost of revenue consists primarily of materials, direct labor, overhead costs, reserves for excess, obsolete and non-sellable inventories and fulfillment costs. Overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and manufacturing operations management. We expect cost of revenue to increase in absolute dollars as our product sales increase.

Gross profit and gross margin

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily average selling prices, product sales mix, production and ordering volumes, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect our gross margin to increase over the long term to the extent our production and ordering volumes increase due to increased sales and we spread the fixed portion of our overhead costs over a larger number of units produced. We intend to use our design, engineering and manufacturing know-how and capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and have a positive impact on our gross margin. Our gross margin could fluctuate from quarter to quarter as our product sales increase, as we introduce new products or make product improvements, as we leverage our fixed costs or as we adopt new manufacturing processes and technologies.

Selling, general and administrative expenses

Selling, general and administrative expenses consist of (i) personnel-related expenses, including salaries, benefits, bonuses, sales commissions, travel expenses and stock-based compensation, (ii) marketing and promotional activities, including trade shows and market research, (iii) professional services fees, including legal, audit and tax fees, (iv) costs of outside consultants and (v) costs associated with ongoing and future post-market studies to expand the evidence base for our products, excluding studies required for regulatory approval of expanded indications for our products. We expect to continue to invest in our existing sales force and personnel, grow our sales force and increase marketing and product education and training efforts as we continue to execute on our growth and sales territory expansion strategy across the United States. In addition, we expect to incur additional expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance and investor relations. As a result, we expect selling, general and administrative expenses to increase in absolute dollars in future periods.

Research and development expenses

Research and development, or R&D, expenses consist primarily of personnel-related expenses, clinical studies, engineering and product development costs to support regulatory clearance of, and related regulatory compliance for, our products. Specifically, R&D expenses that support regulatory approval of, and related regulatory compliance for, our products include costs associated with our clinical studies, consisting of clinical trial design, clinical site establishment and management, clinical data management, travel expenses and the costs of products used for our clinical trials. Personnel-related expenses include salaries, benefits, bonuses and stock-based compensation of our R&D employees. Non personnel-related expenses include costs of outside consultants, testing, materials and supplies, and allocated overhead, including rent, equipment, depreciation and utilities. R&D expenses are charged to expense when incurred. We expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of our new product development efforts, as well as our clinical development, clinical trial and other related activities.

 

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Interest expense

Interest expense consists primarily of interest incurred on our outstanding indebtedness and noncash interest related to the amortization of debt discount and issuance costs associated with our loan and security agreement with Solar Capital, or the Loan Agreement.

Other expense, net

Other expense, net primarily consists of gains and losses resulting from the remeasurement of the fair value of our redeemable convertible preferred stock warrant liability and our success fee derivative liability under the Loan Agreement (as described under “—Loan and security agreement”) at each balance sheet date, as well as interest income generated from our cash balances. We will continue to record adjustments to the estimated fair value of the redeemable convertible preferred stock warrants until the earlier of (i) exercise or expiration of the redeemable convertible preferred stock warrants, or (ii) the closing of this offering or a change of control, at which time outstanding redeemable convertible preferred stock warrants either convert into common stock warrants on a one-to-one basis or expire. Prior to the closing of this offering, the final fair value of the redeemable preferred stock warrant liability associated with any converted warrants will be reclassified to common stock and additional paid-in capital, while the liability associated with expired warrants that are not exercised in connection with this offering will be recognized as a gain within the statement of operations and comprehensive loss. As a result, the redeemable convertible preferred stock warrant liability will be settled and will no longer be subject to remeasurement. We will continue to record adjustments to the estimated fair value of the success fee derivative liability under our Loan Agreement until a qualifying liquidity event, including the closing of this offering, occurs. See Note 5 to our financial statements included elsewhere in this prospectus for the definition of a specified liquidity event under the Loan Agreement.

Provision for income taxes

Income tax provision consists primarily of income taxes in certain state and local jurisdictions in the United States. We have a full valuation allowance for deferred tax assets, including net operating loss carryforwards and tax credits related primarily to R&D expenses.

 

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Results of operations

Comparison of the nine months ended September 30, 2019 and 2020

 

   
     Nine months ended September 30,  
(in thousands, except percentages)    2019     2020     $ Change     % Change  

Revenue

   $ 22,772     $ 31,030     $ 8,258       36

Cost of revenue

     6,533       8,222       1,689       26  
  

 

 

 

Gross profit

     16,239       22,808       6,569       40  

Gross margin

     71.3     73.5    

Operating expenses:

        

Selling, general and administrative

     18,627       24,911       6,284       34  

Research and development

     4,086       5,492       1,406       34  
  

 

 

 

Total operating expenses

     22,713       30,403       7,690       34  
  

 

 

 

Loss from operations

     (6,474     (7,595     (1,121     17  

Interest expense

     (2,118     (3,417     (1,299     61  

Other (expense) income, net

     (414     1,724       2,138       (516
  

 

 

 

Net loss before provision for income taxes

     (9,006     (9,288     (282     3  

Provision for income taxes

     (81     (80     1       (1
  

 

 

 

Net loss and comprehensive loss

   $ (9,087   $ (9,368   $ (281     3

 

 

Revenue

Revenue increased $8.3 million, or 36%, from $22.8 million in the nine months ended September 30, 2019 to $31.0 million in the nine months ended September 30, 2020. Revenue was adversely impacted by the COVID-19 pandemic which reduced our sales volume starting in late March 2020 and for most of the second quarter of 2020. However, sales of VASCADE MVP during the nine months ended September 30, 2020 contributed $11.4 million to the increase in revenue compared to the same period in 2019, which was offset in part by a decrease in sales of VASCADE of $3.1 million due to continued reductions in procedures that use VASCADE. The increase in revenue compared to the same period in 2019 was primarily due to overall increased sales volumes driven by continued sales penetration in our existing sales territories in the United States and the addition of new territories and customer accounts in 2020. Changes in the average selling price of our products were not a significant contributor to the changes in revenue.

Cost of revenue

Cost of revenue increased $1.7 million, or 26%, from $6.5 million in the nine months ended September 30, 2019 to $8.2 million in the nine months ended September 30, 2020. This increase was primarily due to the increase in the volume of VASCADE MVP units manufactured and sold in 2020.

Gross profit and gross margin

Gross profit increased by $6.6 million, while gross margin in the nine months ended September 30, 2020 increased by 2.2 percentage points as compared to the same period in 2019. Gross margin increased primarily due to improved leverage of fixed costs and the higher volume of VASCADE MVP units manufactured and sold in 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $6.3 million, or 34%, from $18.6 million in the nine months ended September 30, 2019 to $24.9 million in the nine months ended September 30, 2020. This

 

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increase was primarily due to an expansion of commercial activities from the commercialization of VASCADE MVP and greater market penetration and was primarily attributable to (i) an increase of $2.4 million in personnel-related expenses associated with an increase in headcount in our sales force, including salaries, benefits, and sales commissions, (ii) an increase of $2.3 million in personnel and consulting costs in connection with our preparation to become a public company, and (iii) $0.9 million in connection with a settlement of the patent infringement claim filed by St. Croix Surgical Systems, LLC. See Note 6 “Commitments and Contingencies—Legal proceedings” to our financial statements included elsewhere in this prospectus for more information regarding the patent litigation with St. Croix Surgical Systems, LLC.

Research and development expenses

R&D expenses increased $1.4 million, or 34%, from $4.1 million in the nine months ended September 30, 2019 to $5.5 million in the nine months ended September 30, 2020. The increase in R&D expenses was primarily due to an increase of $0.6 million in personnel-related expenses and $0.9 million in outside consulting associated with a ramp-up of R&D projects in 2020.

Interest expense

Interest expense increased $1.3 million, or 61%, from $2.1 million in the nine months ended September 30, 2019 to $3.4 million in the nine months ended September 30, 2020. The increase was primarily due to cash interest expense associated with increased borrowings under our Loan Agreement. As of September 30, 2019 and 2020, the aggregate amount of borrowings outstanding under the Loan Agreement was $27.5 million and $40.0 million, respectively.

Other (expense) income, net

Other expense, net decreased $2.1 million from $0.4 million of other expense in the nine months ended September 30, 2019 to $1.7 million of other income in the nine months ended September 30, 2020. This decrease was primarily due to the decline in the fair value of the redeemable convertible preferred stock warrant liability during the nine months ended September 30, 2020 as compared to the same period in 2019, and the probability of a liquidity event assumption in connection with the value of the success fee derivative liability during the nine months ended September 30, 2020 has not changed. The success fee under the Loan Agreement (as described under “—Loan and security agreement”) is required to be paid by us upon the occurrence of a specified liquidity event, including the closing of this offering. See Note 5 to our financial statements included elsewhere in this prospectus for the definition of a specified liquidity event under the Loan Agreement. During the nine months ended September 30, 2019, the success fee derivative liability increased by $0.5 million.

 

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Comparison of the years ended December 31, 2018 and 2019

 

   
     Year ended December 31,  
(in thousands, except percentages)    2018     2019     Change     Change  

Revenue

   $ 21,075     $ 32,509     $ 11,434       54

Cost of revenue

     5,992       9,183       3,191       53  
  

 

 

 

Gross profit

     15,083       23,326       8,243       55  

Gross margin

     71.6     71.8    

Operating expenses:

        

Selling, general, and administrative

     19,399       26,461       7,062       36  

Research and development

     6,556       5,793       (763     (12
  

 

 

 

Total operating expenses

     25,955       32,254       6,299       24  
  

 

 

 

Loss from operations

     (10,872     (8,928     1,944       (18

Interest expense

     (2,124     (2,960     (836     39  

Other expense, net

     (1,525     (938     587       (38
  

 

 

 

Net loss before provision for income taxes

     (14,521     (12,826     1,695       (12

Provision for income taxes

     (47     (103     (56     119  
  

 

 

 

Net loss and comprehensive loss

   $ (14,568   $ (12,929   $ 1,639       (11 )% 

 

 

Revenue

Revenue increased $11.4 million, or 54%, from $21.1 million in 2018 to $32.5 million in 2019, due primarily to the commercialization of VASCADE MVP after we received PMA in late 2018, which contributed $10.4 million to the increase. Sales of VASCADE also contributed to the increase as we continued sales penetration in our existing sales territories in the United States and added new customer accounts in 2019. Changes in the average selling price of our products upon commercial launch were not a significant contributor to the increase in revenue.

Cost of revenue

Cost of revenue increased $3.2 million, or 53%, from $6.0 million in 2018 to $9.2 million in 2019. This increase was primarily due to the increase in the number of VASCADE and VASCADE MVP units manufactured and sold in 2019.

Gross profit and gross margin

Gross profit increased by $8.2 million, while gross margin in 2019 increased by 0.2 percentage points. Gross margin increased primarily due to improved leverage of fixed costs and the higher volume of VASCADE MVP and VASCADE units manufactured and sold in 2019.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $7.1 million, or 36%, from $19.4 million in 2018 to $26.5 million in 2019. This increase was primarily due to an expansion of commercial activities from the commercialization of VASCADE MVP and greater market penetration and was primarily attributable to (i) an increase of $4.8 million in personnel-related expenses associated with an increase in headcount in our sales force, including salaries, benefits, sales commissions and related travel, (ii) an increase of $1.0 million in personnel and consulting costs in connection with our preparation to become a public company and (iii) $0.6 million in legal costs in connection with defending against the patent infringement claim filed by St. Croix Surgical Systems, LLC. See Note 6 “Commitments and contingencies—Legal proceedings” to our financial statements included elsewhere in this prospectus for more information regarding the patent litigation with St. Croix Surgical Systems, LLC.

 

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Research and development expenses

R&D expenses decreased $0.8 million, or 12%, from $6.6 million in 2018 to $5.8 million in 2019. The decrease in R&D expenses was primarily due to a decrease of $1.2 million in clinical trial and regulatory costs in connection with the completion of our AMBULATE clinical trial in 2018, which served as the basis of the PMA for VASCADE MVP, offset by an increase of $0.4 million in personnel-related costs.

Interest expense

Interest expense increased $0.8 million, or 39%, from $2.1 million in 2018 to $2.9 million in 2019. The increase was primarily due to cash interest expense associated with increased borrowings under our Loan Agreement in 2019. As of December 31, 2018, and 2019, the aggregate amount of borrowings outstanding under the Loan Agreement was $20.0 million and $35.0 million, respectively.

Other expense, net

Other expense, net decreased $0.6 million, or 38%, from $1.5 million in 2018 to $0.9 million in 2019. This decrease was primarily due to a lower change in the fair value of the redeemable convertible preferred stock warrant liability, offset by an increase in the success fee derivative liability under the Loan Agreement (as described under “—Loan and security agreement”), which we are required to pay upon the occurrence of a specified liquidity event, including the closing of this offering. See Note 5 to our financial statements included elsewhere in this prospectus for the definition of a specified liquidity event under the Loan Agreement.

Selected quarterly financial information

The following table sets forth our unaudited statement of operations and comprehensive loss data for each of the seven quarters presented. We have prepared the unaudited quarterly information on a basis consistent with our audited annual financial statements included elsewhere in this prospectus and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the results of operations for the periods presented. The following quarterly financial information should be read in conjunction with our financial statements and related notes thereto included elsewhere in this prospectus. Our historical quarterly results are not necessarily indicative of the results that may be expected in the future.

 

                                                                                                                      
   
     For the three months ended  
(in thousands)   

March 31,

2019

   

June 30,

2019

   

Sept. 30,

2019

   

Dec. 31,

2019

   

March 31,

2020

   

June 30,

2020

   

Sept. 30,

2020

 

Revenue:

              

VASCADE

   $ 5,402     $ 5,568     $ 5,548     $ 5,427     $ 4,855     $ 3,390     $ 5,126  

VASCADE MVP

     1,127       2,350       2,777       4,310       4,921       4,610       8,128  
  

 

 

 

Total revenue

     6,529       7,918       8,325       9,737       9,776       8,000       13,254  

Cost of revenue

     1,976       2,373       2,184       2,650       2,541       2,312       3,369  
  

 

 

 

Gross profit

     4,553       5,545       6,141       7,087       7,235       5,688       9,885  

Operating expenses:

              

Selling, general and administrative

     5,744       6,233       6,650       7,834       9,485       5,872       9,554  

Research and development

     1,451       1,391       1,244       1,707       1,888       1,371       2,233  
  

 

 

 

Total operating expenses

     7,195       7,624       7,894       9,541       11,373       7,243       11,787  
  

 

 

 

Loss from operations

     (2,642     (2,079     (1,753     (2,454     (4,138     (1,555     (1,902

Interest expense

     627       644       847       842       1,056       1,172       1,189  

Other (expense) income, net

     17       14       (445     (524     1,123       942       (341
  

 

 

 

Loss before provision for income taxes

     (3,252     (2,709     (3,045     (3,820     (4,071     (1,785     (3,432

Provision for income taxes

     29       31       21       22       29       29       22  
  

 

 

 

Net loss and comprehensive loss

   $ (3,281   $ (2,740   $ (3,066   $ (3,842   $ (4,100   $ (1,814   $ (3,454

 

 

 

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     For the three months ended  

(% of revenue)

  

March 31,

2019

    

June 30,

2019

    

Sept. 30,

2019

    

Dec. 31,

2019

    

March 31,

2020

    

June 30,

2020

    

Sept. 30,

2020

 

Revenue

     100%        100%        100%        100%        100%        100%        100%  

Cost of revenue

     30%        30%        26%        27%        26%        29%        25%  
  

 

 

 

Gross profit

     70%        70%        74%        73%        74%        71%        75%  

Operating expenses:

                    

Selling, general and administrative

     88%        79%        80%        80%        97%        73%        72%  

Research and development

     22%        18%        15%        18%        19%        17%        17%  
  

 

 

 

Total operating expenses

     110%        96%        95%        98%        116%        91%        89%  
  

 

 

 

Loss from operations

     -40%        -26%        -21%        -25%        -42%        -19%        -14%  

Interest expense

     10%        8%        10%        9%        11%        15%        9%  

Other (expense) income, net

     0%        0%        -5%        -5%        11%        12%        -3%  
  

 

 

 

Loss before provision for income taxes

     -50%        -34%        -37%        -39%        -42%        -22%        -26%  

Provision for income taxes

     0%        0%        0%        0%        0%        0%        0%  

Net loss and comprehensive loss

     -50%        -35%        -37%        -39%        -42%        -23%        -26%  

 

 

Liquidity and capital resources

Sources of liquidity

Since inception, we have financed our operations principally through private placements of redeemable convertible preferred stock and debt financing agreements. As of September 30, 2020, we had cash of $53.4 million, an accumulated deficit of $154.2 million and $40.0 million of borrowings outstanding under the Loan Agreement.

Future funding requirements

Our recurring losses from operations and negative cash flows raise doubt about our ability to continue as a going concern. As a result, we concluded that there was substantial doubt about our ability to continue as a going concern within one year after the date that the audited financial statements as of and for the years ended December 31, 2018 and 2019 were issued after March 12, 2020. See Note 1 to our audited financial statements included elsewhere in this prospectus for additional information on our assessment. Similarly, our independent registered public accounting firm included an explanatory paragraph in its report on these financial statements as of and for the year ended December 31, 2019, describing the existence of substantial doubt about our ability to continue as a going concern.

As of September 30, 2020, we had cash of $53.4 million. Based on our current planned operations, we expect that the net proceeds of this offering, together with our cash and additional borrowings available under the Loan Agreement, will enable us to fund our operating expenses for at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If these sources are insufficient to satisfy our liquidity requirements, we may seek to raise additional funds through future equity or debt financings.

We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives and increasing investments in our existing sales force to help facilitate further adoption among existing customer accounts as well as broaden awareness of VASCADE and VASCADE MVP to new customers. We also expect to continue to make investments in research and development and clinical studies to continue to develop robust clinical evidence for our products and develop new technologies. Moreover, we expect to incur additional expenses associated with operating as a public company, including

 

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legal, accounting, insurance, exchange listing and SEC compliance, investor relations and other expenses. Because of these and other factors, we expect to continue to incur substantial net losses and negative cash flows from operations for the foreseeable future.

Our future capital requirements will depend on many factors, including sales volume growth for our products, expansion of sales territories, the continuing impact of the COVID-19 pandemic on our business and our ability to control discretionary spending. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. There can be no assurance that our efforts to procure additional financing will be successful or that, if they are successful, the terms and conditions of such financing will be favorable to us or our stockholders. If we are unable to raise additional financing when needed, we may be required to delay, reduce, or terminate the development, commercialization and marketing of our products and scale back our business and operations. See “Risk factors—Risks related to our business and products—In order to support our continued operations and the growth of our business, we may need to incur additional indebtedness under our existing Loan Agreement or seek capital through new equity or debt financings, which sources of additional capital may not be available to us on acceptable terms or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, it could harm our business and growth prospects.”

Loan and security agreement

We are party to a loan and security agreement, as most recently amended in December 2019, with Solar Capital, Ltd. and Western Alliance Bank, or the Lenders, to provide for a term loan facility of up to $50.0 million, of which $40.0 million was borrowed by us as of September 30, 2020. The remaining $10.0 million under the Loan Agreement is available in two tranches of up to $5.0 million each, provided that we meet certain trailing six-month revenue requirements in 2020 or 2021. We met the remaining revenue requirements under the Loan Agreement but have not drawn on the $10.0 million tranches as of September 30, 2020. We are also required to pay a final fee equal to 5.5% of the principal amount borrowed, in addition to an amendment fee of $0.6 million, upon the earliest to occur of (i) the maturity date, (ii) acceleration and (iii) the prepayment of outstanding borrowings under the Loan Agreement.

Borrowings under the Loan Agreement bear interest at a rate per annum equal to the sum of (i) the greater of the one-month London Inter-Bank Offered Rate or 1.76% per annum, plus (ii) 7.95%, which is due and payable in arrears on a monthly basis. During the first 30 months, ending on June 30, 2022, or prior to January 1, 2023 subject to the satisfaction of certain requirements set forth in the Loan Agreement, payments are interest only. Thereafter, principal is repayable in 18 equal monthly installments during the final 18 months of the borrowing term. All unpaid principal, and accrued and unpaid interest, is due and payable in full on December 1, 2023. Borrowings under the Loan Agreement are collateralized by a security interest on substantially all of our assets, including intellectual property.

The Loan Agreement requires us to pay a success fee totaling $1.2 million upon the occurrence of a specified liquidity event, including the closing of this offering. See Note 5 “Long-term debt” to our financial statements included elsewhere in this prospectus for the definition of a specified liquidity event. In addition, under the Loan Agreement, we are subject to a financial covenant related to minimum liquidity. The liquidity covenant requires that we maintain an amount greater than (i) an amount that exceeds the average cash spent over the most recent three-month period and (ii) $3.0 million. Certain qualified expenditures related to this offering can be excluded from the average cash spent.

 

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Lease agreements

We lease our headquarters in Santa Clara, California pursuant to a lease agreement which terminates in February 2024. We also lease our manufacturing facilities in Guaymas, Mexico pursuant to a lease agreement, as amended, which terminates in November 2026.

Cash flows

The following table summarizes our cash flows for each of the periods presented:

 

     
     Year ended
December 31,
    Nine months ended
September 30,
 
(in thousands)    2018     2019     2019     2020  

Net cash used in operating activities

   $ (14,636   $ (14,336   $ (10,742   $ (7,884

Net cash used in investing activities

     (124     (363     (307     (105

Net cash provided by financing activities

     4,445       14,987       7,505       47,730  
  

 

 

 

Net (decrease) increase in cash and restricted cash

   $ (10,315   $ 288     $ (3,544   $ 39,741  

 

 

Net cash used in operating activities

Net cash used in operating activities for the nine months ended September 30, 2020 was $7.9 million, consisting primarily of a net loss of $9.4 million and a decrease in net operating assets and liabilities of $1.7 million, partially offset by noncash charges of $0.2 million. The decrease in net operating assets and liabilities was due to increases of $1.6 million in accrued expenses and other liabilities and $0.3 million in accounts payable and decreases of $0.5 million in inventories and $0.6 million in prepaid expenses and other assets, partially offset by an increase of $1.1 million in accounts receivable and a decrease of $0.2 million in operating leases liabilities. The noncash charges primarily consisted of depreciation, stock-based compensation, amortization of right-of-use assets and the changes in fair values of the success fee derivative liability and redeemable convertible preferred stock warrant liability.

Net cash used in operating activities for the nine months ended September 30, 2019 was $10.7 million, consisting primarily of a net loss of $9.1 million and an increase in net operating assets and liabilities of $3.0 million, partially offset by noncash charges of $1.3 million. The increase in net operating assets and liabilities was primarily due to increases of $2.5 million in inventories and $1.1 million in accounts receivable and a decrease of $0.2 million in operating lease liabilities, partially offset by an increase of $0.4 million in accounts payable and a decrease of $0.3 million in prepaid expenses and other assets. The noncash charges primarily consisted of depreciation, stock-based compensation, noncash interest expense, amortization of right-of-use assets and the changes in fair values of the success fee derivative liability and redeemable convertible preferred stock warrant liability.

Net cash used in operating activities for the year ended December 31, 2019 was $14.3 million, consisting primarily of a net loss of $12.9 million and an increase in net operating assets and liabilities of $3.6 million, partially offset by noncash charges of $2.2 million. The increase in net operating assets was primarily due to increases of $1.7 million in inventories and $1.8 million in accounts receivable and a decrease of $0.3 million in operating lease liabilities, partially offset by an increase of $0.6 million in accounts payable. The noncash charges primarily consisted of depreciation, stock-based compensation, noncash interest expense, amortization of right-of-use assets and the changes in fair values of the success fee derivative liability and redeemable convertible preferred stock warrant liability.

Net cash used in operating activities for the year ended December 31, 2018 was $14.6 million, consisting primarily of a net loss of $14.6 million and an increase in net operating assets of $3.1 million, offset by noncash

 

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charges of $3.1 million. The increase in net operating assets and liabilities was primarily due to an increase of $1.9 million in inventories and $0.7 million in accounts receivable driven by the continuing growth of our business, partially offset by increases of $0.2 million accrued expenses and other liabilities, due to timing of payments and growth of our operations. We also had noncash charges, which consisted of depreciation, stock-based compensation, noncash interest expense, amortization of right-of-use assets and the change in the fair value of the redeemable convertible preferred stock warrant liability.

Net cash used in investing activities

Net cash used in investing activities in the nine months ended September 30, 2020 was $0.1 million consisting of purchases of property and equipment.

Net cash used in investing activities in the nine months ended September 30, 2019 was $0.3 million consisting of purchases of property and equipment.

Net cash used in investing activities in the year ended December 31, 2019 was $0.4 million consisting of purchases of property and equipment.

Net cash used in investing activities in the year ended December 31, 2018 was $0.1 million consisting of purchases of property and equipment.

Net cash provided by financing activities

Net cash provided by financing activities in the nine months ended September 30, 2020 of $47.7 million primarily relates to proceeds of $44.5 million from the issuance of Series 6 redeemable convertible preferred stock and $5.0 million from additional borrowings under the Loan Agreement, which was offset by payment of $1.8 million of initial public offering costs.

Net cash provided by financing activities in the nine months ended September 30, 2019 of $7.5 million primarily relates to proceeds of $7.5 million from additional borrowings under the Loan Agreement.

Net cash provided by financing activities in the year ended December 31, 2019 of $15.0 million primarily relates to proceeds of $15.0 million from additional borrowings under the Loan Agreement.

Net cash provided by financing activities in the year ended December 31, 2018 of $4.4 million primarily relates to proceeds of $5.0 million from additional borrowings under the Loan Agreement, net of fees paid totaling $0.7 million.

Contractual obligations and commitments

Our principal obligations consist of our operating lease obligations and the principal balance outstanding under the Loan Agreement as well as the final fee and interest. The following table sets out, as of December 31, 2019, our contractual obligations due by period:

 

   
     Payments due by period  
(in thousands)    Total      Less than
1 Year
     1 to 3
Years
     3 to 5
Years
     More than
5 Years
 

Operating lease obligations

   $ 2,474      $ 470      $ 979      $ 724      $ 301  

Loan agreement, including final fee and interest(1)

     48,571        3,241        18,247        27,083         
  

 

 

 

Total

   $ 51,045      $ 3,711      $ 19,226      $ 27,807      $ 301  

 

 

 

(1)   Amounts in the table reflect the contractually required interest payable on outstanding borrowings under the Loan Agreement. Interest payments reflected in the table were calculated using an interest rate of 14.75%, which was the interest rate applicable to borrowings under the Loan Agreement as of December 31, 2019. The interest rate applicable to borrowings as of September 30, 2020 was 9.7%.

 

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In the nine months ended September 30, 2020, we drew down an additional $5.0 million of borrowings under the Solar Loan, as amended, bringing our total outstanding borrowings balance to $40.0 million and final fee to $2.2 million as of September 30, 2020. In addition, under the Loan Agreement, as of September 30, 2020, we will be required to pay the lenders a success fee totaling $1.2 million upon the occurrence of a specified liquidity event, including the closing of this offering. See Note 5 to our financial statements included elsewhere in this prospectus for the definition of a specified liquidity event.

Included in our operating lease obligations in the above table is the November 2019 extension of the terms of our existing manufacturing operating lease to November 2026.

The contractual commitment amounts in the table and footnotes above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty, such as inventory purchase commitments, are not included in the table above.

Critical accounting policies and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While our significant accounting policies are more fully described in Note 2 of our financial statements included elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Revenue recognition

We record product revenue from the sale of our vascular closure devices. Our revenue is generated from the sale of our products to hospitals, ambulatory surgery centers and other treatment facilities in the United States through direct sales representatives. Revenue is recognized in accordance with Topic 606, which we adopted effective January 1, 2018 using the full retrospective approach. The adoption of Topic 606 did not have an impact on the financial statements. To determine revenue recognition for arrangements within the scope of Topic 606, we perform the following five steps:

 

(i)   identify the contract(s) with a customer;

 

(ii)   identify the performance obligations in the contract;

 

(iii)   determine the transaction price;

 

(iv)   allocate the transaction price to the performance obligations in the contract; and

 

(v)   recognize revenue when (or as) the entity satisfies a performance obligation.

We typically reference customer purchase orders to determine the existence of a contract and an associated customer master purchase agreement. Orders that are not accompanied by a purchase order or a master purchase agreement are confirmed with the customer in writing. The purchase orders or similar correspondence, once accepted, identify the performance obligations as well as the transaction price, and otherwise outline the rights and obligations of each party.

 

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At contract inception, we assess the products promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a product that is distinct. Our devices are distinct, and each agreement to transfer a device to the customer represents a performance obligation. Our products are readily available for usage as soon as the customer possesses them. Upon receipt, the customer controls the economic benefits of the product, has significant risks and rewards, and the legal title. We have present right to payment, and therefore, the transfer of control is deemed to happen at a point in time. There are no further performance obligations by us to the customer after receipt. Shipping and handling activities performed after control over the product transfers to the customer (free on-board shipping point) are fulfillment activities and are not considered to be a separate performance obligation.

Revenue is measured as the amount of fixed consideration we expect to receive, which is based on the invoiced price in exchange for transferring products, net of allowances for returns, fees paid to group purchasing organizations, and any sales and value added taxes required to be invoiced. In the event of a specified and qualified access site complication following the use of VASCADE, we provide certain customers with a performance guarantee equal to a $1,000 payment. Customer payments and the amounts associated with changes in estimates of variable consideration during the years ended December 31, 2018 and 2019, and during the nine months ended September 30, 2020 were immaterial.

We allocate the transaction price of each contract among the performance obligations in accordance with the pricing of each item specified on the purchase order or master purchase agreement, which is in turn based on standalone selling prices from our published price lists. Payment terms are typically 30 days from the fulfillment of the orders and fall within the one-year guidance for the practical expedient which allows us to forgo adjustment of the promised amount of consideration for the effects of a significant financing component.

Revenue from a product sale is recognized when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms. Our standard shipping terms are free on-board shipping point unless the customer requests that control and title to the inventory transfer upon delivery. In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of cost of revenue.

We accept product returns at our discretion or if the product is defective as manufactured and establish estimated provisions for returns. In making such estimates, we analyze historical returns and changes in customer demand and acceptance of our product. Returns have been immaterial during the years ended December 31, 2018 and 2019, and during the nine months ended September 30, 2020.

Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

As allowed under the practical expedient, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Costs associated with product sales include commissions, where we apply the practical expedient and recognize commissions as expense when incurred because the expense is incurred at a point in time and the amortization period is less than one year. Commissions are reported in selling, general and administrative expense in the statements of operations and comprehensive loss.

Inventories

Inventory is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) and net realizable value. Net realizable value is determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Inventory

 

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costs include direct materials, direct labor and normal manufacturing overhead. Write-offs for excess or obsolete, or non-sellable inventories are recorded when required to reduce inventory values to their estimated net realizable values based on product life cycle, development plans, product expiration or quality issues. Inventory write-offs are charged to cost of revenue.

Stock-based compensation

We measure our stock-based awards made to employees and non-employees based on the estimated fair values of the awards as of the grant date using the Black-Scholes option-pricing model. The model requires us to make a number of assumptions including expected volatility, expected term, risk-free interest rate and expected dividend yield. We expense the fair value of our equity-based compensation awards on a straight-line basis over the requisite service period, which is the period in which the related services are received. We account for award forfeitures as they occur.

We estimate the fair value of our stock-based awards using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. Our assumptions are as follows:

 

 

Fair value of common stock.    The fair value of our common stock was determined by our board of directors because there was no public market for our common stock. Our board of directors determined the fair value of the common stock by considering a number of objective and subjective factors, including having valuations of our common stock performed by an independent third-party valuation firm, valuations of comparable peer public companies, sales of our redeemable convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of our capital stock, general and industry-specific economic outlook, and equity market conditions.

 

 

Expected term.    The expected term represents the period that the stock options are expected to remain outstanding. We use the simplified method to determine the expected term for our option grants as provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. We use the simplified method to determine our expected term because of our limited history of stock option exercise activity.

 

 

Volatility.    The expected volatility is derived from the historical stock volatilities of several comparable publicly listed peers over a period approximately equal to the expected term of the options as we have no trading history to determine the volatility of our common stock.

 

 

Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.

 

 

Dividend rate.    The expected dividend is zero as we have not paid nor do we anticipate paying any dividends on our common stock in the foreseeable future.

We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our stock-based compensation calculations on a prospective basis. As we continue to accumulate additional data, we may have refinements to our assumptions, which could materially impact our future stock-based compensation expense.

We expect to continue to grant stock options and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

Fair value of common stock

The estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors, with input from management. All options to purchase shares of our common stock

 

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are intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant.

In the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock and considering independent third-party valuations of our common stock. As provided for in Section 409A of the Code, we generally rely on our valuations for up to twelve months unless we have experienced a material event that would have affected the estimated fair value per common share.

Our valuations of our common stock were determined in accordance with the guidelines outlined in the

American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.

The assumptions used to determine the estimated fair value of our common stock are based on numerous

objective and subjective factors, combined with management judgment, including:

 

 

external market conditions affecting the biotechnology industry and trends within the industry;

 

 

our stage of development and business strategy;

 

 

the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;

 

 

the prices at which we sold shares of our redeemable convertible preferred stock;

 

 

our financial condition and operating results, including our levels of available capital resources;

 

 

the progress of our research and development and commercialization efforts;

 

 

equity market conditions affecting comparable public companies; and

 

 

general U.S. market conditions and the lack of marketability of our common stock.

The assumptions underlying these valuations represent our board of directors’ best estimates at the time they were made, which involve inherent uncertainties and the application of the judgment of our board of directors. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

In determining the fair value of our common stock, we estimated the enterprise value of our business using equal weighting between the income and market approaches.

The market approach attempts to value an asset or security by examining observable market values for similar assets or securities. When applied to the valuation of equity, the analysis may include consideration of the financial condition and operating performance of the company being valued relative to those of publicly traded companies or to those of companies acquired in a single transaction, which operate in the same or similar lines of business. In order to achieve comparability, multiples may be adjusted to factor in differences in entity size, profitability, expected growth, working capital, liquidity, and investors’ required rate of return. The specific market approaches employed in our third-party valuations include the following:

 

 

Guideline public company approach. Enterprise value is estimated based upon the observed valuation multiples of comparable public companies.

 

 

Guideline transactions approach. Enterprise value is estimated based upon the observed valuation multiples paid in acquisitions of comparable companies.

 

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The income approach attempts to value an asset or security by estimating the present value of the future economic benefits it is expected to produce. These benefits can include earnings, cost savings, tax deductions, and disposition proceeds from the asset. Projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows. Finally, an assumption is made regarding the sustainable long-term rate of growth and a residual value is estimated and discounted to a present value. The sum of the present value of the cash flows and the residual, or “terminal,” value represents the estimated fair value of the total invested capital of the entity. The specific income approach employed in our third-party valuations was a discounted cash flow analysis. Specific inputs into the discounted cash flow analysis were forecasted by our management team and included:

 

 

estimated future revenues;

 

 

estimated future operating expenses;

 

 

estimated future other income and expenses and provision for income taxes;

 

 

estimated future capital expenditures; and

 

 

estimated future working capital requirements.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:

 

 

Option pricing method. Under the option pricing method, or the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The estimated fair values of the preferred and common stock are inferred by analyzing these options.

 

 

Probability-weighted expected return method. The probability-weighted expected return method, or the PWERM, is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

We determined that a hybrid approach of the OPM and the PWERM methods was the most appropriate method for allocating our enterprise value to determine the estimated fair value of our common stock. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

Following the closing of this offering, our board of directors intends to determine the fair value of our common stock based on the closing quoted market price of our common stock as reported on the NYSE on the date of grant.

Based upon an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of options outstanding as of September 30, 2020 was $                 million, of which $                 million related to vested options and $                 million related to unvested options.

 

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Fair value of redeemable convertible preferred stock warrants

We have issued warrants to purchase shares of redeemable convertible preferred stock. We account for these warrants as a liability in our financial statements because the underlying instrument into which the warrants are exercisable contains deemed liquidation provisions that are outside our control.

The warrants are recorded at fair value using a Black-Scholes option pricing model, which incorporates assumptions and estimates. The estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying equity instruments issuable upon exercise of the warrants, remaining contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of the underlying redeemable convertible preferred stock by taking into consideration our most recent sales of our redeemable convertible preferred stock and additional factors that we deem relevant. As a private company, we have historically lacked company-specific historical and implied volatility information of our stock. Accordingly, we estimate expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants, while we estimated a 0% dividend yield based on the expected dividend yield and the fact that we have never paid or declared dividends. The fair value per share of the redeemable convertible preferred stock is derived from the valuations for our common stock as described under “—Fair value of common stock.” The warrants are subject to remeasurement at each balance sheet date with any changes in fair value being recognized as a component of other expense, net in the statements of operations and comprehensive loss. We will continue to adjust the liability for changes in fair value until the earlier of (i) exercise or expiration of the warrants, or (ii) the closing of this offering or a change of control, at which time outstanding redeemable convertible preferred stock warrants will either convert into common stock warrants on a one-to-one basis or expire. Prior to the closing of this offering, the final fair value of the redeemable preferred stock warrant liability associated with any converted warrants will be reclassified to common stock and additional paid-in capital, while the liability associated with expired warrants that are not exercised in connection with this offering will be recognized as a gain within the statement of operations and comprehensive loss. As a result, the redeemable convertible preferred stock warrant liability will be settled and will no longer be subject to remeasurement.

Success fee derivative liability

The Loan Agreement requires us to pay a $1.2 million success fee upon the occurrence of a specified liquidity event, as defined in the Loan Agreement. The success fee is being accounted for as a derivative liability and was initially recorded at fair value upon entering into the Loan Agreement and is subsequently remeasured to fair value at each reporting d