☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 27-0494101 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5403 Betsy Ross Drive Santa Clara, CA | 95054 | |
(Address of principal executive offices) | (Zip Code) |
Title of each class of securities | Trading symbol(s) | Name of each national exchange and principal U.S. market for the securities | ||
value $0.001 per share |
| SWAV | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||
Emerging growth company | ☐ |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 2022 Annual Meeting of Stockholders (the “Proxy Statement”
Table of Contents
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PART II | |||||||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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PART III | |||||||
Item 10. | Directors, Executive Officers and Corporate Governance |
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Item 11. | Executive Compensation |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 14. | Principal Accounting Fees and Services |
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PART IV | |||||||
Item 15. | Exhibits, Financial Statement Schedules |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements relating to our expectations, projections, beliefs, and prospects, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “might,” “plan,” “expect,” “predict,” “could,” “potentially”or the negative of these terms or similar expressions. You should read these statements carefully because they may relate to future expectations around growth, strategy, and anticipated trends in our business, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements are only predictions based on our current expectations, estimates, assumptions, and projections about future events and are applicable only as of the dates of such statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements.
Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
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We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions and other factors that could cause our actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those described in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”.
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There may also be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Except to the extent required by law, we undertake no obligation to update any of these forward-looking statements after the date of this Annual Report on Form 10-K to conform our prior statements to actual results or revised expectations.
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RISK FACTOR SUMMARY
The following is a summary of the principal risks to which our business is subject. This summary is not complete, and the risks summarized below are not the only risks we face. You should review and carefully consider the risks and uncertainties described in more detail in the section titled “Risk Factors” of this Annual Report on Form 10-K, which includes a more complete discussion of the risks summarized below as well as a discussion of other risks related to our business and an investment in our common stock.
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PART I
Item 1. Business.
Company Overview
We are a medical device company focused on developing and commercializing products intended to transform the way calcified cardiovascular disease is treated. We aim to establish a new standard of care for medical device treatment of atherosclerotic cardiovascular disease (“atherosclerosis”) through our differentiated and proprietary local delivery of sonic pressure waves for the treatment of calcified plaque, which we refer to as intravascular lithotripsy (“IVL”). Our IVL system (our “IVL System”), which leverages our IVL technology (our “IVL Technology”), is a minimally invasive, easy-to-use, and safe way to significantly improve patient outcomes.
Our Products and Product Pipeline
Our IVL catheters are cleared or approved for use in a number of countries and development programs are underway to expand indications and geographies. We are currently selling the following products in countries where we have applicable regulatory approvals:
Products for Treatment of Peripheral Artery Disease (“PAD”):
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Product for the Treatment of Coronary Artery Disease (“CAD”):
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Our differentiated range of M5catheters, M5+ catheters, S4 catheters, and C2 catheters enables delivery of IVL therapy of diseased vasculature throughout the body for calcium modification. Our IVL catheters resemble in form a standard balloon angioplasty catheter, the device most commonly used by interventionalists. This familiarity makes our IVL System easy to learn, adopt and use on a day-to-day basis.
Since inception, we have focused on generating clinical data to demonstrate the safety and effectiveness of our IVL Technology. These initial studies have consistently shown low rates of complications regardless of which vessel was being studied. In addition to gaining regulatory approvals or clearances, the data from our clinical studies strengthen our ability to drive adoption of IVL Technology across multiple therapies in existing and new market segments. Our past studies have also guided optimal IVL procedure technique and informed the design of our IVL System and future products in development. In addition, we also have ongoing clinical programs across several products and indications, which, if successful, will allow us to expand commercialization of our products into new geographies and indications.
During 2021, we were engaged in the following clinical trials:
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In the treatment of CAD, our combined CAD I – IV studies have demonstrated consistent safety and effectiveness outcomes for our IVL System in severely calcified coronary lesions prior to stenting in 683 patients.
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In addition, we initiated the following PAD studies in 2021:
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A development program is also currently underway to explore the ability of our IVL Technology to directly treat calcified aortic valves to safely reduce the symptoms of and potentially delay or negate valve replacement treatment for aortic stenosis (“AS”).
The Opportunity
Atherosclerosis is a common disease of aging in which arteries become narrowed (“stenotic”) and the supply of oxygenated blood to the affected organ is reduced by the progressive growth of plaque. Atherosclerotic plaque is comprised of fibrous tissue, lipids (fat) and, when it progresses, calcium. This calcium is present both deep within the walls of the artery (“deep” or “medial” calcium) and close to the inner surface of the artery (“superficial” or “intimal” calcium).
The first two indications we are targeting with our IVL System are occlusive PAD, the narrowing or blockage of vessels that carry blood from the heart to the extremities, and CAD, the narrowing or blockage of the arteries that supply blood to the heart. In the future, we see significant opportunity in the potential treatment of AS, a condition in which the heart’s aortic valve becomes increasingly calcified with age, causing it to narrow and obstruct blood flow from the heart.
The market opportunity for PAD and CAD can generally be defined as interventional procedures performed to treat those diseases where severe or moderate arterial calcium is present. In addition, IVL is utilized in so called “large bore” endovascular procedures such as transcatheter aortic valve replacements (“TAVR”) and endovascular aortic aneurysm repair (“EVAR”) to treat calcified arteries along the access route, typically the common femoral or iliac arteries, where calcified arteries can hinder the advancement of large-sized sheaths required to deliver these large-sized heart valves or endovascular grafts. The number of interventional procedures and prevalence of severe or moderate calcium vary by arterial segment, but the aggregate addressable market for IVL is estimated to be over $6.9 billion.
Coronary IVL is utilized to treat patients with CAD undergoing a percutaneous coronary intervention (“PCI”) who have severe or moderate arterial calcium that hinder a balloon angioplasty and subsequent stent implantation. According to Clarivate, over six million PCI procedures will be performed globally in 2022. A study published in the American Journal of
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Cardiology in 2014 demonstrated that more than 30% of patients undergoing PCI have severely or moderately calcified lesions and this percentage is growing. Minimizing complications is particularly important in the coronary vessels, but current plaque modification devices carry meaningful safety risks and are inherently challenging to use, which is why these devices are used very sparingly for PCI procedures in patients with calcified coronary artery disease. Despite significant under-penetration of the market, these devices still represented a market of $230 million in 2021 within the United States alone, according to Clarivate; we believe this market is significantly larger globally. Due to the increasing prevalence of calcified cardiovascular disease, the market growth for plaque modification devices exceeds that of PCI procedure growth. We believe the safety, ease of use and efficient impact on calcium of our IVL System will result in rapid adoption and market expansion in markets where our C2 catheter is introduced. We believe there is an over $3.6 billion total addressable market opportunity for our IVL System to treat CAD.
The PAD population in the United States has been estimated to be at least eight million people, according to the National Institutes of Health. Globally over 1.8 million interventions are performed annually to treat symptomatic occlusive PAD. The presence of severe and moderate calcium ranges between 50 – 70% in the iliac, femoropoliteal and infrapopliteal arterial beds that are treated as part of PAD interventions. Current technologies are often not able to safely and effectively treat heavily calcified vessels. Accordingly, we believe our IVL system to treat symptomatic occlusive PAD has a total addressable market opportunity of $1.9 billion.
In addition to PAD treatment, lower extremity arteries are sometimes treated with IVL as part of separate endovascular procedures, specifically TAVR or abdominal or thoracic EVAR (“TEVAR”) procedures, where the iliac or common femoral arteries along the access vascular route are blocked by a calcified narrowing that prevents these relatively large catheters from passing from the lower extremities into the aorta to deliver their respective lifesaving therapies. In 2022 Clarivate estimates that 260,000 TAVR procedures will be performed globally and up to 20% of these procedures are at risk for barriers to transfemoral access due to calcium. Similarly, Clarivate estimates that 215,000 EVAR and TEVAR procedures are performed globally with up to 20% of procedures at risk due to calcified lower extremity arteries. IVL is able to treat these calcified arteries and enable these so-called large bore procedures to be performed via standard transfemoral access technique, thereby reducing a risk of increased complications due to alternative access methods. We estimate that in aggregate large bore access procedures represent an additional addressable market opportunity of over $200 million.
The global market for aortic valve replacement (“AVR”), the main treatment for AS, is growing rapidly, and is dominated by the emergence of TAVR devices. TAVR has rapidly developed into a multibillion-dollar market globally. According to an article published in the Journal of Thoracic Disease in 2017, the global market for TAVR was anticipated to be over 175,000 procedures performed worldwide in 2020 and is expected to grow to over 400,000 by 2028. We believe our IVL System may be able to improve the treatment of AS among patients in whom currently available solutions are inadequate. We are currently working to develop an IVL catheter which we believe can safely and effectively treat patients with AS. If successful, we believe this represents a potential total addressable market of over $3 billion for our IVL System to treat AS.
Current Challenges
The primary approaches to treat vascular disease are angioplasty balloons (“balloons”), drug-coated balloons (“DCB”), bare metal stents, and DES. These devices all work by using pressurized balloons to expand the diseased blood vessels. Calcified plaque creates challenges for these therapies in achieving optimal outcomes in treating PAD and CAD because the calcified vessels fail to expand under safe pressures. This, in turn, can lead to acute failure, damage to the blood vessel, which increases the rate of restenosis (re-occlusion of the vessel following endovascular treatment) or complications requiring adjunctive tools, future re-interventions or conversion to bypass surgery. These complications are significantly increased when treating calcified cardiovascular disease and include dissections, embolization, restenosis, vessel perforations and vessel recoil.
Plaque modification devices (including atherectomy and specialty balloons) have enhanced the treatment of some moderately calcified cardiovascular lesions by improving the ability of stent and balloon therapies to effectively expand in the vessel. Atherectomy devices are designed to break or remove superficial calcium by cutting or sanding the calcium in order to improve vessel expansion. Specialty balloon devices incorporate metallic elements like wires and cutting blades onto standard balloons; these devices are intended to make discreet cuts in the plaque and surrounding tissue in order to improve vessel expansion. Despite improvements in plaque modification devices, significant limitations remain, including being difficult to use and creating complications and inconsistent efficacy. Further, because medial calcium is encased in the vessel wall, the existing plaque modification devices are unable to impact medial calcium without damaging the vessel. Combined, these limitations decrease the utilization of plaque modification devices for treating calcified cardiovascular disease, thereby reducing the clinical benefit of angioplasty and stent therapies compared to their use in non-calcified anatomies.
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Calcified iliac and femoral arteries can hinder the delivery of large endovascular devices for other catheter-based procedures, including those that treat aortic aneurysms (endovascular aneurysm repair and thoracic endovascular aneurysm repair procedures), severe AS treated with TAVR, and cardiac support devices for high-risk PCI (e.g., Abiomed’s Impella). The standard practice for these procedures is to gain vascular access in the femoral artery and insert large diameter sheaths that facilitate the delivery of the treatment devices to the aorta or the heart. However, when significant calcium is present in these arteries, it can prevent delivery of the devices, and thus may require more invasive treatments, increase complications or prevent the device from being used altogether. For example, in up to 20% of patients, the transfemoral approach through the iliac and femoral arteries is not viable for TAVR delivery or creates risk of vessel trauma due to the extent of vascular calcification, according to a 2018 study in the Journal of the American College of Cardiology.
Our Solution
We have adapted the use of lithotripsy to the cardiovascular field with the aim of creating what we believe can become the safest, most effective means of addressing the growing challenge of cardiovascular calcification. Lithotripsy has been used to successfully treat kidney stones (deposits of hardened calcium) for over 30 years. By integrating lithotripsy into a device that resembles a standard balloon catheter, physicians can prepare, deliver, and treat calcified lesions using a familiar form factor, without disruption to their standard procedural workflow. Our differentiated IVL System works by delivering shockwaves through the entire depth of the artery wall, modifying calcium in the medial layer of the artery, not just in the intimal layer. The shockwaves crack this calcium and enable the stenotic artery to expand at low pressures, thereby minimizing complications inherent to traditional balloon dilations, such as dissections or tears. Preparing the vessel with IVL facilitates optimal outcomes with other therapies, including stents and drug-eluting technologies. Using IVL also avoids complications associated with atherectomy devices such as dissection, perforation, and embolism. When followed by an anti-proliferative therapy such as a DCB or DES, the micro-fractures may enable better drug penetration into the arterial wall and improve drug uptake, thereby improving the effectiveness of the combination treatment.
Our IVL System
(Left) Our IVL System consisting of a generator, connector cable and IVL catheter. (Right) Our IVL System delivering lithotripsy directly to a calcified vessel
Our IVL System includes a generator, connector cable, and a variety of IVL catheters designed to treat PAD and CAD. Our IVL System employs our IVL Technology to crack calcium through short, microsecond bursts of sonic pressure waves, which are generated within the IVL catheter, travel through the vessel and crack calcium without harming the soft tissue. Our IVL catheters utilize multiple lithotripsy emitters that are integrated into a standard, semi-compliant balloon-catheter platform. The IVL catheter is advanced to the target lesion and the integrated balloon is inflated with fluid at a low pressure to make contact with the arterial wall. IVL is then activated through the generator with the touch of a button, creating a small bubble within the catheter balloon which rapidly expands and collapses. The rapid expansion and collapse of the bubble creates sonic pressure waves that travel through the vessel and crack the calcium, allowing the blood vessel to expand under low static pressure.
We believe there is a significant opportunity to apply our IVL Technology as a platform to treat a wide array of indications throughout the cardiovascular system. Ultimately, our plan is to have a family of IVL catheters that can treat calcium-related diseases across a wide variety of vasculatures and structures.
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Why Shockwave?
Safe – Simple – Effective.
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Our Growth Strategy
Our mission is to provide safe, effective, and easy-to-use treatments to optimize outcomes for calcified cardiovascular disease. We believe the following strategies will advance our mission and will contribute to our future success and growth.
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Research and Development
We invest in research and development efforts that advance our IVL Technology and related technology with the goal to expand and improve upon our existing product offerings.
We believe our ability to rapidly develop innovative products is attributable to the dynamic product innovation process that we have implemented, the versatility and leveragability of our core technology and the management philosophy behind that process. We have recruited and retained engineers and scientists with significant experience in the development of medical devices. We have a pipeline of products in various stages of development that are expected to provide additional commercial opportunities. Our research and development efforts are based in Santa Clara, California.
Manufacturing
The manufacturing of our IVL catheters is principally done at our facilities in Santa Clara, California, however in 2021 we entered into a contract manufacturing agreement with a third-party contract manufacturer, pursuant to which the contract manufacturer began manufacturing a portion of our demand for our M5 catheters and we are currently in the process of qualifying the contract manufacturer to manufacture our M5+catheters.
We stock inventory of raw materials, components and finished goods at our facilities in California and finished products with our direct sales representatives, who travel to our hospital customers’ locations as part of their sales efforts. In addition, our contract manufacturer holds an inventory of raw materials, components, and finished goods at its manufacturing facility as necessary to support our catheter production requirements.
Our electronics (i.e., our generators and connector cables) are produced by original equipment manufacturing partners using our design specifications. We rely on a single or limited number of suppliers for certain raw materials and components, and we generally have no long-term supply arrangements with our suppliers, as we order on a purchase order basis. Under our contract manufacturing arrangements with our catheter contract manufacturer, however, we make binding one-year purchase commitments, subject to certain adjustment mechanisms specified in the contract manufacturing agreement.
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In the United States, we generally ship our IVL products from Santa Clara to our hospital customers in the United States but also may sell our IVL products directly to our hospital customers through our direct sales representatives, who deliver such products to hospital customers in the field. We have also offered consignment sales arrangements to certain customers. Internationally, we ship our IVL products from Santa Clara to either our third-party logistics provider located in the Netherlands who then ships directly to hospital customers and distributors pursuant to purchase orders or from Santa Clara directly to hospital customers and distributors pursuant to purchase orders. We also ship to some customers in Germany, Austria, Switzerland, France, and the United Kingdom (the “UK”) on a consignment basis from our third-party logistics provider located in the Netherlands. Our catheter contract manufacturer generally ships all products to our facility in Santa Clara, where the products are held in inventory until ready to be shipped to U.S. or international customers. As of December 31, 2021, we had approximately 217 operations and manufacturing employees.
Our rigorous quality control management programs have earned us a number of quality-related manufacturing designations. Our manufacturing facilities are compliant with International Organization for Standardization (“ISO”) 13485:2016. In 2014, we achieved compliance with the European Union’s Medical Device Directive (93/42/EEC) (the “MDD”) and we are working to achieve compliance with the new Medical Devices Regulation (Regulation 2017/745) (the “MDR”), which supersedes, subject to certain transition provisions contained in the MDR, the MDD. We use regular internal audits to help ensure strong quality control practices. An internal, on-going staff training, and education program contributes to our quality assurance program and training is documented and considered part of the employee evaluation process. We are also subject to periodic audits by regulatory agencies.
Sales and Marketing
We market our IVL System to hospitals whose interventional cardiologists, vascular surgeons and interventional radiologists treat patients with PAD and CAD. We have dedicated meaningful resources to establish direct sales capability in the United States, Germany, Austria, Switzerland, France, and the UK which we have complemented with distributors actively selling in over 50 countries in North and South America, Europe, the Middle East, Asia, Africa, and Australia/New Zealand. In addition, in 2021, we began developing our direct sales capability in Japan in advance of our C2 catheter launch, for which we anticipate Japanese regulatory approvals in the first half of 2022. We have been adding new US sales territories and are actively expanding our international field presence through new distributors, and additional sales and clinical personnel and expanded direct sales territories. Of note, we have received the CE Mark in Europe and 510(k) clearance in the United States for our IVL System using our peripheral catheters (our M5 and M5+ catheters and S4 catheters) and CE Mark in Europe for our IVL System using our C2 catheters. In August 2020, we submitted a PMA application with the FDA relating to our C2 catheters in the U.S., which was approved by the FDA in February 2021.
Our sales representatives and sales managers generally have substantial and applicable medical device experience, specifically in the vascular space and market our products directly to interventional cardiologists, vascular surgeons, and interventional radiologists who treat patients with PAD and CAD. We are focused on developing strong relationships with our physician and hospital customers in order to educate them on the use and benefits of our products. Similarly, our marketing team has a significant amount of domain expertise and a strong track record of success. Our global sales and marketing team totaled 250 professionals as of December 31, 2021.
In the United States, our IVL generators and connector cables may be sold, rented, or loaned to hospital customers, while our disposable IVL catheters are sold to hospital customers or may be provided on a consignment basis whereby title to such catheters passes to the hospital once they are used in a clinical procedure. In the consignment model, following such use, we charge the hospital a predetermined set fee for each IVL catheter, which fee may be determined based on the hospital’s overall use of our IVL catheters.
In addition to our direct sales organizations, we sell to distributors in certain geographies outside the United States where we have determined that selling through third party distributors is the best way to optimize our opportunities and resources. We select distribution partners who have deep experience in our markets, have strong customer relationships and have a demonstrated track record of launching innovative products.
Our IVL System is simple, intuitive, easy to install and easy to use. This provides value to our customers, but also makes our sales model a source of competitive advantage. Lower service burden means we can develop a cost-efficient sales model by optimizing a mix of clinical specialists and salespeople. Moreover, our coronary and peripheral IVL catheters have similar call points, meaning we can further leverage our field sales team.
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Reimbursement
In the United States, our products are generally purchased by hospitals, which in turn normally bill various third-party payors, including government programs, such as Medicare and Medicaid, and private health insurance plans, for the healthcare services required to treat each patient. The applicable third-party payors determine whether to provide coverage for a particular procedure or product, and, if so, the amount for which the provider will be reimbursed for treatment. In the United States, there is no uniform system among payors for making coverage and reimbursement decisions. In addition, the process for determining whether a payor will provide coverage for a product or service may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product or service once coverage is approved. Payors may limit coverage to specific products or services on an approved list, or formulary, which might not include all of the FDA-approved or -cleared products for a particular indication.
Outside the United States, reimbursement levels vary significantly by country, and by region within some countries. Reimbursement is obtained from a variety of sources, including government-sponsored and private health insurance plans, and combinations of both.
Our ability to achieve market acceptance or significant sales volume will depend in large part on the availability of coverage and the level of reimbursement for procedures performed using our products under healthcare payment systems in the markets where we sell and distribute our products. We cannot assure you that government or private payors will continue to cover and reimburse the procedures performed using our products in whole or in part in the future or that payment rates will continue to be adequate.
In addition, we expect that we will continue to see pressure globally by third-party payors to manage the cost of healthcare. Cost management may come in a variety of forms, including rules and practices of third-party payors, judicial decisions, laws and regulations, group purchasing and managed care organizations, and medical device reimbursement policies. Cost management could potentially limit the amount which healthcare providers may be willing to pay for our products and impact demand for our products, product pricing, reimbursement, and usage, and which, in turn, may adversely affect our product sales and results of operations.
Competition
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. We compete with manufacturers and distributors of cardiovascular medical devices. The cardiovascular field is highly competitive and certain of our products may compete with products manufactured by other companies, including Boston Scientific Corporation, Cardiovascular Systems, Inc. (“CSI”), Medtronic plc and Philips N.V. Many of these competitors are large, well-capitalized companies with significantly greater market share and resources than we have. As a consequence, they are able to spend more on product development, marketing, sales and other product initiatives than we can. We also compete with smaller medical device companies that have single products or a limited range of products. Some of our competitors have:
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We believe that our proprietary IVL Technology, our focus on calcified cardiovascular disease and our organizational culture and strategy, will be important factors in our future success. We compete primarily on the basis that our products are designed to treat patients with calcified cardiovascular disease safely, easily, and effectively, with improved outcomes and procedural cost savings. Our continued success depends on our ability to:
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We believe we compete favorably with our competitors on the basis of the factors described above.
Intellectual Property
Our success depends in part on our ability to obtain, maintain, protect, and enforce our proprietary technology and intellectual property rights, in particular, our patent rights, preserve the confidentiality of our trade secrets, and operate without infringing the valid and enforceable patents and other proprietary rights of third parties. We rely on a combination of patent, trademark, trade secret, copyright, and other intellectual property rights and measures to protect the intellectual property rights that we consider important to our business. We also rely on know-how and continuing technological innovation to develop and maintain our competitive position.
We seek to protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with suppliers, employees, consultants, and others who may have access to our proprietary information. However, trade secrets and proprietary information can be difficult to protect. While we have confidence in the measures we take to protect and preserve our trade secrets and proprietary information, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets and proprietary information may otherwise become known or be independently discovered by competitors.
As of December 31, 2021, we owned 52 issued U.S. patents and 73 issued foreign patents, 18 pending U.S. non-provisional patent applications and 28 pending foreign patent applications (including five Patent Cooperation Treaty applications). This portfolio includes 22 issued U.S. patents, 37 issued foreign patents, five pending U.S. non-provisional patent applications and six pending foreign patent applications relating to our current IVL Technology.
On January 18, 2022 the U.S. Court of Appeals for the Federal Circuit issued two opinions affirming the previous decisions of the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board, finding that the claims for U.S. Pat. Nos. 9,642,673 and 8,728,091, which were two of our issued U.S. patents relating to our current IVL Technology, are unpatentable following an inter partes review (“IPR”) proceedings filed by CSI, one of our competitors. U.S. Pat. No. 8,956,371, which is another of our issued U.S. patents relating to our current IVL Technology, remains the subject of an IPR proceeding also filed by CSI. For more information regarding these proceedings, see the section titled “Legal Proceedings.”
These issued patents, and any patents granted from such applications, are expected to expire between 2029 and 2041, without taking potential patent term extensions or adjustments into account. The term of individual patents depends upon the legal term for patents in the countries in which they are granted. We aim to protect our innovation with patents, but we cannot be sure that any applications we file will issue as patents, that any patents we obtain will withstand challenge or invalidation, or that we will obtain sufficient patent protection for innovation that turns out to be more important than anticipated.
For more information regarding the risks related to our intellectual property, including the above referenced IPR proceedings, see the section titled “Risk Factors—Risks Related to Our Intellectual Property.”
Government Regulation
Our products are medical devices subject to extensive laws, rules, and regulations of various U.S. federal and state, and international regulatory bodies in each of the markets in which we sell or distribute our products. These laws, rules and regulations govern, among other things, product design and development, pre-clinical and clinical testing, manufacturing, packaging, labeling, advertising, storage, record keeping and reporting, clearance or approval, marketing, distribution, promotion, import and export, pricing and discounts, post-marketing surveillance and interactions with healthcare professionals. Failure to comply with applicable requirements may subject us or one or more of our products to a variety of sanctions, such as loss of product approvals/clearances/certifications, issuance of warning letters, untitled letters, civil monetary penalties and judicial sanctions, such as product seizures, injunctions, or criminal prosecution.
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United States
FDA’s Premarket Clearance and Approval Requirements. Each medical device we seek to commercially distribute in the United States will require either a prior 510(k) clearance, unless it qualifies for an exemption as outlined below, De Novo authorization, or a PMA from the FDA. Medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with the medical device and the extent of regulatory control needed to provide reasonable assurance of safety and effectiveness.
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510(k) Clearance Pathway. When a 510(k) clearance is required, we must submit a premarket notification to the FDA demonstrating that our proposed device is “substantially equivalent” to a predicate device, which is a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976. By regulation, a premarket notification must be submitted to the FDA at least 90 days before we intend to market a device, and we must receive 510(k) clearance from the FDA before we actually market the device. The Medical Device User Fee Amendments performance goal for a traditional 510(k) clearance is 90 days. As a practical matter, however, clearance often takes longer, because the review clock is paused by the FDA to allow time to resolve any questions the FDA may have. To demonstrate substantial equivalence, we must show that the proposed device (1) has the same intended use as the predicate device, and (2) it either has (a) the same technological characteristics as the predicate device or (b) if the proposed device has different technological characteristics than the predicate device, that the device is equally safe and effective and does not raise different questions of safety and effectiveness. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously cleared device or use, the FDA will place the device into Class III.
There are three types of 510(k) clearance: traditional, special, and abbreviated. Special 510(k)s are typically for devices that have certain technological, design or labelling changes that require a new 510(k) but where the method(s) to evaluate the changes are well established and the results of change evaluation can be sufficiently reviewed in a summary or risk analysis format. Abbreviated 510(k)s are for devices that conform to special controls for the device type or to a recognized standard. The special and abbreviated 510(k)s are intended to streamline review, and the FDA intends to process special 510(k)s within 30 days of receipt.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) or possibly a PMA. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance for any particular device, the FDA may retroactively require us to seek 510(k) clearance or possibly a PMA. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or a PMA is obtained. Also, in these circumstances, we may be subject to significant regulatory fines and penalties.
De Novo Classification Pathway. If a novel device is low risk but lacks a predicate device, it may be eligible for de novo classification. In this process, the FDA by order creates a new classification regulation placing the novel device in Class I or II. This process is lengthier and more expensive than a 510(k) review. For instance, the FDA requires that the premarket notification be submitted 150 days, rather than 90 days, before the day that the device is intended to be marketed. This
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process is, however, quicker and less expensive than the PMA pathway described below. Once the classification regulation is established, subsequent devices in this type can use the 510(k) pathway.
Premarket Approval Pathway. A PMA application under Section 515 of the FD&C Act must be submitted to the FDA for Class III devices that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. The PMA application process is much more demanding than the 510(k) premarket notification process. The granting of a PMA is based on a determination by the FDA that the PMA application contains sufficient valid scientific evidence to ensure that the device is safe and effective for its intended use(s).
After a PMA application is submitted, the FDA has 45 days to determine whether the application is sufficiently complete to permit a substantive review and thus whether the FDA will file the application for review. The FDA has 180 days to review a filed PMA application, although the review of an application generally occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are an important factor in the FDA’s overall decision-making process. In addition, the FDA may conduct a preapproval inspection of the manufacturing facility to ensure compliance with the Quality System Regulation (“QSR”). The FDA also may inspect one or more clinical sites to ensure the validity of the data and compliance with applicable FDA regulations.
Upon completion of the PMA application review, the FDA may: (i) approve the PMA which authorizes commercial marketing with specific prescribing information for one or more indications, which can be more limited than those originally sought; (ii) issue an “approvable letter” which indicates the FDA’s belief that the PMA application is approvable and states what additional information the FDA requires, or the post-approval commitments that must be agreed to prior to approval; (iii) issue a “not approvable letter” which outlines steps required for approval, but which are typically more onerous than those in an approvable letter, and may require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable letter, the applicant has 180 days to respond, after which the FDA’s review clock is reset.
Some changes to an approved PMA device, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new PMA application or PMA supplement, as appropriate, before the change can be implemented. Supplements to a PMA often require the submission of the same type of information required for an original PMA application, except that the supplement is generally limited to that information needed to support the proposed change from the device covered by the original PMA. The FDA uses the same procedures and actions in reviewing PMA supplements as it does in reviewing original PMA applications.
Clinical Trials. Clinical trials are almost always required to support a PMA and are sometimes required for 510(k) clearance. In the United States, for significant risk devices, these trials require submission of an application for an IDE to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specific number of patients at specified study sites.
During the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with all reporting and recordkeeping requirements. Clinical trials for significant risk devices may not begin until the IDE application is approved by the FDA and the appropriate IRBs at the clinical trial sites. An IRB is an appropriately constituted group that has been formally designated to review and monitor medical research involving subjects and which has the authority to approve, require modifications in, or disapprove research to protect the rights, safety and welfare of human research subjects. A nonsignificant risk device does not require FDA approval of an IDE; however, the clinical trial must still be conducted in compliance with various requirements of the FDA’s IDE regulations and be approved by an IRB at the clinical trials sites. We, the FDA or the IRB at each site at which a clinical trial is being performed may withdraw approval of a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits or a failure to comply with FDA or IRB requirements. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and effectiveness of the device, may be equivocal or may otherwise not be sufficient to obtain approval or clearance of the product.
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Sponsors of clinical trials of devices are required to register with clinicaltrials.gov, a public database of clinical trial information. Information related to the device, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is made public as part of the registration.
Ongoing Regulation by the FDA. Even after a device receives clearance or approval and is placed on the market, numerous regulatory requirements will apply. These include:
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FDA regulations require us to register as a medical device manufacturer with the FDA. Additionally, the California Department of Health Services (“CDHS”) requires us to register as a medical device manufacturer within the state. Because of this, the FDA and the CDHS inspect us on a routine basis for compliance with the QSR. These regulations require that we manufacture our products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. We have undergone and expect to continue to undergo regular QSR inspections in connection with the manufacture of our products at our facilities. Further, the FDA requires us to comply with various FDA regulations regarding labeling. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA, CDHS or other state authorities, which may include any of the following sanctions:
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The medical device reporting laws and regulations require us to provide information to the FDA when we receive or otherwise become aware of information that reasonably suggests that one of our devices may have caused or contributed to a death or serious injury, or information that reasonably suggests a device malfunction that likely would cause or contribute to death or serious injury if the malfunction were to recur. Our approach has been to file such reports with the FDA even in cases where reporting might not otherwise be required out of an abundance of caution.
In addition, the FDA prohibits an approved device from being marketed for off-label use. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.
Newly discovered or developed safety or effectiveness data may require changes to a product’s labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the
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FDA’s policies may change, which could delay or prevent regulatory clearance or approval of our products under development.
Anti-Kickback Statute. The U.S. federal Anti-Kickback Statute (the “Anti-Kickback Statute”) prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in exchange for or to induce either the referral of an individual for the furnishing or arranging for a good or service, or for the purchasing, leasing, ordering, or arranging for or recommending any good, facility, service or item for which payment may be made in whole or in part under federal healthcare programs, such as the Medicare and Medicaid programs. The term “remuneration” expressly includes kickbacks, bribes, or rebates and also has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry.
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, such as reimbursement support programs, educational and research grants, or charitable donations. 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. Some of our practices, such as the loaning of generators or consignment of catheters, may not in all cases meet all of the criteria for statutory exception or regulatory safe harbor protection from anti-kickback liability.
The government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the statute or specific intent to violate it. 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 federal civil False Claims Act (the “False Claims Act”), which is discussed below. Penalties for violations of the Anti-Kickback Statute include, but are not limited to, criminal, civil and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from Medicare, Medicaid and other federal healthcare programs, and the curtailment or restructuring of operations. Various states have adopted laws similar to the Anti-Kickback Statute, and some of these state laws may be broader in scope in that some of these state laws extend to all payors and may not contain safe harbors. In addition, many foreign jurisdictions in which we operate have similar laws and regulations.
Federal Civil False Claims Act. The False Claims Act prohibits, among other things, persons, or entities from knowingly presenting or causing to be presented a false or fraudulent claims for payment of government fundsor knowingly presenting or causing to be presented a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. Many pharmaceutical and medical device manufacturers have been investigated and have reached substantial financial settlements with the federal government under the False Claims Act 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.
Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government. These individuals, sometimes known as “relators” or, more commonly, as “whistleblowers,” may share in any amounts paid by the subject entity to the government in fines or settlement. The number of filings of qui tam actions has increased significantly in recent years, causing more healthcare companies to have to defend cases brought under the False Claim Act. If an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have adopted laws similar to the False Claims Act, and many of these state laws are broader in scope and apply to all payors, and therefore, are not limited to only those claims submitted to the federal government.
Federal Civil Monetary Penalties Statute. The federal Civil Monetary Penalties Statute, among other things, imposes fines against any person who is determined to have presented, or caused to be presented, claims to a federal healthcare program that the person knew, or should have known, was for an item or service that was not provided as claimed or is false or fraudulent.
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Sunshine Act. The Affordable Care Act also included a provision, commonly referred to as the Sunshine Act, which requires that any manufacturer of drugs, devices, biologics or 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 (“CMS”), information related to payments or other “transfers of value” made to physicians 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, with the reported information made public on a searchable website. Such reporting requirement was expanded by the SUPPORT for Patients and Communities Act, which requires manufacturers, beginning January 1, 2021, to report payments or transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse midwives in addition to physicians and teaching hospitals. Similar laws have been enacted at the state level and in foreign jurisdictions, including France.
Health Insurance Portability and Accountability Act of 1996. The federal Health Insurance Portability and Accountability Act (“HIPAA”) imposes criminal liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. In addition, HIPAA and its implementing regulations established uniform standards for certain covered entities, which are healthcare providers, health plans and healthcare clearinghouses, as well as their business associates, governing the conduct of specified electronic healthcare transactions and protecting the security and privacy of protected health information.
Other Laws, Rules and Regulations. We are also subject to a variety of other U.S. federal, state, and local laws and regulations and foreign laws, rules, and regulations, including:
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International
Regulation of medical devices in general. In addition to the rules and regulations described above, international sales of medical devices are subject to a variety of foreign government regulations, which may vary substantially from country to country. We expect this global regulatory environment will continue to be complex and evolving, which could impact the cost, the time needed to approve, and our ability to maintain existing approvals or obtain future approvals for our products, and require extensive compliance and monitoring obligations in the countries where we sell or distribute our products.
European Union. The European Union (the “EU”) has adopted numerous directives and standards harmonizing the requirements for the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Our products are regulated in the EU as medical devices per the MDR, which was published in May 2017 and came into application in May 2021, and which replaced, subject to certain transition provisions contained in the MDR, the MDD. Conformity with the MDD or MDR, as applicable, is indicated by the CE mark, which can be affixed by the manufacturer after a certificate of conformity is issued by the applicable Notified Body following the successful satisfaction of a variety of requirements. These requirements depend on the class of the product, but normally involve a combination of: (a) preparation of a design dossier; (b) self-assessment by the manufacturer; (c) a third-party assessment, which generally consists of an audit of the manufacturer’s quality system and manufacturing site by a Notified Body; and (d) review of the design dossier, which
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may include safety and technical information, by the Notified Body. Our ability to affix the CE mark is contingent upon continued compliance with the applicable regulations and standards, including compliance with ISO 13485 and applicable vigilance and post-market surveillance.
The MDR, among other things, expanded and modified the pre-market and post-market obligations of manufacturers under the MDD. We are currently relying on transitional provisions, which allow us to continue placing our products on the EU market until expiry of our current certificates of conformity issued under MDD, subject to compliance with certain conditions. However, we have updated our technical documentation and other quality management system processes in preparation for compliance with the MDR requirements.
United Kingdom. We anticipate that our compliance obligations under UK law will continue to increase and change following the departure of the UK from the EU as of January 1, 2021. Although the CE mark will continue to be recognized in Northern Ireland whilst the Northern Ireland Protocol is in force, it will only be recognized in Great Britain until July 1, 2023, and after this date, an equivalent UK mark (UKCA mark) will become mandatory in Great Britain. We will only be able to affix the UKCA mark on our products following completion of a conformity assessment procedure which currently is based on that under the MDD, except that it needs to be supervised by a UK-based Approved Body. We will commence preparations to ensure we can use the UKCA mark by July 2023. The UK government has already made some changes to the MDD-derived regime, including requiring that we appoint a UK-based Responsible Person to serve a point of contact (where previously the UK would be covered by our EU-based Authorized Representative) and register our devices – and is considering further changes. We expect that over time the two processes will continue to diverge.
Other laws and regulations. In addition to laws regulating medical devices, our international operations, distribution and sales require us to comply with various rules of general application: the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”) and similar anti-bribery laws in other jurisdictions including the UK Bribery Act 2010 (the “UKBA”); U.S. and foreign export control, trade embargo and custom laws; U.S. and foreign tax laws; employment, immigration and labor laws; local intellectual property laws, which may not protect intellectual property rights to the same extent as U.S. law; and privacy laws such as the European General Data Protection Regulation and the UK equivalent. Some of these laws, for example the FCPA and the UKBA, have extraterritorial effect. In countries where we sell to our customers directly, we are also subject to more specific laws and codes that regulate interactions between manufacturers of medical devices and healthcare professionals. These rules also vary from country to country.
Regulatory Inspections
We are subject to periodic inspections by the FDA and other regulatory entities, such as our European Notified Body, related to the regulatory requirements that apply to medical devices designed and manufactured, and clinical trials sponsored, by us. When the FDA conducts an inspection, the investigators will identify any deficiencies they believe exist in the form of a notice of inspectional observations, or Form FDA 483. If we receive a notice of inspectional observations or deficiencies from the FDA following an inspection, we would be required to respond in writing, and would be required to undertake corrective and/or preventive or other actions in order to address the FDA’s or other regulators’ concerns. Failure to address the FDA’s concerns may result in the issuance of a warning letter or other enforcement or administrative actions.
Seasonality
We have experienced some seasonality during summer months, which we believe is attributable to the postponement of elective surgeries for summer vacation plans of physicians and patients. We also anticipate that we may in the future experience some seasonal slowing of demand for our products in our fourth quarters due to year-end clinical treatment patterns, such as the postponement of elective surgeries during the holiday period. We expect these seasonal factors to become more pronounced in the future as our business grows.
Human Capital Resources
As of December 31, 2021, we had 657 full-time employees worldwide, of which 383 were located at our headquarters in Santa Clara, California, 234 were remote and field-based employees throughout the country and 40 were located outside of the United States. Of these employees, 250 were in sales and marketing, 217 were in manufacturing and quality, 100 were in research and development, clinical and regulatory, and 90 were in general and administration. We routinely enter into contractual agreements with our employees, which typically include confidentiality and non-competition commitments. None of our U.S. employees are represented by labor unions or collective bargaining agreements with respect to their employment by us. However, in certain countries outside of the United States in which we operate, we are subject to, and comply with, local labor law requirements which may automatically make our employees in those countries subject to industry-wide collective bargaining agreements. We have never experienced a work stoppage.
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We believe that we have a good relationship with our workforce, our employees are a key factor in transforming the way calcified cardiovascular disease is treated by establishing a new standard of care for medical device treatment of atherosclerosis, and our future success largely depends upon our continued ability to attract and retain highly skilled employees. Our employee turnover for the year ended December 31, 2021 was approximately 14%. We consider the turnover rate a valuable metric to measure the effectiveness of our programs and to assist in developing new programs.
To attract, develop, and retain talent, we emphasize:
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We continue to assess and develop additional measures and objectives necessary to attract and retain employees including relating to talent acquisition and retention, employee engagement, employee development and training, and employee safety and wellness.
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Corporate Information
We were incorporated in 2009 as a Delaware corporation under the name Shockwave Medical, Inc. Our principal executive offices are located at 5403 Betsy Ross Drive, Santa Clara, California 95054, and our telephone number is (510) 279-4262. Our website address is www.shockwavemedical.com. The information on, or that can be accessed through, our website is not part of this Annual Report on Form 10-K. We have included our website address as an inactive textual reference only.
We use “Shockwave,” “Shockwave M5,” Shockwave M5+,” “Shockwave C2,” “Shockwave S4” and other marks as trademarks in the United States and other countries. This Annual Report on Form 10-K contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our right or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.
Available Information
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, available free of charge at our website as soon as reasonably practicable after they have been filed with the Securities and Exchange Commission (the “SEC”). Our website address is www.shockwavemedical.com. Information on our website is not part of this report. The SEC maintains a website that contains the materials we file with the SEC at www.sec.gov.We use our website, as well as press releases, public conference calls, public webcasts, as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels.
Item 1A. Risk Factors.
Our operating and financial results are subject to various risks and uncertainties. You should carefully consider the risks described below, as well as all of the other information contained in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and 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.
RISKS RELATED TO OUR BUSINESS
The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have adversely impacted and are expected to continue to adversely impact our business and results of operations.
The global COVID-19 pandemic presents significant risks to us, not all of which we are able to fully evaluate or even to foresee at the current time. The COVID-19 pandemic and related containment measures adversely affected our financial results and business operations during the year ended December 31, 2021 and are expected to continue to adversely impact our financial results and business operations. The extent to which the pandemic will continue to materially adversely affect our business and results of operations will depend on numerous evolving factors and future developments that we are not able to predict, including the duration, spread and severity of the outbreak, the availability and effectiveness of vaccines against COVID-19, continued mutations of the virus and the impact on such mutations on transmission rates and vaccine efficacy, the nature, extent and effectiveness of containment measures, the extent and duration of the effect on the economy, and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic and containment measures have contributed to, among other things:
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All of these factors may have far reaching impacts on our business, operations, and financial results and condition, including without limitation impacts on the health of our management and employees, manufacturing, distribution, marketing and sales operations, customer and patient behaviors, and economic and social conditions generally. The scope and nature of these impacts, most of which are beyond our control, continue to evolve and the outcomes are uncertain, and such impacts could exist for an extended period of time even after any cessation of the pandemic.
We have limited commercial experience.
We were incorporated in 2009 and began commercializing our Shockwave M5 intravascular lithotripsy (“IVL”) catheter (“M5 catheter”) for treating peripheral artery disease (“PAD”) in the United States and Europe in 2018 and our Shockwave C2 IVL catheter (“C2 catheter”) for treating coronary artery disease (“CAD”) in Europe in 2018. We initiated a limited launch of our Shockwave S4 IVL catheter (“S4 catheter”) in the first half of 2019 and commenced a full commercial launch in select approved geographies in the second half of 2019. We submitted our application for U.S. pre-market approval (“PMA”) with the U.S. Food and Drug Administration (the “FDA”) relating to our C2 catheters in August of 2020 and we received FDA approval for our C2 catheters in February 2021. We are currently initiating a limited market release in the United States and select international locations of our Shockwave M5+ IVL catheter (“M5+ catheters”), which was CE-Marked in November 2020 and cleared by the FDA in April 2021. Our limited commercialization experience and limited number of approved or cleared products make it difficult to evaluate our current business and predict our future prospects.
These factors also make it difficult for us to forecast our future financial performance and growth, and such forecasts are subject to a number of uncertainties, including our ability to: (i) successfully complete on-going clinical trials and other clinical trials we may undertake in the future, (ii) continue to successfully commercialize and expand usage of our products in the U.S. and international markets, and (iii) obtain regulatory approvals and successfully commercialize future planned products in the United States or in key international markets. If our assumptions regarding the risks and uncertainties we face, which we use to plan our business, are incorrect or change due to circumstances in our business or our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
We have a history of net losses, and we may continue to incur losses. We may not be able to sustain profitability.
We have incurred net losses since our inception and although we were profitable in the third and fourth quarters of 2021, we incurred a net loss for all of 2021 and we may continue to incur net losses in the future. For the years ended
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December 31, 2021 and 2020, we had net losses of $9.1 million and $65.7 million, respectively. As a result of these losses, as of December 31, 2021, we had an accumulated deficit of approximately $252.8 million. We expect to continue to incur significant sales and marketing, research and development, regulatory and other expenses as we expand our marketing efforts to increase adoption of our products, expand existing relationships with our customers, obtain regulatory clearances or approvals for our planned or future products, conduct clinical trials on our existing and planned or future products and develop new products or add new features to our existing products. In addition, we expect to continue to incur expenses due to the compliance and governance requirements associated with being a public company. We may continue to incur losses in the future, which may fluctuate significantly from period to period. Although we achieved profitability for the third and fourth quarters of 2021, we cannot be sure that we will remain profitable for any substantial period of time. If our revenue declines or fails to grow at a rate faster than increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot ensure that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability.
Our results of operations may fluctuate significantly, which makes our future results of operations difficult to predict and could cause our results of operations to fall below expectations or any guidance we may provide.
Our quarterly and annual results of operations, including our revenue, net income (loss) and cash flow, may fluctuate significantly, which makes it difficult for us to predict our future results of operations. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:
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The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual results of operations. As a result, comparing our results of operations 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 results of operations fall below the expectations of analysts or investors or below any forecasts we may provide to the market, it could have a material adverse effect on our business, financial condition and results or operations.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2021, we had net operating loss (“NOL”) carryforwards of approximately $351.0 million for federal income tax purposes, and $54.0 million for California and $160.6 million for other state income tax purposes. These federal NOLs (generated prior to 2018) begin expiring in 2030, the California NOLs begin expiring in 2031 and other state NOL carryforwards begin expiring in 2029. Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. Some of these NOLs could expire unused and be unavailable to offset our future income tax liabilities. To the extent available, we intend to use these NOL and credit carryforwards to offset future taxable income and/or income tax liabilities associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize the remaining tax attributes before they expire. As well, there are a variety of federal rules and regulations that may impact our ability to use our NOLs, including:
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Changes in tax laws or regulations may have a material adverse effect on our business, cash flow, financial condition, or results of operations.
Future changes in tax laws could have a material adverse effect on our business, cash flow, financial condition, or results of operations. For example, the TCJA enacted many significant changes to the U.S. tax laws, including changes in corporate tax rates, the realization of net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings and the deductibility of expenses. In addition, it is uncertain if and to what extent various states will conform to the TCJA or any newly enacted federal tax legislation. Although we are still awaiting guidance from the Internal Revenue Service on how some of the TCJA changes will impact us, beginning in 2022, the TCJA eliminates the option to immediately deduct research and development expenditures and requires taxpayers to amortize domestic expenditures over five years and foreign expenditures over 15 years. While it is possible that Congress may defer, modify, or repeal this provision, we have no assurance that this provision will be deferred, modified or repealed and even if Congress makes any such decision, it may not be retroactive to January 1, 2022, and could still therefore result in an impact on cash from operating activities and on the balance of our deferred taxes.
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These and other changes resulting from the TCJA or future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense.
We may require additional capital to finance our planned operations, and may not be able to raise capital when needed, which could force us to delay, limit, reduce or eliminate our product development programs, commercialization efforts or other operations.
Since our inception, we have incurred significant net losses and, although we had net income in the third and fourth quarters of 2021, we may incur net losses in the future. To date, our operations have been financed primarily by net proceeds from the sale of our equity securities and our product revenue. As of December 31, 2021, we had $201.0 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $252.8 million. Based on our current planned operations, we expect that our cash, cash equivalents and short-term investments will enable us to fund our cash requirements, including capital expenditures and working capital, for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
We have a number of ongoing clinical trials and expect to continue to make substantial investments in these trials and in additional clinical trials that are designed to provide clinical evidence of the safety and efficacy of our products. We have made and we plan to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives and expanding our international marketing programs to help facilitate further adoption among existing hospital accounts as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs, and clinical studies to develop future generations of our products, support regulatory submissions and demonstrate the clinical efficacy of our products. Moreover, we expect to continue to incur 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 may continue to incur net losses and negative cash flows from operations in the foreseeable future. Our future capital requirements will depend on many factors, including:
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As a result, we may require additional financing to fund working capital and pay our obligations. We may seek to raise any necessary additional capital through a combination of public or private equity offerings and/or debt financings. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us. If adequate funds are not available on acceptable terms when needed, we may be required to significantly reduce operating expenses, which may have a material adverse effect on our business and/or results of operations and financial condition. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. Additional capital may not be available on reasonable terms, or at all.
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We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires, among other things, that we file with the Securities and Exchange Commission (the “SEC”), annual, quarterly, and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), as well as rules subsequently adopted by the SEC and the Nasdaq Global Select Market (“Nasdaq”) to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring that we evaluate and determine the effectiveness of our internal control over financial reporting. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.
Compliance with the rules and regulations applicable to public companies can be time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition, and results of operations. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report by our management on, among other things, our internal control over financial reporting. To achieve compliance with Section 404, we engage in a process to document and evaluate our internal control over financial reporting, which process is both costly and challenging. Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Moreover, because we are no longer an emerging growth company, Section 404(b) of the Sarbanes-Oxley Act requires our independent registered public accounting firm to annually attest to the effectiveness of our internal control over financial reporting, which has, and will continue to, require increased costs, expenses, and management resources. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation. We are required to disclose changes made in our internal controls and procedures on a quarterly basis.
Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. If we identify material weaknesses in our internal control over financial reporting, if we are unable to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to attest that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decrease. We could also become subject to stockholder or other third-party litigation, as well as investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources and could result in fines, trading suspensions or other remedies.
We are highly dependent on our senior management team and key personnel, 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 other key personnel. 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, scientists, clinical specialists, engineers, and other highly skilled personnel and to integrate current and additional personnel in all departments. If we are not successful in attracting and retaining highly qualified personnel, including members of our senior management, it would have a material adverse effect on our business, financial condition, and results of operations.
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Competition for skilled personnel in our market is intense, especially in the San Francisco Bay Area where our headquarters are located, and may limit our ability to hire and retain highly qualified personnel on acceptable terms, or at all. Many of the companies with which we compete for experienced personnel have greater resources than we have. Our competitors also may be successful in recruiting and hiring members of our management team or other key employees, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms, or at all. We have in the past, and may in the future, be subject to allegations that employees we hire have been improperly solicited, or that they have divulged proprietary or other confidential information or that their former employers own such employees’ inventions or other work product, or that they have been hired in violation of non-compete provisions or non-solicitation provisions.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued stock awards that vest over time. The value to employees of stock awards 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. Hiring and retention may also be impacted by the continuing COVID-19 pandemic. Despite our efforts to retain valuable employees, members of our management, scientific 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, cause or good reason. The loss of services of these personnel could prevent or delay our growth plans and the implementation and completion of our strategic objectives or divert management’s attention to seeking qualified replacements. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.
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 results of operations may be adversely affected.
As of December 31, 2021, we had 657 full-time employees worldwide, compared to 449 full-time employees as of December 31, 2020. In response to growth in our business, including our product portfolio, customer base, and research and development programs, we have significantly expanded our employee headcount and existing operations, and established new operations in other countries. In order to manage this growth, we have needed, and expect to continue to need, additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including, among others:
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The growth we may experience in the future may provide challenges to our organization, requiring us to also rapidly expand other aspects of our business, including our manufacturing operations. Rapid expansion in personnel may result in less experienced people producing and selling our products, which could result in unanticipated costs and disruptions to our operations. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to further develop and commercialize our products and, accordingly, may not achieve our research and sales and marketing goals, which would have a material adverse effect on our business, financial condition and results of operations.
We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our results of operations.
As part of our business strategy, we may in the future make acquisitions or investments in companies, products or technologies that we believe could complement or expand our business model, enhance our technical capabilities, or otherwise offer growth opportunities and ways to further address the needs of our customers and potential customers. We cannot predict the number, timing or size of future acquisitions or investments, or the effect that any such transactions might have on our operating results, and this strategy poses a number of risks and uncertainties, including:
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We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result in the development of commercially viable products or product improvements or the generation of significant future revenue.
In the ordinary course of our business, we may enter into or modify collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships, or other arrangements (each, a “Collaboration”) to develop new products or product improvements and to pursue new markets. Any such Collaboration may subject us to business risks that could have a material adverse effect on our business, financial condition, and results of operations, including the following:
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For example, in March 2021, we entered into a joint venture with Genesis MedTech International Private Limited (“Genesis”) to establish a long-term strategic partnership to develop, manufacture and commercialize certain of our interventional products in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (“China”). Under the joint venture agreement, Genesis Shockwave Private Ltd. was formed under the laws of Singapore to serve as a joint venture between us and Genesis for the purpose of establishing and managing such a strategic partnership. The termination of our joint venture with Genesis would disrupt our ability to commercialize our products in China.
We have a limited operating history in China and we face risks with respect to conducting business in connection with our joint venture in China due to certain legal, political, economic and social uncertainties relating to China. Our ability to monetize our joint venture in China may be limited.
Our participation in the joint venture with Genesis in China is subject to general, as well as industry-specific, economic, political and legal developments and risks in China. The Chinese government exercises significant control over the Chinese economy, including but not limited to controlling capital investments, allocating resources, setting monetary policy, controlling and monitoring foreign exchange rates, implementing and overseeing tax regulations, providing preferential treatment to certain industry segments or companies and issuing necessary licenses to conduct business. In addition, we could face additional risks resulting from changes in China’s data privacy and cybersecurity requirements. Accordingly, any adverse change in the Chinese economy, the Chinese legal system or Chinese governmental, economic or other policies could have a material adverse effect on our business and operations in China and our prospects generally.
We face additional risks in China due to China’s historically limited recognition and enforcement of contractual and intellectual property rights. We may experience difficulty enforcing our intellectual property rights in China. Unauthorized use of our technologies and intellectual property rights by China partners or competitors may dilute or undermine the strength of our brands. If we cannot adequately monitor the use of our technologies and products, or enforce our intellectual property rights in China or contractual restrictions relating to use of our intellectual property by Chinese companies, our revenue could be adversely affected.
Our joint venture with Genesis is subject to laws and regulations applicable to foreign investment in China. There are uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. Because many laws and regulations are relatively new, the interpretations of many laws, regulations and rules are not always uniform. Moreover, the interpretation of statutes and regulations may be subject to government policies reflecting domestic political agendas. Enforcement of existing laws or contracts based on existing law may be uncertain and sporadic. As a result of the foregoing, it may be difficult for us to obtain swift or equitable enforcement of laws ostensibly designed to protect companies like ours, which could have a material adverse effect on our business and results of operations. Our ability to monetize our joint venture in China may also be limited.
The terms of the Loan and Security Agreement require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
Our Loan and Security Agreement initially provided for a $2.0 million revolving line of credit and a $15.0 million term loan.
On February 11, 2020, we entered into the First Amendment to the Loan and Security Agreement with Silicon Valley Bank (the “Amended Credit Facility”), to refinance our existing term loan. The Amended Credit Facility provided us with a supplemental term loan in the amount of $16.5 million. After repayment of the outstanding amount of the term loan, we received net proceeds of $3.3 million, which reflected an additional $4.3 million in principal as of the date of the modification less the final balloon payment fee of $1.0 million. In addition, the Amended Credit Facility terminated our revolving line of credit.
The supplemental term loan is secured by all of our assets, excluding intellectual property and certain other assets. Subject to the terms of the Amended Credit Facility, the supplemental term loan can be repaid at any time, subject to certain penalty payments, prior to the December 1, 2023 maturity date, at which time all amounts borrowed will be due and payable. The supplemental term loan is not subject to any financial covenants but is subject to 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. If we fail to comply with the covenants or payments in connection with
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the supplemental term loan, Silicon Valley Bank 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, Silicon Valley Bank would have the right to proceed against the assets we provided as collateral pursuant to the loan. The foregoing may restrict our current and future operations, particularly our ability to respond to certain changes in our business or industry or take future actions.
If we experience significant disruptions in, or breaches of, our information technology systems, our business may be adversely affected.
We depend on using increasingly complex information technology systems both with our own systems and those of our cloud and third-party service providers, for the efficient functioning of our business, including the manufacture, distribution, and maintenance of our products, management of clinical trial data and employee data, as well as for accounting, data storage, compliance, purchasing and inventory management. Our information systems require an ongoing commitment of significant resources designed to maintain, protect, and enhance our existing systems, however, a number of issues could impact the integrity of our systems including:
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As we become more dependent on information technologies to conduct our operations, Technology Risks may become more widespread and Cyber Risks may increase in frequency and sophistication. As well, because of the nature Cyber Risks and the techniques used to obtain unauthorized access, disable, or degrade service or sabotage systems that change frequently and often are not recognized until launched against a target, we and our service providers may be unable to anticipate these techniques or to implement timely adequate preventative measures. In addition, a greater number of our employees working remotely during the COVID-19 pandemic has exposed us, and may continue to expose us, to increased Cyber Risks. Although we have expended, and will likely continue to need to expend, significant resources and make significant capital investment in efforts designed to protect against security breaches or to mitigate the impact of any such breaches, we realize that Cyber Risks are a threat, and there can be no assurance of our efforts will prevent information security breaches that would result in business, legal, financial, or reputational harm to us, or would have a material adverse effect on our results of operations and financial condition.
While we have not experienced any such material Technology Risk or Cyber Risk to date, if a Technology Risk or Cyber Risk results in an actual system disruption or a security incident that results in an unauthorized access to personal information or other confidential information, such disruption or security incident could, among other things:
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Currently, we carry business interruption coverage to mitigate certain potential losses, but this insurance is limited in amount and may not be sufficient in type or amount to cover us against claims related to Technology Risks and Cyber Risks and related business and system disruptions. We cannot be certain that such potential losses will not exceed our policy limits,
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insurance will continue to be available to us on economically reasonable terms, or at all, or any insurer will not deny coverage as to any future claim. In addition, we may be subject to changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements.
Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition, and results of operations. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential, personal, or proprietary information, we could incur liability and the further development and commercialization of our products could be delayed or disrupted. With the ever-changing threat landscape, and while we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business.
We face risks related to our collection and use of data, which could result in investigations, inquiries, litigation, fines, legislative and regulatory action and negative press about our privacy and data protection practices.
In connection with various facets of our business, we collect and use personal data, such as name, mailing address, email addresses, mobile phone number, medical and location information, the collection and use of which is regulated by a variety of privacy and security laws, rules and regulations. We also receive personal data from third parties for similar purposes and subject to legal obligations. Any violations of these rules by us could lead to civil and criminal penalties as well as adverse publicity that could harm our ability to initiate and complete clinical trials. In addition, when conducting clinical trials, we must collect and manage all clinical trial data in a manner consistent with applicable laws and regulations, including the Common Rule, Good Clinical Practice (“GCP”) guidelines, and FDA human subject protection regulations. We also face risks inherent (i) in the collection, use, and selective disclosure of large volumes of personal and non-personal proprietary data and (ii) in the protecting of personal and sensitive data from the Cyber and Technology Risks discussed above with appropriate security measures. Privacy and data protection laws, rules and regulations evolve frequently, and their scope may continually change through new legislation, amendments to existing legislation, and changes in enforcement, and may be inconsistent from one jurisdiction to another.
Any failure by us or any of our third-party service providers to follow such laws, regardless of fault, could result in significant liability under various state, federal and international privacy, data protection and other laws, including, the laws listed below. In addition to the liability related to failing to comply with data security obligations, we may also face liability under state, federal, and internal privacy laws if we handle individual personal information in violation of such applicable laws. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus on privacy and data protection issues that may affect our business, including recently enacted laws in all jurisdictions where we operate:
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We cannot provide assurance that current or future legislation will not prevent us from generating or maintaining personal data or that patients will consent to the use of their personal data (as necessary); either of these circumstances may prevent us from undertaking or publishing essential research and development, manufacturing, and commercialization, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Federal, state, and foreign government requirements include obligations of companies to notify regulators and/or individuals of security breaches involving personally identifiable information resulting from Technology or Cyber Risks experienced by us, or our vendors, contractors, or organizations with whom we had specific contractual obligations to protect our data. Further, the improper access to, use of, or disclosure of our data or a third-party’s personal data could subject us to individual or consumer class action litigation and governmental investigations and proceedings by federal, state and local regulatory entities in the United States and by international regulatory entities. Compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules and possible government oversight.
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. It is possible that 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 become subject to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, loss of export privileges, or severe criminal or civil sanctions, all of which may have a material adverse effect on our business, operating results, reputation, and financial condition.
Any such liability, litigation, investigations and proceedings may or may not be covered by our liability insurance. and may subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs, severely disrupt our business, and may result in significant reputational harm producing a material adverse effect on our client base, patient base and revenue.
Litigation and other legal proceedings may adversely affect our business.
From time to time, 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 an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that may affect how we operate our business. We could incur judgments or enter into settlements of claims for 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 have a material adverse effect on our business, financial condition, and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand, 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.
Our employees, independent contractors, consultants, commercial partners, distributors, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
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 and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) the laws of the FDA and other domestic and 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; (iv) data privacy laws and other similar non-U.S. law; or (v) 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, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations designed to prevent fraud, misconduct, 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
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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, creating fraudulent data in preclinical studies or clinical trials or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation.
We have adopted a code of business conduct and ethics and a global anti-corruption policy, 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. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. 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 civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual 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 have a material adverse effect on our business, financial condition, and results of operations.
Unfavorable global economic conditions could adversely affect our business, financial condition, or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and financial markets. For example, the COVID-19 pandemic has caused extreme volatility and disruptions in the global capital and credit markets. A severe or prolonged economic downturn, could result in a variety of risks to our business, including driving hospitals to tighten budgets and curtail spending, which would negatively impact our sales and business. A significant change in the liquidity or financial condition of our customers could cause unfavorable trends in their purchases and also in our receivable collections, and additional allowances may be required, which could adversely affect our business, financial condition and results of operations. Adverse worldwide economic conditions may also adversely impact our suppliers’ ability to provide us with materials and components, which could have a material adverse effect on our business, financial condition, and results of operations.
Disasters and other business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
We operate our business in regions subject to earthquakes, fires, medical epidemics, and pandemics, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, shifting climate patterns, extreme weather conditions, and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. Additionally, we rely on third-party manufacturers to produce various components that are integrated into our products, third-party distributors to distribute our products and hospitals to purchase our products, each of which is also vulnerable to such natural or man-made disasters or business interruptions. Our ability to obtain supplies of components and to distribute and sell our finished products could be disrupted if the operations of these suppliers, distributors, or hospitals were materially affected by any such natural or man-made disaster or other business interruption.
In addition, our corporate headquarters and manufacturing facilities are located in Santa Clara, California, near major earthquake faults and fire zones. If a major earthquake, wildfire or other natural disaster were to damage our facilities or the facilities of suppliers and service providers, or impact the ability of our employees or the employees of our suppliers and service providers to continue business operations, we may experience potential impacts ranging from production and shipping delays to lost revenues and increased costs. The occurrence of any of these natural or man-made disasters or other business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.
RISKS RELATED TO OUR PRODUCTS
We currently manufacture and sell products that are used in a limited number of procedures and for only certain specified indications, which could negatively affect our operations and financial condition.
Currently, our commercialized products consist primarily of our IVL system (“IVL System”) using M5 catheters and M5+ catheters for the treatment of above-the-knee PAD, S4 catheters for the treatment of below-the knee PAD, and C2
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catheters for the treatment of CAD, each of which is available in the United States, Europe, and other international markets. We are therefore dependent on widespread market adoption of these products and we will continue to be dependent on the success of these products for the foreseeable future. There can be no assurance that our products will gain a substantial degree of market acceptance among specialty physicians, patients, or healthcare providers. Our failure to successfully increase sales of these products or any other event impeding our ability to sell these products would result in a material adverse effect on our business, financial condition, and results of operations.
Our long-term growth depends on our ability to enhance our products, expand our indications and develop and commercialize additional products in a timely manner. If we fail to identify, acquire, and develop other products, we may be unable to grow our business.
As a significant part of our growth strategy, we intend to develop and commercialize additional products through our research and development program or by licensing or acquiring additional products and technologies from third parties. The success of this strategy depends upon our ability to identify, select, and acquire the rights to products and technologies on terms that are acceptable to us. The success of any new product offering or product enhancements will depend on several factors, including our ability to:
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Proposing, negotiating, and implementing an economically viable product or technology acquisition or license is a lengthy and complex process. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition or license of approved or cleared products. We may not be able to acquire or license the rights to additional approved or cleared products on terms that we find acceptable, or at all.
If we are unable to develop suitable potential products through internal research programs or by obtaining rights from third parties, it could have a material adverse effect on our business, financial condition and results of operations.
If our products are not approved for planned or new indications, our commercial opportunity will be limited.
We currently market and sell our M5 and M5+ catheters and S4 catheters for the treatment of calcified plaque in patients with PAD and our C2 catheters for the treatment of calcified plaque in patients with CAD in the United States, Europe and other international markets. However, our strategy includes pursuing additional vascular indications for our products. Conducting clinical studies to obtain data for new or additional indications may require substantial additional funding. We cannot assure you that we will be able to successfully obtain clearance or approval for any of these additional product indications. Even if we obtain clearance or approval to market our products for additional indications in the United States or internationally, we cannot assure you that any such indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop our
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products for new or additional indications, our commercial opportunity will be limited, which would have a material adverse effect on our business, financial condition, and results of operations.
Product clearances and approvals can often be denied or significantly delayed and material modifications to our products may require new clearances or pre-market approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained.
Under FDA regulations, unless exempt, a new medical device may only be commercially distributed after it has received 510(k) clearance, is authorized through the de novo classification process, or is the subject of an approved PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to another legally marketed product not subject to a PMA. Sometimes, a 510(k) clearance must be supported by preclinical and clinical data. Our ability to enroll patients in clinical trials has been and may continue to be impacted by the ongoing COVID-19 pandemic.
The PMA process typically is more costly, lengthy, and stringent than either the 510(k) process or the de novo classification process. Unlike a 510(k) review, which determines “substantial equivalence,” a PMA requires that the applicant demonstrate reasonable assurance that the device is safe and effective by producing valid scientific evidence, including data from preclinical studies and clinical trials. Therefore, to obtain regulatory clearance or approvals, we typically must, among other requirements, provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate to their satisfaction that our products satisfy the criteria for approval. Preclinical testing and clinical trials must comply with the regulations of the FDA and other government authorities in the United States and similar agencies in other countries.
We may be required to obtain PMAs, PMA supplements, de novo classification, or additional 510(k) pre-market clearances to market modifications to our existing products, such as changes to the intended use or technological characteristics of our products. Based on FDA published guidelines, the FDA requires device manufacturers to initially make and document a determination of whether a device modification requires new approval, supplemental approval or clearance; however, the FDA can review a manufacturer’s decision. The FDA may not agree with our decisions not to seek approvals or clearances for particular device modifications. 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 devices, changes that affect safety and effectiveness will require the submission and approval of a PMA supplement. 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 requires us to obtain PMAs, PMA supplements or pre-market clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing of the modified device and perhaps also to recall such modified device until we obtain FDA clearance or approval. We may also be subject to significant regulatory fines or penalties.
The FDA may not approve our current or future PMA applications or supplements or clear our 510(k) applications for new products or modifications to, or additional indications for, our products on a timely basis 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.
The FDA may also change its clearance and approval policies, adopt additional regulations, or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. Any of these actions could have a material adverse effect on our business, financial condition, and results of operations.
International regulatory approval processes may take more or less time than the FDA clearance or approval process. If we fail to comply with applicable FDA and comparable non-U.S. regulatory requirements, we may not receive regulatory clearances or approvals or may be subject to FDA or comparable non-U.S. enforcement actions. We may be unable to obtain future regulatory clearance or approval in a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take longer than anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory clearances or approvals would materially adversely affect our business, financial condition, and results of operations.
We may expend our limited resources to pursue particular products, product candidates, indications or discover programs and fail to capitalize on products, product candidates, indications or discovery programs that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on specific products, product candidates, indications, and discovery programs. As a result, we may forgo or delay pursuit of other opportunities that could have had
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greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs for specific indications may not yield any commercially viable products. Moreover, if we do not accurately evaluate the commercial potential or target market for a particular product or product candidate, we may relinquish valuable rights to that product or product candidate through future collaborations, licenses, and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product or product candidate.
Our products are approved only for specific countries and uses. The use, misuse or off-label use of our products may also result in injuries that lead to product liability suits, which could be costly to our business.
Our products are approved for use in a limited number of countries and for only the indications and uses specified in the applicable approval. This prohibits our ability to market or advertise our products for any other indication, which could limit our growth. Additionally, our products are contra-indicated for use in the carotid or cerebrovascular arteries. Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for a use that has not been cleared or approved by the FDA.
Use of a device outside of its cleared or approved indication is known as “off-label” use. We cannot prevent a physician from using our products for off-label use, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, we are not allowed to actively promote or advertise our products for off-label uses. In addition, we cannot make comparative claims regarding the use of our products against any alternative treatments without conducting head-to-head comparative clinical studies, which are expensive and time-consuming. For more information regarding our regulatory risks, including those related to off-label use, see the section titled “—Risks Related to Government Regulation and Our Industry” below.
We currently require limited training in the use of our products incorporating our IVL technology (“IVL Technology”) because we market primarily to physicians who are experienced in the interventional techniques required to use our devices. If demand for our products continues to grow, less experienced physicians will likely use our products, potentially leading to more injury and an increased risk of product liability claims. The use, misuse or off-label use of our products may in the future result in complications, including damage to the treated artery, infection, internal bleeding, and limb loss, potentially leading to product liability claims.
If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, our business may be harmed.
Clinical development is a long, expensive, and uncertain process and is subject to delays and the risk that products may ultimately prove unsafe or ineffective in treating the indications for which they are designed. Completion of clinical trials may take several years or more. We may experience numerous unforeseen events in relation to a clinical trial process that could delay or prevent us from receiving regulatory clearance or approval for new products, modifications of existing products or new indications for existing products, including:
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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 and stock awards 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 commercializing any of our products currently in development.
We do not know whether any of our future preclinical studies or clinical trials will commence as planned, will need to be restructured or will be completed on schedule, or at all. Any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence sales and generate associated revenue with respect to the applicable product. Any of these occurrences may significantly harm our business, financial condition, and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial, suspension, or revocation of expanded regulatory clearance or approval of our products. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our products or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our products.
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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 obtain regulatory approval for or commercialize our products.
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, including GCP guidelines, the Common Rule, and FDA human subject protection regulations. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct GCP-compliant clinical trials on our products properly and on time. While we have agreements governing their activities, we control only certain aspects of their activities and have limited influence over their actual performance. We may face delays in our regulatory approval process 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, in order to obtain the regulatory clearances or approvals that we need to commercialize our products.
The continuing development of our products depends upon our maintaining strong working relationships with physicians.
The research, development, marketing and sale of our current products and potential new and improved products or future product indications for which we receive regulatory clearance or approval depend upon us maintaining strong working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. Physicians assist us in clinical trials and in marketing, and as researchers, product consultants and public speakers. If we cannot maintain our strong working relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our business, financial condition, and results of operations. At the same time, the medical device industry’s relationship with physicians is under increasing scrutiny by the U.S. Department of Health and Human Services Office of Inspector General (the “OIG”), the U.S. Department of Justice (the “DOJ”), 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 have a material adverse effect on our business, financial condition, and results of operations. For more information on risks relating to the laws impacting our relationships with physicians and other healthcare professionals, see the section titled “—Risks Related to Government Regulation and Our Industry” below.
We have limited commercial manufacturing experience and may experience development or manufacturing problems or delays in producing our products and planned or future products that could limit our potential revenue growth or increase our losses.
We are continuing to develop our expertise in commercially manufacturing our products and our ability to manufacture these products in the volume that we anticipate will be required if we achieve planned levels of commercial sales. The forecasts of demand we use to determine order quantities and lead times for components purchased from outside suppliers may be incorrect. Our failure to obtain required components or sub-assemblies when needed and at a reasonable cost would adversely affect our business. As a result, we may not be able to develop and implement efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture our existing, planned, or future products in significant volumes, while meeting the legal, regulatory, quality, price, durability, engineering, design, and production standards required to market our products successfully.
We may encounter unforeseen situations in the manufacturing and assembly of our products that would result in delays or shortfalls in our production. For example, we may be required to change our production processes and assembly methods in order to accommodate any significant future expansion of our manufacturing capacity, which may increase our manufacturing costs, delay production of our products, reduce our product margin and adversely impact our business. Conversely, 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.
We produce a significant majority of our IVL catheters at our facility in Santa Clara, California, therefore any contamination of the controlled environment, equipment malfunction or failure to strictly follow procedures could significantly reduce our yield. A drop in yield could increase our cost to manufacture our products or, in more severe cases,
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require us to halt the manufacture of our products until the problem is resolved. Identifying and resolving the cause of a drop in yield could require substantial time and resources.
If our manufacturing activities are adversely impacted or if we are otherwise unable to keep up with demand for our products by successfully manufacturing, assembling, testing, and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products, which would have a material adverse effect on our business, financial condition, and results of operations.
We depend upon third-party suppliers, including single source component suppliers, making us vulnerable to supply problems and price fluctuations.
We rely on third-party suppliers to provide us with a portion of our demand for one of our products as well as components used in the manufacturing of our products. Certain components of our products are provided by single source suppliers. In some cases, we purchase supplies through purchase orders and do not have long-term supply agreements with, or guaranteed commitments from, our component suppliers, including single source suppliers. Many of our suppliers and contract manufacturers are not obligated to perform services or supply products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order.
We depend on our suppliers to provide us with materials or products in a timely manner that meet our quality, quantity, and cost requirements. These suppliers may encounter problems during manufacturing for a variety of reasons, including as a result of the ongoing COVID-19 pandemic, any of which could delay or impede their ability to meet our demand. These suppliers may cease producing the products or components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers and contract manufacturers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation.
In addition, if we fail to effectively manage our relationships with our suppliers and contract manufacturers, we may be required to change suppliers or contract manufacturers. While we believe alternate suppliers exist for all materials, components and services necessary to manufacture our products, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming, expensive and may result in interruptions in our operations and product delivery. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which could result in further delay or which may not be obtained at all. If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost, volumes and quality on a timely basis, the continued commercialization of our products, the supply of our products to customers and the development of any future products will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations.
For example, the COVID-19 pandemic has disrupted the operations of certain of our third-party suppliers, resulting in increased lead-times for our purchases of some components and, in certain cases, requiring us to procure materials from alternate suppliers or incur higher logistics expenses. We have worked closely with our manufacturing partners and suppliers to enable us to source key components and maintain appropriate inventory levels to meet customer demand and have not experienced disruptions in our supply chain to date. However, there is no assurance that we will not experience more significant disruptions in our supply chain in the future, particularly if the operations of our contract manufacturing partners or any of our critical single source component providers are more severely impacted by the pandemic and associated containment measures. Any supply interruption from our suppliers or failure to obtain additional suppliers for products or any of the components used in our products would limit our ability to manufacture our products and could have a material adverse effect on our business, financial condition, and results of operations.
We and our suppliers may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect on our business, financial condition, and results of operations.
As a medical device manufacturer, we must register with the FDA and various non-U.S. regulatory agencies, and we are subject to periodic inspection by the FDA and foreign regulatory agencies, for compliance with certain Good Manufacturing Practices (“cGMP”), including design controls, product validation and verification, in process testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review
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and is rigorously monitored through periodic inspections by the FDA and foreign regulatory agencies. Our product and component suppliers are also required to meet certain standards applicable to their manufacturing processes.
We cannot assure you that we or our products or component suppliers comply or will continue to comply with all regulatory requirements. The failure by us or one of our suppliers to achieve or maintain compliance with these requirements or quality standards may disrupt our ability to supply products sufficient to meet demand until compliance is achieved or, until a new supplier has been identified and evaluated. Our or any product or component supplier’s failure to comply with applicable regulations could cause sanctions to be imposed on us, including warning letters, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals or clearances, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, which could harm our business. We cannot assure you that if we need to engage new suppliers to satisfy our business requirements, we can locate new suppliers in compliance with regulatory requirements at a reasonable cost and in an acceptable timeframe. Our failure to do so could have a material adverse effect on our business, financial condition and results of operations.
In the EU, we must maintain certain International Organization for Standardization certifications to sell our products and must undergo periodic inspections by notified bodies, including the British Standards Institution (“BSI”), to obtain and maintain these certifications. If we fail these inspections or fail to meet these regulatory standards, it could have a material adverse effect on our business, financial condition, and results of operations.
We depend on a third party to manufacture a portion of the demand for certain of our products and we may engage additional third-party manufacturers in the future. If any of these manufacturers fail to meet our requirements and strict regulatory standards, we may be unable to develop, commercialize or market our products.
We depend on one third-party to manufacture a certain portion of the demand for one of our products and we may in the future need to depend upon additional third parties to manufacture our products. Reliance on third-party manufacturers entails additional risks, including:
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Any of these factors could cause delay or suspension of clinical trials, regulatory submissions, required approvals, commercialization or marketing of our products or cause us to incur higher costs. Furthermore, if our contract manufacturers fail to deliver the required commercial quantities of finished products on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, we would likely be unable to meet demand for our products and we would lose potential revenue. Any difficulties in locating and hiring third-party manufacturers, or in the ability of third-party manufacturers to supply quantities of our products on the timeline and in the quantities required, could have a material adverse effect on our business. It may take a significant amount of time and resources, including costs, to establish an alternative source of supply for our products and to have any such new source approved by the FDA.
Our success depends in large part on our IVL Technology. If we are unable to successfully market and sell products incorporating our IVL Technology, our business prospects will be significantly harmed, and we may be unable to achieve revenue growth.
Our future financial success will depend substantially on our ability to effectively and profitably market and sell our products incorporating our IVL Technology. The commercial success of our products and any of our planned or future products will depend on a number of factors, including:
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If we fail to successfully market and sell our products, we will not be able to achieve profitability, which will have a material adverse effect on 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 and any new product or product indications that we introduce, which will, in turn, depend in part on our success in growing our customer base and driving increased use of our products. New products or product indications will also need to be approved or cleared by the FDA and comparable non-U.S. regulatory agencies to drive revenue growth. If we cannot achieve revenue growth, it could have a material adverse effect on our business, financial condition, and results of operations.
We are at an early stage in our growth and we must build effective sales and marketing capabilities for our products.
We are at an early stage in our growth and have only recently launched our products for commercial use. For example, we launched our M5 catheters for the treatment of PAD in the United States, Europe and select other countries in 2018, and we launched our C2 catheters for the treatment of CAD in Europe in 2018, and in the United States in February 2021. We initiated a limited launch of our S4 catheter in the first half of 2019 and commenced a full commercial launch in select approved geographies in the second half of 2019. We initiated a limited launch of our M5+ catheters in the United States and Europe in late 2021. We had revenue of $237.1 million and $67.8 million for the years ended December 31, 2021 and 2020, respectively.
Our ability to increase our customer base, achieve broader market acceptance of our products, and increase our global sales depends to a significant extent on our ability to expand our marketing operations. We have dedicated, and will continue to dedicate, significant financial and other resources to our marketing and sales programs, including the expansion of our international field presence through new distributors, the addition of sales and clinical personnel globally, and the addition of new sales territories in the U.S. and select global markets. However, there are a variety of factors thatcould adversely impact our ability to effectively market and sell our products, including:
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Any failure or delay in the development of our sales, marketing, or distribution capabilities, to hire, train and retain our sales force, or of our sales force to meet required productivity levels within a reasonable period of time, may result in us failing to realize the expected benefits of our investments or increase our revenue, which in turn would adversely impact the commercialization of our products and harm our business.
The commercial success of our products will depend upon attaining significant brand awareness and market acceptance of our products among physicians, healthcare payors and the medical community.
Our success will depend, in part, on the acceptance of our products as safe, useful and, with respect to providers, cost effective. To accomplish this, we need to continue to educate the medical community about the safety, efficacy, necessity, and efficiency of our products. This will require educating them not only about the benefits of our technology, but also about the impact of calcified plaque on treatment choices and treatment outcomes. We believe that focusing on calcified plaque is a paradigm shift in the treatment of these diseases because other interventions have not specifically focused on this source of atherosclerosis. Additionally, we will need to convince the medical community that the additional cost and time of integrating the IVL procedure, designed to prepare the vessel for the subsequent stenting or angioplasty procedure, is worth the increased efficacy of the overall procedure and improvement in patient outcomes.
The failure of our clinical, marketing, and executive teams to drive this shift in thinking among physicians, patients, practitioners, third-party payors, and regulators could adversely affect our ability to grow our business. We cannot predict how quickly, if at all, physicians will accept our products or, if accepted, how frequently they will be used. Our products and planned or future products we may develop, may never gain broad market acceptance among physicians and the medical community for some or all of our targeted indications. The degree of market acceptance of any of our products will depend on a number of factors, including:
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For example, in July 2018, we initiated and subsequently completed a voluntary recall of our S4 catheters after seeing a higher instance of leaks in the balloon, which prevented the balloon from staying inflated at four atmospheres (“atm”) for the full course of lithotripsy application. Although there were no patient safety issues reported and no reports of adverse clinical events related to this issue, and the issue has been corrected, customer satisfaction problems early in a product’s launch can have lasting negative impact on our ability to sell such product. We proceeded with a full commercial launch of our S4 catheterin select approved geographies in the second half of 2019. However, we cannot guarantee that issues with our S4 catheters will not resurface. Any future government or voluntary recalls of our S4 catheter could divert managerial and financial resources, harm our reputation, and adversely affect our business.
If we do not educate physicians about PAD and the existence of our products, our products may not gain market acceptance since many physicians do not routinely screen for PAD while screening for CAD. Additionally, 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. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition, and results of operations.
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 manufacture and sell products that are used in a limited number of procedures and there is a limited total addressable market for our products. The sizes of the markets for our current and future products have not been established with precision and may be smaller than we estimate.
Our estimates of the annual total addressable markets for our current products and products under development are based on a number of internal and third-party estimates, including, without limitation, the number of patients with calcified cardiovascular disease and the assumed prices at which we can sell our products for markets that have not been established. 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, thereby reducing the predictive accuracy of these underlying factors. In addition, our estimates of the sizes of the PAD and CAD patient populations include patients who are asymptomatic or in the early stages of disease; these patients might never progress to more advanced disease stages and, accordingly, might never be likely candidates for treatment with our products. 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 patients who would benefit from our products, 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 negatively affect our business, financial condition, and results of operations.
We may be unable to compete successfully with larger companies in our highly competitive industry.
There are numerous approved products for treating vascular diseases in the indications in which we have received clearance or approval and those that we are pursuing or may pursue in the future. Many of these cleared or approved products are well-established and are widely accepted by physicians, patients, and third-party payors who may encourage the use of competitors’ products. 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. We compete or plan to compete with manufacturers and distributors of cardiovascular medical devices. The cardiovascular field is highly competitive and certain of our products may compete with products manufactured by other companies, including Boston Scientific Corporation, Cardiovascular Systems, Inc. (“CSI”), Medtronic plc and Philips N.V. Many of these competitors are large, well-capitalized companies with significantly greater market share and resources than we have. As a consequence, they are able to spend more on product development, marketing, sales and other product initiatives than we can. We also compete with smaller medical device companies that have single products or a limited range of products. Some of our competitors have:
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We believe that our proprietary IVL Technology, our focus on calcified cardiovascular disease, and our organizational culture and strategy, will be important factors in our future success. We compete primarily on the basis that our products treat patients with calcified cardiovascular disease safely and effectively, with improved outcomes and procedural cost savings.
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 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 materially harm our ability to develop and commercialize our products, which would have a material adverse effect on our business, financial condition, and results of operations.
In the future our products may become obsolete, which would negatively affect operations and financial condition.
The medical device industry is characterized by extensive research and rapid and significant technological change. There can be no assurance that other companies will not succeed in developing or marketing devices and products that are more effective than our IVL System or that would render our IVL System obsolete or noncompetitive. Additionally, new surgical procedures, medications and other therapies could be developed that replace or reduce the importance of our products. Accordingly, our success will depend, in part, on our ability to anticipate technological advancements and competitive innovations and introduce new products to adapt to these advancements and innovations.
There can be no assurance that (i) our new product development efforts will result in any commercially successful products, (ii) we will be able to respond more quickly than our competitors, many of whom have greater financial, marketing, product development, and other resources, to new or emerging technologies or a changing clinical landscape, or (iii) we will be more successful in attracting potential customers and strategic partners than our competitors. Given these factors, we cannot assure you that we will be able to sustain or increase our level of success. Our failure to introduce new and innovative products in a timely manner, and our inability to maintain or grow the market acceptance of our existing products, could have a material and adverse effect on our business, results of operations, financial condition, and cash flows.
Consolidation in the medical device industry could have an adverse effect on 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 products 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. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, results of operations or financial condition.
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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 payors, including governmental payors (such as the Medicare and Medicaid programs in the United States), managed care organizations and private health insurers. Third-party payors decide which treatments they will cover and establish reimbursement rates for those treatments. Third-party payors in the United States generally do not provide direct reimbursement for our products. Rather, we expect certain components of our IVL System to continue to be purchased by hospitals and other providers who will then seek reimbursement from third-party payors for the procedures performed using our products. While third-party payors generally cover and provide reimbursement for procedures using our currently cleared or approved products, we can give no assurance that these third-party payors will continue to provide coverage and adequate reimbursement for the procedures using our products, to permit hospitals and physicians to offer procedures using our products to patients requiring treatment, or that current reimbursement levels for procedures using our products will continue. Third-party payors are increasingly examining the cost effectiveness of products, in addition to their safety and efficacy, when making coverage and payment decisions. Furthermore, although we believe there is potential to improve on the current reimbursement profile for our devices in the future, the overall amount of reimbursement available for PAD and CAD procedures could remain at current levels or decrease in the future. Additionally, we cannot be sure that the PAD and CAD procedure reimbursement amounts will not reduce or otherwise negatively affect 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.
Third-party payors have also instituted initiatives to limit the growth of healthcare costs using, for example, price regulation or controls and competitive pricing programs. Some third-party payors also require demonstrated superiority, on the basis of randomized clinical trials, or pre-approval of coverage, for new or innovative devices or procedures before they will reimburse healthcare providers who use such devices or procedures. Additionally, no uniform policy for coverage and reimbursement exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. It is uncertain whether our current products or any planned or future products will be viewed as sufficiently cost effective to warrant coverage and adequate reimbursement levels for procedures using such marketed products.
We have established safety and effectiveness data in specific patient populations in the treatment of PAD and CAD. Results of earlier studies may not be predictive of future clinical trial results, and planned studies may not establish an adequate safety or efficacy profile for such products and other planned or future products, which would affect market acceptance of these products.
Because our IVL Technology is relatively new in the treatment of CAD and PAD, we have performed clinical trials only with limited patient populations. The long-term, one-year results of coronary IVL has been studied within stable coronary disease. Short-term and long-term results in this patient population are not predictive for other coronary indications including acute coronary syndromes. Short-term results of peripheral IVL in the treatment of PAD have been studied across a variety of peripheral vessel beds and severity of PAD. The long-term effects of peripheral IVL in a large number of patients have not been released yet and the results of short-term clinical outcomes do not necessarily predict long-term clinical benefits or reveal long-term adverse effects.
The results of preclinical studies and clinical trials of our products conducted to date may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Our interpretation of data and results from our clinical trials do not ensure that we will achieve similar results in future clinical trials in other patient populations. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier, feasibility clinical trials have nonetheless failed to replicate results in later, pivotal clinical trials and subsequently failed to obtain marketing approval. Products in later, pivotal stages of clinical trials may fail to show the desired safety and effectiveness despite having progressed through nonclinical studies and earlier, feasibility clinical trials.
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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 us and our ability to sell our products.
The medical device industry has historically been subject to extensive litigation over product liability claims. 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 in connection with the use of our products on patients. If these physicians are not properly trained or are negligent, the capabilities of our products may be diminished, or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies.
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:
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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 have a material adverse effect on 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. Defending a product liability suit, regardless of its merit or eventual outcome, could be costly, could divert management’s attention from our business and might result in adverse publicity, which could result in reduced acceptance of our products in the market, product recalls or market withdrawals. In addition, the occurrence of an adverse event relating to our products, a product recall or a product liability claim against us may cause our stock price to decline, which could result in securities class action litigation claims against us.
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.
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We intend to continue to expand sales of our products internationally, 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 materially adversely affect our business.
While the majority of our revenue has been in the United States, our current products are cleared in the EU and certain other international markets for the treatment of PAD and CAD, and international sales comprised 21% of our revenue for the year ended December 31, 2021. Our future growth may depend, in part, on our ability to develop and commercialize our planned and future products in foreign markets. Sales of our products outside of the United States are and will be subject to foreign regulatory requirements governing clinical trials and marketing approval. To obtain separate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements regarding safety and efficacy and governing, among other things, clinical trials, commercial sales, pricing and distribution of our planned or future products. We will incur substantial expenses in connection with our international expansion. Additional risks related to operating in foreign countries include:
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These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations, which would have a material adverse effect on 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 if the FDA grants marketing approval for a product, 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
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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 negatively affect our business, financial results, and results of operations.
We face additional credit and compliance risks related to our international sales using foreign distributors.
We partner with distributors for our products in select geographies outside of the United States. Specifically, as of December 31, 2021, we have contracted with distributors who are actively selling our products in over 50 countries in North and South America, Europe, the UK, the Middle East, Asia, Africa, and Australia/New Zealand. For the year ended December 31, 2021, approximately 21% of our sales were outside of the United States. We may not be able to collect all of the funds owed to us by our foreign distributors. Some foreign distributors may experience financial difficulties, including bankruptcy, which may hinder our collection of accounts receivable. Where we extend credit terms to distributors, we periodically review the collectability and creditworthiness when determining the payment terms for such distributors. If our uncollectible accounts exceed our expectations, this could adversely impact our results of operations. In addition, failure by our foreign distributors to comply with the FCPA or other applicable laws, rules and regulations, insurance requirements or other contract terms could have a negative impact on our business. Failure to manage the risks related to our foreign distributors would have a material adverse effect on our business, financial condition, and results of operations.
Governmental export or import controls could limit our ability to compete in foreign markets and subject us to liability if we violate them.
Our products may be subject to U.S. export controls. Governmental regulation of the import or export of our products, or our failure to obtain any required import or export authorization for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products may create delays in the introduction of our products in international markets or, in some cases, prevent the export of our products to some countries altogether. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments and persons targeted by U.S. sanctions. If we fail to comply with export and import regulations and such economic sanctions, we may be fined or other penalties could be imposed, including a denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export our products to existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell access to our products would likely materially and adversely affect our business, financial condition, and results of operations.
We are subject to numerous laws and regulations related to anti-bribery and anti-corruption, such as the FCPA and the U.K. Bribery Act and violations of these laws could result in substantial penalties and prosecution.
For our sales and operations outside the United States, we are subject to various heavily enforced anti-bribery and anti-corruption laws, such as the FCPA, U.K. Bribery Act 2010, and similar laws around the world. These laws generally prohibit offering, promising, authorizing or making improper payments, directly or indirectly, for the purpose of obtaining or retaining business or gaining any advantage. We face significant 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.
We leverage various third parties to conduct our business and sell our products abroad, including to government-owned universities and hospitals. We, our distributors, and our other third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities (such as in the context of obtaining government approvals, registrations or licenses or sales to government owned or controlled healthcare facilities, universities, institutes, clinics, etc.) and we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. 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
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our employees, representatives, 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 materially 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 have a material and adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO GOVERNMENT REGULATION AND OUR INDUSTRY
If we fail to comply with U.S. federal and state and international 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 adversely affected.
Healthcare providers and third-party payors play a primary role in the distribution, recommendation, ordering and purchasing of any medical device for which we have obtained or may in the future obtain marketing clearance or approval. Through our arrangements with principal investigators, healthcare professionals, third-party payors, 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 U.S. federal Anti-Kickback Statute (the “Anti-Kickback Statute”) and the federal civil False Claims Act (the “False Claims Act”). Our relationships and our distributors’ relationships with physicians, other health care professionals and hospitals are subject to scrutiny under various state and federal anti-kickback laws. There are similar laws in other countries.
Healthcare fraud and abuse laws and related regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include the Anti-Kickback Statute, the False Claims Act, federal Civil Monetary Penalties Statute, the federal Health Insurance Portability and Accountability Act (“HIPAA”), and the Physician Payments Sunshine Act, along with analogous state and foreign law equivalents, each as more fully described in in the sections titled “Business—Government Regulation—United States” and “Business—Government Regulation—International.”
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. Enforcement agencies also continue to pursue novel theories of liability under these laws. In particular, government agencies recently 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, False Claims Act 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, it is possible that some of our business activities, including certain sales and marketing practices of our marketed IVL System, and financial arrangements with physicians, other healthcare providers, and other customers, could be subject to challenge under one or more such laws. For example, in the United States and certain foreign countries, we may loan for free to customers both the reusable IVL generator and connector cable so long as the customer is purchasing our single-use catheters. Customers also have the option to purchase the IVL generator and connector cable either at the initiation of the relationship or following the consignment period. Additionally, we may consign catheters to our customers, free of charge, until a catheter is used at which time the customer is billed for the catheter. The Anti-Kickback Statute includes, among others, space and equipment rental safe harbors. These safe harbors require, among other things, that the aggregate payment between the parties is set in advance and consistent with fair market value. As the IVL generator and connector cable are provided for free, and no payment is made for storage of our catheters at customers’ facilities, these arrangements may not satisfy these or other safe harbors or statutory exceptions. 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
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under other fraud and abuse laws such as the False Claims Act 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 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 False Claims Act, Anti-Kickback Statute or civil monetary penalties law cases also may be required to enter into a corporate integrity agreement with the OIG in order to avoid exclusion from participation (i.e., 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 have a material adverse effect on our business, financial condition, and results of operations.
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 foreign agencies regulate our products as medical devices. Complying with these regulations is costly, time-consuming, complex, and uncertain. For example, 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, De Novo authorization or approval of a PMA from the FDA, unless an exemption applies. FDA regulations and regulations of similar agencies specific to medical devices are wide-ranging and include, among other things, oversight of:
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Our current products are subject to extensive regulation by the FDA and non-U.S. regulatory agencies. Further, all of our potential products and improvements of our current 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. The FDA can also refuse to clear or approve pending applications.
Any enforcement action by the FDA and other comparable non-U.S. regulatory agencies could have a material adverse effect on 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:
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If any of these events were to occur, it would have a material and adverse effect on our business, financial condition and results of operations.
We may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, which may limit the market for the product. Although we have obtained 510(k) clearance to market our M5, M5+, and S4 catheters and PMA approval for our C2 catheters, our clearances or approvals can be revoked if safety or efficacy problems develop.
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.
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 recalls and 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. In addition to the “general controls,” some Class II medical devices are also subject to “special controls,” including adherence to a particular guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, most Class III devices are subject to PMA. Our C2 catheter for the treatment of CAD is designated as a Class III product and will follow the PMA process. As a company, we do not have prior experience in obtaining PMA approval.
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 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 products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies; and could result in substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may have a material and adverse effect on our business, financial condition and results of operations, and may result in greater and continuing governmental scrutiny of our business in the future.
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.
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Although we have obtained regulatory clearance for our M5, M5+, and S4 catheters for the treatment of PAD and our C2 catheter for the treatment of CAD in the United States and in certain non-U.S. jurisdictions, they will remain subject to extensive regulatory scrutiny.
Although our M5, M5+ and S4 catheters have obtained regulatory clearance in the United States and in certain non-U.S. jurisdictions for the treatment of PAD, and our C2 catheters have obtained regulatory clearance in the United States and certain non-U.S. jurisdictions for the treatment of CAD, 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 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 cleared or approved labeling for each product. 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.
If a regulatory agency discovers previously unknown problems with our products, 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 our products, such regulatory agency or enforcement authority may impose restrictions on that product or us, including requiring withdrawal of the product from the market. In addition, a regulatory agency or enforcement authority may, among other things:
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In addition, violations of the U.S. federal Food, Drug and Cosmetic Act (“FD&C 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 adversely affect 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 have a material adverse effect on our business, financial condition, and results of operations.
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We may be liable if the FDA or another regulatory agency concludes that we have engaged in the off-label promotion of our products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of the off-label use of our products. Healthcare providers may use our products, if approved, off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional, reimbursement, or training materials for sales representatives or physicians constitute promotion of an off-label use, the FDA could request that we modify our training, promotional or reimbursement materials and/or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, disgorgement of profits, and significant penalties, including civil fines and criminal penalties. Other federal, state or foreign governmental authorities also might take action if they consider our promotion, reimbursement or training materials to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Although we train our sales force not to promote our products for off-label uses, and our instructions for use in all markets specify that our products are not intended for use outside of those indications cleared or approved for use, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion. For example, the government may take the position that off-label promotion resulted in inappropriate reimbursement for an off-label use in violation of the False Claims Act for which it might impose significant civil fines and even pursue criminal action. If this were to occur, our reputation could be damaged, and adoption of the products by our customers would be impaired.
Our products may be subject to recalls after receiving FDA or foreign approval or clearance or cause or contribute to a death or a serious injury or malfunction in certain ways prompting voluntary corrective actions or agency enforcement actions, which could divert managerial and financial resources, harm our reputation, and adversely affect 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, or if there is a reasonable likelihood our products might cause or contribute to a death or a serious injury or malfunction. 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. In July 2018, for example, we initiated and subsequently completed a voluntary recall of our S4 catheters after seeing a higher instance of leaks in the balloon, which prevented the balloon from staying inflated at four atm for the full course of lithotripsy application. While there were no patient safety issues reported and no reports of adverse clinical events related to this issue and the issue has been corrected, we believe it was prudent to suspend utilization of the device and recall the product while we determined the cause of the leak. Any future recalls of our products could divert managerial and financial resources, harm our reputation, and adversely affect our business.
If we initiate a future 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.
In addition, we are subject to medical device reporting regulations that require us to report to the FDA or similar foreign governmental authorities if one of our products may have caused or contributed to a death or serious injury or if we become aware that it has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction recurred. We are also subject to the correction and removal reporting regulations, which require us to report to the FDA any field corrections and device recalls or removals that we undertake to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act caused by the device which may present a risk to health. Failures to properly identify reportable events or to file timely reports, as well as failure to address each of the FDA’s observations to the FDA’s satisfaction, could subject us to sanctions and penalties, including warning letters and recalls. Physicians, hospitals, and other healthcare providers may make similar reports to regulatory authorities. Any such reports may trigger an investigation by the FDA or similar foreign regulatory bodies, which could divert managerial and financial resources, harm our reputation, and have a material adverse effect on our business, financial condition and results of operations. Any adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as an inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit as a result of a corrective action, would require our time and capital, distract management from operating our business and may harm our reputation and have a material adverse effect on 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 or country equivalent, our operations could be interrupted, and our potential product sales and results of operations could suffer.
Our manufacturing processes and those of our third-party suppliers must 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 devices. We and our suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process where we market products in non-U.S. jurisdictions. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic announced and unannounced inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. If we experience an unsuccessful QSR inspection, our operations could be disrupted, and our manufacturing could be interrupted. Failure to take adequate corrective action in response to an adverse QSR 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 products and cause our revenue to decline.
We have registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the California Department of Health Services. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDPH to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our suppliers.
We produce a significant majority of our IVL catheters in-house at our facility in Santa Clara, California, which, together with our research and development, controlled environment room and office space, currently totals approximately 166,000 square feet. Our Santa Clara facility has been inspected by the FDA and audited by the BSI. We have also entered into a contract manufacturing agreement with a third-party contract manufacturer to produce a portion of our demand for our M5 catheters. We can provide no assurance that the FDA or other inspecting bodies will continue to find us or our suppliers to be in compliance with the QSR. If our or our contract manufacturer’s facilities are found to be in noncompliance or if we 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 manufacture 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 manufacture 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 adversely affect our ability to operate our 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 pursuing the operations and activities in question, including the continued manufacturing and sale of any impacted product.
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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 our products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and possibly unobtainable.
Healthcare reform initiatives and other administrative and legislative proposals may adversely affect 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 payors 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 have a material adverse effect on 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 (the “ACA”) was enacted. 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 latter of which since made non-enforceable), the provision of subsidies to eligible individuals enrolled in plans offered on the health insurance exchanges and the expansion of the Medicaid program. The ACA has impacted existing government healthcare programs and has resulted in the development of new programs.
Certain provisions of the ACA have been subject to judicial challenges, as well as efforts to repeal or replace them or to alter their interpretation and implementation, and there may be additional challenges and amendments to the ACA in the future. For example, legislation affecting the implementation of certain taxes under the ACA have been signed into law, including the TCJA, which 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 Bipartisan Budget Act of 2018 (“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, a United States District Court Judge for the Northern District of Texas ruled that (i) the “individual mandate” was unconstitutional as a result of the associated tax penalty being repealed by Congress as part of the TCJA; and (ii) the individual mandate is not severable from the rest of the ACA, and as a result the entire ACA is invalid. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision that the individual mandate is unconstitutional but remanded the case to the district court to reconsider the severability question. In March 2020, the U.S. Supreme Court agreed to hear the case and oral arguments before the U.S. Supreme Court took place on November 10, 2020. On June 17, 2021, the U.S. Supreme Court dismissed the challenge to the ACA without specifically ruling on the constitutionality of the ACA. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, President Biden issued an Executive Order to initiate a special enrollment period from February 15, 2021, through August 15, 2021, for purposes of obtaining health insurance coverage through the ACA marketplace. The Executive Order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to further judicial or Congressional challenges in the future. It is unclear how any such efforts to repeal, replace, amend or invalidate the ACA or its implementing regulations, or portions thereof, and the healthcare reform measures of the Biden administration will impact the ACA or our business.
In addition, other healthcare reform 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, on average, 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 (with the exception of a temporary suspension from May 1, 2020 through May 31, 2022, due to the COVID-19 pandemic). The law provides for 1% Medicare sequestration in the second quarter of 2022 and allows the full 2% sequestration thereafter until 2030. To offset the temporary suspension during the COVID-19 pandemic, in 2030, the sequestration will be 2.25% for the first half of the year, and 3% in the second half of the year. 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.
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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, as well as internationally, directed at containing or lowering the cost of healthcare. 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 payors of healthcare services to contain or reduce costs of healthcare may harm:
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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.
Various new healthcare reform proposals are emerging at the federal and state level. 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 have a material adverse effect on our business, financial condition and results of operations.
Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our planned or future products and to manufacture, market and distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. In the United States in recent years, new legislation has been proposed and adopted at the federal and state levels that is effecting major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted and we may not be able to comply with the changed laws, they could increase the cost of manufacturing, marketing, or selling our product, could make approvals of pipeline products more difficult or prevent us from selling our products at all. We expect there will continue to be a number of legislative and regulatory changes to the U.S. health care system that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof and may impose additional costs or lengthen regulatory review times of planned or future products.
If, as a result of legislative or regulatory healthcare reform, we cannot sell our products profitably, whether due to our own inability to comply with, or the inability of other economic operators in our supply chain to qualify under, any legislative reform, our business would be harmed. In addition, any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future products could make it more difficult and costly to obtain clearance or approval for new products or to produce, market and distribute existing products. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.
For example, in April 2017, the EU adopted a new Medical Devices Regulation (Regulation 2017/745) (“MDR”), which became effective May 26, 2021 and replaced the EU’s Medical Devices Directive (93/42/EEC) (“MDD”). Unlike directives, which must be implemented into the national laws of the EU member states, regulations are directly applicable in all EU member states and are intended to eliminate current differences in the regulation of medical devices among EU member states. The MDR is significantly more comprehensive and detailed than the MDD. Among other things, the MDR requires manufacturers to report on the composition of their products and verify the presence of any of 1,200 substances referenced in the MDR. Medical devices that have a valid CE Mark under MDD can continue to be sold until May 2024 or until the CE Mark expires, whichever comes first, provided there are no significant changes to the design or intended use of the device. Complying with the new requirements of MDR may cause regulatory authorization timelines for future medical
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device products to become extended and significantly increase the costs of obtaining and maintaining CE Marks for our products. Adjusting to MDR may be costly and disruptive to our business.
Broader legislative changes may also impact our operations. The UK held a referendum on June 23, 2016, in which voters approved withdrawal from the EU (commonly referred to as Brexit). On January 31, 2020, the UK withdrew from the EU and the transition period ended on December 31, 2020. The UK and EU reached agreement regarding their future relationship on December 24, 2020. As a result of Brexit, there may be greater restrictions on imports and exports into and out of the UK and EU countries and regulatory complexities that could adversely impact our business.
Environmental and health safety laws may result in liabilities, expenses, and restrictions on our operations. Failure to comply with environmental laws and regulations could subject us to significant liability.
Federal, state, local and foreign laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. Our research and development and manufacturing operations may involve the use of hazardous substances and are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment, and disposal of products containing hazardous substances. These operations are permitted by regulatory authorities, and the resultant waste materials are disposed of in material compliance with environmental laws and regulations. Using hazardous substances in our operations exposes us to the risk of accidental injury, contamination or other liability from the use, storage, importation, handling, or disposal of hazardous materials. If our or our suppliers’ operations result in the contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have a material adverse effect on our business, financial condition, and results of operations. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive, and non-compliance could result in substantial liabilities, fines and penalties, personal injury and third-party property damage claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs, and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our business, financial condition, and results of operation.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
If we are unable to obtain and maintain patent or other intellectual property protection for our products, 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 adversely affected.
As with other medical device companies, our success depends in large part on our ability to maintain and solidify a proprietary position for our products, which will depend upon our success in obtaining and enforcing effective intellectual property (including patent claims) that cover the use, functionality and manufacture of such products. With respect to patents specifically, the process for filing, maintaining and enforcing rights in or obtaining licenses for patents is complex and subject to many risks and uncertainties, including the following:
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Consequently, we do not know whether our IVL products and 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 materially adversely affect our business, financial condition, and results of operations. 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. Any such outcome could impair our ability to prevent competition from third parties, which may have an adverse impact on our business and results of operations.
Patents covering our products could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad.
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 USPTO, or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review (“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, our 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 technology or products. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us.
For example, petitions for IPR of U.S. Pat. Nos. 9,642,673, 8,956,371 and 8,728,091, which are three of our issued U.S. patents that relate to our current IVL Technology, were filed in December 2018 at the USPTO’s Patent Trial and Appeal Board (the “PTAB”) by Cardiovascular Systems, Inc., one of our competitors. The PTAB instituted IPR proceedings for all three patents. The PTAB held oral hearings on April 15-16, 2020. On July 8, 2020, the PTAB ruled that one claim (“Claim 5”) in U.S. Pat No. 8,956,371 (the “’371 patent”) is valid and ruled that all other claims in the ’371 patent are invalid and that all claims of U.S. Pat No. 8,728,091 (the “’091 patent”) are invalid. On July 20, 2020, the PTAB ruled that all claims of U.S. Pat. No. 9,642,673 (the “’673 patent”) are invalid. On August 27, 2020, further briefing by the parties was requested by the PTAB judge in the ’371 patent proceeding to assess whether recent guidance from the USPTO relating to “applicant admitted prior art” impacted the PTAB decision in the ’371 patent proceeding. In addition, the PTAB judge reset the time for
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commencement of an appeal in the ’371 patent proceeding pending the entry of a final decision after the requested briefing. On October 13, 2020, we submitted the last of the requested briefing, and the PTAB decision is pending. Subject to the final PTAB decision regarding the ’371 patent proceeding, we anticipate appealing this ruling to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”).
We appealed the rulings in the IPR proceedings for the ’091 patent and the ’673 patent to the Federal Circuit. On January 18, 2022, the Federal Circuit issued two short opinions affirming the decisions of the PTAB, finding that the claims of the ’091 patent and the ’673 patent are unpatentable (the “Rulings”). These Rulings conclude the IPR proceedings initiated by CSI for these two patents and resulted in the loss in scope of the ’091 patent and the ’673 patent, which may limit our ability to stop others from using or commercializing products and technology similar or identical to ours.
IPR proceedings relating to the ’371 patent remain pending before the PTAB on rehearing and have not yet been addressed by the Federal Circuit. Claim 5 of the ’371 patent was found to be valid and all other claims remain valid and enforceable until a final decision is obtained from the PTAB and any appeals have been exhausted. Upon the conclusion of such appeals, if we are unsuccessful in whole or in part, the ’371 patent proceedings could result in the loss or narrowing in scope of the ’371 patent, which could further limit our ability to stop others from using or commercializing products and technology similar or identical to ours.
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 connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. 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 (e.g., 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. The outcome 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 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.
Any loss or limitation of patent protection could have a material adverse effect on our business, financial condition, and results of operations.
Changes in 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 (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. The number of IPR challenges filed is increasing, and in many cases, the USPTO is canceling or significantly narrowing issued patent
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claims. 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 have a material adverse effect on our business, financial condition, and results of operations.
In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future.
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 have a material adverse effect on our business, financial condition and results of operations.
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 have a material adverse effect on 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 and otherwise violating the patents and other intellectual property 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.
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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 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 may face claims from non-practicing entities (“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. 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 patents, and we are unsuccessful in demonstrating that such patents 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. 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 adverse effect 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 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 have a material adverse effect on our business, financial condition, or 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 we may be required to defend against claims of infringement. In addition, our patents 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 a patent owned by us 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
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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 adverse effect 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 have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition, or results of operations.
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. We seek to protect such proprietary information, in part, through 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 some of our consultants that require them to assign to us any inventions created as a result of their working with us. These confidentiality and information assignment 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. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by such third parties, despite the existence of confidentiality restrictions. Confidentiality agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event the unwanted use is outside the scope of the provisions of the agreements or in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other 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 propriety 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 detecting the disclosure or misappropriation of confidential information and enforcing a claim that a party illegally disclosed or misappropriated confidential information is difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known to, or be independently discovered by, competitors, and in such cases we could not assert any trade secret rights against such parties. 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 have a material adverse effect on our business, financial condition and results of operations.
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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.
Many of our employees, consultants and contractors are or were previously employed at other medical device companies, including those that are our direct competitors or could potentially become our direct competitors. In some cases, those employees joined our company recently. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. 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. In addition, we have been and may in the future be subject to allegations that we caused an employee to breach the terms of such employee’s non-competition or non-solicitation agreement. 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 have a material adverse effect on our business, financial condition and results of operations. We cannot guarantee that this type of litigation will not occur in the future, which may adversely affect our ability to hire the most qualified personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
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 adversely affected.
We rely on our trademarks and trade names to distinguish our products from the products of our competitors and have registered or applied to register many of these trademarks. Our 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 (including domain names) and trade names may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, and results of operations.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock has been and may continue to be highly volatile.
The trading price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control. From January 1, 2021 through December 31, 2021, the closing price of our common stock has ranged from $92.73 per share to $241.83 per share. Stock markets in general and the market for medical device companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Price declines in our common stock could result from general market and economic conditions, some of which are beyond our control, and a variety of other factors, including any of the risk factors described in this Annual Report on Form 10-K or those that we have not anticipated. The market price for our common stock may be influenced by many factors, including:
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In addition, the trading prices for common stock of other medical device companies have been highly volatile, due in part to the COVID-19 pandemic, which continues to rapidly evolve. The extent to which the pandemic may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
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An active trading market for our common stock may not be sustained.
Our common stock is currently listed and trades on the Nasdaq under the symbol “SWAV.” We cannot assure you that an active trading market for our common stock will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our common stock when desired, or the prices that you may obtain for your shares.
We do not intend to pay dividends on our common stock, so any returns will be limited to increases, if any, in our stock’s value. Your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our common stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Any return to stockholders will therefore be limited to the appreciation in the value of their stock, if any.
Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.
As of December 31, 2021, our executive officers, directors and 5% stockholders beneficially owned approximately 37% of the outstanding shares of capital stock. As of December 31, 2021, we had 35,444,472 shares of common stock outstanding. Accordingly, these stockholders have a material influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, mergers, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with the interests of our other stockholders. For example, these stockholders could attempt to delay or prevent a change in control of the company, even if such a change in control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the company or our assets and might affect the prevailing price of our common stock. The significant concentration of stock ownership may negatively impact the price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
As of December 31, 2021, our executive officers and directors held options to purchase an aggregate of 906,047 shares of our common stock at a weighted-average exercise price of $4.82 per share and 218,491 shares of common stock underlying outstanding restricted stock units (“RSUs”). We have registered all of the shares of common stock issuable upon the exercise of outstanding options, upon the vesting of outstanding RSUs and upon exercise or settlement of any other equity incentives we may grant in the future, for public resale under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, these shares may be freely sold in the public market upon issuance, subject to applicable vesting requirements and compliance by affiliates with Rule 144 of the Securities Act. Furthermore, holders of our common stock have certain rights with respect to the registration of such shares under the Securities Act.
We are at risk of securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. In recent years, medical device companies have experienced significant stock price volatility. 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.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
Our stock price and trading volume is heavily influenced by the way analysts and investors interpret our financial information and other disclosures. The trading market for our common stock depends, 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. 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.
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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.
Our restated certificate of incorporation, our amended and restated bylaws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of Delaware law (where we are incorporated), our restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. In addition, 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 or remove our board of directors. These provisions include:
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In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that could have resulted in a premium over the market price for shares of our common stock.
These provisions apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our and our stockholders’ best interests and could also affect the price that some investors are willing to pay for our common stock.
Our restated certificate of incorporation provides, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. This exclusive forum provision will not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder and our restated certificate of incorporation provides that the federal district courts of the United States of America are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, or a Federal Forum Provision, unless we consent in writing to the selection of an alternative forum. Our decision to adopt a Federal Forum Provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal or state courts will follow the holding of the Delaware Supreme Court or determine that the Federal Forum Provision should be enforced in a particular case, application of the Federal Forum Provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.
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Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities will be deemed to have notice of and consented to our exclusive forum provisions, including the Federal Forum Provision. These 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 such lawsuits against us and our directors, officers and other employees. If a court were to find the choice of forum provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business and financial condition.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate offices are located in Santa Clara, California where we lease approximately 166,000 square feet of office, lab and manufacturing space under leases expiring in December 2031. In addition, we produce a significant number of our IVL catheters in-house at our facilities in Santa Clara. We believe that our facilities in Santa Clara meet our current and future anticipated needs.
Item 3. Legal Proceedings.
Petitions for inter partes review (“IPR”) of U.S. Pat. Nos. 9,642,673, 8,956,371 and 8,728,091, which are three of our issued U.S. patents that relate to our current IVL technology, were filed in December 2018 at the U.S. Patent and Trademark Office’s (the “USPTO”) Patent Trial and Appeal Board (the “PTAB”) by Cardiovascular Systems, Inc. (“CSI”), one of our competitors. The PTAB instituted IPRproceedings for all three patents.
The PTAB held oral hearings on April 15-16, 2020. On July 8, 2020, the PTAB ruled that one claim (“Claim 5”) in U.S. Pat No. 8,956,371 (the “’371 patent”) is valid and ruled that all other claims in the ’371 patent are invalid and that all claims of U.S. Pat No. 8,728,091 (the “’091 patent”) are invalid. On July 20, 2020, the PTAB ruled that all claims of U.S. Pat. No. 9,642,673 (the “’673 patent”) are invalid. On August 27, 2020, further briefing by the parties was requested by the PTAB judge in the ’371 patent proceeding to assess whether recent guidance from the USPTO relating to “applicant admitted prior art” impacted the PTAB decision in the ’371 patent proceeding. In addition, the PTAB judge reset the time for commencement of an appeal in the ’371 patent proceeding pending the entry of a final decision after the requested briefing. On October 13, 2020, we submitted the last of the requested briefing, and the PTAB decision is pending. Subject to the final PTAB decision regarding the ’371 patent proceeding, we anticipate appealing this ruling to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”).
We appealed the rulings in the IPR proceedings for the ’091 patent and the ’673 patent to the Federal Circuit. On January 18, 2022, the Federal Circuit issued two short opinions affirming the decisions of the PTAB, finding that the claims of the ’091 patent and the ’673 patent are unpatentable (the “Rulings”). The Rulings conclude the IPR proceedings initiated by CSI for these two patents and resulted in the loss in scope of the ’091 patent and the ’673 patent, which may limit our ability to stop others from using or commercializing products and technology similar or identical to ours.
IPR proceedings relating to the ’371 patent remain pending before the PTAB on rehearing and have not yet been addressed by the Federal Circuit. Claim 5 of the ’371 patent was found to be valid and all other claims remain valid and enforceable until a final decision is obtained from the PTAB and any appeals have been exhausted. Upon the conclusion of such appeals, if we are unsuccessful in whole or in part, the ’371 patent proceedings could result in the loss or narrowing in scope of the ’371 patent, which could further limit our ability to stop others from using or commercializing products and technology similar or identical to ours.
For more information regarding the risks presented by such proceedings, see the section titled “Risk Factors—Risks Related to Our Intellectual Property.”
From time to time, we may become involved in various legal proceedings that arise in the ordinary course of our business. We have received, and may from time to time receive, letters from third parties alleging patent infringement, violation of employment practices or trademark infringement, and we may in the future participate in litigation to defend ourselves. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us due to diversion of management time and attention as well as the financial costs related to resolving such disputes.
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Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market InformationSecurities Authorized for Common StockIssuance under Equity Compensation Plans
Our common stock is traded on the Nasdaq Global Select MarketFor a description of our securities authorized for issuance under equity compensation plans, see Item 12 of Part III of this Amendment under the symbol SWAV.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Holders of Record
As of February 18, 2022, there were 20 holders of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock represented by these record holders.
Stock Performance Graph
The following shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that Section, and shall not be deemed to beheading “Equity Compensation Plan Information,” which is incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, exceptin response to the extent we specifically incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Health Care Index. The graph assumes $100 was invested in each of our common stock, the NASDAQ Composite Index and the NASDAQ Health Care Index, and assumes reinvestment of any dividends. Note that historic stock price performance is not necessarily indicative of future stock price performance.this item.
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*$100 invested on 3/7/19 in stock or in index, including reinvestment of dividends. Fiscal year ending December 31.
Item 6. Reserved.
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Item 7. 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 our consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K.
This Annual Report on Form 10-K contains statements relating to our expectations, projections, beliefs, and prospects, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words, such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “might,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they may discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section titled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Overview
We are a medical device company focused on developing and commercializing products intended to transform the way calcified cardiovascular disease is treated. We aim to establish a new standard of care for medical device treatment of atherosclerotic cardiovascular disease (“atherosclerosis”) through our differentiated and proprietary local delivery of sonic pressure waves for the treatment of calcified plaque, which we refer to as intravascular lithotripsy (“IVL”). Our IVL system (our “IVL System”), which leverages our IVL technology (our “IVL Technology”), is a minimally invasive, easy-to-use, and safe way to significantly improve patient outcomes. Our IVL catheters are cleared or approved for use in a number of countries and development programs are underway to expand indications and geographies. We are currently selling the following products in countries where we have applicable regulatory approvals:
Products for Treatment of Peripheral Artery Disease (“PAD”):
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Product for the Treatment of Coronary Artery Disease (“CAD”):
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Our differentiated range of M5 and M5+catheters, S4 catheters and C2 catheters enables delivery of IVL therapy of diseased vasculature throughout the body for calcium modification. Our IVL catheters resemble in form a standard balloon angioplasty catheter, the device most commonly used by interventionalists. This familiarity makes our IVL System easy to learn, adopt and use on a day-to-day basis.
Since inception, we have focused on generating clinical data to demonstrate the safety and effectiveness of our IVL Technology. These initial studies have consistently shown low rates of complications regardless of which vessel was being
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studied. In addition to gaining regulatory approvals or clearances, the data from our clinical studies strengthen our ability to drive adoption of IVL Technology across multiple therapies in existing and new market segments. Our past studies have also guided optimal IVL procedure technique and informed the design of our IVL System and future products in development. In addition, we also have ongoing clinical programs across several products and indications, which, if successful, will allow us to expand commercialization of our products into new geographies and indications. For a discussion of our current clinical trials, refer see the section titled “Business – Company Overview – Our Products and Product Pipeline.”
The first two indications we are targeting with our IVL System are PAD, the narrowing or blockage of vessels that carry blood from the heart to the extremities, and CAD, the narrowing or blockage of the arteries that supply blood to the heart. In the future, we see significant opportunity in the potential treatment of aortic stenosis, a condition where the heart’s aortic valve becomes increasingly calcified with age, causing it to narrow and obstruct blood flow from the heart.
We have adapted the use of lithotripsy to the cardiovascular field with the aim of creating what we believe can become the safest, most effective means of addressing the growing challenge of cardiovascular calcification. Lithotripsy has been used to successfully treat kidney stones (deposits of hardened calcium) for over 30 years. By integrating lithotripsy into a device that resembles a standard balloon catheter, physicians can prepare, deliver, and treat calcified lesions using a familiar form factor, without disruption to their standard procedural workflow. Our differentiated IVL System works by delivering shockwaves through the entire depth of the artery wall, modifying calcium in the medial layer of the artery, not just at the superficial most intimal layer. The shockwaves crack this calcium and enable the narrowed artery to expand at low pressures, thereby minimizing complications inherent to traditional balloon dilations, such as dissections or tears. Preparing the vessel with IVL facilitates optimal outcomes with other therapies, including stents and drug-eluting technologies. Using IVL also avoids complications associated with atherectomy devices such as dissection, perforation, and embolism. When followed by an anti-proliferative therapy such as a drug-coated balloons or drug-eluting stents, the micro-fractures may enable better drug penetration into the arterial wall and improve drug uptake, thereby improving the effectiveness of the combination treatment.
We market our products to hospitals whose interventional cardiologists, vascular surgeons, and interventional radiologists treat patients with PAD and CAD. We have dedicated meaningful resources to establish a direct sales capability in the United States, Germany, Austria, Switzerland, France, and the United Kingdom, and we are working to build out our direct sales team in Japan in anticipation of the launch of our C2 catheters, for which we anticipate Japanese regulatory approvals in the first half of 2022. We have complemented our direct sales capability with distributors actively selling our products in over 50 countries in North and South America, Europe, the Middle East, Asia, Africa, and Australia/New Zealand. We are actively expanding our international field presence through new distributors, as well as additional sales and clinical personnel. In addition, we are continuing to add new U.S. sales territories.
For the years ended December 31, 2021, 2020 and 2019, we generated revenue of $237.1 million, $67.8 million and $42.9 million, respectively, and incurred net losses of $9.1 million, $65.7 million and $51.1 million, respectively. For the years ended December 31, 2021, 2020 and 2019, 21%, 45% and 47%, respectively, of our product revenue was generated from customers located outside of the United States. Our sales outside of the United States are denominated principally in Euros. As a result, we have foreign exchange exposure. We have not entered into any material foreign currency hedging contracts, although we may do so in the future.
Since inception, we have incurred significant net losses. Although we had positive net income for the quarters ended September 30, 2021, and December 31, 2021, we had a net loss for the year ended December 31, 2021. We may continue to incur losses in the future, which may vary significantly from period to period. We expect to continue to incur significant expenses as we (i) expand our marketing efforts to increase adoption of our products, (ii) expand existing relationships with our customers, (iii) obtain regulatory clearances or approvals for our planned or future products, (iv) conduct clinical trials on our existing and planned or future products, and (v) develop new products or add new features to our existing products. We will need to continue to generate significant revenue in order to sustain profitability as we continue to grow our business. Even if we achieve profitability for any period, we cannot be sure that we will remain profitable for any substantial period of time.
To date, our principal sources of liquidity have been the net proceeds we received through the sales of our common stock in our public offerings, private sales of our equity securities, payments received from customers purchasing our products and, to a lesser extent, proceeds from our debt financings. For the year ended December 31, 2021, we had positive cash flows from operations of $15.0 million. As of December 31, 2021, we had $201.0 million in cash, cash equivalents and short-term investments and an accumulated deficit of $252.8 million.
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Impact of the COVID-19 pandemic
The global COVID-19 pandemic presents significant risks to us and has had, and continues to have, far reaching impacts on our business, operations, and financial results and condition, directly and indirectly, including, without limitation, impacts on: the health of our management and employees; our manufacturing, distribution, marketing and sales operations; our research and development activities, including clinical activities; and customer and patient behaviors.
Access to many hospitals and other customer sites may be or may periodically be, depending on the current COVID-19 infection rates in the applicable location, restricted to essential personnel, which negatively impacts our ability to promote the use of our products with physicians. Additionally, many hospitals and other therapeutic centers have in the past suspended, and may suspend or continue to suspend in the future, many elective procedures, resulting in a reduced volume of procedures using our products. Our customer behavior is impacted by the prevalence of COVID-19 and changes in the infection rates in the locations where our customers are located.
Quarantines, shelter-in-place and similar government orders have also impacted and may continue to impact, our third-party manufacturers and suppliers, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain.
In addition, we have recently seen some disruptions in the operations of certain of our third-party suppliers, resulting in increased lead-times, higher component costs and lower allocations for our purchase of some components and, in certain cases, requiring us to procure materials from alternate suppliers or incur higher logistical expenses. We are continuing to work closely with our manufacturing partners and suppliers to enable us to source key components and maintain appropriate inventory levels to meet customer demand. However, we have not experienced material disruptions in our supply chain to date.
We have taken a variety of steps to address the impact of the COVID-19 pandemic, while attempting to minimize business disruption. Essential staff in manufacturing and limited support functions continued to work from our Santa Clara headquarters following appropriate hygiene and social distancing protocols. To reduce the risk to our other employees and their families from potential exposure to COVID-19, until recently all other staff in our Santa Clara headquarters were required to work from home. Certain of these other employees had begun to return to our headquarters full or part-time during the second quarter of 2021, although we continue to review the impact of the omicron variant of COVID-19 on employee safety. We continue to limit travel to protect the health and safety of our employees and customers.
We are continuing to monitor the impact of the COVID-19 pandemic on our employees and customers and on the markets in which we operate, and will take further actions that we consider prudent to address the COVID-19 pandemic, while ensuring that we can support our customers and continue to develop our products.
The ultimate extent of the impact of the COVID-19 pandemic on us remains highly uncertain and will depend on future developments and factors that continue to evolve, including the ability of various regions to effectively manage COVID-19, the extent of the continuing resurgence of COVID-19, the efficacy and extent of distribution of vaccines, and the impact of mutations of COVID-19, including the current omicron variant, and the ability of various economies and supply-chains to recover from the COVID-19 pandemic. Most of these developments and factors are outside of our control and could exist for an extended period of time even after any cessation of the pandemic.
Factors Affecting Our Business
There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:
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In addition, we have experienced and expect to continue to experience meaningful variability in our quarterly revenue and gross margin as a result of a number of factors, including, but not limited to: inventory write-offs and write-downs; costs, benefits and timing of new product introductions; the availability and cost of components and raw materials; and fluctuations in foreign currency exchange rates. Additionally, we experience quarters in which operating expenses, in particular research and development expenses, fluctuate depending on the stage and timing of product development.
While these factors may present significant opportunities for us, they also pose significant risks and challenges that we must address.
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Components of Our Results of Operations
Product revenue
Product revenue is primarily derived from the sale of our IVL catheters.
We sell our products to hospitals, primarily through direct sales representatives, as well as through distributors in selected international markets. For products sold through direct sales representatives, control is transferred upon delivery to customers. For products sold to distributors internationally and certain customers that purchase stocking orders in the United States, control is transferred upon shipment or delivery to the customer’s named location, based on the contractual shipping terms. Additionally, a portion of our revenue is generated through a consignment model under which inventory is maintained at hospitals. For consignment inventory, control is transferred at the time the catheters are consumed in a procedure.
Cost of product revenue
Cost of product revenue consists primarily of costs of components for use in our products, the materials and labor that are used to produce our products, the manufacturing overhead that directly supports production and the depreciation relating to the generators used in our IVL System that we provide to our hospital customers, often on a cost-free loan basis to facilitate the use of our IVL catheters in their procedures. We depreciate the generators over a three-year period. We expect cost of product revenue to increase in absolute terms as our revenue grows.
Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of direct materials, product mix, geographic mix, discounting practices, manufacturing costs, product yields, head count and cost-reduction strategies. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which, if successful, we believe will reduce costs and enable us to increase our gross margin percentage. While we expect gross margin percentage to increase over the long term, gross margin percentage will likely fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and development expenses
Research and development expenses consist of applicable personnel, consulting, materials and clinical trial expenses. Research and development expenses include:
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Research and development costs are expensed as incurred. In the future, we expect research and development expenses to increase in absolute dollars as we continue to develop new products, enhance existing products and technologies and perform activities related to obtaining additional regulatory approval.
Sales and marketing expenses
Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits, sales commissions, travel and stock-based compensation. Other sales and marketing expenses include marketing and promotional activities, including trade shows and market research, and cost of outside consultants. We expect to continue to grow our sales force and increase marketing efforts as we continue commercializing products based on our IVL Technology.
General and administrative expenses
General and administrative expenses consist of personnel-related expenses, including salaries, benefits, bonus, travel and stock-based compensation. Other general and administrative expenses include professional services fees, including legal,
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audit and tax fees, insurance costs, cost of outside consultants and employee recruiting and training costs. Moreover, we expect to incur additional expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and Securities and Exchange Commission (“SEC”) compliance and investor relations.
Share in net loss of equity method investment
Share in net loss of equity method investment, represents our proportionate share of the underlying income or loss incurred in connection with our joint venture with Genesis MedTech International Private Limited (“Genesis”).
Other income (expense), net
Other income (expense), net consists of interest earned on our cash equivalents and short-term investments and the net impact of foreign exchange gains and losses.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020:
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| Year Ended December 31, |
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Revenue: |
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Product revenue |
| $ | 237,146 |
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| $ | 67,789 |
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| $ | 169,357 |
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| 250 | % |
Cost of revenue: |
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Cost of product revenue |
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| 41,438 |
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| 20,991 |
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| 20,447 |
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| 97 | % |
Gross profit |
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| 195,708 |
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| 46,798 |
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| 148,910 |
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| 318 | % |
Operating expenses: |
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Research and development |
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| 50,544 |
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| 36,926 |
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| 13,618 |
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| 37 | % |
Sales and marketing |
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| 111,288 |
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| 51,672 |
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| 59,616 |
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| 115 | % |
General and administrative |
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| 34,747 |
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| 23,863 |
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| 10,884 |
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| 46 | % |
Total operating expenses |
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| 196,579 |
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| 112,461 |
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| 84,118 |
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| 75 | % |
Loss from operations |
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| (871 | ) |
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| (65,663 | ) |
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| 64,792 |
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| (99 | )% |
Share in net loss of equity method investment |
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| (6,286 | ) |
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| — |
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| (6,286 | ) |
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| 100 | % |
Interest expense |
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| (1,096 | ) |
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| (1,212 | ) |
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| 116 |
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| (10 | )% |
Other income (expense), net |
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| (582 | ) |
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| 1,256 |
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| (1,838 | ) |
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| (146 | )% |
Net loss before taxes |
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| (8,835 | ) |
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| (65,619 | ) |
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| 56,784 |
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| (87 | )% |
Income tax provision |
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| 301 |
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| 80 |
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| 221 |
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| 276 | % |
Net loss |
| $ | (9,136 | ) |
| $ | (65,699 | ) |
| $ | 56,563 |
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| (86 | )% |
Product revenue. Product revenue increased by $169.4 million, or 250%, from $67.8 million in 2020 to $237.1 million in 2021, driven primarily by coronary catheter revenues, and secondarily by peripheral catheter revenues, as further described below.
The following table represents our product revenue based on product line:
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Coronary |
| $ | 161,463 |
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| $ | 24,586 |
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| $ | 136,877 |
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| 557 | % |
Peripheral |
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| 74,064 |
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| 41,994 |
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| 32,070 |
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| 76 | % |
Other |
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| 1,619 |
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| 1,209 |
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| 410 |
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| 34 | % |
Product revenue |
| $ | 237,146 |
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| $ | 67,789 |
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| $ | 169,357 |
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Coronary product revenue increased by $136.9 million, or 557%, from $24.6 million in 2020 to $161.5 million in 2021. In February 2021, we received FDA approval for our C2 catheters. The increase in coronary product revenue was due to the commencement of sales in the United States, increased adoption of our products internationally, and continued recovery from
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the COVID-19 pandemic impact in the prior year. All coronary product revenue was from international customers for the year ended December 31, 2020.
Peripheral product revenue increased by $32.1 million, or 76%, from $42.0 million in 2020 to $74.1 million in 2021. The change was due to an increase in the number of our M5 and S4 IVL catheters sold within the United States and internationally driven by increased adoption of our products and recovery from the COVID-19 pandemic impact in the prior year.
Other product revenue increased by $0.4 million, or 34%, from $1.2 million in 2020 to $1.6 million in 2021. The change was due to an increase in the purchase volume of our IVL generators and other accessories within the United States and internationally.
We sold to a greater number of customers in the United States and to a greater number of distributors internationally in 2021 compared to 2020. Product revenue, classified by the major geographic areas in which our products are shipped, was $186.3 million within the United States and $50.8 million for all other countries in 2021 compared to $37.1 million within the United States and $30.7 million for all other countries in 2020.
Cost of product revenue and gross margin percentage.Cost of product revenue increased by $20.4 million, or 97%, from $21.0 million in 2020 to $41.4 million in 2021. The increase was driven by higher product sales volume compared to the prior year. Gross margin percentage improved to 83% in 2021, compared to 69% in 2020. This change in gross margin percentage was primarily due to higher average selling price and lower fixed costs per unit from increased production volume of our IVL catheters and increased manufacturing efficiencies from improvements to operations and production.
Research and development expenses.The following table summarizes our research and development expenses incurred during the periods presented:
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Compensation and personnel-related costs |
| $ | 29,051 |
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| $ | 17,097 |
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| $ | 11,954 |
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| 70 | % |
Clinical-related costs |
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| 8,586 |
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| 10,268 |
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| (1,682 | ) |
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| (16 | )% |
Material and supplies |
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| 3,382 |
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| 2,984 |
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| 398 |
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| 13 | % |
Facilities and other allocated costs |
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| 5,547 |
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| 2,941 |
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| 2,606 |
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| 89 | % |
Outside consultants |
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| 3,022 |
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| 1,868 |
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| 1,154 |
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| 62 | % |
Other research and development costs |
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| 956 |
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| 1,768 |
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| (812 | ) |
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| (46 | )% |
Total research and development expenses |
| $ | 50,544 |
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| $ | 36,926 |
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| $ | 13,618 |
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| 37 | % |
Research and development expenses increased by $13.6 million, or 37%, from $36.9 million in 2020 to $50.5 million in 2021. The increase was primarily due to a $12.0 million increase in compensation and personnel-related costs due to an increase in head count to support research and development activities. There was also a $2.6 million increase in facilities and other allocated costs due to increased information technology, rent and building expenditures, a $1.2 million increase for outside consultants, and a $0.4 million increase in materials and supplies. These increases were partially offset by a $1.7 million decrease in clinical-related costs primarily due to the timing of completion of patient enrollment for certain clinical trials and the timing of commencement of new clinical trials, and a $0.8 million decrease in other research and development costs due to software license costs in the prior year not incurred in the current year.
Sales and marketing expenses. Sales and marketing expenses increased by $59.6 million, or 115%, from $51.7 million in 2020 to $111.3 million in 2021. The increase was primarily due to a $45.2 million increase in compensation and personnel-related costs, as a result of a higher head count and increased revenue for the year-ended December 31, 2021. Marketing and promotional expenses increased by $5.2 million to support the continued commercialization of our products. There was also a $4.3 million increase due to travel-related costs driven by higher head count and continued recovery from the COVID-19 pandemic impact in the prior year, a $2.4 million increase in facilities and other allocated costs, due to increased information technology, rent and building expenditures, a $1.9 million increase due to consulting and general corporate expenses, a $0.5 million increase in materials and supplies, and a $0.1 million increase due to recruiting and training fees.
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General and administrative expenses.General and administrative expenses increased by $10.9 million, or 46%, from $23.9 million in 2020 to $34.7 million in 2021. The change was primarily due to a $7.7 million increase in compensation and personnel-related costs due to an increase in head count, $2.1 million increase in consulting, professional services and general corporate expenses, and a $1.1 million increase in recruiting, training, information technology and facilities costs.
Share in net loss of equity method investment. The share in net loss of equity method investment of $6.3 million in 2021 was due to our 45% ownership in the joint venture which was acquired in March 2021.
Interest expense. Interest expense of $1.1 million was related to our outstanding term loan which matures in December 2023. The term loan requires monthly repayments of principal starting in July 2022.
Other income (expense), net.Other income (expense), net decreased by $1.8 million, or 146%, from $1.3 million in other income, net in 2020 to $0.6 million in other expense, net in 2021. The decrease in other income was primarily due to a decrease in interest income attributable to the decreased interest rate environment in the comparable period and the timing of the maturities of marketable securities. Also included in other income (expense), net are the net impact of foreign exchange gains and losses.
Comparison of the Years Ended December 31, 2020 and 2019
For a discussion regarding our financial condition and our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.
Liquidity and Capital Resources
Sources of liquidity
To date, our principal sources of liquidity have been the net proceeds we received through the sales of our common stock in our public offerings, private sales of our equity securities, payments received from customers purchasing our products and, to a lesser extent, proceeds from our debt financings. On March 11, 2019, upon completion of our initial public offering (“IPO”), we received net proceeds of $99.9 million, after deducting underwriting discounts and commissions and offering expenses. Concurrent with the IPO, we completed a private placement for net proceeds of $10.0 million. On November 15, 2019, we completed a follow-on offering for net proceeds of $96.7 million, after deducting underwriting discounts and commissions and offering expenses. On June 19, 2020, we completed an offering for net proceeds of $83.4 million, after deducting underwriting discounts and commissions and offering expenses.
On February 11, 2020, we entered into the First Amendment to the Loan and Security Agreement with Silicon Valley Bank (the “Amended Credit Facility”) to refinance our existing term loan, which was accounted for as a modification. The Amended Credit Facility provided us with a supplemental term loan in the amount of $16.5 million. We received net proceeds of $3.3 million, which reflects an additional $4.3 million in principal as of the date of the modification less the final balloon payment fee of $1.0 million. The supplemental term loan matures on December 1, 2023. The Amended Credit Facility provides an interest-only payment through June 30, 2022.
We have a number of ongoing clinical trials and expect to continue to make substantial investments in these trials as well as additional clinical trials designed to provide clinical evidence of the safety and efficacy of our existing products. We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives and expanding our international marketing programs to help facilitate further adoption among existing hospital accounts and physicians as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs, and clinical studies to develop future generations of products based on our IVL Technology, support regulatory submissions, and demonstrate the clinical efficacy of our products. Moreover, we expect to continue to incur 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, although we had positive net income for the quarters ended September 30, 2021, and December 31, 2021, we had a net loss for the year ended December 31, 2021 and we may incur net losses and have negative cash flows from operations in the future.
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As of December 31, 2021, we have $201.0 million in cash, cash equivalents and short-term investments and an accumulated deficit of $252.8 million.
In the short term, we believe that our cash, cash equivalents and short-term investments will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including supporting working capital and capital expenditure requirements. In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including:
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To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and cash and other requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event that additional financing is required from outside sources, there is a possibility we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.
Our material cash requirements include the following contractual and other obligations:
Debt, Principal, and Interest
Our debt, principal and interest commitments consist of our debt obligations under the Amended Credit Facility. As of December 31, 2021, we had debt, principal, and interest commitments of $17.1 million, of which $6.0 million is expected to be paid within the next twelve months.
Manufacturing Purchase Obligations
We have fixed commitments with a contract manufacturer of approximately $12.7 million within the next twelve months.
Operating Leases
Our operating lease commitments mostly consist of our lease obligations for our Santa Clara headquarter office spaces. During the year ended 2021, we entered into a lease amendment and executed a lease for an additional facility. Our total operating lease commitments as of December 31, 2021 are approximately $56.2 million, of which $3.5 million is expected to be paid within the next twelve months.
We did not have during the periods presented, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
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Net cash provided by (used in): |
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Operating activities |
| $ | 15,036 |
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| $ | (71,184 | ) |
| $ | (48,107 | ) |
Investing activities |
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| 26,416 |
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| (107,473 | ) |
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| (59,543 | ) |
Financing activities |
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| (2,451 | ) |
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| 90,035 |
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| 208,052 |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
| $ | 39,001 |
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| $ | (88,622 | ) |
| $ | 100,402 |
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Operating activities
In 2021, cash provided by operating activities was $15.0 million, attributable to a net loss of $9.1 million, non-cash charges of $40.7 million, partially offset by a net change in our net operating assets and liabilities of $16.5 million. Non-cash charges primarily consisted of $27.3 million in stock-based compensation, $6.3 million in share in net loss of equity method investment, $3.6 million in depreciation and amortization, $2.0 million in amortization of right-of-use assets, $1.1 million in accretion of discount on available-for-sale securities, and $0.5 million in amortization of debt issuance costs. The change in our net operating assets and liabilities was primarily due to a $25.7 million increase in accounts receivable due to an increase in sales, a $12.1 million increase in inventory driven by an increase in raw material, work in progress, and finished goods inventory to support sales growth, a $2.1 million increase in prepaid expenses and other current assets, and a $0.2 million decrease in lease liability due to lease payments. These changes were partially offset by a $21.6 million increase in accrued and other current liabilities resulting from expansion in our operating activities and accrued employee compensation driven by increased headcount, a $1.9 million increase in accounts payable due to the timing of vendor billings and payments, and a decrease in other assets of $0.1 million.
In 2020, cash used in operating activities was $71.2 million, attributable to a net loss of $65.7 million and a net change in our net operating assets and liabilities of $20.3 million, partially offset by non-cash charges of $14.8 million. Non-cash charges primarily consisted of $10.4 million in stock-based compensation, $1.9 million in depreciation and amortization, $1.5 million in amortization of right-of-use assets, $0.6 million in amortization of debt issuance costs, $0.3 million in accretion of discount on available-for-sale securities and $0.2 million of a loss due to the write down of fixed assets. The change in our net operating assets and liabilities was primarily due to a $17.1 million increase in inventory and $4.3 million increase in accounts receivable due to an increase in sales, a $0.5 million increase in prepaid expenses and other current assets, a $0.3 million increase in other assets, a $1.4 million decrease in accounts payable and a $0.8 million decrease in lease liabilities. These changes were partially offset by a $4.0 million increase in accrued and other current liabilities resulting primarily from the expansion in our operating activities, leasehold improvements associated with our Santa Clara office and laboratory premises, and accrued bonuses and commissions.
Investing activities
In 2021, cash provided by investing activities was $26.4 million, attributable to proceeds from maturities of available-for-sale investments of $156.1 million, partially offset by purchase of available-for-sale investments of $117.2 million and purchases of property and equipment of $12.4 million.
In 2020, cash used in investing activities was $107.5 million, attributable to the purchase of available-for-sale securities of $168.0 million and the purchase of property and equipment of $11.5 million, partially offset by proceeds from the maturity of available-for-sale investments of $72.0 million.
Financing activities
In 2021, cash used in financing activities was $2.5 million, attributable to $8.3 million of payment of taxes withheld on net settled vesting of restricted stock units (“RSUs”), partially offset by proceeds of $3.0 million from stock option exercises and proceeds of $2.8 million from the issuance of shares under our employee stock purchase plan.
In 2020, cash provided by financing activities was $90.0 million, attributable to $83.4 million from the public offering of our common stock, $3.3 million from borrowings under the Amended Credit Facility, proceeds of $4.3 million from stock
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option exercises and proceeds of $1.8 million from the issuance of shares under our employee stock purchase plan. These changes were offset by payment of taxes withheld on net settled vesting of RSUs of $1.4 million, principal payments on our term loan of $1.1 million and payment of public offering costs of $0.2 million.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated 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 the Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, 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
Product Revenue
We sell our products to hospitals, primarily through direct sales representatives, as well as through distributors in selected international markets. For products sold through direct sales representatives, control is transferred upon delivery to customers. For products sold to distributors internationally and certain customers that purchase stocking orders in the United States, control is transferred upon shipment or delivery to the customer’s named location, based on the contractual shipping terms. Additionally, a portion of our revenue is generated through a consignment model under which inventory is maintained at hospitals. For consignment inventory, control is transferred at the time the catheters are consumed in a procedure.
Under agreements with our customers, we may provide for the use of an IVL generator and connector cable at no charge to facilitate the use of our IVL catheters. These agreements do not contain contractually enforceable minimum commitments and are generally cancellable by either party with 30 days’ notice.
License Revenue
For arrangements that contain a license of our functional intellectual property with a customer, we consider whether the license grant is distinct from other performance obligations in the arrangement. A license grant of functional intellectual property is generally considered to be capable of being distinct if a customer can benefit from the license on its own or together with other readily available resources. License revenue for licenses of functional intellectual property is recognized at a point in time when we satisfy our performance obligation of transferring the license to the customer.
On March 19, 2021, we entered into the Joint Venture Deed (the “JV Agreement”) with Genesis to establish a long-term strategic partnership to develop, manufacture and commercialize certain of our interventional products in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau. Under the JV Agreement, Genesis Shockwave Private Ltd. (the “JV”) was formed under the laws of Singapore to serve as a joint venture with Genesis for the purpose of establishing and managing such a strategic partnership.
In connection with the formation of the JV on March 19, 2021, we received a 45% equity stake in the JV in exchange for the contribution of intellectual property. We determined that the JV met the definition of a customer under Topic 606, Revenue from Contracts with Customers, and that the promised goods and services of the contribution of the license of intellectual property and associated manufacturing technology transfer to the JV were considered to be a single performance obligation. The transaction price of $12.3 million was estimated by reference to the cash value of the shares which were issued at the formation of the JV.
83
As of December 31, 2021, the associated manufacturing technology transfer to the JV has not yet been completed. We recorded a related party contract liability, noncurrent, of $12.3 million for the outstanding performance obligation.
Equity Method Investment
Entities which we have significant influence over the activities, but do not control, are accounted for under the equity method of accounting in accordance with Topic 323, Investments - Equity Method and Joint Ventures.
Our carrying value in the equity method investment is reported as equity method investment on our consolidated balance sheet. We record our proportionate share of the underlying income or loss which is recognized in share in net loss of equity method investment. For the year ended December 31, 2021, our share in the losses incurred by the equity method investee was $6.3 million. We eliminate any intra-entity profits to the extent of our beneficial interest.
We assess our equity method investment for impairment when events or circumstances suggest that the carrying amount of the investment may be impaired. We consider all available evidenced in assessing whether a decline in fair value is other than temporary. If the decline in fair value is determined to be other than temporary, the difference between the carrying amount of the investment and estimated fair value is recognized as an impairment charge.
Accrued research and development costs
We accrue liabilities for estimated costs of research and development activities conducted by our third-party service providers, which include the conduct of preclinical and clinical studies. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced, and include these costs in accrued liabilities on the consolidated balance sheet and within research and development expense on the consolidated statements of operations and comprehensive loss.
We accrue for these costs based on factors, such as estimates of the work completed and budget provided and in accordance with agreements established with our third-party service providers. We make significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, we adjust our accrued liabilities. We have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Recent Accounting Pronouncements
No recently issued accounting standards are expected to have a material impact on our consolidated financial statements.
84
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate risk
Our cash, cash equivalents and short-term investments as of December 31, 2021 consist of $201.0 million in bank deposits, money market funds, U.S Treasury securities and commercial paper. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure.
As of December 31, 2021, we had $17.1 million in variable rate debt outstanding, consisting of the supplemental term loan under our Amended Credit Facility. The supplemental term loan requires monthly repayments of principal starting on July 2022. The supplemental term loan matures on December 1, 2023 and accrues interest at a floating per annum rate equal to the greater of the prime rate minus 1.25% and 3.5%. The interest rate was 3.5% as of December 31, 2021.
Foreign currency exchange risk
As we expand internationally, our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is denominated primarily in U.S. dollars and Euros. For the years ended December 31, 2021 and 2020, approximately 12% and 26% of our revenue, respectively, was denominated in Euros. Our expenses are generally denominated in the currencies of the jurisdiction in which the respective operations are located, which are primarily in the United States. For the year ended December 31, 2021, we incurred $0.8 million in foreign exchange losses, primarily driven by Euro denominated accounts receivable and the strengthening of the U.S. Dollar relative to the Euro during the period. A 10% change in exchange rates could result in a change in fair value of $2.1 million and $0.6 million in foreign currency cash and accounts receivable as of December 31, 2021 and 2020, respectively. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts, although we may do so in the future.
85
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
86
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Shockwave Medical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Shockwave Medical, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
| |
|
|
87
|
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
San Jose, California
February 25, 2022
88
SHOCKWAVE MEDICAL, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 89,209 |
|
| $ | 50,423 |
|
Short-term investments |
|
| 111,772 |
|
|
| 151,931 |
|
Accounts receivable, net |
|
| 37,435 |
|
|
| 11,689 |
|
Inventory |
|
| 42,978 |
|
|
| 29,859 |
|
Prepaid expenses and other current assets |
|
| 4,508 |
|
|
| 2,398 |
|
Total current assets |
|
| 285,902 |
|
|
| 246,300 |
|
Operating lease right-of-use assets |
|
| 27,496 |
|
|
| 7,568 |
|
Property and equipment, net |
|
| 24,361 |
|
|
| 16,362 |
|
Equity method investment |
|
| 5,987 |
|
|
| — |
|
Other assets |
|
| 1,936 |
|
|
| 1,812 |
|
TOTAL ASSETS |
| $ | 345,682 |
|
| $ | 272,042 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 3,520 |
|
| $ | 1,466 |
|
Term notes, current portion |
|
| 5,500 |
|
|
| 3,300 |
|
Accrued liabilities |
|
| 40,870 |
|
|
| 19,942 |
|
Lease liability, current portion |
|
| 1,738 |
|
|
| 873 |
|
Total current liabilities |
|
| 51,628 |
|
|
| 25,581 |
|
Lease liability, noncurrent portion |
|
| 28,321 |
|
|
| 7,488 |
|
Term notes, noncurrent portion |
|
| 11,630 |
|
|
| 13,319 |
|
Related party contract liability, noncurrent portion |
|
| 12,273 |
|
|
| — |
|
TOTAL LIABILITIES |
|
| 103,852 |
|
|
| 46,388 |
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; NaN shares issued and outstanding as of December 31, 2021 and 2020 |
|
| — |
|
|
| — |
|
Common stock, $0.001 par value; 281,274,838 shares authorized; 35,444,472 and 34,684,337 issued and outstanding as of December 31, 2021 and 2020 |
|
| 35 |
|
|
| 35 |
|
Additional paid-in capital |
|
| 494,806 |
|
|
| 469,283 |
|
Accumulated other comprehensive income (loss) |
|
| (202 | ) |
|
| 9 |
|
Accumulated deficit |
|
| (252,809 | ) |
|
| (243,673 | ) |
TOTAL STOCKHOLDERS’ EQUITY |
|
| 241,830 |
|
|
| 225,654 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 345,682 |
|
| $ | 272,042 |
|
The accompanying notes are an integral part of these consolidated financial statements.
89
SHOCKWAVE MEDICAL, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|
| Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
| $ | 237,146 |
|
| $ | 67,789 |
|
| $ | 42,927 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
| 41,438 |
|
|
| 20,991 |
|
|
| 17,159 |
|
Gross profit |
|
| 195,708 |
|
|
| 46,798 |
|
|
| 25,768 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 50,544 |
|
|
| 36,926 |
|
|
| 32,853 |
|
Sales and marketing |
|
| 111,288 |
|
|
| 51,672 |
|
|
| 30,620 |
|
General and administrative |
|
| 34,747 |
|
|
| 23,863 |
|
|
| 14,134 |
|
Total operating expenses |
|
| 196,579 |
|
|
| 112,461 |
|
|
| 77,607 |
|
Loss from operations |
|
| (871 | ) |
|
| (65,663 | ) |
|
| (51,839 | ) |
Interest expense |
|
| (1,096 | ) |
|
| (1,212 | ) |
|
| (944 | ) |
Change in fair value of warrant liability |
|
| — |
|
|
| — |
|
|
| (609 | ) |
Share in net loss of equity method investment |
|
| (6,286 | ) |
|
| — |
|
|
| — |
|
Other income (expense), net |
|
| (582 | ) |
|
| 1,256 |
|
|
| 2,345 |
|
Net loss before taxes |
|
| (8,835 | ) |
|
| (65,619 | ) |
|
| (51,047 | ) |
Income tax provision |
|
| 301 |
|
|
| 80 |
|
|
| 62 |
|
Net loss |
| $ | (9,136 | ) |
| $ | (65,699 | ) |
| $ | (51,109 | ) |
Unrealized gain (loss) on available-for-sale securities |
|
| (211 | ) |
|
| (5 | ) |
|
| 35 |
|
Adjustment for net gain realized and included in other income, net |
|
| — |
|
|
| (21 | ) |
|
| — |
|
Total comprehensive loss |
| $ | (9,347 | ) |
| $ | (65,725 | ) |
| $ | (51,074 | ) |
Net loss per share, basic and diluted |
| $ | (0.26 | ) |
| $ | (1.99 | ) |
| $ | (2.14 | ) |
Shares used in computing net loss per share, basic and diluted |
|
| 35,098,130 |
|
|
| 33,088,095 |
|
|
| 23,904,828 |
|
The accompanying notes are an integral part of these consolidated financial statements.
90
SHOCKWAVE MEDICAL, INC.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
|
| Convertible Preferred Stock |
|
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
| Total Stockholders' Equity |
| ||||||||||||||
|
| Shares |
|
| Amount |
|
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Deficit |
|
| (Deficit) |
| ||||||||
Balance — December 31, 2018 |
|
| 18,670,328 |
|
| $ | 152,806 |
|
|
|
| 1,824,852 |
|
| $ | 2 |
|
| $ | 4,275 |
|
| $ | — |
|
| $ | (126,865 | ) |
| $ | (122,588 | ) |
Exercise of common stock warrants for cash |
|
| — |
|
|
| — |
|
|
|
| 50,331 |
|
|
| — |
|
|
| 110 |
|
|
| — |
|
|
| — |
|
|
| 110 |
|
Issuance of common stock upon net exercise of warrants |
|
| — |
|
|
| — |
|
|
|
| 180,952 |
|
|
| — |
|
|
| 133 |
|
|
| — |
|
|
| — |
|
|
| 133 |
|
Conversion of preferred stock to common stock upon initial public offering |
|
| (18,670,328 | ) |
|
| (152,806 | ) |
|
|
| 18,670,328 |
|
| 18 |
|
|
| 152,788 |
|
|
| — |
|
|
| — |
|
|
| 152,806 |
| |
Conversion of Series A-1 warrants to common stock warrants upon initial public offering |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 789 |
|
|
| — |
|
|
| — |
|
|
| 789 |
|
Issuance of common stock in connection with initial public offering, net of issuance costs of $11.5 million |
|
| — |
|
|
| — |
|
|
|
| 6,555,000 |
|
| 7 |
|
|
| 99,917 |
|
|
| — |
|
|
| — |
|
|
| 99,924 |
| |
Issuance of common stock in connection with private placement |
|
| — |
|
|
| — |
|
|
|
| 588,235 |
|
| 1 |
|
|
| 9,999 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
| |
Issuance of common stock in connection with public offering, net of issuance costs of $6.8 million |
|
| — |
|
|
| — |
|
|
|
| 2,854,048 |
|
|
| 3 |
|
|
| 96,674 |
|
|
| — |
|
|
| — |
|
|
| 96,677 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
|
| 723,155 |
|
|
| — |
|
|
| 2,206 |
|
|
| — |
|
|
| — |
|
|
| 2,206 |
|
Vesting of early exercised options |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| — |
|
|
| 27 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 3,646 |
|
|
| — |
|
|
| — |
|
|
| 3,646 |
|
Adjustment for fractional shares resulting from reverse stock split |
|
| — |
|
|
| — |
|
|
|
| (114 | ) |
|
| — |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| (3 | ) |
Unrealized gain on available-for-sale securities |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 35 |
|
|
| — |
|
|
| 35 |
|
Net loss |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (51,109 | ) |
|
| (51,109 | ) |
Balance — December 31, 2019 |
|
| — |
|
|
| — |
|
|
|
| 31,446,787 |
|
|
| 31 |
|
|
| 370,561 |
|
|
| 35 |
|
|
| (177,974 | ) |
|
| 192,653 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
|
| 1,185,764 |
|
| 2 |
|
|
| 4,315 |
|
|
| — |
|
|
| — |
|
|
| 4,317 |
| |
Issuance of common stock under employee stock purchase plan |
|
| — |
|
|
| — |
|
|
|
| 52,612 |
|
|
| — |
|
|
| 1,795 |
|
|
| — |
|
|
| — |
|
|
| 1,795 |
|
Issuance of common stock in connection with vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
|
| 69,900 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of common stock in connection with public offering, net of issuance costs of $6.1 million |
|
| — |
|
|
| — |
|
|
|
| 1,955,000 |
|
| 2 |
|
|
| 83,366 |
|
|
| — |
|
|
| — |
|
|
| 83,368 |
| |
Restricted stock units withheld in net settlement for tax |
|
| — |
|
|
| — |
|
|
|
| (25,726 | ) |
|
| — |
|
|
| (1,420 | ) |
|
| — |
|
|
| — |
|
|
| (1,420 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 10,666 |
|
|
| — |
|
|
| — |
|
|
| 10,666 |
|
Net gain reclassified from accumulated other comprehensive income |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21 | ) |
|
| — |
|
|
| (21 | ) |
Unrealized loss on available-for-sale securities |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
|
| (5 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (65,699 | ) |
|
| (65,699 | ) |
Balance — December 31, 2020 |
|
| — |
|
|
| — |
|
|
|
| 34,684,337 |
|
|
| 35 |
|
|
| 469,283 |
|
|
| 9 |
|
|
| (243,673 | ) |
|
| 225,654 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
|
| 547,155 |
|
|
| — |
|
|
| 3,049 |
|
|
| — |
|
|
| — |
|
|
| 3,049 |
|
Issuance of common stock under employee stock purchase plan |
|
| — |
|
|
| — |
|
|
|
| 36,833 |
|
|
| — |
|
|
| 2,837 |
|
|
| — |
|
|
| — |
|
|
| 2,837 |
|
Issuance of common stock in connection with vesting of restricted stock units |
|
| — |
|
|
| — |
|
|
|
| 239,213 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Restricted stock units withheld in net settlement for tax |
|
| — |
|
|
| — |
|
|
|
| (63,066 | ) |
|
| — |
|
|
| (8,337 | ) |
|
| — |
|
|
| — |
|
|
| (8,337 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 27,974 |
|
|
| — |
|
|
| — |
|
|
| 27,974 |
|
Unrealized loss on available-for-sale securities |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (211 | ) |
|
| — |
|
|
| (211 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,136 | ) |
|
| (9,136 | ) |
Balance — December 31, 2021 |
|
| — |
|
| $ | — |
|
|
|
| 35,444,472 |
|
| $ | 35 |
|
| $ | 494,806 |
|
| $ | (202 | ) |
| $ | (252,809 | ) |
| $ | 241,830 |
|
The accompanying notes are an integral part of these consolidated financial statements.
91
SHOCKWAVE MEDICAL, INC.
Consolidated Statements of Cash Flows
(in thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (9,136 | ) |
| $ | (65,699 | ) |
| $ | (51,109 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 3,579 |
|
|
| 1,863 |
|
|
| 1,337 |
|
Share in net loss of equity method investment |
|
| 6,286 |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 27,257 |
|
|
| 10,350 |
|
|
| 3,646 |
|
Amortization of right-of-use assets |
|
| 1,957 |
|
|
| 1,483 |
|
|
| 944 |
|
Accretion of discount on available-for-sale securities |
|
| 1,093 |
|
|
| 300 |
|
|
| (543 | ) |
Loss on write down of fixed assets |
|
| 7 |
|
|
| 187 |
|
|
| 67 |
|
Change in fair value of warrant liability |
|
| — |
|
|
| — |
|
|
| 609 |
|
Amortization of debt issuance costs |
|
| 511 |
|
|
| 646 |
|
|
| 436 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (25,746 | ) |
|
| (4,312 | ) |
|
| (4,527 | ) |
Inventory |
|
| (12,073 | ) |
|
| (17,056 | ) |
|
| (6,824 | ) |
Prepaid expenses and other current assets |
|
| (2,110 | ) |
|
| (501 | ) |
|
| (785 | ) |
Other assets |
|
| 91 |
|
|
| (306 | ) |
|
| 41 |
|
Accounts payable |
|
| 1,870 |
|
|
| (1,392 | ) |
|
| 1,272 |
|
Accrued and other current liabilities |
|
| 21,637 |
|
|
| 4,017 |
|
|
| 8,339 |
|
Lease liabilities |
|
| (187 | ) |
|
| (764 | ) |
|
| (1,010 | ) |
Net cash provided by (used in) operating activities |
|
| 15,036 |
|
|
| (71,184 | ) |
|
| (48,107 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale securities |
|
| (117,245 | ) |
|
| (167,953 | ) |
|
| (119,476 | ) |
Proceeds from maturities of available-for-sale securities |
|
| 156,100 |
|
|
| 72,000 |
|
|
| 63,750 |
|
Purchase of property and equipment |
|
| (12,439 | ) |
|
| (11,520 | ) |
|
| (3,817 | ) |
Net cash provided by (used in) investing activities |
|
| 26,416 |
|
|
| (107,473 | ) |
|
| (59,543 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock upon initial public offering, net of issuance costs paid |
|
| — |
|
|
| — |
|
|
| 100,547 |
|
Proceeds from issuance of common stock in private placement |
|
| — |
|
|
| — |
|
|
| 10,000 |
|
Proceeds from issuance of common stock in public offering, net of issuance costs paid |
|
| — |
|
|
| 83,368 |
|
|
| 96,856 |
|
Payments of taxes withheld on net settled vesting of restricted stock units |
|
| (8,337 | ) |
|
| (1,420 | ) |
|
| — |
|
Proceeds from term loans |
|
| — |
|
|
| 3,265 |
|
|
| — |
|
Payment of deferred offering costs |
|
| — |
|
|
| (179 | ) |
|
| — |
|
Proceeds from stock option exercises |
|
| 3,049 |
|
|
| 4,317 |
|
|
| 2,206 |
|
Proceeds from issuance of common stock under employee stock purchase plan |
|
| 2,837 |
|
|
| 1,795 |
|
|
| — |
|
Proceeds from warrant exercises |
|
| — |
|
|
| — |
|
|
| 110 |
|
Principal payment of term loan |
|
| — |
|
|
| (1,111 | ) |
|
| (1,667 | ) |
Net cash provided by (used in) financing activities |
|
| (2,451 | ) |
|
| 90,035 |
|
|
| 208,052 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 39,001 |
|
|
| (88,622 | ) |
|
| 100,402 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 51,873 |
|
|
| 140,495 |
|
|
| 40,093 |
|
Cash, cash equivalents and restricted cash equivalents at end of period |
| $ | 90,874 |
|
| $ | 51,873 |
|
| $ | 140,495 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 586 |
|
| $ | 549 |
|
| $ | 534 |
|
Income tax paid |
| $ | 143 |
|
| $ | 22 |
|
| $ | 120 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on conversion of convertible preferred stock |
| $ | — |
|
| $ | — |
|
| $ | 152,806 |
|
Offering cost included in account payable and accrued liabilities |
| $ | — |
|
| $ | — |
|
| $ | 179 |
|
Common stock warrants issued on conversion of preferred stock warrants and the reclassification of the warrant liability |
| $ | — |
|
| $ | — |
|
| $ | 789 |
|
Right-of-use asset obtained in exchange for lease liability |
| $ | 21,885 |
|
| $ | 226 |
|
| $ | 6,948 |
|
Property and equipment purchases included in accounts payable and accrued liabilities |
| $ | 1,923 |
|
| $ | 2,448 |
|
| $ | 52 |
|
Equity method investment obtained in exchange for related party contract liability |
| $ | 12,273 |
|
| $ | — |
|
| $ | — |
|
Transfer of fixed assets to inventory |
| $ | 329 |
|
| $ | 413 |
|
| $ | 119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
92
Shockwave Medical, Inc.
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Shockwave Medical, Inc. (the “Company”) was incorporated on June 17, 2009. The Company is primarily engaged in the development of Intravascular Lithotripsy (“IVL”) technology for the treatment of calcified plaque in patients with peripheral vascular, coronary vascular and heart valve disease. Built on a balloon catheter platform, the IVL technology uses lithotripsy to disrupt both superficial and deep vascular calcium, while minimizing soft tissue injury, and an integrated angioplasty balloon to dilate blockages at low pressures, restoring blood flow.
In 2016, the Company began commercial and manufacturing operations, and began selling catheters based on the IVL technology. The Company’s headquarters are in Santa Clara, California. The Company is located and operates primarily in the United States and has subsidiaries in Germany, the United Kingdom, Japan and France.
As of December 31, 2021, the Company had cash, cash equivalents and short-term investments of $201.0 million, which are available to fund future operations. The Company believes that its cash, cash equivalents, and short-term investments as of December 31, 2021, will be sufficient for the Company to continue as a going concern for at least 12 months from the date the consolidated financial statements are filed with the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to the valuation of inventory, the allowance for doubtful accounts, the fair value of stock options, recoverability of the Company’s net deferred tax assets, and related valuation allowance and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Cash and cash equivalents |
| $ | 89,209 |
|
| $ | 50,423 |
|
Restricted cash |
|
| 1,665 |
|
|
| 1,450 |
|
Total cash, cash equivalents, and restricted cash |
| $ | 90,874 |
|
| $ | 51,873 |
|
93
Restricted cash as of December 31, 2021 and 2020 relates to letters of credit established for real property leases relating to buildings housing the Company’s corporate offices and manufacturing facilities, and is recorded as other assets on the consolidated balance sheets.
Short-Term Investments
Short-term investments have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company determines the appropriate classification of its investments in debt securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase are classified as current based on their availability for use in current operations.
The Company evaluates, on a quarterly basis, its marketable securities for potential impairment. For marketable securities in an unrealized loss position, the Company assesses whether such declines are due to credit loss based on factors such as changes to the rating of the security by a ratings agency, market conditions and supportable forecasts of economic and market conditions, among others. If credit loss exists, the Company assess whether it has plans to sell the security or it is more likely than not it will be required to sell any marketable security before recovery of its amortized cost basis. If either condition is met, the security’s amortized cost basis is written down to fair value and is recognized through other income, net.
If neither condition is met, declines as a result of credit losses, if any, are recognized as an allowance for credit loss, limited to the amount of unrealized loss, through other income, net. Any portion of unrealized loss that is not a result of a credit loss, is recognized in other comprehensive income. Realized gains and losses, if any, on marketable securities are included in other income, net. The cost of investments sold is based on the specific-identification method. Interest on marketable securities is included in other income, net.
Equity Method Investments
Entities which the Company has significant influence over activities of the entity,but do not control, are accounted for under the equity method of accounting in accordance with Topic 323, Investments - Equity Method and Joint Ventures. The Company’s carrying value in the equity method investment is reported as equity method investment on the Company’s consolidated balance sheets. The Company records its proportionate share of the underlying income or loss which is recognized in share in net loss of equity method investment. For the year ended December 31, 2021, the Company’s share in the losses incurred by the equity method investee was $6.3 million. The Company eliminates any intra-entity profits to the extent of the Company’s beneficial interest.
The Company assesses its equity method investment for impairment when events or circumstances suggest that the carrying amount of the investment may be impaired. The Company considers all available evidence in assessing whether a decline in fair value is other than temporary. If the decline in fair value is determined to be other than temporary, the difference between the carrying amount of the investment and estimated fair value is recognized as an impairment charge.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, investments and trade receivables. Risks associated with cash, cash equivalents and restricted cash are mitigated by banking with creditworthy institutions and purchasing investments with investment grade ratings. The Company performs ongoing evaluations of its customers using its historical collection experience, current and future economic market conditions and a review of the current aging status and financial condition of its customers, and generally does not require collateral.
Concentration of Customers
For the years ended December 31, 2021, 2020 and 2019 no customer accounted for 10% or more of the Company’s revenue. There were 0 customers which accounted for 10% or more of the Company’s accounts receivable as of December 31, 2021. NaN customer accounted for 15% of the Company’s accounts receivable as of December 31, 2020.
94
Fair Value of Financial Instruments
The Company’s cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. Management believes that its term notes bear interest at the prevailing market rates for instruments with similar characteristics; accordingly, the carrying value of this instrument approximates its fair value.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Accounts Receivable and Allowance for Doubtful Accounts
The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020 using the modified retrospective method. The adoption of this standard did not have a cumulative effect on opening accumulated deficit as of January 1, 2020 and did not have a material impact on the Company’s financial statements.Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting prior to the adoption of ASU 2016-13.
Accounts receivable are recorded at invoice value, net of any allowance for credit losses. The Company’s expected loss allowance methodology for receivables is developed using its historical collection experience, current and future economic market conditions and a review of the current aging status and financial condition of its customers. Specific allowance amounts are established to record the appropriate allowance for customers that have an identified risk of default. General allowance amounts are established based upon the Company’s assessment of expected credit losses for its receivables by aging category. Balances are written off when they are ultimately determined to be uncollectible.
The following table summarizes the activity in the allowance for doubtful accounts:
|
| For the Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Beginning balance |
| $ | 380 |
|
| $ | 194 |
|
| $ | 76 |
|
Amounts charged (reversed) to costs and expenses |
|
| (12 | ) |
|
| 205 |
|
|
| 121 |
|
Write-offs |
|
| (18 | ) |
|
| (19 | ) |
|
| (3 | ) |
Ending balance |
| $ | 350 |
|
| $ | 380 |
|
| $ | 194 |
|
Inventory
Inventory is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) and net realizable value. Inventory costs include direct materials, direct labor and normal manufacturing overhead. Prior to achieving normal capacity, excess capacity costs are expensed in cost of product revenue as period costs. Finished goods that are used for research and development are expensed as consumed. Provisions for slow-moving, excess or obsolete 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.
95
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of their useful life or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized. Maintenance and repairs are charged to operations as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. The Company has not identified any such impairment losses to date.
Revenue
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, Revenue from Contracts with Customers, the Company performs 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.
Product Revenue
The Company records product revenue primarily from the sale of its IVL catheters. The Company sells its products to hospitals, primarily through direct sales representatives, as well as through distributors in selected international markets. Additionally, a portion of the Company’s revenue is generated through a consignment model under which inventory is maintained at hospitals.
Product revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
For products sold through direct sales representatives, control is transferred upon delivery to customers. For products sold to distributors internationally and products sold to customers that utilize stocking orders, control is transferred upon shipment or delivery to the customer’s named location, based on the contractual shipping terms. For consignment inventory, control is transferred at the time the IVL catheters are consumed in a procedure. The Company elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfillment activity, and not a separate performance obligation.
The Company may provide for the use of an IVL generator and connector cable under an agreement to customers at no charge to facilitate use of the IVL catheters. These agreements do not contain contractually enforceable minimum commitments and are generally cancellable by either party with 30 days’ notice.
License Revenue
For arrangements that contain a license of the Company’s functional intellectual property with a customer, the Company considers whether the license grant is distinct from other performance obligations in the arrangement. A license grant of functional intellectual property is generally considered to be capable of being distinct if a customer can benefit from the license on its own or together with other readily available resources. License revenue for licenses of functional intellectual property is recognized at a point in time when the Company satisfies its performance obligation of transferring the license to the customer.
Consideration received in advance of the satisfaction of a performance obligation is recognized as a contract liability. No license revenues have been recognized for the year ended December 31, 2021.
Research and Development Costs
Research and development costs, including new product development, regulatory compliance, and clinical research are expensed as incurred.
96
Accrued Research and Development Costs
The Company accrues liabilities for estimated costs of research and development activities conducted by its third-party service providers, which include the conduct of preclinical and clinical studies. The estimated costs of research and development activities are recorded based upon the estimated amount of services provided but not yet invoiced, and these costs are included in accrued liabilities on the consolidated balance sheets and within research and development expense on the consolidated statements of operations and comprehensive loss.
These costs are accrued for based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with third-party service providers. Significant judgments and estimates are made in determining the accrued liabilities balance in each reporting period. Accrued liabilities are adjusted as actual costs become known. There have not been any material differences between accrued costs and actual costs incurred since the Company’s inception.
Stock-Based Compensation
The Company accounts for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for stock-based compensation awards is the date of grant and the expense is recognized on a straight-line basis, over the vesting period. The Company accounts for forfeitures as they occur.
Leases
For its operating leases with a lease term of 12 months or greater, the Company recognized a right-of-use asset and a lease liability on its consolidated balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise.
Operating lease cost for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the consolidated statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.
The Company elected the practical expedients to exclude from its balance sheets recognition of leases having a term of 12 months or less (short-term leases) and to not separate lease components and non-lease components for its long-term real estate leases.
Defined Contribution Plan
The Company has a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. This plan allows eligible employees to defer a portion of their annual compensation on a pre-tax basis. The Company recognized expense related to its contributions to the plan of $2.5 million and $1.1 million for the years ended December 31, 2021 and 2020, respectively. The Company did 0t make such contributions for the year ended December 31, 2019.
Comprehensive Loss
Comprehensive loss is comprised of net loss and changes in unrealized gains and losses on the Company’s available-for-sale investments.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. Dollar. Accordingly, all monetary assets and liabilities of the subsidiary are remeasured at the current exchange rate at the end of the period, nonmonetary assets and liabilities are remeasured at historical rates, and revenue and expenses are remeasured at average exchange rates during the period. There were net foreign currency transaction losses of $0.8 million for the year ended December 31, 2021. There were
97
net foreign currency transaction gains of $0.3 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively.
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration of potential dilutive shares of common stock. Because the Company was in a loss position for the period presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive.
The following outstanding potentially dilutive common stock equivalents have been excluded from the calculation of diluted net loss per share for the period presented due to their anti-dilutive effect:
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Common stock options issued and outstanding |
|
| 1,524,985 |
|
|
| 2,087,202 |
|
|
| 3,315,001 |
|
Restricted stock units |
|
| 1,156,683 |
|
|
| 859,577 |
|
|
| 280,904 |
|
Employee stock purchase plan |
|
| 10,028 |
|
|
| 15,251 |
|
|
| 16,420 |
|
Total |
|
| 2,691,696 |
|
|
| 2,962,030 |
|
|
| 3,612,325 |
|
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management makes an assessment of the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which judgment occurs. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of provision for income taxes.
Segment Reporting
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined that it operates in 1 segment. The Company’s long-lived assets are held predominantly in the United States with the exception of certain equipment on loan to customers held internationally, which was not material for the periods presented.
98
3. Financial Instruments and Fair Value Measurements
The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy:
|
| December 31, 2021 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
|
| (in thousands) |
| |||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
| $ | 80,155 |
|
| $ | — |
|
| $ | — |
|
| $ | 80,155 |
|
Money market funds |
|
| 47,541 |
|
|
| — |
|
|
| — |
|
|
| 47,541 |
|
Commercial paper |
|
| — |
|
|
| 20,472 |
|
|
| — |
|
|
| 20,472 |
|
Corporate bonds |
|
| — |
|
|
| 11,145 |
|
|
| — |
|
|
| 11,145 |
|
Total assets |
| $ | 127,696 |
|
| $ | 31,617 |
|
| $ | — |
|
| $ | 159,313 |
|
|
| December 31, 2020 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
|
| (in thousands) |
| |||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
| $ | 126,363 |
|
| $ | — |
|
| $ | — |
|
| $ | 126,363 |
|
Money market funds |
|
| 35,053 |
|
|
| — |
|
|
| — |
|
|
| 35,053 |
|
Commercial paper |
|
| — |
|
|
| 31,968 |
|
|
| — |
|
|
| 31,968 |
|
Total assets |
| $ | 161,416 |
|
| $ | 31,968 |
|
| $ | — |
|
| $ | 193,384 |
|
4. Cash Equivalents and Short-Term Investments
The following is a summary of the Company’s cash equivalents and short-term investments:
|
| December 31, 2021 |
| |||||||||||||
|
| Amortized Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
U.S. Treasury securities |
| $ | 80,353 |
|
| $ | — |
|
| $ | (198 | ) |
| $ | 80,155 |
|
Money market funds |
|
| 47,541 |
|
|
| — |
|
|
| — |
|
|
| 47,541 |
|
Commercial paper |
|
| 20,472 |
|
|
| — |
|
|
| — |
|
|
| 20,472 |
|
Corporate bonds |
|
| 11,149 |
|
|
| — |
|
|
| (4 | ) |
|
| 11,145 |
|
Total |
| $ | 159,515 |
|
| $ | — |
|
| $ | (202 | ) |
| $ | 159,313 |
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 47,541 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 111,772 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 159,313 |
|
|
| December 31, 2020 |
| |||||||||||||
|
| Amortized Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
U.S. Treasury securities |
| $ | 126,354 |
|
| $ | 11 |
|
| $ | (2 | ) |
| $ | 126,363 |
|
Money market funds |
|
| 35,053 |
|
|
| — |
|
|
| — |
|
|
| 35,053 |
|
Commercial paper |
|
| 31,968 |
|
|
| — |
|
|
| — |
|
|
| 31,968 |
|
Total |
| $ | 193,375 |
|
| $ | 11 |
|
| $ | (2 | ) |
| $ | 193,384 |
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 41,453 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 151,931 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 193,384 |
|
99
As of December 31, 2021, the fair value of the Company’s available-for-sale securities, by remaining contractual maturities, were as follows (in thousands):
One year or less |
| $ | 113,330 |
|
Greater than one year and less than two years |
|
| 45,983 |
|
Total |
| $ | 159,313 |
|
For the years ended December 31, 2021 and 2019, the Company recognized no material realized gains or losses on cash equivalents and short-term investments. For the year ended December 31, 2020, the Company recognized $21,000 in realized gains on cash equivalents and short-term investments.
5. Balance Sheet Components
Inventory
Inventory consists of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Raw material |
| $ | 7,685 |
|
| $ | 4,995 |
|
Work in progress |
|
| 13,315 |
|
|
| 6,051 |
|
Finished goods |
|
| 20,326 |
|
|
| 16,952 |
|
Consigned inventory |
|
| 1,652 |
|
|
| 1,861 |
|
Total inventory |
| $ | 42,978 |
|
| $ | 29,859 |
|
Property and Equipment, Net
Property and equipment, net consists of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Equipment |
| $ | 6,234 |
|
| $ | 3,794 |
|
Equipment on loan to customers |
|
| 1,714 |
|
|
| 1,756 |
|
Office furniture |
|
| 549 |
|
|
| 157 |
|
Software |
|
| 742 |
|
|
| 175 |
|
Leasehold improvements |
|
| 17,742 |
|
|
| 5,808 |
|
Construction in progress |
|
| 3,544 |
|
|
| 7,800 |
|
Property and equipment, gross |
|
| 30,525 |
|
|
| 19,490 |
|
Less: accumulated depreciation and amortization |
|
| (6,164 | ) |
|
| (3,128 | ) |
Total property and equipment, net |
| $ | 24,361 |
|
| $ | 16,362 |
|
Depreciation and amortization expense amounted to $3.6 million, $1.9 million and $1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
100
Accrued Liabilities
Accrued liabilities consist of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Accrued employee compensation |
| $ | 25,749 |
|
| $ | 10,885 |
|
Accrued research and development costs |
|
| 4,605 |
|
|
| 3,057 |
|
Accrued asset purchases |
|
| 4,101 |
|
|
| 2,527 |
|
Accrued professional services |
|
| 2,636 |
|
|
| 1,325 |
|
Other |
|
| 3,779 |
|
|
| 2,148 |
|
Total accrued liabilities |
| $ | 40,870 |
|
| $ | 19,942 |
|
6. Commitments and Contingencies
Operating Leases
The Company’s operating leases consist of leased facilities for the Company’s headquarter offices, laboratory, and manufacturing space. Also included in operating leases are leases for vehicles, for use by certain of the Company’s employees, which were not material for the periods presented.
In September 2021, the Company entered into an office lease agreement (“3003 Bunker Hill Lease”) for the 3003 Bunker Hill facility which expires in December 2031. Concurrently, the Company entered into a First Amendment to Office Lease (Net) (the “Lease Amendment”) which extended the lease terms of the 5353 Betsy Ross and 5403 Betsy Ross facilities to December 2031. The 5403 Betsy Ross lease (“5403 Lease”) will continue in its existing terms (and with no changes to its terms, including its base rent) until its expiration in August 2022, at which point the leased space under the 5403 Lease will become subject to the terms of the Lease Amendment. The 3003 Bunker Hill Lease and the Lease Amendment contain options to extend the lease term at the respective facilities for up to 2 additional five-year terms at the then fair market rate. As of December 31, 2021, the Company is not reasonably certain it will exercise these extension options.
The weighted average remaining lease term and discount rate used to measure the Company’s operating lease liabilities were 9.9 years and 5.0%, respectively. The Company estimated the discount rate using the incremental borrowing rate as the rate implicit in the lease was not readily determinable.
Short-term leases are leases having a term of 12 months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases. As of December 31, 2021, the Company has no material finance leases.
Operating lease cost was $2.9 million, $2.2 million and $1.2 million, for the years ended December 31, 2021, 2020, and 2019, respectively.
The following are minimum future rental payments owed under lease agreements which have commenced as of December 31, 2021:
| (in thousands) |
| |
2022 | $ | 3,204 |
|
2023 |
| 4,194 |
|
2024 |
| 4,289 |
|
2025 |
| 4,415 |
|
2026 |
| 4,545 |
|
Thereafter |
| 24,664 |
|
Total minimum lease payments | $ | 45,311 |
|
Less: imputed interest and adjustments |
| (15,252 | ) |
Total lease liability | $ | 30,059 |
|
101
The total minimum future rental payments owed for the 5403 Betsy Ross facility under the terms of the Lease Amendment which has not yet commenced as of December 31, 2021 is $10.8 million.
7. Term Notes
Loan and Security Agreement
In February 2018, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the “Loan and Security Agreement”). The terms of the Loan and Security Agreement included a term loan of $15.0 million and a revolving line of credit of $2.0 million.
The term loan accrued interest at a floating per annum rate equal to the greater of (a) the Wall Street Journal prime rate minus 1.75% and (b) 2.75%. There was a final payment equal to 6.75% of the original aggregate principal amount, or $1.0 million, of the term loan advances, which was being accrued over the term of the loan using the effective-interest method.
In connection with the execution of the Loan and Security Agreement, the Company issued warrants to purchase 34,440 shares of the Company’s common stock. Upon issuance, the fair value of the warrants of $0.1 million was recorded as a debt issuance cost. The debt issuance cost will be amortized to interest expense, net over the term of the loan.
In February 2020, the Company entered into a First Amendment to the Loan and Security Agreement (the “Amended Credit Facility”) to, among other things, refinance its existing term loan, which is accounted for as a modification of the Loan and Security Agreement. Under the Amended Credit Facility, the existing revolving line of credit of $2.0 million was terminated and the termination fee of less than $0.1 million was waived. The Amended Credit Facility provides the Company with a supplemental term loan in the amount of $16.5 million. After repayment of the outstanding amount of the term loan, the Company received net proceeds of $3.3 million, which reflects an additional $4.3 million in principal as of the date of the modification less the final balloon payment fee of $1.0 million. The principal amount outstanding under the supplemental term loan accrues interest at a floating per annum rate equal to the greater of (a) the prime rate minus 1.25% and (b) 3.5%. The interest rate was 3.5% as of December 31, 2021.
The supplemental term loan matures on December 1, 2023. The Amended Credit Facility provides an interest-only payment period through June 30, 2022.
The additional final payment for the Amended Credit Facility is $1.6 million, which is currently being accrued over the term of the supplemental term loan using an effective interest rate that reflects the revised cash flows of the modified term loan.
The Company recorded interest expense of $1.1 million, $1.2 million and $0.9 million, for the years ended December 31, 2021, 2020 and 2019, respectively.
The supplemental term loan is secured by all of the Company’s assets, excluding intellectual property and certain other assets. The loan contains customary affirmative and restrictive covenants, including with respect to the Company’s ability to enter into fundamental transactions, incur additional indebtedness, grant liens, pay any dividend or make any distributions to its holders, make investments, merge or consolidate with any other person or engage in transactions with the Company’s affiliates, but does not include any financial covenants.
Long-term debt and net premium balances are as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Principal amount of term note |
| $ | 16,500 |
|
| $ | 16,500 |
|
Net premium associated with accretion of final payment, and other debt issuance costs |
|
| 630 |
|
|
| 119 |
|
Term note, current and noncurrent |
|
| 17,130 |
|
|
| 16,619 |
|
Less: term note, current portion |
|
| (5,500 | ) |
|
| (3,300 | ) |
Term note, noncurrent portion |
| $ | 11,630 |
|
| $ | 13,319 |
|
102
Future minimum payments of principal and estimated payments of interest on the Company’s outstanding variable rate borrowings as of December 31, 2021 are as follows:
Year ending December 31: |
| (in thousands) |
| |
2022 |
|
| 6,045 |
|
2023 |
|
| 12,779 |
|
Total future payments |
|
| 18,824 |
|
Less: amounts representing interest |
|
| (756 | ) |
Less: final payment |
|
| (1,568 | ) |
Total principal amount of term note payments |
| $ | 16,500 |
|
8. Stock-Based Compensation
Total stock-based compensation was as follows:
|
| Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Cost of product revenue |
| $ | 1,153 |
|
| $ | 496 |
|
| $ | 268 |
|
Research and development |
|
| 6,240 |
|
|
| 2,464 |
|
|
| 943 |
|
Sales and marketing |
|
| 11,043 |
|
|
| 3,478 |
|
|
| 972 |
|
General and administrative |
|
| 8,821 |
|
|
| 3,912 |
|
|
| 1,463 |
|
Total stock-based compensation |
| $ | 27,257 |
|
| $ | 10,350 |
|
| $ | 3,646 |
|
Stock-based compensation of $717,000 and $316,000 was capitalized into inventory for the years ended December 31, 2021 and 2020, respectively. NaN material stock-based compensation was capitalized into inventory for the year ended December 31, 2019. Stock-based compensation capitalized into inventory is recognized as cost of product revenue when the related product is sold.
Determination of Fair Value
The estimated grant-date fair value of all the Company’s stock-based awards was calculated using the Black-Scholes option pricing model, based on the following assumptions:
| |||
| |||
|
| ||
|
| ||
|
| ||
|
|
The fair value of each stock option grant was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The Company’s historical share option exercise information is limited due to a lack of sufficient data points, and did not provide a reasonable basis upon which to estimate an expected term. The expected term for option grants is therefore determined using the simplified method. The simplified method deems the expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards.
Expected Volatility—Since the Company has limited trading history for its common stock due to its short trading history, the expected volatility was estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.
103
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.
Expected Dividend Yield—The expected dividend yield is 0 as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.
The Company has elected to recognize forfeitures of share-based payment awards as they occur.
2009 Equity Incentive Plan and 2019 Equity Incentive Plan
On June 17, 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) under which the Company’s board of directors (the “Board”) may issue stock options to employees, directors and consultants.
In February 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which became effective in connection with the Company’s initial public offering. As a result, effective as of March 6, 2019, the Company may not grant any additional awards under the 2009 Plan. The 2009 Plan will continue to govern outstanding equity awards granted thereunder. The Company initially reserved 2,000,430 shares of common stock for the issuance of a variety of awards under the 2019 Plan, including stock options, stock appreciation rights, awards of restricted stock and awards of restricted stock units (“RSUs”). In addition, the number of shares of common stock reserved for issuance under the 2019 Plan will automatically increase on the first day of January for a period of up to ten years, which commenced on January 1, 2020, in an amount equal to 3% of the total number of shares of the Company’s common stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Board. As of December 31, 2021, the Company had reserved 3,745,216 shares of common stock for issuance under the 2019 Plan.
104
Stock Options
Option activity under the 2009 Plan and 2019 Plan is set forth below:
|
| Shares Available for Grant |
|
| Number of Shares |
|
| Weighted- Average Exercise Price Per Share |
|
| Weighted- Average Remaining Term |
| Aggregate Intrinsic Value |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in years) |
| (in thousands) |
| |||||||||||||
Balance, December 31, 2018 |
|
| 392,299 |
|
|
| 3,636,358 |
|
| $ | 3.54 |
|
| 7.79 |
| $ | 11,267 |
| ||||||||||||
Awards authorized |
|
| 2,000,430 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Options expired |
|
| (287,600 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Options granted |
|
| (442,858 | ) |
|
| 442,858 |
|
|
| 14.69 |
|
|
|
|
|
|
| ||||||||||||
Options exercised |
|
| — |
|
|
| (722,242 | ) |
|
| 3.10 |
|
|
|
|
|
|
| ||||||||||||
Options cancelled |
|
| 41,973 |
|
|
| (41,973 | ) |
|
| 3.85 |
|
|
|
|
|
|
| ||||||||||||
Balance, December 31, 2019 |
|
| 1,704,244 |
|
|
| 3,315,001 |
|
| $ | 5.08 |
|
| 7.28 |
| $ | 128,744 |
| ||||||||||||
Awards authorized |
|
| 943,345 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Options exercised |
|
| — |
|
|
| (1,185,764 | ) |
|
| 3.64 |
|
|
|
|
|
|
| ||||||||||||
Options cancelled |
|
| 42,035 |
|
|
| (42,035 | ) |
|
| 4.45 |
|
|
|
|
|
|
| ||||||||||||
Balance, December 31, 2020 |
|
| 2,689,624 |
|
|
| 2,087,202 |
|
| $ | 5.92 |
|
| 6.77 |
| $ | 204,137 |
| ||||||||||||
Awards authorized |
|
| 1,040,530 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Options exercised |
|
| — |
|
|
| (547,155 | ) |
|
| 5.57 |
|
|
|
|
|
|
| ||||||||||||
Options cancelled |
|
| 15,062 |
|
|
| (15,062 | ) |
|
| 9.33 |
|
|
|
|
|
|
| ||||||||||||
Balance, December 31, 2021 |
|
| 3,745,216 |
|
|
| 1,524,985 |
|
| $ | 6.01 |
|
| 5.76 |
| $ | 262,793 |
| ||||||||||||
Vested and exercisable, December 31, 2021 |
|
|
|
|
|
| 1,295,974 |
|
| $ | 5.12 |
|
| 5.55 |
| $ | 224,475 |
| ||||||||||||
Vested and expected to vest, December 31, 2021 |
|
|
|
|
|
| 1,524,985 |
|
| $ | 6.01 |
|
| 5.76 |
| $ | 262,793 |
|
There were 0 options granted during the years ended December 31, 2021 and 2020. The weighted-average grant date fair value of options granted during the year ended December 31, 2019, was $6.58. The total grant date fair value of options vested was $1.6 million, $2.3 million and $1.9 million for the years ended December 31, 2021, 2020, and 2019, respectively.
As of December 31, 2021, total unrecognized stock-based compensation related to unvested stock options was $1.0 million, which the Company expects to recognize over a remaining weighted-average period of 0.8 years.
105
Restricted Stock Units
RSUs are share awards that entitle the holder to receive freely tradable shares of the Company’s common stock upon vesting. RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The Company’s RSUs generally vest over a four-year period with a 25% one-year cliff or over a three-year period in equal amounts on a semi-annual basis, provided the employee remains continuously employed with the Company. The fair value of RSUs is equal to the closing price of the Company’s common stock on the grant date.
RSU activity under the 2019 Plan is set forth below:
|
| Number of Shares |
|
| Weighted- Average Grant Date Fair Value Per Share |
| ||
Balance, December 31, 2018 |
|
| — |
|
| $ | — |
|
RSUs granted |
|
| 288,170 |
|
|
| 38.28 |
|
RSUs forfeited |
|
| (5,600 | ) |
|
| 40.01 |
|
RSUs vested |
|
| (1,666 | ) |
|
| 59.79 |
|
Balance, December 31, 2019 |
|
| 280,904 |
|
| $ | 38.12 |
|
RSUs granted |
|
| 687,223 |
|
|
| 51.34 |
|
RSUs forfeited |
|
| (38,650 | ) |
|
| 41.55 |
|
RSUs vested |
|
| (69,900 | ) |
|
| 38.46 |
|
Balance, December 31, 2020 |
|
| 859,577 |
|
| $ | 48.50 |
|
RSUs granted |
|
| 588,305 |
|
|
| 138.52 |
|
RSUs forfeited |
|
| (51,986 | ) |
|
| 77.13 |
|
RSUs vested |
|
| (239,213 | ) |
|
| 47.18 |
|
Balance, December 31, 2021 |
|
| 1,156,683 |
|
| $ | 93.27 |
|
The total grant date fair value of RSUs vested was $11.3 million, $2.7 million, and $0.1 million, for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, there was $87.6 million of unrecognized stock-based compensation expense related to RSUs to be recognized over a weighted-average period of 2.7 years.
Employee Share Purchase Plan (ESPP)
In February 2019, the Company adopted the Employee Stock Purchase Plan (“ESPP”), which became effective as of March 6, 2019. The Company initially reserved 300,650 shares of the Company’s common stock for purchase under the ESPP. In addition, the number of shares of common stock reserved for issuance under the ESPP will automatically increase on the first day of January for a period of up to ten years, which commenced on January 1, 2020, in an amount equal to 1% of the total number of shares of the Company’s common stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Board.
Each offering to the employees to purchase stock under the ESPP will begin on each September 1 and March 1 and will end on the following February 28 or 29 and August 30, respectively. On each purchase date, which falls on the last date of each offering period, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. The occurrence and duration of offering periods under the ESPP are subject to the determinations of the Compensation Committee of the Board, in its sole discretion.
106
The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. The Company recorded $1.3 million, $0.8 million and $0.3 million of stock-based compensation expense related to the ESPP for the years ended December 31, 2021, 2020 and 2019, respectively.
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Expected term (in years) |
| 0.5 |
|
| 0.5 |
|
| 0.5 |
|
Expected volatility |
| 48.9%-64.8% |
|
| 44.3%-74.0% |
|
| 76.9% |
|
Risk-free interest rate |
| 0.1% |
|
| 0.1%-0.3% |
|
| 1.9% |
|
Expected dividend yield |
| 0% |
|
| 0% |
|
| 0% |
|
9. Income Taxes
The following table presents income (loss) before income taxes for the periods presented:
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Domestic |
| $ | (9,388 | ) |
| $ | (65,957 | ) |
| $ | (51,179 | ) |
Foreign |
|
| 553 |
|
|
| 338 |
|
|
| 132 |
|
Total loss before income taxes |
| $ | (8,835 | ) |
| $ | (65,619 | ) |
| $ | (51,047 | ) |
Current income tax provision consists of the following:
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Domestic |
| $ | 84 |
|
| $ | 3 |
|
| $ | — |
|
Foreign |
|
| 217 |
|
|
| 77 |
|
|
| 62 |
|
Total current income tax provision |
| $ | 301 |
|
| $ | 80 |
|
| $ | 62 |
|
The components of the deferred tax assets and liabilities are as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryovers |
| $ | 85,764 |
|
| $ | 73,453 |
|
Fixed and intangible assets |
|
| 512 |
|
|
| 718 |
|
Accruals and reserves |
|
| 7,603 |
|
|
| 2,245 |
|
Stock-based compensation |
|
| 5,523 |
|
|
| 2,060 |
|
Research and development credits |
|
| 4,698 |
|
|
| 3,379 |
|
Contributions |
|
| 42 |
|
|
| 42 |
|
Lease liability |
|
| 7,398 |
|
|
| 2,004 |
|
Total deferred tax assets |
|
| 111,540 |
|
|
| 83,901 |
|
Less valuation allowance |
|
| (104,773 | ) |
|
| (82,087 | ) |
Gross deferred tax assets |
|
| 6,767 |
|
|
| 1,814 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Right-of-use-assets |
|
| (6,767 | ) |
|
| (1,814 | ) |
Gross deferred tax liabilities |
|
| (6,767 | ) |
|
| (1,814 | ) |
Total net deferred tax assets |
| $ | — |
|
| $ | — |
|
107
Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Income tax benefit at federal statutory rate |
| $ | (1,856 | ) |
| $ | (13,780 | ) |
| $ | (10,720 | ) |
State and local income taxes net of federal tax benefit |
|
| 36 |
|
|
| (9 | ) |
|
| (9 | ) |
Foreign tax rate differential |
|
| 101 |
|
|
| 6 |
|
|
| 35 |
|
Change in valuation allowance |
|
| 19,027 |
|
|
| 27,990 |
|
|
| 14,470 |
|
Stock-based compensation |
|
| (17,968 | ) |
|
| (13,425 | ) |
|
| (3,403 | ) |
Research and development credits |
|
| (808 | ) |
|
| (611 | ) |
|
| (354 | ) |
Section 382 limitation |
|
| 575 |
|
|
| — |
|
|
| — |
|
Equity method investment |
|
| 1,320 |
|
|
| — |
|
|
| — |
|
Other |
|
| (126 | ) |
|
| (91 | ) |
|
| 43 |
|
Total current income tax provision |
| $ | 301 |
|
| $ | 80 |
|
| $ | 62 |
|
Due to the uncertainties surrounding the realization of deferred assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss (“NOL”) and other deferred tax assets. The valuation allowance increased by $22.7 million,$27.0 million and $22.8 million during the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021, the Company had NOL carryforwards available to reduce future federal, California and other state income of $351.0 million, $54.0 million and $160.6 million, respectively. The federal NOL carryforwards of $78.4 million and $272.6 million begin expiring in 2030 and never expire respectively, the California NOL carryforwards begin expiring in 2031 and other state NOL carryforwards begin expiring in various years, starting in 2029.
As of December 31, 2021, the Company had research and development credit carryforwards of $5.5 million for federal income tax purposes and $5.0 million for California state income tax purposes available to reduce future taxable income, if any. The federal research and development credit carryforwards expire beginning 2033 and California credits can be carried forward indefinitely.
Utilization of the NOL carryforward may be subject to an annual limitation due to the ownership change provided by the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions. The annual limitation may result in the expiration of the NOL before utilization. The Company has completed a study under Section 382 of the Code through December 31, 2020, and determined there was a $2.4 million loss of federal NOLs and a $0.1 million loss of federal research and development credits as a result of ownership changes. Utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, are subject to an annual limitation under the Code and similar state provisions, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments such as built-in gain or built-in loss, as required. Any limitation may result in expiration of all or a portion of its NOLs losses and or tax credit carryforwards before utilization.
Uncertain Tax Positions
The activity related to the gross amount of unrecognized tax benefits is as follows:
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Beginning balance |
| $ | 3,746 |
|
| $ | 2,586 |
|
| $ | 1,896 |
|
Additions (Reductions) based on tax positions related to prior years |
|
| (79 | ) |
|
| (3 | ) |
|
| — |
|
Additions based on tax positions related to current years |
|
| 1,554 |
|
|
| 1,163 |
|
|
| 690 |
|
Balance at end of year |
| $ | 5,221 |
|
| $ | 3,746 |
|
| $ | 2,586 |
|
108
If recognized, gross unrecognized tax benefits would not have an impact on the Company’s effective tax rate due to the Company’s full valuation allowance position. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of gross unrecognized tax benefits will change significantly in the next twelve months.
The Company is subject to taxation in the United States, Germany, the United Kingdom (the “UK”), Japan and France. The Company is subject to examination of its income tax returns since inception by U.S. federal and certain state tax authorities due to its NOLs. The income tax returns of the German entity are open to examination for the tax years 2017 and forward. The income tax returns for the entities in Japan, the UK and France are open to examination for the tax years starting 2020, 2021 and 2021, respectively. The Company is not currently under audit with the Internal Revenue Service, or any foreign, state or local jurisdictions, nor has it been notified of any other potential future income tax audit. The federal and California statute of limitations remains open for three and four years, respectively, from the date of utilization of any NOL or credits.
10. Revenue
The following table represents the Company’s product revenue based on product line:
|
| Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
Coronary |
| $ | 161,463 |
|
| $ | 24,586 |
|
| $ | 15,621 |
|
Peripheral |
|
| 74,064 |
|
|
| 41,994 |
|
|
| 26,325 |
|
Other |
|
| 1,619 |
|
|
| 1,209 |
|
|
| 981 |
|
Product revenue |
| $ | 237,146 |
|
| $ | 67,789 |
|
| $ | 42,927 |
|
Peripheral product revenue encompasses sales of the Company’s M5 and S4 IVL catheters. Coronary product revenue encompasses sales of the Company’s C2 catheters. Other product revenue encompasses sales of the Company’s generators and related accessories.
The following table represents the Company’s product revenue based on the location to which the product is shipped:
|
| Year Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| (in thousands) |
| |||||||||
United States |
| $ | 186,324 |
|
| $ | 37,121 |
|
| $ | 22,699 |
|
Europe |
|
| 38,571 |
|
|
| 23,456 |
|
|
| 17,499 |
|
All other countries |
|
| 12,251 |
|
|
| 7,212 |
|
|
| 2,729 |
|
Product revenue |
| $ | 237,146 |
|
| $ | 67,789 |
|
| $ | 42,927 |
|
11. Equity Method Investments
Genesis Shockwave Private Limited
On March 19, 2021, the Company entered into the Joint Venture Deed (or “JV Agreement”) with Genesis MedTech International Private Limited (“Genesis”) to establish a long-term strategic partnership to develop, manufacture and commercialize certain of the Company’s interventional products in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (“China”). Under the JV Agreement, Genesis Shockwave Private Ltd. (the “JV”) was formed under the laws of Singapore to serve as a joint venture of Genesis and the Company for the purpose of establishing and managing such a strategic partnership.
On the same date, Genesis and the Company entered into a Share Subscription Agreement pursuant to which, among other things, the JV issued (i) 54,900 ordinary shares which represents 55% of total equity of the JV, to Genesis in exchange for a cash contribution of $15.0 million, of which 50% was paid upon signing and the remaining 50% will be due within one year of signing, and (ii) 45,000 ordinary shares which represents 45% of total equity, to the Company as consideration for the Shockwave License Agreement (or “License Agreement”). Under the License Agreement, the Company has agreed to contribute to the JV an exclusive license under certain of the Company’s intellectual property rights to develop, manufacture, distribute and commercialize certain products in China and is entitled to receive royalties on the sales of the licensed products in China. Further, the Company entered into a Distribution Agreement, pursuant to which the Company has agreed to sell certain Company-manufactured products to the JV and/or a to-be formed Chinese subsidiary of the JV for commercialization and distribution in China.
109
The Company has accounted for its investment in the JV under the equity method of accounting. As of December 31, 2021, the carrying value of the Company’s investment in the JV was $6.0 million. The Company’s share of losses generated by the JV for the year ended December 31, 2021 was $6.3 million which was recorded in share in net loss of equity method investment. The JV has not generated any revenues to date.
The following table summarizes the unaudited balance sheet for the JV:
|
| December 31, |
| |
|
| 2021 |
| |
Balance sheet: |
| (in thousands) |
| |
Current assets |
| $ | 14,854 |
|
Current liabilities |
|
| (1,539 | ) |
Net assets |
| $ | 13,315 |
|
The following table summarizes the unaudited results of operations for the JV:
|
| For the Year Ended December 31, |
| |
|
| 2021 |
| |
|
| (in thousands) |
| |
Revenues |
| $ | — |
|
Loss from operations |
|
| 14,043 |
|
Net loss |
| $ | 14,043 |
|
Upon execution of the License Agreement, on March 19, 2021, the Company received a 45% equity stake in the JV. The Company determined that the JV met the definition of a customer under Topic 606, and that the promised goods and services of the contribution of the license of intellectual property and associated manufacturing technology transfer to the JV were considered to be a single performance obligation. The transaction price of $12.3 million was estimated by reference to the cash value of the shares which were issued at the formation of the JV.
For the year ended December 31, 2021, the Company sold approximately $184,000 in product to the JV for use in ongoing clinical trials. As of December 31, 2021, approximately $138,000 was owed by the JV to the Company for the sale of the product.
As of December 31, 2021, the associated manufacturing technology transfer to the JV had not yet been completed. The Company maintains a related party contract liability, noncurrent, of $12.3 million for the outstanding performance obligation. The Company expects to satisfy the outstanding performance obligation upon the completion of training provided by the Company to the JV, and successful regulatory approval from the China National Medical Products Administration.
110
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures.
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included in this Item 9A of this Annual Report on Form 10-K.
111
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Shockwave Medical, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Shockwave Medical, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Shockwave Medical, Inc (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Shockwave Medical, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
February 25, 2022
112
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
Not applicable.
113
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Board Composition
The directors and their ages, occupations and length of service on our board of directors (“Board” or “Board of Directors”) as of April 26, 2024 are provided in the table below and in the additional biographical descriptions set forth in the text below the table:
Name | Age | Director Since | Occupation | Independent | AC | CC | NESG | |||||||
Class I Directors | ||||||||||||||
C. Raymond Larkin, Jr.* | 75 | January 2019 | Independent Director | Yes | — | — | C | |||||||
Laura Francis | 57 | January 2019 | CEO, SI-BONE, Inc. | Yes | C, F | M | — | |||||||
Maria Sainz | 58 | July 2020 | CEO, Hyperfine, Inc. | Yes | — | C | M | |||||||
Class II Directors | ||||||||||||||
Kevin Ballinger | 52 | May 2023 | Independent Director | Yes | — | M | M | |||||||
Antoine Papiernik | 57 | July 2013 | Managing Partner, Sofinnova Partners | Yes | M | — | — | |||||||
Sara Toyloy | 57 | March 2021 | President, Fabrica Consulting LLC | Yes | M | — | — | |||||||
Class III Directors | ||||||||||||||
Doug Godshall | 59 | May 2017 | President and CEO, Shockwave | No | — | — | — | |||||||
Frederic Moll, M.D. | 72 | May 2011 | Independent Director | Yes | — | — | M | |||||||
F.T. “Jay” Watkins | 71 | June 2013 | Managing Partner, Sonder Capital | Yes | M | — | — |
*: Board Chair | F: Financial Expert | M: Member | C: Committee Chair | AC: Audit Committee | CC: Compensation Committee | NESG: Nominating and ESG Committee |
4
Class I Directors
C. Raymond Larkin, Jr. Mr. Larkin has served as a member and as Chairman of our Board of Directors since January 2019. Mr. Larkin is presently also Chairman of the board of directors of Align Technology Inc. (Nasdaq Stock Market LLC (“Nasdaq”): ALGN), a global medical device company, where he has served as a director since March 2004 and as Chairman since February 2006. In addition, Mr. Larkin has served on the board of directors of Reva Medical Inc., a medical device company, since July 2017 and was Chairman until 2019. Previously, Mr. Larkin served as a director of HeartWare International, Inc. (“HeartWare”), a medical device company, from October 2008 and as Chairman of the board of directors from June 2010 until its acquisition by Medtronic, plc (NYSE: MDT) in August 2016. Previously, he was President and Chief Executive Officer of Nellcor Puritan Bennett, Inc., one of the world’s preeminent respiratory products companies. Mr. Larkin also served as Chief Executive Officer of Eunoe, Inc., a medical device company. Mr. Larkin served as a Captain in the United States Marine Corps and received his B.S. in Industrial Management from LaSalle University. Mr. Larkin’s extensive experience in analyzing, investing in and advising medical device and emerging growth companies provides him with the qualifications and skills to serve on our Board of Directors.
Laura Francis. Ms. Francis has served as a member of our Board of Directors since January 2019. Since April 2021, Ms. Francis has been Chief Executive Officer and a member of the board of directors of SI-BONE, Inc. (Nasdaq: SIBN), an orthopedic device company. Ms. Francis previously served as SI-BONE’s Chief Operating Officer from July 2019 to April 2021, and as SI-BONE’s Chief Financial Officer from May 2015 to April 2021. Prior to joining SI-BONE, she was the Chief Financial Officer for Auxogyn, Inc., a women’s health company, from December 2012 to September 2014. From September 2004 to December 2012, Ms. Francis served as Vice President of Finance, Chief Financial Officer and Treasurer for Promega Corporation, a life science reagent company. From March 2002 to September 2004, she served as the Chief Financial Officer of Bruker BioSciences Corporation (Nasdaq: BRKR), a public life science instrumentation company. From May 2001 to March 2002, Ms. Francis served as Chief Operating Officer and Chief Financial Officer of Nutra-Park Inc., an agricultural biotechnology company. From April 1999 to May 2001, Ms. Francis was Chief Financial Officer of Hypercosm, Inc., a software company. From October 1995 to April 1999, she was an engagement manager with McKinsey & Company, a consulting firm. Early in her career, Ms. Francis was an audit manager with Coopers & Lybrand, an accounting firm. Ms. Francis received her B.B.A. from the University of Wisconsin and M.B.A. from Stanford University. She is a Certified Public Accountant (inactive) in the State of California. Ms. Francis’s extensive experience as an executive officer of a number of public and private medical device and life science growth companies provides her with the qualifications and skills to serve on our Board of Directors.
Maria Sainz. Ms. Sainz has served as a member of our Board of Directors since July 2020. Since October 2022, Ms. Sainz has been Chief Executive Officer of Hyperfine, Inc. (Nasdaq: HYPR), a medical device company, and has served as a member its board of directors since December 2021. From May 2018 to February 2021, Ms. Sainz served as President and Chief Executive Officer of AEGEA Medical, Inc., a women’s health company in the field of endometrial ablation, until its acquisition by The Cooper Companies Inc. (Nasdaq: COO). From May 2012 to July 2017, Ms. Sainz served as the President and Chief Executive Officer of Cardiokinetix Inc., a medical device company pioneering a catheter-based treatment for heart failure. From April 2008 to May 2012, Maria was the President and Chief Executive Officer of Concentric Medical, Inc., a developer of minimally invasive products for the treatment of acute ischemic stroke, which was acquired in 2011 by Stryker Corporation (NYSE: SYK). Ms. Sainz began her medical technology career at Guidant Corporation (“Guidant”), where she held positions of increasing responsibility in Europe and the United States. At the time of the acquisition of Guidant by Boston Scientific Corporation (NYSE: BSX) (“Boston Scientific”), a publicly traded global company focused on a variety of interventional medical specialties, she served as President of the Cardiac Surgery division of Guidant. Ms. Sainz has been intimately involved in several major medical technology product launches such as coronary stents and cardiac resynchronization therapy devices. Ms. Sainz currently serves as a member of the board of directors for several private medical companies. Previously, Ms. Sainz served as a member of the boards of directors of Avanos Medical, Inc. (NYSE: AVNS), a medical device company, from February 2015 to January 2023, Atrion Corporation, a medical device company, from August 2021 to October 2022, Orthofix Medical Inc. (Nasdaq: OFIX), a
5
global medical device company, from June 2008 to September 2011 and November 2012 to June 2021, Iridex Corporation (Nasdaq: IRIX), a laser-based medical device company, from April 2018 to June 2020, and Spectranetics Corporation, a cardiovascular medical device company, from November 2010 to July 2017. She received her M.A. in Languages from the University Complutense in Madrid, Spain and a master’s in international management from the American Graduate School of International Management. Ms. Sainz’s international and healthcare industry experience provides her with the qualifications and skills to serve on our Board of Directors.
Class II Directors
Kevin Ballinger. Mr. Ballinger has served as a member of our Board of Directors since May 2023. From July 2020 to September 2023, Mr. Ballinger served as President of Aldevron, LLC (“Aldevron”), a privately held genomics company that was acquired by Danaher Corporation (NYSE: DHR) in August 2021. Prior to joining Aldevron, he spent 25 years at Boston Scientific (NYSE: BSX). During his last nine years at Boston Scientific, Mr. Ballinger served as Executive Vice President and Global President of the Interventional Cardiology division. Mr. Ballinger has served on the board of directors of Silk Road Medical, Inc. (Nasdaq: SILK), a medical device company, since December 2020. Mr. Ballinger earned his B.S. in Mechanical Engineering from Michigan Technological University, and his M.B.A. from the University of Minnesota’s Carlson School of Management. Mr. Ballinger’s healthcare industry experience provides him with the qualifications and skills to serve on our Board of Directors.
Antoine Papiernik. Mr. Papiernik has served as a member of our Board of Directors since July 2013. Mr. Papiernik has been Managing Partner of Sofinnova Partners since 1997. He has been an initial investor and a board member in public companies, including ProQr Therapeutics N.V. and Mainstay Medical International plc. Mr. Papiernik is also a board member of private companies MayHealth, Highlife, Home Biosciences, MD Start II, Mnemo Therapeutics, Noema Pharma AG, Pi-Cardia, Reflexion Medical, Inspirna, SafeHeal, Tissium, and Moon Surgical SAS. He has served on the boards of EOS (Ethical Oncology Science) S.p.A., CoAxia, Inc., Lectus Therapeutics Ltd, Entourage Medical Technologies, Inc., Corwave SA, Auris Medical Holding and Impatients. Mr. Papiernik previously was an initial investor and a board member of the following companies: Actelion Pharmaceuticals Ltd. (“Actelion”), NovusPharma S.p.A. (sold to Cell Therapeutics, Inc.), Movetis NV (sold to Shire Plc), Pixium Vision SA and Stentys SA, which went public, respectively, on the Zürich stock exchange, the Milan Nuovo Mercato, the Belgium Stock Exchange, the Stockholm stock exchange, and EuroNext Paris. He was also a board member for Cotherix Inc. (initially listed on the Nasdaq, then sold to Actelion), CoreValve (sold to Medtronic plc), Fovea Pharmaceuticals (sold to Sanofi-Aventis S.A.) and ReCor Medical, Inc. (sold to Otsuka Pharmaceutical Co., Ltd.). Mr. Papiernik received his M.B.A. from the Wharton School of Business, University of Pennsylvania and his B.S. from Institut Etudes Economiques Commerciales. Mr. Papiernik’s experience in the healthcare industry provides him with the qualifications and skills to serve on our Board of Directors.
Sara Toyloy. Ms. Toyloy has served as a member of our Board of Directors since March 2021. Ms. Toyloy is currently President of Fabrica Consulting LLC, which she founded in February 2020. From March 2008 to February 2020, Ms. Toyloy served as President, New Therapies and Chief Regulatory Officer and Executive Vice President, Regulatory, Clinical Quality of Elixir Medical Corporation. Prior to this, Ms. Toyloy held several executive management positions at Medtronic Vascular Inc., including Executive Vice President of Biosensors International from February 2005 to August 2007 and Vice President of Regulatory and Clinical Affairs from December 2002 through October 2004. From January 1990 through November 2002, Ms. Toyloy served in a number of positions at Guidant, ultimately as Guidant’s Director of Regulatory Affairs and Clinical Research. Ms. Toyloy has served on the board of directors of Tissium, a private medical technology company, since September 2022. Ms. Toyloy received her B.S. Degree in Biological Sciences from California State University Hayward. She is also a member of the Regulatory Affairs Professional Society and a permanent member of the California Community College Honor Scholarship Society. Ms. Toyloy has been a guest lecturer at the Stanford Biomedical Technology and Innovation Program and in 2019 was recognized as the Distinguished Alumna for the School of Science at California State University East Bay (formerly California State University Hayward). Ms. Toyloy’s experience in healthcare and healthcare regulation provides her with the qualifications and skills to serve on our Board of Directors.
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Class III Directors
Doug Godshall. Mr. Godshall has served as our President and Chief Executive Officer and as a member of our Board of Directors since May 2017. Mr. Godshall currently serves on the board of directors of the Medical Device Manufacturers Association, a national trade association providing educational and advisory assistance to medical technology companies. Previously, Mr. Godshall served as the Chief Executive Officer of HeartWare, from September 2006 until August 2016 and as director from October 2006 until its acquisition by Medtronic plc (NYSE: MDT) in August 2016. Prior to joining HeartWare, Mr. Godshall served in various executive, managerial and leadership positions at Boston Scientific (NYSE: BSX), where he had been employed since 1990. Mr. Godshall also served on the board of directors of Eyepoint Pharmaceuticals, Inc. (Nasdaq: EYPT), a pharmaceuticals company, from March 2012 to June 2021. He currently serves on the boards of directors of two private companies, Saluda Medical, Inc. and Galvanize Therapeutics, Inc. Mr. Godshall received his B.A. in Business from Lafayette College and M.B.A from Northeastern University. Mr. Godshall’s experience in the clinical development, business execution, and regulatory strategy for medical devices and pharmaceuticals provides him with the qualifications and skills to serve on our Board of Directors.
Frederic Moll, M.D. Dr. Moll has served as a member of our Board of Directors since May 2011. From April 2019 to March 2023, Dr. Moll has served as Chief Development Officer for Johnson & Johnson Medical Devices Companies (NYSE: JNJ). Previously, Dr. Moll was a co-founder, and, from September 2012 to April 2019, was the Chairman and Chief Executive Officer of Auris Health, Inc., a surgical robotics company, until it was acquired by Johnson & Johnson Medical Devices Companies. Dr. Moll was also a co-founder and, from September 2002 to December 2011, served as the Chief Executive Officer of Hansen Medical, Inc., a surgical robotics company. Previously, Dr. Moll co-founded Intuitive Surgical, Inc. (NASDAQ: ISRG), a surgical robotics company, and from 1995 to 2002 served as its first Chief Executive Officer. Dr. Moll also co-founded Endo-Therapeutics, Inc. and Origin Medsystems, Inc. (“Origin”), which later became an operating company within Guidant following its acquisition by Eli Lilly & Company (NYSE: LLY) (“Eli Lilly”). Dr. Moll has served on the boards of directors of PROCEPT BioRobotics Corporation (Nasdaq: PRCT), a robotic surgical company, since August 2011, and Lux Health Acquisition Corp., a special purpose acquisition company, since June 2020. Dr. Moll previously served as a member and Chairman of the board of directors of Restoration Robotics, Inc., a robotic medical device company, from November 2002 until its merger with Venus Concept Inc. (Nasdaq: VERO) in November 2019. He also served as a member of the board of directors of Intersect ENT, Inc., a medical technology company, from March 2006 to February 2021, and a member of the board of directors of Biolase, Inc. (Nasdaq: BIOL), a dental laser company, from June 2013 until November 2017. Dr. Moll received his B.A. in Economics from the University of California at Berkeley, an M.S. in Management from Stanford University and an M.D. from the University of Washington. Dr. Moll’s experience in the healthcare sector and his medical background and experience provide him with the qualifications and skills to serve on our Board of Directors.
F.T. “Jay” Watkins. Mr. Watkins has served as a member of our Board of Directors since June 2013. He previously served as the Chairperson of our Board from May 2017 to January 2019. Mr. Watkins currently serves as a Managing Partner at Sonder Capital. Prior to joining Sonder Capital, Mr. Watkins was a Managing Director at De Novo Ventures (“De Novo”) from 2002 to December 2021. Before joining De Novo, he was a co-founder and founding Chief Executive Officer of Origin, a venture funded medical technology start-up, until its acquisition by Eli Lilly (NYSE: LLY) in 1995. When Eli Lilly spun out its medical device businesses as Guidant, Mr. Watkins became a member of Guidant’s Management Committee and served as president of several divisions, including the Minimally Invasive Surgery Group, the Cardiac and Vascular Surgery Group and Heart Rhythm Technologies. Mr. Watkins also co-founded Gynecare, Inc., a woman’s health care company, which was spun out, taken public and subsequently acquired by Johnson & Johnson (NYSE: JNJ). Mr. Watkins was also the founding president of Compass, Guidant’s corporate business development and new ventures group, where he was involved in the acquisition of two public companies and led venture investments in 14 companies. Prior to joining Origin, Mr. Watkins also held management positions in several start-ups, including Microgenics (acquired by Boehringer Mannheim) and was a consultant with McKinsey & Company. Mr. Watkins received his M.B.A. from Harvard Business School and his B.A. from Stanford University. Mr. Watkins’ experience in the healthcare industry provides him with the qualifications and skills to serve on our Board of Directors.
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Independence of the Board of Directors
The Board conducts an annual review of the independence of our directors and in its most recent review determined that all of our directors, other than Mr. Godshall, are independent directors within the meaning of the applicable Nasdaq listing standards and relevant securities and other laws, rules and regulations regarding the definition of “independent” (the “Independent Directors”). Under the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our Board of Directors considered the current and prior relationships that each non-employee director has with our Company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section titled “Certain Relationships and Related Party Transactions”. There are no family relationships between any director and any of our executive officers.
Information Regarding Committees of the Board of Directors
The Board has a number of committees that perform certain functions for the Board. The current committees of the Board are the Audit Committee, the Compensation Committee and the Nominating and ESG Committee. Below is a description of each committee of the Board. Each of the committees has authority to engage legal counsel or other experts or consultants as it deems appropriate to carry out its responsibilities. The Board has determined that each member of each committee meets the applicable Nasdaq listing standards and relevant securities and other laws, rules and regulations regarding “independence” and that each member is free of any relationship that would impair such committee member’s individual exercise of independent judgment with regard to Shockwave.
Audit Committee
The Board has a separately designated standing Audit Committee established in accordance with Section 3(a)(58) of the Exchange Act. The Audit Committee was established by the Board to assist the Board in its oversight of the integrity of our financial statements and internal controls, the design, implementation and performance of our internal audit function, and our compliance with legal and regulatory requirements. In addition, the Audit Committee assists the Board in its oversight of the qualification, independence and performance of our independent registered public accounting firm and recommends to the Board the appointment of our independent registered public accounting firm. The Audit Committee also has oversight of our ethics and compliance program and receives regular reports on program effectiveness.
The members of our Audit Committee are Laura Francis, Antoine Papiernik, Sara Toyloy, and F.T. “Jay” Watkins. Ms. Francis is the chair of our Audit Committee. The composition of our Audit Committee meets the requirements for independence under the current Nasdaq listing standards and SEC rules and regulations, including independence requirements specific to members of the audit committee of the board of directors of a listed company. Each member of our Audit Committee is financially literate. In addition, our Board of Directors has determined that Ms. Francis is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. In making that determination, the Board relied on the past business experience of Ms. Francis. This designation does not impose any duties, obligations or liabilities that are greater than are generally imposed on members of our Audit Committee and our Board of Directors. Our Audit Committee is directly responsible for, among other things:
selecting a firm to serve as the independent registered public accounting firm to audit our financial statements;
ensuring the independence of the independent registered public accounting firm;
• | discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and that firm, our interim and year-end operating results; |
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establishing procedures for employees to anonymously submit concerns, including regarding questionable accounting or audit matters;
reviewing our guidelines and policies with respect to financial and information security risk management, including cybersecurity and other information technology risks;
considering the adequacy of our internal controls;
reviewing material related party transactions or those that require disclosure;
overseeing our cybersecurity risk management program;
overseeing our compliance program; and
• | approving or, as permitted, pre-approving all audit and non-audit services to be performed by the independent registered public accounting firm. |
In 2023, the Audit Committee met six times. Our Audit Committee operates under a written charter that satisfies the applicable rules of the SEC and the listing standards of Nasdaq. The Audit Committee charter can be found in the Corporate Governance section of the Investors section of our website at www.shockwavemedical.com. The Audit Committee charter grants the Audit Committee authority to obtain, at our expense and without seeking Board or management approval, advice and assistance from legal, accounting or other advisors and consultants and other external resources that the Audit Committee considers necessary or appropriate in the performance of its duties.
As required by its charter, the Audit Committee conducts a self-evaluation at least annually. The Audit Committee also reviews and assesses the adequacy of its charter at least annually and recommends any proposed changes to the Board for its consideration.
The Board annually reviews Nasdaq listing standards’ definition of independence for Audit Committee members and has determined that all members of our Audit Committee are “independent” and “financially literate” under Nasdaq listing standards and that members of the Audit Committee received no compensation from the Company other than for service as a director in 2023.
Compensation Committee
The members of our Compensation Committee are Kevin Ballinger, Laura Francis, and Maria Sainz. Ms. Sainz is the chair of our Compensation Committee. Each member of our Compensation Committee is a non-employee director, as defined by Rule 16b-3 promulgated under the Exchange Act, and meets the requirements for independence under the current Nasdaq listing standards and SEC rules and regulations, including independence requirements specific to members of the compensation committee of the board of directors of a listed company. Our Compensation Committee is responsible for, among other things:
reviewing and recommending that our Board of Directors approve the compensation of our Chief Executive Officer, and reviewing and approving the compensation for our other named executive officers (“NEOs”) and each other direct report of the Chief Executive Officer at the level of vice president or above;
reviewing and recommending to our Board of Directors the compensation of our directors;
• | reviewing and approving, or recommending that the Board approve, the terms of compensatory arrangements with our executive officers, including severance agreements and change-of-control protections; |
administering our stock and equity incentive plans;
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reviewing and approving, or making recommendations to our Board of Directors with respect to, incentive compensation and equity plans;
retaining and managing independent compensation consultants and assessing annually whether there are any conflicts of interest with such consultants; and
reviewing our overall compensation philosophy.
During 2023, the Compensation Committee met five times. Our Compensation Committee operates under a written charter that satisfies the applicable rules of the SEC and the listing standards of Nasdaq. The Compensation Committee charter can be found in the Corporate Governance section of the Investors section of our website at www.shockwavemedical.com. The Compensation Committee charter grants the Compensation Committee sole authority to retain or obtain the advice of a compensation consultant, legal counsel or other adviser, including the authority to approve such advisers’ reasonable compensation. The Compensation Committee may select such advisers, or receive advice from any other adviser, only after taking into consideration all factors relevant to that person’s independence from management, including those independence factors enumerated by the SEC and Nasdaq rules.
Under the Compensation Committee charter, the Compensation Committee may, in its discretion, delegate its duties to a subcommittee or to the chair of the Compensation Committee when it deems it appropriate and in the best interests of the Company.
As required by its charter, the Compensation Committee conducts a self-evaluation at least annually. The Compensation Committee also annually reviews and assesses the adequacy of its charter and recommends any proposed changes to the Board for its consideration.
Compensation Committee Processes and Procedures
The implementation of our compensation philosophy is carried out under the supervision of the Compensation Committee. The Compensation Committee charter requires that the Compensation Committee meet as often as it determines is appropriate to carry out its responsibilities under its charter. The agenda for each meeting is usually developed by the chair of the Compensation Committee, in consultation with other Compensation Committee members, management and the Compensation Committee’s independent advisors. The Compensation Committee also meets regularly in executive session. However, our President and Chief Executive Officer, our General Counsel and our Vice President of Human Relations, in addition to the Compensation Committee’s independent advisors, may attend portions of the Compensation Committee meetings for the purpose of providing analysis and information to assist management with their recommendations on various compensation matters. Management does not participate in the executive sessions of the Compensation Committee.
In 2023, the Compensation Committee engaged Compensia, Inc. (“Compensia”) as an independent adviser to the Compensation Committee. During 2023, Compensia conducted analysis and provided advice on, among other things, the appropriate cash and equity compensation for our executive officers, including our Chief Executive Officer and then-serving Chief Financial Officer. Compensia reported directly to the Compensation Committee, which retained sole authority to direct the work of and engage Compensia. As part of its analysis, Compensia collected and analyzed compensation information from a peer group of comparable public companies and reported to the Compensation Committee, which is described in more detail below in the section titled “Executive Compensation—Compensation Discussion & Analysis—How We Determine Executive Compensation—Peer Group”. The Compensation Committee considered this itemreport when making its determinations regarding executive compensation in 2023, as detailed below in the section titled “Executive Compensation”.
In April 2023, the Compensation Committee, taking into account the various factors prescribed by Nasdaq regarding the independence of compensation consultants, confirmed the independence of Compensia as a compensation adviser.
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Nominating and ESG Committee
The Nominating and ESG Committee is incorporatedgenerally responsible for identifying qualified Board candidates, recommending director nominees and appointments to Board committees, evaluating Board performance, overseeing director compensation, overseeing the Company’s Corporate Governance Guidelines and overseeing the Company’s corporate responsibilities initiatives. The members of our Nominating and ESG Committee are C. Raymond Larkin, Jr., Kevin Ballinger, Frederic Moll, M.D. and Maria Sainz. Mr. Larkin is the chair of the Nominating and ESG Committee. Each member of the Nominating and ESG Committee meets the requirements for independence under the current Nasdaq listing standards. Our Nominating and ESG Committee is responsible for, among other things:
identifying and recommending candidates for membership on our Board of Directors;
reviewing and recommending our corporate governance guidelines and policies;
reviewing proposed waivers of the corporate governance guidelines for directors and executive officers;
overseeing the process of evaluating the performance of our Board of Directors;
reviewing management succession plans;
assisting our Board of Directors on corporate governance matters; and
providing oversight of the Company’s corporate responsibility initiatives and principles, including those relating to environmental and social matters.
A detailed discussion of the Nominating and ESG Committee’s procedures for recommending candidates for election as a director appears below under the section titled “—Procedures of the Nominating and ESG Committee”.
During 2023, the Nominating and ESG Committee met four times. Our Nominating and ESG Committee operates under a written charter that satisfies the applicable rules of the SEC and the listing standards of Nasdaq. The Nominating and ESG Committee charter can be found in the Governance section of the Investors section of our website at www.shockwavemedical.com. The Nominating and ESG Committee charter complies with the guidelines established by referenceNasdaq. The charter of the Nominating and ESG Committee grants the Nominating and ESG Committee sole authority to retain and terminate any advisers, including search firms to identify director candidates and legal counsel, including sole authority to approve all such advisers’ fees and other retention terms.
As required by its charter, the Nominating and ESG Committee leads our Board in a self-evaluation at least annually. The Nominating and ESG Committee also periodically reviews and assesses the adequacy of its charter and recommends any proposed changes to the Board for approval.
With respect to environmental and social matters, the Nominating and ESG Committee provides oversight with respect to our efforts and related public disclosure regarding environmental stewardship in our operations and social matters pertaining to our business, including current and emerging social trends and issues that may affect the business operations, performance and public image of the Company.
Procedures of the Nominating and ESG Committee
In connection with nominating directors for election at our annual meetings of stockholders and periodically throughout the year, the Nominating and ESG Committee considers the composition of the Board and each committee of the Board to evaluate its effectiveness and whether changes should be considered to either the Board or any of the committees. In support of this process, the Board has determined that the Board as a whole must have the right diversity, mix of characteristics and skills for the optimal functioning of the Board in its oversight of our Company. The Board considers the following factors and qualifications, without limitation:
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the appropriate size and the diversity of the Board;
the needs of the Board with respect to the particular talents and experience of its directors;
the knowledge, skills and experience of nominees, including experience in the industry in which the Company operates, business, finance, management or public service, in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of the Board;
familiarity with domestic and international business matters;
familiarity and experience with legal and regulatory requirements; and
experience with accounting rules and practices.
Pursuant to the Nominating and ESG Committee charter, the Nominating and ESG Committee periodically reviews the composition of the Board in light of current challenges and needs of the Board and the Company and determines whether it may be appropriate to add or remove individuals after considering issues of judgment, diversity, skills, background and experience. The Nominating and ESG Committee considers such factors as gender, race, ethnicity and experience, area of expertise, as well as other individual attributes that contribute to the total diversity of viewpoints and experience represented on the Board of Directors. Our Nominating and ESG Committee may also consider such other factors as it may deem, from time to time, are in our definitive Proxy Statementand our stockholders’ best interests.
Once the Nominating and ESG Committee and the Board determine that it is appropriate to add a new director, either as a replacement or as a new position, the Nominating and ESG Committee uses a flexible set of procedures in selecting individual director candidates. This flexibility allows the Nominating and ESG Committee to adjust the process to best satisfy the objectives it is attempting to accomplish in any given director search. The first step in the general process is to identify the type of candidate the Nominating and ESG Committee may desire for a particular opening, including establishing the specific target skill areas, experiences and backgrounds that are to be the focus of a director search. The Nominating and ESG Committee may consider candidates recommended by management, by members of the Nominating and ESG Committee, by the Board, by stockholders or by a third party it may engage to conduct a search for possible candidates. In considering candidates submitted by stockholders, the Nominating and ESG Committee will take into consideration the needs of the Board and the qualifications of the candidate. Additional information regarding the process for properly submitting stockholder nominations of candidates for membership on our Board, including information regarding the deadlines and the written notice requirements applicable to such nominations, is set forth in our Second Amended and Restated Bylaws (our “Bylaws”).
Once candidates are identified, the Nominating and ESG Committee conducts an evaluation of qualified candidates. The evaluation generally includes interviews and background and reference checks. There is no difference in the evaluation process of a candidate recommended by a stockholder as compared to the evaluation process of a candidate identified by any of the other means described above. In identifying and evaluating potential nominees to serve as directors, the Nominating and ESG Committee will examine each nominee on a case-by-case basis regardless of who recommended the nominee and take into account all factors it considers appropriate.
If the Nominating and ESG Committee determines that a candidate should be nominated as a candidate for election to the Board, the candidate’s nomination is then recommended to the Board, and the directors may in turn conduct their own review to the extent they deem appropriate. When the Board has agreed upon a candidate, such candidate is recommended to the stockholders for election at an annual meeting of stockholders or appointed as a director by a vote of the Board as appropriate.
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Additional Governance Information
Code of Business Conduct and Ethics
Our Board of Directors has adopted our code of business conduct and ethics (the “Code of Conduct”), which applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our Code of Conduct is available in the Corporate Governance section of the Investors section of our website at www.shockwavemedical.com. We intend to disclose future amendments to our Code of Conduct, or any waivers of such code, on our website or in public filings.
Supplier Code of Conduct
Our Board of Directors has adopted our Supplier Code of Conduct that outlines Shockwave’s expectations and guidelines with respect to the conduct of any third party that provides goods or services to Shockwave, which applies to all of our direct and indirect suppliers, their employees, subsidiaries, agents and subcontractors. The full text of our Supplier Code of Conduct is available in the Corporate Governance section of the Investors section of our website at www.shockwavemedical.com.
Executive Officers
The following table sets forth certain information concerning our executive officers as of the date of this Amendment:
Name | Age | Position | ||
Doug Godshall | 59 | President, Chief Executive Officer & Director | ||
Renee Gaeta | 43 | Chief Financial Officer | ||
Isaac Zacharias | 49 | President, Chief Commercial Officer |
There are no family relationships between any of our directors and any of our executive officers.
Mr. Godshall’s biography is included above under the section titled “Board Composition” with the biographies of the other members of the Board. Biographies for our other executive officers are below.
Renee Gaeta. Ms. Gaeta has served as our Chief Financial Officer since February 2024. From July 2021 to January 2024, Ms. Gaeta served as the Chief Financial Officer of Eko Health, Inc., a privately held cardiopulmonary digital health company. From July 2017 to July 2021, Ms. Gaeta served as Chief Financial Officer and a member of the executive team at Establishment Labs Holdings, Inc., a global medical technology company. Prior to that, at Sientra, Inc., a medical aesthetics company, Ms. Gaeta served as Vice President, Corporate Controller, and an executive team member. For a ten-year period early in Ms. Gaeta’s career, she held roles of increasing responsibility at KPMG LLP, an international accounting firm, ultimately as Director, Transaction and Restructuring. Ms. Gaeta has served on the board of directors and as a member of the audit committee of Candel Therapeutics, Inc., a clinical stage biopharmaceutical company focused on developing off-the-shelf multimodal biological immunotherapies, since August 2022. She previously served on the board of directors and as the chair of the audit committee of SeaSpine Holdings Corporation, a global medical technology company focused on surgical solutions for the treatment of spinal disorders, from February 2019 to January 2023 (when it merged with Orthofix Medical, Inc.). Ms. Gaeta received her B.S. in Accounting from Loyola Marymount University and is a Certified Public Accountant in the State of California.
Isaac Zacharias. Mr. Zacharias has served as our President, Chief Commercial Officer since June 2022 and previously served as our Chief Commercial Officer beginning November 2018. Previously, Mr. Zacharias served as our General Manager of Structural Heart and Vice President of International Sales from March 2018 to November 2018. Prior to joining Shockwave, Mr. Zacharias served as the Vice President, General Manager for the PCI Guidance business at Boston Scientific from July 2011 to March 2018. Prior to that, Mr. Zacharias served as the Vice President, New Business
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Development for Boston Scientific where he negotiated investments and acquisitions for the Cardiology, Rhythm Management and Vascular business units. Mr. Zacharias began his career as a research and development engineer and has held a variety of clinical and marketing roles. Mr. Zacharias received his B.S. and M.S. degrees in Mechanical Engineering from the University of California, Davis.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of ownership and reports of changes in the ownership with the SEC.
To the best of our knowledge and based solely on a review of the copies of such reports filed with the Securities and Exchange Commission in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end ofSEC, during the fiscal year ended December 31, 2023, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with on a timely basis except, due to a clerical oversight, the following: (i) a late Form 4 filed on November 3, 2023 on behalf of Ms. Phung to report the exercise of 2,400 stock options on April 26, 2022, a grant of 720 restricted stock units (“RSUs”) on June 1, 2023, and a grant of 229 RSUs on September 1, 2023; (ii) a total of four Forms 4 filed on November 15, 2023 on behalf of Mr. Godshall, Ms. Phung, Mr. Puckett, and Mr. Zacharias, respectively, to report sales of common stock on November 2, 2023 to satisfy tax liabilities associated with the vesting and settlement of RSUs; (iii) one Form 4 filed on November 21, 2023 on behalf of Mr. Godshall to report the sale on April 25, 2022 of an aggregate 1,887 shares of common stock to satisfy tax liabilities arising from the vesting and settlement of RSUs; (iv) one Form 4 filed on December 12, 2023 on behalf of Ms. Francis to report a gift of stock on October 2, 2023 to a revocable trust of which she and her spouse are co-trustees; (v) a late Form 4 filed on December 12, 2023 on behalf of Mr. Zacharias to report the sale of common stock to satisfy tax liabilities associated with the vesting and settlement of RSUs, which sales occurred on April 17, 2021 (the “Proxy Statement”).and December 9, 2022, respectively; and (vi) one Form 4 amendment filed on January 4, 2024 on behalf of Mr. Watkins to report an option exercise that occurred on June 20, 2023.
Item 11. Executive Compensation.
Compensation Discussion & Analysis
The following Compensation Discussion and Analysis (“CD&A”) provides information about our compensation program for the following executive officers, who constituted our NEOs for the fiscal year ended December 31, 2023:
Doug Godshall, our President and Chief Executive Officer;
Dan Puckett, our former Chief Financial Officer; and
Isaac Zacharias, our President, Chief Commercial Officer.
We refer to these three officers as our NEOs, each of whose compensation is set forth in the Summary Compensation Table and the other compensation tables included in this Amendment. Following fiscal year end, Dan Puckett resigned as our Chief Financial Officer, effective February 5, 2024, and Renee Gaeta was appointed as our Chief Financial Officer, also effective February 5, 2024. Mr. Puckett will assist with the transition of his role to Ms. Gaeta and will consult for the Company through February 5, 2025.
This CD&A also discusses our executive compensation philosophy; decisions involving our executive team, including the NEOs, with respect to compensation paid for 2023; the role of Compensia, our compensation consultant; the individual components of our executive compensation program; and certain other policies affecting executive compensation at Shockwave.
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Executive Summary
2023 Compensation Highlights
• | Competitive Base Salaries. After evaluating the competitive positioning of our NEOs’ base salaries in the context of our overall compensation philosophy and peer group data, the Compensation Committee approved, or in the case of our Chief Executive Officer, recommended to the Board of Directors for approval and the Board of Directors approved, base salary increases between 5% and 11.5% for our NEOs in 2023. These changes reflected significant growth in our financial and competitive market profile, driven in part by revenue growth of 49% year-over-year from fiscal 2022 to fiscal 2023. |
• | Challenging Annual Incentive Goals.Our NEOs were eligible to earn an annual incentive based on our level of achievement of rigorous corporate financial and strategic goals for the year, which are the same goals for all employees at the Company. The bonus earned by our NEOs other than our CEO also include a weighting tied to their individual performance for the year. Based on the achievement of our strong growth and product development milestones, our NEOs earned annual incentives between 127% and 129% of their respective targets. |
• | Performance-Based Restricted Stock Units (“PRSUs”). In 2023, our Compensation Committee continued to grant PRSUs as a component of the long-term incentive compensation of our NEOs. PRSUs granted in 2023 represented 50% of the target equity value awarded to our Chief Executive Officer and 40% of the target value for our other NEOs, and are eligible to be earned based on the achievement of 2- and 3-year revenue growth targets. Our PRSUs were designed to provide a measure of performance that is long-term while also providing incremental measurement vesting opportunities in the context of a high growth and dynamic business environment. The 2- and 3-year performance periods provide an emphasis on sustained growth that is also differentiated from the one-year revenue measurement in the bonus plan. |
Goals of Our Executive Compensation Program
The Compensation Committee believes that the most effective compensation program is one that is designed to:
• | Align pay with our performance. Our annual bonus awards are generally not earned unless pre-determined levels of performance are achieved against annual corporate goals approved by our Board of Directors. Likewise, our stock option awards will not provide realizable value and our RSU and PRSU awards will not provide increased value unless there is an increase in the value of our shares, which benefits all stockholders. |
• | Align total compensation with stockholder objectives. Our executive compensation program is intended to align our executives’ interests with those of our stockholders by linking compensation to corporate performance and corresponding creation of stockholder value, and by rewarding our executives for the creation of value for our stockholders. |
• | Attract, incentivize, reward and retain diverse, talented individuals with relevant experience through a competitive pay structure. Attraction and retention are uniquely challenging in the San Francisco Bay Area and Silicon Valley where we are headquartered. We compete for talent with other companies that offer competitive compensation packages. We reward individuals fairly over time and seek to retain those individuals who continue to meet our high expectations. |
• | Deliver balanced total compensation packages to accomplish our business objectives and mission. Our executive compensation program focuses on total compensation, combining short- and long-term components, cash and equity, and fixed and variable payments, in the proportions that we believe are the most appropriate to incentivize and reward our NEOs for achieving our corporate goals while minimizing incentives for excessive risk-taking or unethical conduct. |
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The Compensation Committee evaluates both performance and compensation to ensure that we maintain our ability to attract and retain superior employees in key positions and that total compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. Accordingly, the Compensation Committee believes executive compensation packages that we provide to our executives should (i) include both cash and stock-based compensation that reward performance as measured against established goals and (ii) align executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value.
In addition, the Compensation Committee seeks to ensure that we maintain sound governance and compensation policies and practices. In designing and overseeing our executive compensation program, we strive to employ best practices and regularly assess our policies and practices.
What We Do
• | A significant portion of our executive compensation program is dependent upon stock price appreciation and other variable, at-risk pay components. Our NEOs receive both RSUs and PRSUs, which vest based on the achievement of milestones based on revenue growth. |
Prior to making executive compensation decisions, we review peer company compensation data.
We ensure management acts and thinks like stockholders through stock ownership requirements through our Stock Ownership Policy.
We seek third-party executive compensation advice for the Compensation Committee from an independent consulting firm directly engaged by the Compensation Committee that does not perform any other services for us.
We have adopted an Amended and Restated Policy for Recoupment of Incentive Compensation (“Clawback Policy”) that applies to incentive compensation paid to our NEOs.
We assess the risk-reward balance of our compensation programs annually with an independent third-party compensation consultant in order to mitigate undue risks in our programs.
What We Don’t Do
No supplemental executive retirement plan.
• | No golden parachute excise tax gross-ups. |
NEOs may not pledge our common stock as collateral for any obligation.
NEOs may not engage in transactions intended to hedge or offset the market value of our common stock owned by them.
No perquisites to any of our executive officers that are not generally available to our full-time, salaried employees.
No incentives rewarding excessive risks.
Compensation Risk Oversight
Our compensation committee has responsibility for establishing our compensation philosophy and objectives, determining the structure, components and other elements of our programs, and reviewing and approving the compensation of our NEOs. We do not believe that our executive compensation program creates risks that are reasonably likely to have a material adverse effect on us.
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Key Components and Design of Our Executive Compensation Program
Our compensation program focuses on (i) cash compensation in the form of base salary and an annual variable bonus opportunity, and (ii) long-term equity awards. The Compensation Committee uses a combination of general guidelines for compensation, described below, combined with the Compensation Committee’s experience and business judgment to establish total compensation for each NEO that is a mix of current, short-term and long-term incentive compensation, and cash and non-cash compensation, which the Compensation Committee believes is appropriate to maintain an effective executive compensation program and incentivize performance to our short- and long-term corporate goals. In addition, we often compete for talent with companies much larger than us that offer competitive compensation packages, particularly in the Silicon Valley where we are headquartered.
Design Elements of Our Compensation Program
Element | Description | Primary Design Element | ||
Base Salary | • Annual fixed cash compensation. | • Provides compensation for functional expertise and day-to-day responsibilities. • Based on position, scope of responsibilities, individual performance and experience and competitive data. | ||
Annual Bonus | • Chief Executive Officer payout evaluated based 100% on achievement of corporate goals. • Other NEO payout evaluated based 75% on corporate goals and 25% on individual goals. • Corporate goals may include goals and objectives relating to operational performance (e.g., quality and delivery performance), growth, product development milestones, implementation of strategic programs, financial results and human resource initiatives, and are the same goals for all Company employees. • Individual goals and objectives are tailored to each NEO’s position (other than our Chief Executive Officer) and were designed to award performance based on the individual’s contribution to the Company’s growth, financial performance, structural organization and achievement of strategic initiatives. | • Emphasizes financial results by making them a key factor in determination of amount of bonus and whether a bonus is paid. • Other major factors are the results for the most recently completed year, the annual operating plan for the current year, and general economic and market conditions. • Aligns our executives with the Company’s business objectives and performance expectations. • Aligns executive pay with the achievement of long-term strategic objectives that create long-term value for stockholders. • Opportunity based on position, scope of responsibilities, individual performance and experience, risk assessments and competitive data. |
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Element | Description | Primary Design Element | ||
Long Term Equity Awards | • In 2023, NEOs were awarded RSUs, which vest in quarterly installments over four years, and PRSUs, which vest in two tranches, with 50% subject to a two-year performance period and 50% subject to a three-year performance period, in each case with performance targets as approved by the Compensation Committee based on revenue growth. | • Links the interests and risks of executives with those of our stockholders. • Promotes executive focus on long-term Company performance through stock price and long-term operating performance that is expected to build long-term stockholder value. • Time-based RSU vesting provides a retention incentive that is aligned with stockholders, even during periods of stock price volatility. • Performance-based PRSU vesting is designed to provide variable compensation that is focused on longer term results. • Award sizes based on position, scope of responsibilities, individual performance and experience, risk assessments and competitive data. • Mix of awards determined based on Compensation Committee evaluation of market conditions and other factors. | ||
Retirement and Other Benefits | • Opportunities to save a portion of current compensation for retirement and other future needs (401(k) Plan) and invest in Company stock at a discounted price under our Employee Stock Purchase Plan (“ESPP”). • We provide all employees, including our NEOs, with life insurance, accidental death and dismemberment insurance, health, dental, short- and long-term disability insurance, and other insurance plans. | • Attract and retain executives and other employees. • Decisions on benefits are considered generally with respect to the broader employee population. | ||
Severance Benefits | • Transition assistance for involuntary termination in connection with a change in control. | • Provides economic protections against termination of employment. • Based on position, scope of responsibilities, individual performance and experience, as well as competitive data. |
At-Risk Compensation
Because we believe it is important to our success to pursue long-term corporate objectives, to avoid excessive risk-taking and to preserve our cash resources, the target bonus opportunity and the long-term equity awards are “at-risk” compensation or, in other words, are dependent on the accomplishment of the Company’s business and financial objectives or the performance of Shockwave’s stock. We believe that this best aligns each NEO’s incentives with the interests of our stockholders. As shown in the graphic below, in 2023, approximately 92% of our Chief Executive Officer’s target total direct compensation was variable and at-risk compensation, and on average, approximately 84% of the target total direct compensation of our other NEOs was variable and at-risk.
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As depicted above, the overall mix was heavily weighted toward variable, incentive-based cash and stock compensation, and the variable compensation was primarily weighted toward long-term equity incentives, including RSUs and PRSUs.
Advisory Stockholder Vote on “Say on Pay” and Stockholder Engagement
At our 2023 annual meeting of stockholders (the “2023 Annual Meeting”), stockholders were provided the opportunity to cast an advisory (non-binding) vote on the compensation of our NEOs for 2022, and approximately 94% of the stockholders voting at the meeting approved the compensation paid to our NEOs.
Our Compensation Committee reviews our executive compensation program annually, taking into consideration feedback from our stockholders, including the results of our say-on-pay vote, as well as market conditions and input from the Compensation Committee’s independent compensation consultant. Taking into consideration the strong say-on-pay support at our 2023 Annual Meeting, our Compensation Committee determined to retain most of the key features of our executive compensation program during fiscal year 2023.
How We Determine Executive Compensation
Role of Our Compensation Committee
The Compensation Committee is (and was at all times during 2023) composed entirely of independent directors, as defined by Rule 5605(a)(2) of the Nasdaq listing standards. Our Compensation Committee meets at least quarterly or as often as it determines necessary to carry out its duties and responsibilities through regularly scheduled meetings and, if necessary, special meetings. The Compensation Committee reviews and oversees our compensation policies, plans, and programs and reviews and generally determines the compensation to be paid to the NEOs. The Compensation Committee does not delegate any of its functions to others in determining executive compensation. The independent members of our Board of Directors, upon recommendation from the Compensation Committee, approve the compensation of our Chief Executive Officer.
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Role of Management
Our Compensation Committee receives support from our senior management team in designing our executive compensation program and analyzing competitive market practices. Our Chief Executive Officer and other executives, including our General Counsel and VP of Human Resources, regularly participate in Compensation Committee meetings to provide input on our compensation philosophy and objectives. In making compensation determinations for NEOs other than our Chief Executive Officer, the Compensation Committee considers recommendations from our Chief Executive Officer. In making his recommendations, our Chief Executive Officer receives input from our human resources department and from the individuals who report directly to the other executive officers, and he reviews various third-party compensation surveys and compensation data provided by Compensia, as described below. While our Chief Executive Officer discusses his recommendations for the other executive officers with the Compensation Committee, he does not participate in the deliberations and recommendations to our Board of Directors concerning, or our Board of Directors’ determination of, his own compensation.
Role of the Independent Compensation Consultant
During fiscal year 2023, the Compensation Committee retained the services of Compensia as independent executive compensation consultant to advise the Compensation Committee on compensation matters related to the executive and director compensation programs. Compensia provided peer company and industry compensation data and provided the Compensation Committee with advice regarding executive officers’ compensation, including base salaries, performance-based bonuses and long-term equity compensation, and similar advice regarding non-employee director compensation. The Compensation Committee has also consulted with Compensia as needed with respect to specific questions that arise with respect to the Compensation Committee’s responsibilities, including trends and best practices regarding executive compensation and compensation committees, in order to help inform the Compensation Committee’s decisions.
Compensia reports directly to the Compensation Committee, which maintains the authority to direct Compensia’s work and engagement, and advises the Compensation Committee and our human resources department on projects from time to time. Compensia interacts with management to gain access to Company information that is required to perform services and to understand the culture and policies of the organization. A Compensia representative is usually present at Compensation Committee meetings, and the Compensation Committee and Compensia meet at times in executive session with no members of management present, as needed, to address various compensation matters, including deliberations regarding our Chief Executive Officer’s compensation. A Compensia representative also meets with the chair of the Compensation Committee in advance of Compensation Committee meetings to agree on upcoming workflow, discuss content for the meetings, and review materials for upcoming meetings.
The Compensation Committee reviews the objectivity and independence of the advice provided by Compensia. In 2023, the Compensation Committee considered the specific independence factors adopted by the SEC and Nasdaq and determined that Compensia is independent and that its work did not raise any conflicts of interest.
Peer Group
In October 2022, in order to assess the competitiveness of our executive compensation program for purposes of compensation in 2023, the Compensation Committee, with the assistance of Compensia, developed a peer group intended to represent companies with operations and financial profiles similar to the Company. The peer group was selected using the following criteria:
• | Industry: Publicly traded, medical device companies with a focus on differentiated, research and development driven business models. |
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• | Revenue: Revenue between approximately $120 million and $1.0 billion. |
• | Market Capitalization: Market capitalization generally targeted between $3 billion and $30 billion. |
• | Location: U.S. headquartered. |
• | Other Considerations. Avoid concentration of newly publicly traded companies with limited disclosure of public company compensation practices, and exclude companies with unusual factors that impact executive compensation, such as controlled companies, delayed filings, or presence of activist investors. |
Based on the criteria outlined above, the Compensation Committee approved the following companies as our peer group for assessment of 2023 compensation:
2023 Peer Group
Abiomed | Inspire Medical Systems | Repligen | ||
Axonics | Insulet | STAAR Surgical Company | ||
Bio-Techne | iRhythm Technologies | Tandem Diabetes Care | ||
CONMED | Maravai LifeSciences Holdings | Teleflex | ||
Globus Medical | Natera | |||
Inari Medical | Penumbra |
The Compensation Committee believes it is important to understand and reference what similarly situated life sciences companies are paying their executives and uses this iteminformation as one of the data points it considers when making compensation decisions for the NEOs. As such, the Compensation Committee will continue to revisit and revise the Company’s peer group in future years to ensure the Company remains competitive in its continuing recruitment and retention efforts.
Factors Considered by the Compensation Committee.
Our Compensation Committee sets the compensation of our NEOs at levels that the Compensation Committee determines to be competitive and appropriate for each NEO. The Compensation Committee’s pay decisions are not driven solely by a particular target level of compensation relative to market data, and the Compensation Committee does not otherwise use a formulaic approach to setting executive pay. Instead, the Compensation Committee believes that executive pay decisions require the consideration of multiple relevant factors, which may vary from year to year. The list below reflects the factors the Compensation Committee considers in determining and approving the amount, form and mix of pay for our NEOs:
Company financial and business performance.
Each NEO’s criticality to the business.
Internal pay equity.
The need to attract and retain talent.
Aggregate compensation cost and impact on stockholder dilution.
• | Peer group and other relevant market data, and recommendations on compensation policy, structure and design provided by Compensia, the Compensation Committee’s independent compensation consultant. See further discussion under the section titled “—Role of the Independent Compensation Consultant” and “—Peer Group”. |
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Each NEO’s knowledge, skills, responsibilities, and experience.
The potential of our NEOs to contribute to our strategic goals.
Recommendations of the Chief Executive Officer with respect to NEOs, other than himself, based on his direct knowledge of each NEO’s performance and industry experience.
Each NEO’s individual performance.
The independent judgment and experience of our Compensation Committee members.
Feedback from our stockholders.
Principal Elements of 2023 Executive Compensation
Base Salary. Base salaries, and any increases or decreases to those levels for each NEO, are reviewed and approved each year by our Compensation Committee, or in the case of our Chief Executive Officer, recommended to the Board of Directors for approval. In 2023, changes to base salary were made considering other factors such as the overall performance of the Company, new roles and responsibilities assumed by the NEO, the performance of the NEO’s area of responsibility, the NEO’s impact on strategic goals, the length of service with the Company, or revisions to or alignment with our long-term compensation philosophy. The Compensation Committee also took into account historical compensation, internal parity with other executives, potential as a key contributor, and special recruiting and retention situations. In addition, base salary increases for our CEO and CFO reflected a goal of better aligning their cash compensation with the median of companies in our compensation peer group. Taking into account the foregoing factors, on January 11, 2023, the Compensation Committee approved, or in the case of our Chief Executive Officer, recommended to the Board of Directors for approval and the Board of Directors approved, base salary increases for our NEOs to be effective as of February 1, 2023, as set forth in the table below:
NEO | 2022 Base Salary ($) | Increase from 2022 Base Salary (%) | 2023 Base Salary ($) | |||
Doug Godshall | 650,000 | 11.5 | 725,000 | |||
Dan Puckett | 444,032 | 10.0 | 488,435 | |||
Isaac Zacharias | 490,000 | 5.0 | 514,500 |
Further information regarding the base salaries earned by our NEOs for services in 2023 is reported in the Summary Compensation Table.
Annual Cash Bonuses. Our cash bonus plan is designed to motivate and reward our NEOs for achievements relative to our goals and expectations for each fiscal year. Each NEO has a target bonus opportunity, defined as a percentage of their annual base salary. For our Chief Executive Officer, 100% of the cash bonus opportunity under our annual bonus plan (“ABP”) was evaluated based on performance of the Company against the 2023 Corporate Goals. For our other NEOs, 75% of such NEO’s cash bonus opportunity under the ABP was based on performance of the Company against the 2023 Corporate Goals and 25% of such NEO’s cash bonus opportunity under the ABP was evaluated against such NEO’s attainment of annual individual goals and objectives. Following the end of each fiscal year, our Compensation Committee determines the annual cash incentive bonuses paid to our NEOs based upon our performance relative to our plan and achievement of corporate objectives for the year.
On January 11, 2023, our Compensation Committee approved, or in the case of our Chief Executive Officer recommended to the Board of Directors for approval and the Board of Directors approved, target cash bonuses for our NEOs for 2023, established as a percentage of each NEO’s base salary (the “Target Bonus”), described in the table below:
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NEO | 2023 Target Bonus (%)(1) | 2023 Target Bonus ($) | ||
Doug Godshall | 100 | 725,000 | ||
Dan Puckett | 60 | 293,061 | ||
Isaac Zacharias | 65 | 334,425 |
(1) | No changes to targets from fiscal year 2022. |
The annual cash bonuses are made under our ABP, which is administered as a Cash-Based Awards program under the 2019 Equity Incentive Plan (the “2019 Plan”). The 2023 ABP awards for our NEOs are reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
On January 11, 2023, our Compensation Committee also established a series of corporate goals (the “2023 Corporate Goals”), against which the Target Bonus would be measured at the end of 2023 for purposes of determination of actual bonuses to be paid. The 2023 Corporate Goals are described in the table below:
2023 Corporate Goals
(January 2023)
Category | Percentage of Total | Minimum 50% Payout | Target 100% Payout | Exceeds 125% Payout | Exceeds 200% Payout(1) | |||||||||||||||
Financial |
| |||||||||||||||||||
Revenue | 50 | % | $ | 625,000,000 | $ | 695,000,000 | N/A | $ | 765,000,000 | |||||||||||
Operating Margin | 15 | % | 25.0 | % | 27.0 | % | N/A | 29.0 | % | |||||||||||
Product Development(2) |
| |||||||||||||||||||
Product Development Project 1 | 10 | % | 9/30/2023 | 6/30/2023 | 3/31/2023 | N/A | ||||||||||||||
Product Development Project 2 | 10 | % | 12/31/2023 | 12/31/2023 | 12/31/2023 | N/A | ||||||||||||||
Product Development Project 3 | 10 | % | 6/30/2023 | 12/31/2023 | 12/31/2023 | N/A | ||||||||||||||
Product Development Project 4 | 5 | % | 9/30/2023 | 12/31/2023 | 9/30/2023 | N/A |
(1) | 200% payout only applies to the financial goals, which are measured on a sliding scale. |
(2) | Because of the competitively sensitive nature of this information, we are not disclosing the specifics of the product development goals. |
The Compensation Committee determined that each 2023 Corporate Goal: (a) was considered challenging but achievable at the time it was established; (b) was appropriate to drive successful execution of specific, near-term strategic objectives for the Company, enhance accountability, and continue to emphasize the Company’s financial performance during the fiscal year of the achievement of annual cash bonuses; and (c) effectively balanced near-term financial performance with strategic and operational objectives that would support the Company’s long-term growth and long-term strategies. The Compensation Committee determined that any impact on the financial goals from any acquisitions during 2023 would not factor into the calculation.
In 2023, exclusive of any impact from our acquisition of the Reducer, we generated revenue of $725.9 million, our operating margin was 27.2% and our product development goals were either met or exceeded, as indicated below. As a result, in January 2024, the Compensation Committee determined the 2023 Corporate Goals for our NEOs were achieved at 129% of target.
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2023 Corporate Achievements
(January 2024)
Category | Weight (%) | Actual | Achievement (%) | Payout (%) | ||||||||||||
Revenue | 50.0 | $ | 725,900,000 | 144.3 | 72.1 | |||||||||||
Operating Margin | 15.0 | 27.2 | % | 112.5 | 16.9 | |||||||||||
Product Development Project 1 | 10.0 | 3/31/2023 | 125.0 | 12.5 | ||||||||||||
Product Development Project 2 | 10.0 | 12/31/2023 | 125.0 | 12.5 | ||||||||||||
Product Development Project 3 | 10.0 | 12/31/2023 | 100.0 | 10.0 | ||||||||||||
Product Development Project 4 | 5.0 | 12/31/2023 | 100.0 | 5.0 | ||||||||||||
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| |||||||||||||||
Total | 129.0 | |||||||||||||||
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In the case of our NEOs other than our Chief Executive Officer, 25% of the bonus payout was determined based on each NEO’s level of achievement of individual goals, which were tailored to each NEO’s position and were designed to award performance based on the individual’s contribution to the Company’s growth, financial performance, structural organization, and achievement of strategic initiatives. In January 2024, the Compensation Committee determined the individual performance factors applicable to Messrs. Puckett and Zacharias were each achieved at 120% of target.
Based on the corporate and individual performance factors for each NEO, the Compensation Committee approved, or in the case of our Chief Executive Officer recommended to the Board of Directors for approval and the Board of Directors approved, the following bonus awards for each NEO in January 2023:
NEO | 2023 Target Bonus (%) | 2023 Target Bonus ($) | Corporate Performance Factor (%) | Individual Performance Factor (%) | 2023 Actual Incentive Bonus Amount ($)(1) | |||||||||||||||
Doug Godshall | 100 | 725,000 | 129 | N/A | 935,250 | |||||||||||||||
Dan Puckett | 60 | 293,061 | 129 | 120 | 371,455 | |||||||||||||||
Isaac Zacharias | 65 | 334,425 | 129 | 120 | 423,884 |
(1) | The 2023 Actual Incentive Bonus Amount is equal to the 2023 Target Bonus, expressed as a dollar amount, multiplied by a modifier based on attainment of 2023 Corporate Goals in the case of Mr. Godshall and the 2023 Corporate Goals as well as individual goals in the case of Messrs. Puckett and Zacharias. The incentive bonus for 2023 was paid in February 2024. |
Long Term Equity Awards. We use equity awards to motivate and reward our NEOs for long-term corporate performance and to align their interests with those of our stockholders. Beginning in 2022, we redesigned our annual executive equity grant structure to include both RSUs and PRSUs. For 2023, our Chief Executive Officer received 50% of his equity awards in the form of time-based RSUs and 50% as PRSUs, and our other NEOs received 60% of their equity awards in the form of time-based RSUs and 40% as PRSUs. We believe this mix balances our emphasis on tying our long-term financial performance and stockholder value creation to the NEOs’ financial gain, with our need to effectively retain our key talent in a highly competitive market.
In determining the magnitude of 2023 long term equity awards, the Compensation Committee made its decisions, after careful consideration, with the goal of taking into account the factors described under the section titled “—How We Determine Executive Compensation—Factors Considered by the Compensation Committee”. Based on these factors, and accounting for our exceptional operating performance and strong stockholder return in 2023, the Compensation Committee approved equity grants that were generally aligned with the 75th percentile of our competitive market. In 2023, the target market positioning of our equity compensation awarded reflected the Compensation Committee’s assessment of our NEOs’ individual performances as well as the performance of the Company, which was demonstrated by stockholder return and revenue growth that exceeded all companies in our compensation peer group.
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NEO | Time-based RSUs (#) | Grant Date Fair Value of Time- based RSUs ($) | Target Number of PRSUs (#) | Grant Date Fair Value of PRSUs (at Target) ($) | ||||||||||||
Doug Godshall | 20,354 | 3,894,941 | 20,354 | 3,894,941 | ||||||||||||
Dan Puckett | 6,514 | 1,246,519 | 4,342 | 830,885 | ||||||||||||
Isaac Zacharias | 7,156 | 1,371,094 | 4,777 | 914,127 |
Time-based RSUs. The time-based RSUs granted to our NEOs in 2023 vest in equal quarterly installments over four years.
Performance-based RSUs. The PRSUs are eligible to be earned in two annual tranches, with 50% subject to a two-year performance period of January 1, 2023 through December 31, 2024 (the “First Measurement Period”), and the remaining 50% subject to a three-year performance period of January 1, 2023 through December 31, 2025 (the “Second Measurement Period”). The number of PRSUs that will be earned will be based on the Company’s percentage increase in annual growth rate of revenue during the relevant measurement period (“CAGR”), in accordance with the following formula:
Target Number of PRSUs for the Applicable Measurement Period | X | Achievement Percentage | = | Number of Earned PRSUs for Applicable Measurement Period |
The revenue growth targets established by the Compensation Committee are intended to be challenging goals that represent significant growth relative to our revenue during the Measurement Period. The targets are not disclosed because we believe to do so would be competitively harmful, as it would give competitors insight into our strategic and financial planning processes. However, the targets were set to ensure they were stretch targets that would not pay out below a minimum growth target and would drive positive stockholder return. PRSUs can be earned up to 200% of target in the event of overachievement relative to targets. PRSUs will vest, to the extent earned, at the end of each performance period following certification of results by the Compensation Committee.
For information about the specific grants of long-term equity to the NEOs in 2023, see the section titled “—Grants of Plan-Based Awards,” below.
PRSUs were granted to our NEOs for the first time in 2022 (the “2022 PRSUs”). The first measurement period for the 2022 PRSUs ended on December 31, 2023, and the first annual tranche of 50% of the 2022 PRSUs were eligible to be earned based on the two-year CAGR. Our Compensation Committee determined the achievement of a 74.86% increase in CAGR. The following table shows the 2022 actual payout level for the first tranche of the 2022 PRSUs:
Grant Year | Performance Period | % of Grant Vesting | Performance Metric | Threshold (50% Vest) | Target (100% Vest) | Maximum (200% Vest) | Actual Performance | |||||||
2022 | 2022—2023 | 50% | CAGR | 40% | 50% | 60% | 74.86% |
As a result of a 74.86% increase in CAGR exceeding the maximum performance of 60%, the Compensation Committee approved, or in the case of our Chief Executive Officer recommended to the Board of Directors for approval and the Board of Directors approved, a payout on the first tranche of the 2022 PRSUs at 200% of target and certified performance in January 2024. The following number of shares of our common stock were issued upon the vesting of the PRSU awards to the following NEOs:
NEO | Number of PRSUs Earned | |||
Doug Godshall | 22,078 | |||
Dan Puckett | 5,520 | |||
Isaac Zacharias | 7,560 |
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Other Compensation-Related Policies
Employment and Separation Pay Agreements. We have entered into offer letters with each of our NEOs, the key terms of which are described below under “NEO Offer Letters and Employment Arrangements”. In addition, as a condition of employment, each of our NEOs has also entered into our standard, at-will employment, confidential information, invention assignment and arbitration agreement. Under these agreements, each officer has made a covenant not to solicit our employees, both during the officer’s employment and for the 12-month period following termination of employment for any reason. In addition, we have entered into amended and restated separation pay agreements with each of our NEOs (each, an “Amended and Restated Separation Pay Agreement”) to provide for the payment of benefits in the event that the NEO becomes subject to involuntary or constructive termination of employment. The Amended and Restated Separation Pay Agreements are described in more detail below in the section titled “—NEO Amended and Restated Separation Pay Arrangements.” In February 2024, we entered into a consulting agreement with Mr. Puckett providing for certain benefits in connection with his resignation as Chief Financial Officer of the Company and his transition into an advisory role, including cash payments and continued vesting of equity awards during the consulting period and payment of his fiscal year 2023 annual performance bonus. These arrangements are further described under the section below titled “—Consulting Agreement.”
Clawback Policy. In October 2023, the Board adopted our Clawback Policy, which is intended to comply with applicable SEC rules and Nasdaq listing standards. The Clawback Policy provides that if we are required to prepare an accounting restatement due to our material non-compliance with any financial reporting requirement, the Administrator shall require each Covered Person to reimburse or forfeit to the Company any incentive-based compensation (as defined in the Clawback Policy) received by the Covered Person prior to the restatement that exceeds the amount they would have received had their incentive-based compensation been calculated based on the financial restatement. Per applicable requirements, the Clawback Policy is enforced without consideration of a Covered Person’s responsibility or fault or lack thereof. For more information, see the full text of our Clawback Policy, which is filed as an exhibit to the Original Filing.
Stock Ownership Policy. To align our NEOs’ and directors’ interests with those of our stockholders, in December 2020 we adopted a Stock Ownership Policy requiring that: (i) our Chief Executive Officer hold Company shares with a value equal to three times (3x) our Chief Executive Officer’s base salary; (ii) our other NEOs hold Company shares with a value equal to one times (1x) such NEO’s base salary; and (iii) each non-employee director hold Company shares with a value equal to three times (3x) such director’s annual base cash retainer. The policy is initially subject to a five-year phase-in, with the initial compliance date set for January 1, 2026, at which time all directors and NEOs who were serving in such capacity as of the policy’s adoption date must achieve compliance, and each new director or NEO appointed after the effective date of the policy has five years from their appointment date to comply with the Stock Ownership Policy. The Compensation Committee re-determines the value of the held shares requirement following each January 1 based on the average closing price of the Company’s common stock over a 30-day period prior to the re-determination date. Each covered person then has one year to meet the applicable new value requirement. For purposes of determining compliance with the Stock Ownership Policy, the following shares are treated as owned: (i) shares of our common stock owned individually, either directly or indirectly, including shares underlying vested stock awards; (ii) shares of our common stock owned by a covered person’s immediate family members residing in the same household; (iii) shares acquirable upon net exercise of vested stock options; and (iv) shares initially granted to a Director who is required to assign any shares granted to the Director to the Director’s employer as a condition of employment. No other rights to acquire shares of our common stock (including unvested stock options or similar rights) are considered shares of our common stock owned for purposes of compliance with the policy. Should any applicable person fail to comply with the Stock Ownership Policy, the Board may take action as it deems appropriate.
Anti-Hedging and Anti-Pledging Policy. We maintain a formal anti-hedging and anti-pledging policy for our employees (including our NEOs) and directors. Under our Statement of Policy Concerning Trading in Company Securities (the “Insider Trading Policy”), which was adopted by the Board in June 2019 and most recently amended in February 2023, our employees (including our NEOs) and directors are prohibited from engaging in any hedging transactions (including transactions involving options, puts, calls, prepaid variable forward contracts, equity swaps, collars and exchange funds or other derivatives) that are designed to hedge or speculate on any change in the market value of the Company’s equity securities, or pledging Company securities in any circumstance, including by purchasing Company securities on margin or holding Company securities in a margin account.
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Tax and Accounting Considerations
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code generally does not allow a tax deduction to public companies for compensation paid to certain executive officers in one calendar year over $1 million per executive. While our Compensation Committee is mindful of the benefit to us of the deductibility of compensation and may consider deductibility when analyzing potential compensation alternatives, our Compensation Committee believes that it should not be constrained by Section 162(m) in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, our Compensation Committee has not adopted a policy that requires that all compensation be deductible, and, accordingly, we expect that a portion of our future executive compensation will not be deductible under Section 162(m).
Accounting Treatment
We account for stock compensation in accordance with the authoritative guidance set forth in FASB ASC Topic 718, which requires companies to measure and recognize the compensation expense for all share-based awards (including stock options, RSUs and PRSUs) made to employees (including NEOs) and directors over the period during which the award recipient is required to perform services in exchange for the award (for NEOs, generally the four-year vesting period of RSU awards and stock option awards or the two- or three-year performance period of PRSU awards). We estimate the fair value of stock options using the Black-Scholes option-valuation model. This calculation is performed for accounting purposes and is reported in the compensation tables below.
Compensation Committee Report
The following report shall not be deemed to be “soliciting material” or “filed” with the SEC or incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent that we specifically incorporate it by reference into such filing.
The Compensation Committee has reviewed and discussed with management the Compensation Discussion & Analysis contained in this Amendment. Based upon this review and discussion, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion & Analysis be included in this Amendment.
Respectfully,
Maria Sainz, Chair
Kevin Ballinger, and
Laura Francis
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Summary Compensation Table
The following table discloses compensation paid by us during fiscal years 2023, 2022 and 2021 to our NEOs:
Name and Principal Position | Year | Salary ($) | Stock Awards ($)(1) | Non-Equity Incentive Plan Compensation ($)(2) | All Other Compensation ($)(3) | Total ($) | ||||||||||||||||||
Doug Godshall, President and Chief Executive Officer | 2023 | 716,346 | 7,789,883 | 967,500 | 5,000 | 9,478,729 | ||||||||||||||||||
2022 | 644,231 | 6,845,660 | 923,650 | 5,330 | 8,418,871 | |||||||||||||||||||
2021 | 575,192 | 5,919,500 | 817,020 | 5,330 | 7,317,042 | |||||||||||||||||||
Dan Puckett, Former Chief Financial Officer | 2023 | 483,312 | 2,077,404 | 371,455 | 5,000 | 2,937,171 | ||||||||||||||||||
2022 | 438,178 | 2,139,259 | 353,871 | 5,330 | 2,936,638 | |||||||||||||||||||
2021 | 378,611 | 2,012,630 | 274,769 | 5,330 | 2,671,340 | |||||||||||||||||||
Isaac Zacharias, President, Chief Commercial Officer | 2023 | 511,673 | 2,285,221 | 423,884 | 5,000 | 3,225,778 | ||||||||||||||||||
2022 | 475,666 | 6,119,626 | 427,029 | 5,330 | 7,027,651 | |||||||||||||||||||
2021 | 384,662 | 2,131,020 | 289,551 | 5,330 | 2,810,563 |
(1) | Amounts shown in this column do not reflect dollar amounts actually received by our NEOs. Instead, these amounts reflect the aggregate grant date fair value of RSUs and PRSUs granted in the applicable year, computed in accordance with the provisions of FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 11 to our financial statements included in the Original Filing. For the PRSUs the amount reported is based on the probable outcome of the applicable performance condition at the time of grant (i.e., based on 100% of performance). If the PRSUs were instead valued based on the maximum outcome of the applicable performance condition (i.e., based on 200% of performance), the total amount for the PRSUs reported in this column for 2023 would increase as follows: Mr. Godshall from $3,894,941 to $7,789,883, Mr. Puckett from $830,885 to $1,661,770 and Mr. Zacharias from $1,371,094 to $2,742,189. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. |
(2) | These figures reflect the annual bonuses earned by each NEO under the ABP based on such NEO’s service in 2021, 2022 and 2023, which were paid in February 2022, February 2023, and February 2024 respectively. |
(3) | These figures reflect the matching contribution made to the Company’s 401(k) Plan and for 2022 and 2021 compensation the life insurance premiums paid on behalf of each executive. |
NEO Offer Letters, Employment Arrangements and Retention Agreements
We have entered into offer letters with each of our NEOs. Each of these offer letters provides for at-will employment and generally includes the Proxy StatementNEO’s initial base salary, a recommendation for the Board of Directors to approve the grant of an initial stock option award, and, with respect to Messrs. Godshall and Zacharias, an indication of eligibility for an annual bonus award opportunity. In addition, as a condition of employment, each of our NEOs has also entered into our standard, at-will employment, confidential information, invention assignment and arbitration agreement. Under these agreements, each officer has made a covenant not to solicit our employees, both during the officer’s employment and for the 12-month period following termination of employment for any reason. Any potential payments and benefits due upon a termination of employment or a change in control are further described in the following section titled “—NEO Amended and Restated Separation Pay Arrangements.”
In connection with the proposed Merger and at the request of Parent, we entered into a retention agreement (the “Retention Agreement”) with Mr. Zacharias on April 4, 2024. The Retention Agreement modifies certain provisions of Mr. Zacharias’s Amended and Restated Separation Pay Agreement and provides that from the closing of the Merger (the “Closing”) through the first anniversary of the Closing (the “Retention Date”), Mr. Zacharias’s title will be President, Shockwave
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Medical, reporting to the Global Head of Heart Recovery, MedTech, of Parent. Pursuant to the Retention Agreement, Mr. Zacharias is entitled to a retention opportunity equal to $2,100,000 payable on the Retention Date, subject to Mr. Zacharias’s continued employment with us, Parent or our or Parent’s affiliates through the Retention Date. Notwithstanding the foregoing, if Mr. Zacharias’s employment is terminated prior to the Retention Date other than for Cause (as defined in the Amended and Restated Separation Pay Agreement), due to Mr. Zacharias’s death or disability, or if Mr. Zacharias resigns for Good Reason (as defined in the Amended and Restated Separation Pay Agreement and modified by the Retention Agreement), then Mr. Zacharias will be entitled to receive the sum of (i) the salary continuation and COBRA continuation benefits payable under the Amended and Restated Separation Pay Agreement and (ii) $1,251,924, which sum is equal to $2,100,000, subject to Mr. Zacharias’s execution and non-revocation of a release of claims. The Retention Agreement also provides that during the 12 months following the Closing, Mr. Zacharias will continue to receive at least the same base salary as he received immediately prior to the Closing and be eligible for at least the same target cash bonus opportunity as he was eligible for immediately prior to the Closing. Following the Retention Date, Mr. Zacharias will not be entitled to any severance or separation payments or benefits under the Amended and Restated Separation Pay Agreement and, if he remains employed by Parent and its affiliates, Mr. Zacharias will be eligible for severance benefits under the applicable severance policy of Parent or its affiliates.
Consulting Agreement
On January 29, 2024, Mr. Puckett resigned as Chief Financial Officer of the Company, effective as of February 5, 2024. In connection with his resignation, Mr. Puckett and the Company entered into a consulting agreement, effective as of February 5, 2024 (the “Consulting Agreement”), pursuant to which Mr. Puckett agreed to assist with the transition of his role and consult for the Company through February 4, 2025. Pursuant to the terms of the Consulting Agreement, Mr. Puckett is entitled to a payment of (a) $20,000 per month during the period from February 5, 2024 through October 4, 2024 and (b) $10,000 per month during the period from October 5, 2024 through February 4, 2025; continued vesting during the term of the Consulting Agreement of all outstanding equity; and payment of his 2023 annual performance bonus. The foregoing summary of the Consulting Agreement does not purport to be complete and is incorporated hereinsubject to, and qualified in its entirety by, reference.the Consulting Agreement, which was filed as an exhibit to the Original Filing.
NEO Amended and Restated Separation Pay Arrangements
In March 2022, we entered into an Amended and Restated Separation Pay Agreement with each of our NEOs to provide for the payment of benefits in the event that the NEO becomes subject to involuntary or constructive termination of employment.
Each Amended and Restated Separation Pay Agreement provides that upon a qualifying termination of employment, subject to certain conditions and limitations—including the NEO’s execution of a general release of claims against us and our affiliates—the NEO will be provided with the following benefits:
If the qualifying termination occurs in the absence of a Change in Control (used here as defined in the Amended and Restated Separation Pay Agreements):
a cash severance benefit equal to 9 months’ base salary (18 months’ base salary for Mr. Godshall), to be paid in installments in accordance with our normal payroll practices;
• | an amount equal to the annual bonus the NEO would have earned for the year of termination, pro-rated for the NEO’s service during that year, to be paid on the date the annual bonuses are paid to similarly-situated executives; and |
reimbursement for COBRA premiums for up to 9 months (up to 18 months for Mr. Godshall), but not beyond the date on which the NEO becomes eligible to receive substantially similar coverage from another employer.
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If the qualifying termination occurs within three months prior to or within 12 months following a Change in Control:
a cash severance benefit equal to 18 months’ base salary (24 months’ base salary for Mr. Godshall), to be paid in installments in accordance with our normal payroll practices;
• | an amount equal to the annual bonus the NEO would have earned for the year of termination, pro-rated for the NEO’s service during that year, to be paid on the date the annual bonuses are paid to similarly situated executives; |
reimbursement for COBRA premiums for up to 18 months, but not beyond the date on which the NEO becomes eligible to receive substantially similar coverage from another employer;
all unvested equity awards will become immediately vested and fully exercisable; and
all stock options granted to the NEO that are then outstanding shall remain exercisable for a period of one year following the NEO’s termination date, or, if shorter for a given stock option, for the remainder of that stock option’s full term.
For purposes of the Amended and Restated Separation Pay Agreements:
a “qualifying termination” means (i) in the case of Mr. Godshall, a termination without Cause or a resignation for Good Reason at any time during the term of the agreement; and (ii) for each other NEO, a termination without Cause at any time during the term of the agreement, or a resignation for Good Reason that occurs within three months prior to or within 12 months following a Change in Control.
“Cause” is defined to mean the NEO’s (i) willful failure to perform his or her duties (other than any such failure resulting from incapacity due to physical or mental illness); (ii) engagement in dishonesty, illegal conduct, or gross misconduct, which, in each case, poses a substantial risk of material injury to us or our affiliates; (iii) embezzlement, misappropriation, or fraud, whether or not related to the NEO’s employment; (iv) conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a misdemeanor involving moral turpitude; (v) material breach of any material obligation under the agreement or any other written agreement between the executive and us; or (vi) material failure to comply with our written policies or rules, if such failure poses a substantial risk of material reputational or financial harm to us.
“Change in Control” is defined to mean the occurrence of any of the following: (i) one person (or more than one person acting as a group) acquires ownership of our stock that, together with the stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of our stock; provided that, a Change in Control shall not occur if any person (or more than one person acting as a group) owns more than 50% of the total fair market value or total voting power of our stock and acquires additional stock; (ii) one person (or more than one person acting as a group) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) ownership of our stock possessing 30% or more of the total voting power of our stock; (iii) a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; (iv) the sale of all or substantially all of our assets; or (v) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of our shareholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (1) the entity resulting from such Business Combination (the “Surviving Company”), or (2) if applicable, the ultimate parent entity that directly or indirectly has Beneficial Ownership of sufficient voting securities eligible to elect a majority of the members of the board of directors (or the analogous governing body) of the Surviving Company (the “Parent Company”), is represented by the outstanding voting securities of the Company entitled to vote generally in
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the election of directors (the “Outstanding Company Voting Securities”) that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Outstanding Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Outstanding Company Voting Securities among the holders thereof immediately prior to the Business Combination (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Company or the Parent Company)(as defined in the Amended and Restated Separation Pay Agreements) is or becomes the beneficial owner, directly or indirectly, of 50% or more of the total voting power of the outstanding voting securities eligible to elect members of the board of directors of the Parent Company (or the analogous governing body) (or, if there is no Parent Company, the Surviving Company); and (C) at least a majority of the members of the board of directors (or the analogous governing body) of the Parent Company (or, if there is no Parent Company, the Surviving Company) following the consummation of the Business Combination were Board members at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination. |
• | “Good Reason” is defined to mean the occurrence of any of the following without the NEO’s written consent: (i) a material reduction in annual rate of base salary other than a general reduction that affects all similarly situated executives in substantially the same proportions; (ii) a material reduction in target incentive opportunity under the annual incentive plan; (iii) a relocation of the NEO’s principal place of employment by more than 30 miles; (iv) any material breach by us of any material provision of the Amended and Restated Separation Pay Agreement; (v) our failure to obtain an agreement from any successor to assume and agree to perform the Amended and Restated Separation Pay Agreement in the same manner and to the same extent that we would be required to perform if no succession had taken place, except where such assumption occurs by operation of law; (vi) a material, adverse change in the NEO’s title, authority, duties, or responsibilities (other than temporarily while the executive is physically or mentally incapacitated or as required by applicable law); or (vii) a material adverse change in the reporting structure applicable to the NEO; or (viii) for Mr. Godshall only, the Company’s failure to nominate Mr. Godshall for election to the Board and to use its best efforts to have him elected and re-elected, as applicable. |
The Amended and Restated Separation Pay Agreements also include a “best net after-tax” Section 280G cutback, pursuant to which if the payments and benefits provided pursuant to an Amended and Restated Separation Pay Agreement are subject to the Section 280G excise tax, they will be reduced such that they are not subject to the Section 280G excise tax, but only if such reduction would result in the NEO receiving a greater amount on a net after-tax basis. reduction but are payable at different times, the amounts shall be reduced (but not below zero) on a pro rata basis.
The Amended and Restated Separation Pay Agreements also contain a provision reflecting our Clawback Policy.
Grants of Plan-Based Awards
The following table sets forth information concerning the cash bonus opportunities made available to our NEOs pursuant to the ABP and the RSUs and PRSUs granted to our NEOs under the 2019 Plan during our fiscal year ended December 31, 2023.
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Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | Grant Date Fair Value of Stock Awards ($)(4) | |||||||||||||||||||||||||||||||||||||
Name | Type of Award | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | ||||||||||||||||||||||||||||||||
Doug Godshall | Cash | — | 362,500 | 725,000 | 1,178,125 | |||||||||||||||||||||||||||||||||||
RSU | 2/01/2023 | 20,354 | 3,894,941 | |||||||||||||||||||||||||||||||||||||
PRSU | 2/01/2023 | 10,177 | 20,354 | 40,708 | 20,354 | 3,894,941 | ||||||||||||||||||||||||||||||||||
Dan Puckett | Cash | — | 146,531 | 293,061 | 448,750 | |||||||||||||||||||||||||||||||||||
RSU | 2/01/2023 | 6,514 | 1,246,519 | |||||||||||||||||||||||||||||||||||||
PRSU | 2/01/2023 | 2,171 | 4,342 | 8,684 | 4,342 | 830,885 | ||||||||||||||||||||||||||||||||||
Isaac Zacharias | Cash | — | 167,213 | 334,425 | 512,088 | |||||||||||||||||||||||||||||||||||
RSU | 2/01/2023 | 7,165 | 1,371,094 | |||||||||||||||||||||||||||||||||||||
PRSU | 2/01/2023 | 2,389 | 4,777 | 9,554 | 4,777 | 914,127 |
(1) | Non-equity incentive plan awards are made pursuant to the ABP under the 2019 Plan, as described in the section titled “—Compensation Discussion and Analysis—2023 Compensation Decisions for our NEOs—Principal Elements of Compensation—Annual Cash Bonuses”. These amounts do not necessarily correspond to the actual amounts that were received by our NEOs. No other non-equity incentives were granted. |
(2) | Amounts in these columns represent a range of payouts possible under the PRSUs. The amount shown in the “Target” column for each award represents 100% of the PRSUs granted, which equals the number of units that would vest if the “Target” performance level were achieved. The “Threshold” level is the minimum level of performance that must be met before any payout may occur and represents 50% of the Target payout amount. The amount shown in the “Maximum” column is 200% of the Target payout amount. Further information about these awards is provided in the section titled “—Compensation Discussion and Analysis—Principal Elements of Compensation —Long Term Equity Awards.” |
(3) | Each equity award included here was granted under the 2019 Plan. No other equity awards were granted. |
(4) | Amounts in this column represent the grant date fair value of each RSU and PRSU award, as calculated in accordance with FASB ASC Topic 718. The RSUs are valued using the fair value method. See Note 11 to the consolidated financial statements included in the Original Filing for the assumptions used in calculating these amounts. For the PRSUs, the amount reported is based on the probable outcome of the applicable performance condition at the time of grant (i.e., based on 100% of performance). |
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information concerning unexercised options, stock that has not vested and equity incentive plan awards for our NEOs as of the end of our fiscal year ended December 31, 2023.
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Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||
Name | Grant Date | Numbers of Securities Underlying Unexercised Options (#) Exercisable | Numbers of Securities Underlying Unexercised Options (#) Unexercisable | Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(3) | Number of Unearned Shares or Units of Stock that Have Not Vested (#)(4) | Market Value of Unearned Shares or Units of Stock That Have Not Vested($)(3) | ||||||||||||||||||||||||||||||
Doug Godshall | 05/09/2017 | 324,799 | — | (1) | — | 3.42 | 05/09/2027 | — | — | — | — | |||||||||||||||||||||||||||||
03/06/2019 | 81,967 | — | (1) | — | 17.00 | 03/06/2029 | — | — | — | — | ||||||||||||||||||||||||||||||
02/18/2020 | — | — | — | — | — | 21,050 | (2) | 4,011,288 | — | — | ||||||||||||||||||||||||||||||
02/01/2021 | — | — | — | — | — | 25,000 | (2) | 4,764,000 | — | — | ||||||||||||||||||||||||||||||
02/01/2022 | — | — | — | — | — | 16,560 | (2) | 3,155,674 | 22,078 | 4,207,184 | ||||||||||||||||||||||||||||||
02/01/2023 | — | — | — | — | — | 16,538 | (2) | 3,151,481 | 20,354 | 3,878,658 | ||||||||||||||||||||||||||||||
Dan Puckett | 07/19/2018 | 55 | — | (1) | — | 4.03 | 07/19/2028 | — | — | — | — | |||||||||||||||||||||||||||||
03/06/2019 | 80 | — | (1) | — | 17.00 | 03/06/2029 | — | — | — | — | ||||||||||||||||||||||||||||||
02/18/2020 | — | — | — | — | — | 7,500 | (2) | 1,429,200 | — | — | ||||||||||||||||||||||||||||||
02/01/2021 | — | — | — | — | — | 8,500 | (2) | 1,619,760 | — | — | ||||||||||||||||||||||||||||||
02/01/2022 | — | — | — | — | — | 6,210 | (2) | 1,183,378 | 5,520 | 1,051,891 | ||||||||||||||||||||||||||||||
02/01/2023 | — | — | — | — | — | 5,293 | (2) | 1,008,634 | 4,342 | 827,412 | ||||||||||||||||||||||||||||||
Isaac Zacharias | 04/10/2018 | 9,222 | — | (1) | — | 4.03 | 04/10/2028 | — | — | — | — | |||||||||||||||||||||||||||||
11/14/2018 | 40,408 | — | (1) | — | 6.71 | 11/14/2028 | — | — | — | — | ||||||||||||||||||||||||||||||
02/18/2020 | — | — | — | — | — | 7,500 | (2) | 1,429,200 | — | — | ||||||||||||||||||||||||||||||
02/01/2021 | — | — | — | — | — | 9,000 | (2) | 1,715,040 | — | — | ||||||||||||||||||||||||||||||
02/01/2022 | — | — | — | — | — | 8,445 | (2) | 1,609,279 | 7,507 | 1,430,534 | ||||||||||||||||||||||||||||||
06/09/2022 | — | — | — | — | — | 10,839 | (2) | 2,065,480 | — | — | ||||||||||||||||||||||||||||||
02/01/2023 | — | — | — | — | — | 5,822 | (2) | 1,109,440 | 4,777 | 910,305 |
(1) | This stock option is fully vested. |
(2) | Subject to vesting as to 1/4 of the award upon continued service through the first anniversary of the date of grant and as to 1/4 of the award upon continued service through each year thereafter, through the fourth anniversary of the date of grant. The PRSUs are represented at the target amount of shares that may be earned under the awards (i.e., based on 100% of performance). |
(3) | Based on the closing price of our common stock underlying the award on December 30, 2023, the last trading day of 2023, which was $190.56 per share. |
(4) | Based on the probable outcome of the applicable performance condition at the time of the PRSU grant (i.e., based on 100% of performance). |
Option Exercises and RSUs Vested
The following table sets forth information regarding options exercised by, and shares vested under RSU awards granted to, our NEOs for the fiscal year ending December 31, 2023.
Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) | ||||||||||||
Doug Godshall | 70,000 | 13,400,680 | 46,885 | 9,502,661 | ||||||||||||
Dan Puckett | 3,300 | 566,489 | 17,040 | 3,461,864 | ||||||||||||
Isaac Zacharias | 7,646 | 1,346,248 | 21,744 | 4,431,832 |
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(1) | Values were determined based on the difference between the fair market value of our shares of common stock on the date of exercise and the exercise price of the options. |
(2) | Values were determined based on the fair market value of our shares of common stock on the date of vesting. |
Pension Benefits and Nonqualified Deferred Compensation
We do not provide a defined benefit pension plan or a nonqualified deferred compensation plan for our employees.
Potential Payments Upon Termination or Change in Control
The information in the “Potential Payments Upon Termination or Change in Control” table below summarizes the compensation that would be payable under various scenarios if the NEO’s employment had terminated on December 31, 2023, the last day of fiscal year 2023 and the price per share of our common stock is the closing market price as of December 29, 2023, the last trading day of 2023. The amounts shown below reflect payments and benefits available under the Amended and Restated Separation Pay Agreements.
Name | Termination Scenario | Cash ($)(4) | COBRA Premiums ($)(5) | Stock Options/ Restricted Stock Units ($)(6) | Total ($) | |||||||||||||
Doug Godshall | Death | 1,051,154 | — | — | 1,051,154 | |||||||||||||
Long-Term Disability | 1,051,154 | — | — | 1,051,154 | ||||||||||||||
Voluntary Termination(1) | 83,654 | — | — | 83,654 | ||||||||||||||
Change in Control(2) | 2,483,846 | 44,548 | 23,168,285 | 25,696,679 | ||||||||||||||
Involuntary Termination(3) | 2,125,673 | 44,548 | — | 2,170,221 | ||||||||||||||
Dan Puckett | Death | 440,148 | — | — | 440,148 | |||||||||||||
Long-Term Disability | 440,148 | — | — | 440,148 | ||||||||||||||
Voluntary Termination(1) | 68,693 | — | — | 68,693 | ||||||||||||||
Change in Control(2) | 1,165,116 | 44,548 | 7,120,274 | 8,329,938 | ||||||||||||||
Involuntary Termination(3) | 802,632 | 22,274 | — | 824,906 | ||||||||||||||
Isaac Zacharias | Death | 463,842 | — | — | 463,842 | |||||||||||||
Long-Term Disability | 463,842 | — | — | 463,842 | ||||||||||||||
Voluntary Termination(1) | 39,958 | — | — | 39,958 | ||||||||||||||
Change in Control(2) | 1,231,352 | 44,548 | 10,269,278 | 11,545,178 | ||||||||||||||
Involuntary Termination(3) | 847,597 | 22,274 | — | 869,871 |
(1) | “Voluntary Termination” means a termination for Cause or without Good Reason (as defined by the Amended and Restated Separation Pay Agreements). |
(2) | Change in Control payments are made if there is a qualifying termination within three months prior to or within 12 months following a Change in Control (as defined in the Amended and Restated Separation Pay Agreements). |
(3) | “Involuntary Termination” is any termination other than for Cause, death, or disability, or by our Chief Executive Officer for Good Reason (as defined in the Amended and Restated Separation Pay Agreements). |
(4) | This represents a severance payment of 1.5 times the executive officer’s annual base salary plus annual target bonus for Change in Control or 0.75 times for Involuntary Termination (except that the multiplier for base salary is 2.0 times for a Change in Control and 1.5 times for Involuntary Termination in the case of our Chief Executive Officer). |
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(5) | Continued payment for the cost of the executive officer’s premiums for health continuation coverage under COBRA for a period equal to the number of months of severance pay but no longer than the end of the COBRA period. |
(6) | The value of accelerated vesting is calculated based on the per share closing price on the Nasdaq Global Select Market on December 29, 2023, the last trading day of 2023, which was $190.56 per share, less, if applicable, the aggregate exercise price of each outstanding unexercisable stock option. All stock options granted to the applicable NEO that are then outstanding shall remain exercisable for a period of one year following the termination date, or, if shorter for a given stock option, for the remainder of that stock option’s full term. The PRSUs assume the target achievable amount (i.e., based on 100% of performance). |
Equity awards held by our NEOs are subject to the terms of the relevant equity incentive plan and the award agreement evidencing such award. The award agreements set forth the terms and conditions of the respective awards and, among other things, describe the effect of various termination events on the vesting of unvested equity awards other than terminations in the context of a change in control, as discussed in the section titled “—NEO Amended and Restated Separation Pay Arrangements.”
Compensation Risk Assessment
We believe that although a portion of the compensation provided to our NEOs and other employees is performance-based, our executive compensation program does not encourage excessive or unnecessary risk-taking. This is primarily due to the fact that our compensation programs are designed to encourage our executive officers and other employees to remain focused on both short-term and long-term strategic goals, in particular in connection with our pay-for-performance compensation philosophy. As a result, we do not believe that our compensation programs are reasonably likely to have a material adverse effect on the Company. Factors supporting this conclusion include:
Compensation is overseen by our Compensation Committee, all members of which are Independent Directors;
With the assistance of Compensia, our Compensation Committee annually reviews director and officer compensation levels against those of an appropriate group of comparable peer firms;
Compensation focuses on a proper balance of short- and longer-term performance;
Equity grant guidelines inform the size of equity awards;
We maintain internal controls on sales commissions;
Our Insider Trading Policy prohibits the hedging and pledging of our stock; and
Separation agreements entered into with our executives are reasonable.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, the following presents information regarding the relationship of the median of the annual total compensation of our employees, other than our Chief Executive Officer, to the annual total compensation of our Chief Executive Officer, Mr. Godshall.
We identified the median employee for our 2023 pay ratio analysis using the following methodology:
We selected December 31, 2023 as the date on which to determine our median employee (the “Determination Date”). As of the Determination Date, our employee population consisted of 1,468 individuals. This population consisted of full-time, part-time, and temporary employees located in the United States and internationally.
35
To identify the median employee from our employee population, we prepared a list of employees as of December 31, 2023 by their corresponding annual total cash compensation (base salary or hourly wages, overtime wages, commissions and bonuses) and the grant date fair value of equity awards, based on the Company’s payroll and other compensation records. We excluded Mr. Godshall and certain temporary employees that were employed by third-party agencies for whom we do not determine the rate of pay.
• | We annualized compensation for employees that were not employed for the full year of 2023 and did not make any cost-of-living adjustments in identifying the median employee. Amounts paid in foreign currencies were converted to U.S. dollars, using conversion rates as of December 31, 2023 as provided in our system of record for compensation information. Using this methodology, we determined that our median employee was a full-time Senior Field Clinical Specialist based in the United States. |
In determining our 2023 pay ratio, we combined all elements of our median employee’s compensation for 2023 using the same methodology that we used for calculating Mr. Godshall’s total compensation shown in the Summary Compensation Table, and the annual total compensation of our median employee was $123,500. Mr. Godshall’s annual total compensation, as reported in the Summary Compensation Table, was $9,478,729. Based on this information, the ratio of the annual total compensation of Mr. Godshall to the annual total compensation of our median employee was approximately 77:1 for 2023.
We believe that the above pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. In addition, because the SEC rules for identifying the median employee allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employment and compensation practices, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee during part or all of 2023 were Kevin Ballinger, Laura Francis, Antoine Papiernik and Maria Sainz. None of the members of our Compensation Committee in 2023 were at any time an officer or employee of ours or any of our subsidiaries, and none had or have any relationships with us that are required to be disclosed under Item 404 of Regulation S-K. During 2023, none of our executive officers served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our Board of Directors or Compensation Committee.
Director Compensation
Our directors play a critical role in guiding our strategic direction and overseeing the management of Shockwave. The many responsibilities and risks and the substantial time commitment of being a director require that we provide adequate compensation commensurate with our directors’ workload and opportunity costs.
We maintain a non-employee director compensation plan for our Independent Directors pursuant to which they receive an annual cash retainer and annual equity grants in the form of RSUs.
In order to remain competitive in an increasingly challenging landscape for recruitment of non-employee directors and based on input from Compensia, our Compensation Committee approved an Amended and Restated Non-Employee Director Compensation Plan (the “Director Plan”) in April 2023, which included an increase to the annual retainers for the chairs of our Audit, Compensation and Nominating and ESG Committees from $20,000 to $22,500, $15,000 to $17,500 and $10,000 to $12,500, respectively, and an increase in the annual equity grant (as described below) from $185,000 to $215,000. Our Director Plan is described below.
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Annual Cash Retainers
During 2023, each of our Independent Directors received annual retainers for Board and committee services as follows:
Position | Annual Cash Retainer under Director Plan ($) | |||
Board Member | 50,000 | |||
Non-Executive Chair | 50,000 | |||
Committee Chair | ||||
Audit | 22,500 | |||
Compensation | 17,500 | |||
Nominating and ESG | 12,500 | |||
Committee Member | ||||
Audit | 10,000 | |||
Compensation | 7,500 | |||
Nominating and ESG | 5,000 |
Equity Awards
In addition, the Director Plan provides for the grant of an initial equity award upon appointment of an Independent Director to our Board of Directors, and the grant of an annual equity award to each Independent Director continuing in service as of the date of an annual meeting of stockholders. The Director Plan specifies that all equity grants to Independent Directors will be in the form of RSUs, with an initial equity grant provided to new directors for $277,500 fair value at grant date and an annual equity grant for each Independent Director continuing in service as of the date of an annual meeting of stockholders for $215,000 fair value at grant date. The Director Plan also allows for directors to defer settlement of the annual RSU grant. Directors must elect to defer settlement of the annual RSU grant on or before December 31 of any year for the annual RSUs granted during the following year and subsequent years. Deferral elections become irrevocable on January 1 for that year and any revocations only apply to the annual RSUs granted in the year following revocation. We may continue to include equity awards as part of the Director Plan in the future or provide awards to our Independent Directors outside of this policy.
Our only employee director, Mr. Godshall, who is our President and Chief Executive Officer, does not receive any compensation for his services as a director. For more information on Mr. Godshall’s compensation as an officer, see the section titled “Executive Compensation”.
The following table lists actual compensation paid to each of our directors during 2023, other than Mr. Godshall.
Director Compensation in 2023
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1)(2) | Total ($) | |||||||||
Kevin Ballinger | 15,625 | 492,423 | 508,048 | |||||||||
Laura Francis(3) | 82,500 | 214,868 | 297,368 | |||||||||
Ray Larkin(4) | 118,750 | 214,868 | 333,618 | |||||||||
Frederic Moll, M.D.(5) | 58,750 | 214,868 | 273,618 | |||||||||
Antoine Papiernik(6) | 62,188 | 214,868 | 277,056 | |||||||||
Maria Sainz | 75,000 | 214,868 | 289,868 | |||||||||
Sara Toyloy | 63,750 | 214,868 | 278,618 | |||||||||
F.T. “Jay” Watkins(7) | 63,750 | 214,868 | 278,618 |
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(1) | Amounts shown in this column do not reflect dollar amounts actually received by our directors. Instead, these amounts reflect the aggregate grant date fair value of RSUs granted in 2023, computed in accordance with the provisions of FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 11 to our financial statements included in the Original Filing. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. |
(2) | Each of the amounts reflected in the column represents the annual director grant in the form of RSU awards, which vest on the one-year anniversary of the date of grant. |
(3) | As of December 31, 2023, Ms. Francis held an option to purchase 16,190 shares of our common stock, which was fully vested and exercisable. |
(4) | As of December 31, 2023, Mr. Larkin held an option to purchase 28,688 shares of our common stock, which was fully vested and exercisable. |
(5) | As of December 31, 2023, Dr. Moll held options to purchase 115,741 shares of our common stock, which were fully vested and exercisable. |
(6) | The figure in the Fees Earned or Paid in Cash column was paid to Sofinnova Partners SAS, Mr. Papiernik’s employer. In addition, Mr. Papiernik has assigned beneficial ownership of the stock awards granted to him to his employer. |
(7) | As of December 31, 2023, Mr. Watkins held options to purchase 107,694 shares of our common stock, which were fully vested and exercisable. |
In order to remain competitive in an increasingly challenging landscape for recruitment of non-employee directors and based on input from Compensia, our Compensation Committee approved an Amended and Restated Non-Employee Director Compensation Plan in March 2024, which included an increase to the annual retainers for membership on the Board from $50,000 to $57,500, for the non-executive chair from $50,000 to $65,000 and for the chairs of our Audit and Nominating and ESG Committees from $22,500 to $25,000 and $12,500 to $15,000, respectively, and an increase in the initial equity grant (as described above) from $277,500 to $330,000 and in the annual equity grant (as described above) from $215,000 to $220,000.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table provides certain information required by this item will be includedwith respect to all of our equity compensation plans as of December 31, 2023:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) | Weighted average exercise price of outstanding options, warrants, and rights ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by stockholders | 823,536 | (1) | $ | 5.90 | (2) | 880,809 | (3) | |||||
|
|
|
|
|
| |||||||
Equity compensation plans not approved by stockholders | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | 823,536 | $ | 5.90 | (2) | 880,809 | |||||||
|
|
|
|
|
|
(1) | Amount does not include any shares of common stock issuable under our ESPP. We issue shares under our ESPP once every six months based on employee elections in the preceding six months. Pursuant to the terms of our ESPP, the number of shares to be issued and the price per share is not determined until immediately before the date of issuance. |
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(2) | The weighted-average exercise price does not reflect the shares that will be issued in connection with the settlement of RSUs or PRSUs, since RSUs and PRSUs have no exercise price. |
(3) | Includes shares available for issuance under our 2019 Plan and our ESPP. The number of shares available for issuance under our 2019 Plan increases automatically on the first day of each fiscal year of the Company beginning with the 2020 fiscal year and ending with the 2028 fiscal year, in an amount equal to the least of (i) 3% of the outstanding shares of our common stock on the last business day of the immediately preceding fiscal year and (ii) such number of shares determined by our Board. The number of shares available for issuance under our ESPP increases automatically on the first day of each fiscal year of the Company beginning with the 2020 fiscal year and ending with the 2028 fiscal year, in an amount equal to the lesser of (i) 1% of the outstanding shares of our common stock on the last business day of the immediately preceding fiscal year and (ii) such number of shares determined by our Board. |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of March 31, 2024 by:
each person whom we know to own beneficially more than 5% of our common stock;
each of our directors and NEOs individually; and
all of our directors and executive officers as a group.
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes shares of common stock subject to stock options that are exercisable within 60 days of March 31, 2024, and RSUs that may vest and settle within 60 days of March 31, 2024. Shares issuable pursuant to stock options or RSUs are deemed outstanding for computing the percentage of the person holding such equity awards but are not outstanding for computing the percentage of any other person. The percentage ownership of our common stock in the Proxy Statement“Shares Beneficially Owned” column in the table is based on 37,496,110 shares of our common stock issued and outstanding as of March 31, 2024.
Unless otherwise indicated, the mailing address of each of the stockholders below is incorporated herein by reference.c/o Shockwave Medical, Inc., 5403 Betsy Ross Drive, Santa Clara, CA 95054. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.
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Shares Beneficially Owned | ||||||||
Name of Beneficial Owner | Number (#) | Percent (%) | ||||||
Greater than 5% Stockholders | ||||||||
BlackRock, Inc.(1) | 3,740,596 | 10.0 | ||||||
The Vanguard Group, Inc.(2) | 3,633,720 | 9.7 | ||||||
Entities affiliated with Wellington Management Group LLP(3) | 2,500,594 | 6.7 | ||||||
Entities and persons affiliated with FMR LLC(4) | 2,039,230 | 5.4 | ||||||
Directors and Named Executive Officers | ||||||||
Douglas Godshall(5) | 474,180 | 1.3 | ||||||
Renee Gaeta | — | * | ||||||
Daniel Puckett(6) | 771 | * | ||||||
Isaac Zacharias(7) | 50,908 | * | ||||||
Kevin Ballinger | — | * | ||||||
Laura Francis(8) | 17,738 | * | ||||||
C. Raymond Larkin, Jr.(9) | 33,233 | * | ||||||
Frederic Moll, M.D.(10) | 320,559 | * | ||||||
Antoine Papiernik(11) | 34,177 | * | ||||||
Maria Sainz(12) | 4,592 | * | ||||||
Sara Toyloy(13) | 2,937 | * | ||||||
Jay Watkins(14) | 105,490 | * | ||||||
All current executive officers and directors as a group (11 persons)(15) | 1,053,814 | 2.8 |
* | Represents less than 1% of our outstanding common stock. |
(1) | The number of shares reported is based solely on information disclosed on a Statement on Schedule 13G, Amendment No. 3, filed with the SEC on January 24, 2024, reporting beneficial ownership of our common stock as of December 31, 2023 by BlackRock, Inc. (“BlackRock”), a Delaware corporation, on behalf of itself as a parent holding company or control person for the following subsidiaries: (i) BlackRock Life Limited; (ii) BlackRock Advisors, LLC; (iii) Aperio Group, LLC; (iv) BlackRock (Netherlands) B.V.; (v) BlackRock Fund Advisors; (vi) BlackRock Institutional Trust Company, National Association; (vii) BlackRock Asset Management Ireland Limited; (viii) BlackRock Financial Management, Inc.; (ix) BlackRock Asset Management Schweiz AG; (x) BlackRock Investment Management, LLC; (xi) BlackRock Investment Management (UK) Limited; (xii) BlackRock Asset Management Canada Limited; (xiii) BlackRock (Luxembourg) S.A.; (xiv) BlackRock Investment Management (Australia) Limited; (xv) BlackRock Advisors (UK) Limited; and (xvi) BlackRock Fund Managers Ltd. Of the aggregate 3,740,596 shares of our common stock reported as beneficially owned in such capacity, BlackRock reported sole voting power with respect to 3,650,730 shares and sole dispositive power with respect to 3,740,596 shares. BlackRock’s principal business office address is 50 Hudson Yards, New York, NY 10001. |
(2) | The number of shares reported is based solely on information disclosed on a Statement on Schedule 13G, Amendment No. 4, filed with the SEC on February 13, 2024, reporting beneficial ownership of our common stock as of December 29, 2023 by The Vanguard Group, Inc. (“Vanguard”), a Pennsylvania corporation, in its capacity as a registered investment adviser. Pursuant to the aforementioned Statement, these securities are beneficially owned by Vanguard through managed accounts belonging to its clients. Of the total number of shares of our common stock reported as beneficially owned, Vanguard reported that it has sole voting power with respect to none of the shares, shared voting power with respect to 15,957 shares, sole dispositive power with respect to 3,578,704 shares, and shared dispositive power with respect to 55,016 shares. Vanguard’s principal business office address is 100 Vanguard Boulevard, Malvern, PA 19355. |
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(3) | The number of shares reported is based solely on information disclosed on a Statement on Schedule 13G filed with the SEC on February 8, 2024, which reported an aggregate 2,500,594 shares of our common stock directly or indirectly beneficially owned, as of December 29, 2023 by: (i) Wellington Management Group LLP; (ii) Wellington Group Holdings LLP; and (iii) Wellington Investment Advisors Holdings LLP (collectively, the “Wellington Holding Companies”) as well as (iv) Wellington Management Company LLP (“Wellington US” and, together with the Wellington Holding Companies, the “Wellington Affiliates”) each in its respective capacity as a holding company or registered investment adviser. Further, on the Statement, the Wellington Affiliates reported direct or indirect beneficial ownership of our common stock on behalf of themselves and as parent holding companies and/or control persons for the following subsidiary investment advisers: (v) Wellington Management Canada LLC; (vi) Wellington Management Singapore Pte Ltd; (vii) Wellington Management Hong Kong Ltd; (viii) Wellington Management International Ltd; (ix) Wellington Management Japan Pte Ltd; and (x) Wellington Management Australia Pty Ltd. Of the total number of shares of our common stock reported as beneficially owned, the Wellington Holding Companies reported shared voting power with respect to 2,274,412 shares and shared dispositive power with respect to 2,500,594 shares, and Wellington US reported shared voting power with respect to 2,260,495 shares and dispositive power with respect to 2,437,153 shares. The principal business office address of each of the aforementioned parties is c/o Wellington Management Company LLP, 280 Congress Street, Boston, MA 02210. |
(4) | The number of shares reported is based solely on information disclosed on a Statement on Schedule 13G, Amendment No. 5, filed with the SEC on February 9, 2024, reporting beneficial ownership of our common stock as of December 31, 2023 by FMR LLC, a Delaware limited liability company, and Abigail P. Johnson. According to the aforementioned Statement, the following subsidiaries of parent holding company FMR LLC may also be deemed to beneficially own securities reported by it: (a) FIAM LLC, (b) Fidelity Institutional Asset Management Trust Company, (c) Fidelity Management & Research Company LLC, (d) Fidelity Management Trust Company, and (e) Strategic Advisers LLC (collectively, the “FMR Affiliates”). Abigail P. Johnson is the Director, Chairman, and Chief Executive Officer of FMR LLC, and may be deemed to exercise voting and investment discretion over securities held by FMR LLC or the FMR Affiliates. Additionally, according to the Statement, certain members of the Johnson family who have entered into a voting agreement with respect to their aggregate equity ownership of FMR LLC may be deemed to form a controlling group with respect to FMR LLC pursuant to the Investment Company Act of 1940. The address of each of the aforementioned parties is 245 Summer Street, Boston, MA 02210. |
(5) | Consists of (a) 94,954 shares of our common stock owned directly by Mr. Godshall, (b) an aggregate 376,766 shares of our common stock underlying vested Company Options, and (c) 2,460 shares of our common stock underlying RSUs which will vest within 60 days following March 31, 2024. |
(6) | Consists of (a) 229 shares of our common stock owned directly by Mr. Puckett, (b) an aggregate 135 shares of our common stock underlying vested Company Options, and (c) 407 shares of our common stock underlying RSUs which will vest within 60 days following March 31, 2024. Mr. Puckett served as our Chief Financial Officer until February 5, 2024. |
(7) | Consists of (a) 22,164 shares of our common stock owned directly by Mr. Zacharias, (b) an aggregate 27,709 shares of our common stock underlying vested Company Options, and (c) 1,035 shares of our common stock underlying RSUs which will vest within 60 days following March 31, 2024. |
(8) | Consists of (a) 497 shares of our common stock directly owned by Ms. Francis, (b) 3,551 shares of our common stock directly owned by the David and Laura Francis Joint Revocable Trust, of which Ms. Francis and her spouse are co-trustees and (c) an aggregate 13,690 shares of our common stock underlying vested Company Options which are held directly by Ms. Francis. |
(9) | Consists of (a) 4,545 shares of our common stock owned directly by Mr. Larkin and (b) an aggregate 28,688 shares of our common stock underlying vested Company Options. |
(10) | Consists of (a) 285,791 shares of our common stock directly owned by Dr. Moll, (b) an aggregate 33,774 shares of our common stock underlying vested Company Options which are directly held by Dr. Moll and (c) 994 shares of our common stock underlying vested RSUs. |
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(11) | Consists of 34,177 shares held directly by Sofinnova Capital VII FCPR (“Sofinnova VII”). Mr. Papiernik, a member of our Board of Directors, is also a managing partner of Sofinnova Partners SAS, a French corporation (“Sofinnova SAS”), which is the management company of Sofinnova VII. By virtue of Mr. Papiernik’s employment agreement with Sofinnova SAS, beneficial ownership and pecuniary interest in the securities ascribed to Mr. Papiernik in the first sentence of this footnote has been assigned to Sofinnova VII. Additionally, as its management company, Sofinnova SAS, may be deemed to have sole voting and dispositive power over the shares held by Sofinnova VII. The managing partners of Sofinnova SAS, Denis Lucquin, Antoine Papiernik (a member of our Board of Directors) and Monique Saulnier, may be deemed to have shared voting and dispositive power with respect to the securities reported in this row. The address of each of the aforementioned parties is Sofinnova Partners, Immeuble le Centorial, 16-18 Rue du Quatre-Septembre, 75002 Paris, France. |
(12) | Consists of (a) 3,598 shares of our common stock held directly by Ms. Sainz as of March 31, 2024 and (b) 994 shares of our common stock underlying vested RSUs. |
(13) | Consists of (a) 1,943 shares of our common stock held directly by Ms. Toyloy as of March 31, 2024 and (b) 994 shares of our common stock underlying vested RSUs. |
(14) | Consists of (a) 3,796 shares of our common stock held directly by Mr. Watkins and (b) an aggregate 101,694 shares of our common stock underlying vested Company Options. |
(15) | Consists of an aggregate total of (a) 455,016 shares of our common stock, (b) 582,321 shares of our common stock underlying vested Company Options, and (c) 6,477 shares of our common stock underlying RSUs which are vested or will vest within 60 days following March 31, 2024. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this itemWe describe below transactions and series of similar transactions, since the beginning of our last fiscal year or which are currently proposed, to which we were a party or will be includeda party, in which:
the amounts involved exceed $120,000; and
any of our directors, any nominees for director, executive officers or beneficial holders of more than 5% of any class of our capital stock, or any member of their immediate family, or any entity affiliated with any of the foregoing persons, had or will have a direct or indirect material interest.
Other than as described below, there have not been, nor are there any currently proposed, transactions or series of similar transactions meeting these criteria to which we have been or will be a party other than compensation arrangements, which are described where required under the section titled “Executive Compensation”.
Director and Officer Indemnification
We have entered into an indemnification agreement with each of our directors and executive officers. These indemnification agreements and our Restated Certificate of Incorporation and Bylaws indemnify each of our directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law.
Policies and Procedures for Related Party Transactions
Our Board of Directors adopted a written Related Person Transaction Policy in connection with our initial public offering, setting forth the policies and procedures for the review and approval or ratification of related-party transactions. Pursuant to its charter, the Audit Committee is responsible for reviewing all related party transactions in accordance with applicable law, SEC and Nasdaq rules and regulations and our Related Person Transaction Policy. This policy covers any transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant and a related party had or will have a direct or indirect material interest, as determined by the Audit Committee, including, without limitation, for purchases of goods or services by or from the related party or entities in which the related party has a material interest, and indebtedness, guarantees of indebtedness or employment by us of a related party.
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All related party transactions described in this section occurred prior to adoption of the Related Person Transaction Policy and as such, these transactions were not subject to the approval and review procedures set forth in the Proxy Statementpolicy. However, these transactions were reviewed and is incorporated hereinapproved by reference.our Board of Directors.
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Fiscal Year Ended December 31, | ||||||||
Description of Services Provided by EY | 2023 | 2022 | ||||||
Audit Fees (1) | $ | 4,755,025 | $ | 2,047,836 | ||||
Audit Related Fees (2) | 578,000 | 298,813 | ||||||
Tax Fees (3) | 66,696 | 149,600 | ||||||
All Other Fees (4) | — | 1,939 | ||||||
TOTAL | $ | 5,399,721 | $ | 2,498,188 | ||||
(1) | Audit fees for EY for 2023 and 2022 were for professional services rendered for the audits of our financial statements, review of interim financial statements, assistance with registration statements filed with the SEC and services that are normally provided by EY in connection with statutory and regulatory filings or engagements. |
(2) | Audit related fees for EY 2023 and 2022 were for assurance and other services that were reasonably related to the performance of the audit or review of our financial statements and services related to other permissible advisory services. |
(3) | Tax fees for EY for 2023 and 2022 pertained to tax compliance and consulting services. |
(4) | All other fees for EY for 2022 relate to professional services not included in the categories above, including a subscription to a database for accounting research. |
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) We have filed the following documents as part of this Annual Report on Form 10-K:
1. Financial Statements: The financial statements included in “Index to Consolidated Financial Statements” in Part II, Item 8 are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules: All schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes.
3. Exhibits.
Exhibit Index
|
|
|
| Incorporation by Reference | ||||||
Exhibit Number |
| Description |
| Form |
| File No. |
| Exhibit(s) |
| Filing Date |
3.1 |
|
| 8-K |
| 001-38829 |
| 3.3 |
| March 12, 2019 | |
3.2 |
|
| 8-K |
| 001-38829 |
| 3.4 |
| March 12, 2019 | |
4.1 |
|
| S-1 |
| 333-229590 |
| 4.1 |
| February 8, 2019 | |
4.2 |
|
| S-1 |
| 333-229590 |
| 4.2 |
| February 8, 2019 | |
4.3* |
| Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 |
|
|
|
|
|
|
|
|
10.1 |
|
| S-1 |
| 333-229590 |
| 10.1 |
| February 8, 2019 | |
10.2 |
|
| 10-K |
| 001-38829 |
| 10.2 |
| March 12, 2020 | |
10.3† |
|
| S-1 |
| 333-229590 |
| 10.3 |
| February 8, 2019 | |
10.4† |
| 2019 Equity Incentive Plan and form of Stock Option Agreement |
| S-1/A |
| 333-229590 |
| 10.4 |
| February 25, 2019 |
10.5* |
|
|
|
|
|
|
|
|
| |
10.6* |
| Form of Global Performance-Based Restricted Stock Unit Award Agreement |
|
|
|
|
|
|
|
|
10.7† |
|
| S-1/A |
| 333-229590 |
| 10.5 |
| February 25, 2019 | |
10.8† |
|
| S-1 |
| 333-229590 |
| 10.6 |
| February 8, 2019 | |
10.9† |
|
| S-1 |
| 333-229590 |
| 10.7 |
| February 8, 2019 | |
10.10† |
|
| 10-Q |
| 001-38829 |
| 10.1 |
| November 8, 2019 | |
10.11† |
|
| S-1 |
| 333-229590 |
| 10.8 |
| February 8, 2019 | |
10.12† |
|
| S-1 |
| 333-229590 |
| 10.9 |
| February 8, 2019 | |
10.13† |
| Form of Separation Pay Agreement for Executive Officers (other than CEO) |
| 10-Q |
| 001-38829 |
| 10.2 |
| November 8, 2019 |
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10.14* |
| Amended and Restated Non-Employee Director Compensation Policy |
|
|
|
|
|
|
|
|
10.15 |
|
| S-1 |
| 333-229590 |
| 10.10 |
| February 8, 2019 | |
10.16 |
|
| 10-K |
| 001-38829 |
| 10.15 |
| March 12, 2020 | |
10.17 |
|
| 8-K |
| 001-38829 |
| 10.1 |
| September 28, 2021 | |
10.18 |
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| 8-K |
| 001-38829 |
| 10.2 |
| September 28, 2021 | |
21.1* |
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23.1* |
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24.1* |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS* |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104* |
| The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 has been formatted in Inline XBRL and contained in Exhibit 101 |
* Filed herewith45
† Indicates a management contract or compensatory plan or arrangement.
116
Item 16. Form 10-K Summary46
None.
* | Filed herewith |
^ | Schedules (or similar attachments) have been omitted from this exhibit pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon request. |
† | Indicates a management contract or compensatory plan or arrangement. |
# | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
11747
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment No. 1 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.authorized.
Shockwave Medical, Inc. | |||||||
Date: | By: | /s/ Douglas Godshall | |||||
Douglas Godshall | |||||||
President, Chief Executive Officer & Director |
POWER OF ATTORNEY AND SIGNATURES48
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Douglas Godshall and Dan Puckett, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
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118