Apollo Endosurgery, Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number: 001-35706
APOLLO ENDOSURGERY, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 16-1630142 (I.R.S. Employer Identification No.) | |||||||
1120 S. Capital of Texas Highway, Building 1, Suite #300, Austin, Texas (Address of principal executive offices) | 78746 (Zip Code) | |||||||
Registrant’s telephone number (512) 279-5100 | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of Exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value per share | APEN | The Nasdaq Global Market | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | |||||||
Non-accelerated filer ☒ | Smaller reporting company ☒ | |||||||
Emerging growth company ☐ | ||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | ||||||||
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recover period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
The aggregate market value of the common stock held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors of the registrant are affiliates of the registrant) was computed based on the adjusted close price of $3.65 as reported on the Nasdaq Global Market on June 30, 2022 is $131,397,602.
As of March 15, 2023, there were 57,971,919 shares of the issuer’s $0.001 par value common stock issued and outstanding.
APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 9B. | Other Information | |||||||
As used herein, “Apollo,” “we,” “us,” “our” and “Company” refer to Apollo Endosurgery, Inc. and its subsidiaries, unless the context otherwise requires.
In this Annual Report on Form 10-K, references to U.S. dollars, USD or $ are to U.S. Dollars.
Investors and others should note that we announce material financial information to our investor using our investor relations website (https://ir.apolloendo.com/). SEC filings, public conference calls and webcasts. We use these channels to communicate with our members and the public about our company, our services, and other issues. Therefore, we encourage investors, the media, and others interested in our company to review the information we provide on the channels listed above.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements.
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Forward-looking statements reflect our current views with respect to future events, are based on assumptions (disclosed or undisclosed) and may be limited or incomplete, and are subject to risks, uncertainties and other important factors. We discuss many of these risks in this Annual Report on Form 10-K in greater detail in the section entitled “Risk Factors” under Part I, Item 1A below. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements as predictions of future events. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report on Form 10-K. You should read this Annual Report on Form 10-K and the documents that we incorporate by reference in and have filed as exhibits to this Annual Report on Form 10-K, completely and with the understanding that our actual future results may be materially different from what we expect.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:
•Failure to complete, or delays in completing, the Merger with Boston Scientific announced on November 29, 2022 could materially and adversely affect our results of operations and our stock price.
•Uncertainty about the Merger or negative publicity related to the Merger may adversely affect relationships with existing or prospective physicians, patients, payors, hospitals, surgical centers partners and distributors, suppliers, employees and other business partners, whether or not the Merger is completed.
•Our business has been and likely will continue to be adversely affected by the COVID-19 pandemic.
•We have incurred significant operating losses since inception and may not be able to achieve profitability.
•Our long-term growth depends on our ability to successfully develop the endobariatric weight loss and therapeutic endoscopy markets and successfully commercialize our Endoscopy products.
•A weakening of U.S. and international macroeconomic conditions, including, but not limited to, inflation and recessionary impacts, may harm our sales and results of operations.
•Our future growth may depend on physician adoption and recommendation of procedures utilizing our products.
•Our future growth depends on patient awareness of and demand for procedures that use our products.
•Our future growth depends on developing clinical data that demonstrates the safety and efficacy of our products and the procedures that use our products.
•Our future growth depends on obtaining and maintaining adequate coverage and reimbursement for procedures performed with our products.
•The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits and/or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
•We are dependent on certain suppliers, vendors and manufacturers, and supply or service disruptions could materially adversely affect our business and future growth.
•We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
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•If our facilities or the facility of a supplier become inoperable, we will be unable to continue to research, develop, manufacture and commercialize our products and, as a result, our business will be harmed.
•Our products are subject to extensive regulation by the FDA and foreign regulatory authorities, including the requirement to obtain premarket approval and the requirement to report adverse events and violations of the U.S. Federal Food, Drug and Cosmetic Act that could present significant risk of injury to patients. Even though we have received FDA approval of our PMA applications and 510(k) clearances to commercially market our products, we will continue to be subject to extensive regulatory oversight.
•If our products contribute to a serious injury or death, or malfunction in certain ways, we may be subject to liability claims and will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
•If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
•Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.
•We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.
•We have substantial indebtedness which contain restrictive covenants that may limit our operating flexibility and our failure to comply with the covenants and payment requirements of our indebtedness may subject us to increased interest expenses, lender consent and amendment costs or adverse financial consequences.
•We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.
•Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
•Our business and operations would suffer in the event of system failures, security breaches or cyber-attacks.
The summary risk factors described above should be read together with the text of the full risk factors below, in the section titled “Risk Factors” in Part II, Item 1A. and the other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file with the Securities and Exchange Commission. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial may also harm our business, financial condition, results of operations and future growth prospects.
PART I
ITEM 1. BUSINESS
Overview
We are a medical technology company primarily focused on the design, development and commercialization of next-generation, less invasive medical devices to advance gastrointestinal therapeutic endoscopy.
Our Endoscopy product portfolio consists of the OverStitch® Endoscopic Suturing System, X-Tack® Endoscopic HeliX Tacking System, Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™, Apollo REVISE Sx™ Systems and Orbera® Intragastric Balloon.
Our products are primarily used by gastroenterologists and bariatric surgeons in a variety of settings to treat multiple gastrointestinal (“GI”) conditions including closure of acute perforations and chronic fistulas; tissue closure after the removal of abnormal neoplastic lesions in the esophagus, stomach or colon (also known as polypectomy, endoscopic submucosal dissections, endoscopic mucosal resections and endoscopic full thickness resections); the treatment of swallowing disorders (peroral endoscopic myotomy, or “POEM”); esophageal stent fixation and obesity.
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Beginning in 2021, we have revitalized our organization with the addition of key members to our senior leadership team, including our Chief Executive Officer, Chief Financial Officer, Vice President of U.S. Sales, Vice President of Marketing and Medical Education, and Vice President of Market Access and Reimbursement. By leveraging our team’s extensive experience to create clinically distinct solutions that improve patient lives, we have created a strong foundation for growth and believe that we are well-positioned to positively impact patient care and address substantial unmet clinical needs in gastroenterology and bariatrics. We intend to become a technology provider of choice for doctors, hospitals, healthcare systems, and payors.
Proposed Acquisition by Boston Scientific Corporation
On November 29, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Scientific Corporation (“Boston Scientific”) and Textile Merger Sub, Inc., an indirect wholly owned subsidiary of Boston Scientific (“Merger Sub”), providing for the acquisition of Apollo by Boston Scientific. Upon the terms and subject to the conditions of the Merger Agreement, Boston Scientific will acquire Apollo via the merger of Merger Sub with and into Apollo, with the separate corporate existence of Merger Sub thereupon ceasing and Apollo continuing as the surviving company and an indirect wholly owned subsidiary of Boston Scientific (the “Merger”). The Merger was approved by our stockholders on February 9, 2023. The consummation of the Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. If the Merger is consummated, each of our stockholders will be entitled to receive $10.00 in cash, without interest thereon, for each share of our common stock that the stockholder owns immediately prior to the time at which Merger has become effective, unless the stockholder is entitled to and has properly exercised and not waived, withdrawn, failed to perfect or otherwise lost the stockholder’s appraisal rights.
The Merger Agreement contains certain customary termination rights for Apollo and Boston Scientific. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, Boston Scientific will be obligated to pay to the Company a termination fee equal to (i) $30.0 million in cash if, prior to such termination, Boston Scientific has not exercised its right to extend the date by which the Merger must become effective pursuant to the Merger Agreement (the “Outside Date”) from January 31, 2024 to July 31, 2024, or (ii) $50.0 million in cash if, prior to such termination, Boston Scientific has exercised its right to extend the Outside Date from January 31, 2024 to July 31, 2024. If the Merger Agreement is terminated under other certain specified circumstances, Apollo will be obligated to pay to Boston Scientific a termination fee equal to $19.0 million in cash.
See the section titled “Risk Factors — Risks Related to our Proposed Transaction with Boston Scientific” included under Part I, Item 1A of this Annual Report on Form 10-K for more information regarding the risks associated with the Merger.
Recent Developments
In July 2022, we announced the marketing authorization of the Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ Systems through the U.S. Food and Drug Administration’s (FDA) De Novo Classification process, a rigorous pre-market pathway for low-to moderate-risk devices without a predicate. These products are the first and only devices authorized by the FDA for endoscopic sleeve gastroplasty (ESG) and endoscopic bariatric revision. In the third quarter of 2022, we began education, marketing and training programs to increase awareness, use and adoption of our suturing technologies in weight loss procedures in the U.S. We have initiated a limited launch and completed our first commercial sale in the first quarter of 2023.
Also in July 2022 the landmark Multi-center ESG Randomized Interventional Trial (MERIT) was published in The Lancet. The MERIT study is a multi-center, prospective randomized clinical trial evaluating the safety and effectiveness of the Endoscopic Sleeve Gastroplasty (ESG) procedure, a minimally invasive, endoscopic weight loss procedure performed with Apollo Endosurgery’s OverStitch® Endoscopic Suturing System. In the study, patients with Body Mass Index (BMI) ≥30 and ≥40 kg/m² were randomized to treatment with ESG and lifestyle modification or to a control group which involved lifestyle modification alone. At the conclusion of the primary endpoint (52 weeks), qualifying patients in the control group were allowed to cross-over to ESG if they met certain conditions. Nine U.S. centers participated in the study, representing both gastroenterology and bariatric surgery practices from academic and community settings. One hundred and fifty-seven subjects completed the study through 52 weeks of follow up (68 treatment and 89 control subjects). Seventy-two control patients crossed over to treatment at 52 weeks, and both groups were followed an additional 52 weeks. Key results for patients undergoing ESG include:
•49.2% excess body weight loss at 12 months in the treatment group (vs 3.2% EWL in control);
•16.3% average total body weight loss in the responder group;
•68.3% of responders maintained at least 25% EWL at 104 weeks;
•improvements in quality of life, eating behaviors, and depression; and
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•three ESG patients (2.0%) experienced a device or procedure related serious adverse event, all of which resolved and did not require intensive care or surgical intervention.
Corporate Background
Apollo was founded in 2005 and is incorporated in Delaware with headquarters in Austin, Texas. The Company was founded to develop and commercialize innovations originating from a collaboration of physicians from the Mayo Clinic, Johns Hopkins University, Medical University of South Carolina, the University of Texas Medical Branch and the Chinese University of Hong Kong, who called themselves the Apollo Group. The work of the Apollo Group resulted in a significant portfolio of patents in the field of flexible endoscopy and minimally invasive surgery aimed at minimizing the trauma of surgical access by taking advantage of natural orifices to deliver surgical tools to targeted areas.
In December 2013, we entered into an asset purchase agreement to acquire the obesity intervention division of Allergan, Inc. The assets acquired were the Lap-Band® System and related laparoscopic surgery accessories (the Surgical product line) and the Orbera Intragastric Balloon System. In conjunction with this purchase agreement, we entered into several agreements whereby Allergan agreed to provide manufacturing and distribution support over a two-year period as we established our own capabilities. Our 2013 acquisition of Allergen’s obesity intervention division included their international sales distribution channel, which continues to be a strategic asset for us. In December 2018, we subsequently divested our assets related to the Surgical product line, including the LapBand system. Currently, over 40% of our revenue is derived from customers outside the United States.
In December 2016, we completed a business combination (the “Lpath Merger”) with Lpath, Inc. (“Lpath”), a publicly traded company. Following the Lpath Merger, Lpath was renamed “Apollo Endosurgery, Inc.” and our common stock began trading on The Nasdaq Global Market under the symbol “APEN.”
“Orbera”, “OverStitch”, “X-Tack”, “Apollo ESG”, “Apollo REVISE”, the Apollo logo and other trademarks or service marks of Apollo Endosurgery, Inc. appearing in this annual report are the property of Apollo Endosurgery, Inc. Other trademarks, service marks or trade names appearing in this annual report are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us, by these other companies.
Today, we have offices in the United Kingdom and Italy that oversee regional sales and distribution activities outside the U.S. and a manufacturing facility in Costa Rica. All other activities are managed and operated from our facilities in Austin, Texas. Our products are offered in over 75 countries today, across a wide range of patient indications.
Our principal executive offices are located at 1120 S. Capital of Texas Highway, Building 1, Suite 300, Austin, Texas 78746. Our telephone number is (512) 279-5100. We have a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. A copy of this document is published on the Apollo website at www.apolloendo.com/compliance and may be obtained free of charge by writing to the VP, Legal and Compliance at our principal executive office or by email at investor-relations@apolloendo.com. The information in or accessible through the Apollo website referred to above are not incorporated into, and are not considered part of, this report.
Apollo’s Market and Strategy
Our vision is to be the industry leader and preferred technology partner for delivering innovative, cost-effective minimally invasive gastrointestinal and bariatric products that improve patient care. We provide products that advance endoscopic solutions for a wide range of patient needs ranging from gastrointestinal defect closure and stent management to the treatment of obesity. Our endoscopy products allow these solutions to be delivered endolumenally by an endoscopist using a flexible endoscope, thus providing patients with treatment options that are designed to remove or defer the need for traditional surgery.
Our endoscopy products are designed to treat a variety of gastrointestinal conditions including closure of gastrointestinal defects, managing gastrointestinal complications and the treatment of obesity. For the year ended December 31, 2022, 70% of our total sales related to the OverStitch Endoscopic Suturing System and X-Tack Endoscopic HeliX Tacking System products and 29% related to the Orbera Intragastric Balloon System products.
We believe the addressable global market for intragastric balloons is about $100 million, and the historical addressable market for our endoscopy products is approximately $215 million, consisting of a $175 million primarily U.S. market for advanced upper gastrointestinal defect closure. We intend to expand our future potential addressable market through new indications for our current products, new applications for existing solutions, increased clinical support and increased reimbursement.
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We believe that, through the development of our current endoscopic suturing system, the advanced gastrointestinal procedures market, which includes defect closures in both the upper and lower gastrointestinal tracts, presents an aggregate global market opportunity of approximately $850 million, including the potential U.S. market for polyp removal defect closures, which is expected to be in excess of $500 million. Additionally, we aim to expand the indications for our Orbera and OverStitch products to continue addressing the approximately $3.9 billion global endobariatric weight loss market.
Our development strategy is to further establish the medical relevancy of our products in areas of unmet medical need, such as addressing the needs of the approximately 10 million U.S. patients with non-alcoholic steatohepatitis, or NASH. NASH is the leading cause of liver transplants in women and patients over the age of 65. NASH treatment presents a large and growing market opportunity, having grown from $1.9 billion in 2019 to $2.9 billion in 2021 and projected to reach $54 billion by 2027, representing a 59% estimated compound annual growth rate.
By leveraging our team’s extensive experience to create clinically distinct solutions that improve patient lives, we have created a strong foundation for growth and believe that we are well-positioned to positively impact patient care and address substantial unmet clinical needs in gastrointestinal and weight loss applications. We intend to become a partner of choice for doctors, hospitals, healthcare systems, and payors. We are committed to attracting, engaging, and retaining the best talent in the industry.
We intend to continue to pursue regulatory clearance in key international markets where we believe there is strong market demand for our products to continue to broaden our portfolio of products through internal product development efforts, and will consider acquisitions that complement our current business.
The key elements of our strategy include:
Support the continued adoption of our endoscopy products and establish Apollo as the market leader in GI defect closure and fixation.
We intend to establish endoscopic suturing as a standard of care in GI defect closure and fixation through the continued market penetration of our flagship product, the OverStitch Endoscopic Suturing System, and the X-Tack Endoscopic HeliX Tacking System, which we launched in December 2020, expanding the clinical utility of our suturing technology to a larger population of gastrointestinal procedures in the lower GI tract.
Interventional and therapeutic gastroenterology is a high growth area within medicine, and our suturing products are used in both the upper and lower GI tract. Examples of upper GI applications include fistula closure, esophageal stent fixation, and tunnel closure for peroral endoscopic myotomy, or POEM. Fistulas are chronic or acute defects that can form between two sites in the GI tract, cavity or skin, often occurring as a result of abdominal surgery. Esophageal stents are often used as part of the treatment of esophageal blockage from cancers or benign scarring and fixation is designed to prevent the premature migration of the stent, especially in benign conditions, which is common and costly. Clinical evidence shows that fully covered esophageal stents that are not fixed in place will have as high as a 60% migration rate. Suturing stents in place helps reduce stent migration by preventing repeat procedures and complications for the patient.
In the lower GI tract, there are over 21 million colonoscopies performed annually in the United States alone. Cancer screening followed by the endoscopic resection of complex flat and large polyps can provide patients with an alternative to surgical resections. Delayed bleeding is a general risk of endoscopic resection and patients over the age of 50 are more often on anti-thrombotic (blood thinning) medications which carry a higher risk of bleeding. Suturing the resection site aids in healing and helps prevent delayed bleeding following the procedure.
Currently, we estimate that our products have been used in over 90% of the top 20 research hospitals and top 25 GI specialized hospitals in the U.S. We intend to leverage our clinical experience in these leading academic institutions and hospitals to further penetrate existing accounts, as well as expand our global user base, through clinical research, clinical selling and training, peer-to-peer education programs, industry and society collaborations, product enhancement, new product development initiatives and expanding regulatory indications and obtaining new regulatory approvals in strategic markets.
Create an endoscopic weight loss franchise
We intend to leverage our unique product portfolio to address the growing global obesity crisis. We believe that our Orbera intragastric balloon and OverStitch system provide a comprehensive set of scalable, safe, effective, organ-sparing solutions. The underlying procedures may be performed in an outpatient facility by either a gastroenterologist or a bariatric surgeon, positioning us to increase market penetration and potentially expand the market for weight loss procedures.
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Worldwide obesity numbers have nearly tripled since 1975. More than 650 million people are now considered clinically obese. In the U.S., more than 100 million adults are obese, comprising in excess of 40% of the adult population. Obesity related conditions including heart disease, stroke, type 2 diabetes, liver disease, and certain types of cancer are among the leading causes of preventable, premature death. Obesity costs the U.S. health care system more than $170 billion a year, yet less than 1% of eligible obese patients are treated with bariatric surgical weight loss procedures each year.
Traditional obesity intervention has been bariatric surgery (typically, gastric bypass, sleeve gastrectomy or gastric banding), which is mostly performed laparoscopically. Today, based on U.S. population demographics and physician society reported bariatric procedure volumes, less than 1% of the population eligible for bariatric surgery elects to have a procedure each year. Based on published surveys, the eligible patients’ primary resistance to bariatric surgery is fear of surgery in general, and more specifically fear associated with the invasive nature of bariatric surgery, permanent anatomical alteration, potential for non-permanent results and the post-operative severe complications that have been reported with bariatric surgery.
Our Orbera intragastric balloon is currently a leading gastric weight loss balloon worldwide, with over 450,000 balloons placed globally to date. We expect to leverage recent market momentum, including clinical practice guidelines published by the American Gastroenterology Association in 2021 recommending the use of intragastric balloons for obesity management, to drive growth for our Orbera products.
One of the most promising newly developed weight-loss procedures is commonly referred to as endoscopic sleeve gastroplasty (“ESG”). ESG is a minimally-invasive (nonsurgical) weight loss procedure that uses Apollo ESG™ or the OverStitch Endoscopic Suturing System to transorally reduce the volume of a person’s stomach; similar to the goal of a surgical sleeve gastrectomy procedure but without the invasiveness and need for amputation of a significant portion of the patient’s stomach. The potential advantages of an ESG procedure include maintaining the original structural and functional integrity of the stomach, providing clinically meaningful weight loss, low adverse events, reversibility, short recovery time, and avoidance of surgical incisions. We believe the application of Apollo ESG™ in the U.S. or OverStitch in markets outside the U.S. to bariatric weight loss procedures addresses many of the concerns that patients have about traditional bariatric surgeries. In addition, the ESG procedure has the potential to fill an important clinical gap between diet, exercise and medications for patients with a relatively low BMI and traditional bariatric surgeries that are often reserved for patients with a BMI > 40 kg/m2. To date, there have been more than 6,500 participants studied in ESG clinical trials. Clinically, these trials show average excess body weight loss greater than 50% and a low adverse event rate. In fact, clinical studies of the ESG procedures typically demonstrate a complication rate of less than 2%, whereas published studies of sleeve gastrectomy and RNY gastric bypass surgeries have reported complication rates ranging from 5% to 26%.
In addition, we believe that endoscopic revisions of bariatric surgeries present another potential market for application of our Apollo REVISE™ products. Between 2011 and 2019, over 1.4 million laparoscopic sleeve and gastric bypasses were performed in the U.S. alone. We estimate that 30% to 50% of these are potential revision candidates. In 2019, more than 43,000 revision procedures were performed in the U.S. This revision segment is the fastest growing segment of the traditional bariatric surgery market. In a peer-reviewed study, published in 2021, that compared results at five years, endoscopic revision demonstrated equivalent efficacy and an improved safety profile as compared to surgical revision. We estimate that over 70% of our top 100 accounts in the U.S. are already performing revision procedures.
In July 2022, we announced the marketing authorization of Apollo ESG, Apollo ESG SX, Apollo REVISE and Apollo REVISE Sx Systems through the U.S. Food and Drug Administration’s (FDA) De Novo Classification process, a rigorous pre-market review pathway for low-to moderate-risk devices without a predicate. These products are the first and only devices authorized by the FDA for endoscopic sleeve gastroplasty (ESG) and endoscopic bariatric revision.
Apollo Products
The Apollo Endoscopy products consist primarily of the OverStitch Endoscopic Suturing System, X-Tack Endoscopic HeliX Tacking System (collectively “ESS”) and the Intragastric Balloon System (most often branded as Orbera). In July 2022, we announced the marketing authorization of the Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ Systems through the FDA De Novo Classification process. These products are the first and only devices authorized by the FDA for endoscopic sleeve gastroplasty (ESG) and endoscopic bariatric revision.
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OverStitch Endoscopic Suturing System
The OverStitch and OverStitch Sx Endoscopic Suturing System (“ESS”, “OverStitch” or “Sx”) enables advanced endoscopic procedures from within the GI tract, or endolumenally, by allowing physicians to suture, especially full-thickness, and secure the approximation of tissue. OverStitch and OverStitch Sx are currently one of the few U.S. cleared flexible endoscopic suturing devices capable of full-thickness suturing of tissue. OverStitch is a single-use suturing device that is attached to a flexible endoscope. The flexible endoscope, with the OverStitch device attached, allows a physician to access a patient’s upper and lower GI tract and accurately suture the tissue inside the GI tract for different clinical needs, including a range of defect repairs, esophageal stent fixation to prevent stent migration, and volumetric space reduction. The OverStitch Endoscopic Suturing System received FDA 510(k) clearance in August 2008 and CE Mark in November 2012. The OverStitch Sx Endoscopic Suturing System received FDA 510(k) clearance in June 2018 and CE Mark in November 2018.
The OverStitch device that was 510(k) cleared in August 2008 is compatible with a specific dual channel flexible endoscope, sold by Olympus, that has limited market presence, representing less than five percent of the flexible endoscopes in hospitals and clinics around the world. We have updated the OverStitch labeling to include both Olympus and Fujinon endoscopes as compatible with OverStitch, reducing our reliance on Olympus. Beginning in November 2018, we began the first commercial shipments of the OverStitch Sx that is compatible with four major scope manufacturers and over 20 single-channel flexible endoscopes with diameters ranging from 8.8 mm to 9.8 mm. These Sx compatible single-channel endoscopes represent the majority of flexible endoscopes in hospitals and clinics around the world today.
Since its market introduction in 2008, over 100,000 OverStitch units have been sold for procedures worldwide. We estimate that approximately 60% of OverStitch uses in the U.S. were for advanced gastrointestinal therapies. The other uses were for endoscopic sleeve gastroplasty, or ESG, approximately 25%, and bariatric revision, approximately 15%. Outside the U.S., we estimate that the majority of OverStitch uses, approximately 65%, were for ESG. The other uses outside the U.S. were for bariatric revision, approximately 20%, and for advanced gastrointestinal therapies, approximately 15%.
The MERIT-Trial was designed to enroll two hundred patients, stratified into three groups (Obesity, Obesity with hypertension, Obesity with diabetes). The trial has two levels: (1) the randomized study phase with primary outcomes for both treatment and control participants evaluated at twelve months, and (2) the crossover, non-randomized study phase with outcomes for (a) the initial treatment participants at 24 months after their ESG, and (b) the control cross-over participants evaluated at twelve months after their ESG. The MERIT trial subsequently received an Investigational Device Exemption from the FDA in 2019. The primary outcomes for the first level procedures of the study are measured after a one-year follow-up period. The final enrolled patient completed their 12-month follow-up during the fourth quarter of 2020. In June 2021, one of the principal investigators of the MERIT trial reported that, based on a preliminary analysis, the MERIT trial had achieved its primary end points for safety and efficacy, and in October 2021, the primary investigators reported on the primary endpoints at a virtual session of the International Society for Surgery of Obesity (IFSO).
In July of 2022, the MERIT-Trial was published in The Lancet. Key results for patients undergoing ESG include:
•49.2% excess body weight loss at 12 months in the treatment group (vs 3.2% EWL in control);
•16.3% average total body weight loss in the responder group;
•68.3% of responders maintained at least 25% EWL at 104 weeks;
•improvements in quality of life, eating behaviors, and depression; and
•three ESG patients (2.0%) experienced a device or procedure related serious adverse event, all of which resolved and did not require intensive care or surgical intervention.
During 2017, we entered into a Registry Funding Agreement with the American Gastroenterological Association (“AGA”) Center for GI Innovation and Technology to develop and administer a registry (the “AGA Registry”) to collect real-world evidence related to the safety and efficacy of a number of flexible endoscopic suturing-enabled procedures, including the revision of gastric bypass (known as an outlet revision) who have experienced weight regain after their initial bariatric surgery; the fixation of esophageal stents to prevent migration; and other suturing procedures currently in practice. Enrollment and follow up completed in 2021. The resulting data will be used to present the benefits of endoscopic suturing procedures relative to traditional therapies. The registry was closed and data from the registry has been published.
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During 2018, we established a European multi-center, longitudinal data repository for ESG and outlet revision procedures. This registry collected outcomes for over 1,000 patients enrolled across participating European centers related to procedure safety and effectiveness. In addition, a second, multi-center, retrospective data repository for gastrointestinal applications performed using the OverStitch System was also created. The objective of this registry is to collect European demographic, procedural and outcome data when OverStitch is used during various non-bariatric procedures including closure of full thickness and mucosal defects, post-operative leaks, perforations, stent fixation, treatment of gastrointestinal bleeding and other procedures. The goal is to support the clinical use and benefits of endolumenal suturing as well as provide real-world data on safety and effectiveness which can support physicians, patients and payors in making informed decisions. The registries continue and publications have been generated from both.
In July 2022, we received marketing authorization for the Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ systems through the FDA’s De Novo Classification process. The Apollo ESG and Apollo ESG Sx Systems are intended to be used by trained gastroenterologists or surgeons to facilitate weight loss in adults with obesity with Body Mass Index (BMI) between 30 and 50 kg/m2 who have not been able to lose weight or maintain weight loss through more conservative measures. The Apollo REVISE and Apollo REVISE Sx Systems are intended to be used by trained gastroenterologists or surgeons that perform bariatric procedures to facilitate weight loss in adult patients with obesity with BMI between 30 and 50 kg/m2 by enabling transoral outlet reduction (TORe) as a revision to a previous bariatric procedure. The De Novo was approved largely based on the MERIT trial, a multi-center, prospective randomized clinical trial evaluating the safety and effectiveness of ESG compared to a medically monitored regimen of diet and healthy lifestyle.
We recently announced the planned introduction of OverStitch NXT, our next-generation single channel endoscopic suturing system. Key features of OverStitch NXT include several enhancements over our current single channel product, OverStitch SX, including:
•expanded range of addressable anatomy;
•improved physician control of tissue engagement and suturing; and
•intuitive installation; estimated more than 50% faster than our legacy solution.
Since dual channel scopes are often in limited supply and require significant capital outlays, we believe that OverStitch NXT will create multiple opportunities for expanded customer access and adoption in both new and existing accounts. We expect to launch OverStitch NXT in the second half of 2023.
X-Tack Endoscopic HeliX Tacking System
The X-Tack Endoscopic HeliX Tacking System (“X-Tack”) is a novel, through-the-scope, suture-based device designed specifically for closing and healing defects in both the lower and upper gastrointestinal tract. The X-Tack device enables physicians to easily address the challenges commonly encountered when closing large or irregularly shaped defects. The procedure involves suture-tethered HeliX Tacks, independently positioned into healthy tissue adjacent to a defect, then cinched to close the construct. X-Tack fulfills a long-expressed need for advanced closure devices to improve healing and address potential adverse events that can occur following standard colonic polypectomy and endoscopic mucosal resection of complex polyps, such as delayed bleeding or perforation.
Each X-Tack device enables physicians to place up to four individual HeliX Tacks into healthy tissue adjacent to a defect using a novel Persian drill handle. The HeliX Tack design includes barbs on the coil for enhanced tack fixation. Each HeliX Tack has an eyelet tethering it to a suture. Pulling tension on the suture approximates the HeliX Tacks and, in turn, closes the tissue defect. A suture cinch is then used as the final step to secure the suture in place. Because it offers multiple points of fixation, we believe the X-Tack enhances a physician’s ability to overcome challenges of accurately closing large or irregularly shaped defects.
In December 2020, we received 510(k) clearance from the FDA for our X-Tack Endoscopic HeliX Tacking System. We commercially launched the X-Tack system in the U.S. beginning in January 2021. Currently, X-Tack is licensed in ten additional countries, including Brazil, Australia, Israel, Hong Kong, and Thailand. Additional submissions are underway. In December 2022, X-Tack entered review for CE Marking under the European Medical Device Regulation (“MDR”).
The endoscopic removal of upper gastrointestinal and colorectal neoplasia has a 2% risk of perforation and 8-10% risk of delayed bleeding. These two serious adverse events often result in additional endoscopic as well as surgical interventions, hospitalizations, expanded health care costs, and significant distress for both patients and their physicians. The closure of resection sites has been reported to significantly reduce the incidence of these two adverse events and has generated growing advocacy among physician societies.
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Today, closure of polyp resection sites can be accomplished by applying through-the-scope (TTS) metallic (hemostatic) clips, over-the-scope (OTSC) large metallic clips or suturing with our OverStitch device. However, clips have limited use for large wide or irregular shaped defects while suturing requires use of a gastroscope, limiting access to the full length of the colon and also requires removal of the scope from the patient in order to mount the suturing device.
The X-Tack closure device is intended to resolve the limitations of TTS clips, OTSC and endoscopic suturing by offering functionality through the working channel of any standard gastroscope or colonoscope with precise HeliX Tack placement and tight closure of sites of varying shapes and sizes.
Orbera Intragastric Balloon System
The intragastric balloon system (“IGB”, the “Orbera System” or “Orbera”) is currently marketed under three brands depending on geography: the Orbera Intragastric Balloon System, the BIB, and the Orbera365 Managed Weight Loss System (“Orbera365”). Our IGB is a non-surgical alternative for interventional weight loss. Orbera is the global market leader among intragastric balloons and is available in over 75 countries and more than 450,000 units have been sold worldwide. Our IGB is a single silicone balloon that is filled with saline after its endoscopic placement into the patient’s stomach. Once in the patient’s stomach, the balloon serves to reduce stomach capacity, causing patients to consume less following the procedure, and delay gastric content emptying which assists the patient in losing weight. Placement of the balloon is temporary; at the end of its indwell time it is removed endoscopically, typically, under conscious sedation.
Outside the U.S., the BIB was CE marked in May 1997 and the Orbera365 was CE marked in August 2017. In the U.S., Orbera was approved by the FDA in August 2015.
In the U.S., Orbera is indicated for a dwell time in the stomach of up to six months, in adults with a BMI range of 30 to 40 kg/m2, who have tried other weight loss programs, such as supervised diet and exercise, but were unable to lose or maintain weight loss. Outside the U.S., Apollo’s intragastric balloons are generally indicated for similar patients with a BMI of ≥ 30 kg/m2 and the labelled dwell times are six months for BIB balloon and twelve months for Orbera365 balloon. All balloons should be removed at or before their labelled dwell time. Outside the U.S., patients with BMI ≤ 40 kg/m2 may also receive a balloon to increase the possibility of long-term weight loss and also to reduce the risk of an anticipated surgery (e.g. obesity surgery, joint replacement, etc.).
Today, IGBs are frequently used for aesthetic weight loss purposes and because of this, the IGB procedure is typically not covered by insurance and is paid for directly by the patient. While aesthetics is a significant market today for Orbera; we believe that IGB use for medical purposes is a potentially larger opportunity.
Specific to Orbera, there is a substantial and increasing body of evidence that shows that the level of weight loss with Orbera is very effective in the treatment of comorbidities associated with obesity. The clinical effectiveness and safety profile of the Orbera System as a non-ulcerogenic weight loss device has been reported in over 250 peer reviewed publications. Although not specifically indicated for the treatment of any individual obesity-related comorbidities, studies have consistently reported resolution or improvement in a patient’s pre-existing comorbidities at the time of Orbera removal. Orbera is currently the only balloon or other endoscopic product that has been recognized in the ASGE Preservation and Incorporation of Valuable Endoscopic Innovations assessment to have met its threshold standards for the treatment of obesity. The meta-analysis performed by the ASGE was based on the aggregation of certain clinical studies conducted outside the U.S. and reported an estimated TBWL at six months of approximately 13.2%. In 2021, the American Gastroenterology Association published clinical practice for Intragastric Balloons in the Management of Obesity. The guidelines suggest the use of intragastric balloons with lifestyle modification over lifestyle modification alone. Furthermore, the guidelines highlight the improvements in cardiovascular disease, diabetes and non-alcoholic fatty liver disease that are associated with a 10% reduction in total body weight loss.
As part of the FDA approval of Orbera, we were required to conduct a post-approval clinical study. The Orbera Post-Approval Study (PAS) was a prospective, multi-center, open-label study of the safety and effectiveness of Orbera as an adjunct to weight reduction for obese adults (22 years of age and older) with a BMI of ≥ 30 kg/m2 and BMI ≤ 40 kg/m2. The Orbera PAS completed enrollment in September 2018 with 281 patients treated with Orbera from 11 U.S. clinical study sites. The study’s primary endpoint was a serious adverse event rate of less than 15% and secondary endpoint was total body weight loss of at least 7.5% at the time of Orbera’s removal. All study endpoints were met and our PAS obligation is complete.
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As part of the CE mark approval for Orbera 365, Apollo initiated a post market clinical study, known as the OPTIMA365 study. The OPTIMA365 study aimed to enroll 100 patients at four to five centers in different European countries and to follow those patients for 24 months. The start of this study was delayed by the COVID-19 pandemic and the study experienced a number of delays. However, the first clinical site began enrollment in February 2021. At this time, the study has enrolled 25 patients in Spain. Meanwhile, additional real world data has been identified and collected on the Obera365 balloon. This real world data includes many more patients than the OPTIMA365 study. In the event that our Notified Body determines that MDR requirements for Post Market Follow Up have been satisfied based upon the existing real world evidence and the current results of the OPTIMA365 study, Apollo may terminate additional enrollment and activity under the OPTIMA365 study.
In February 2017, the FDA issued a letter to health care providers related to adverse events following placement of liquid-filled balloons which were not seen during the U.S. pivotal studies, specifically related to events of spontaneous balloon over-inflation and, separately, reports of acute pancreatitis. We subsequently developed updates to Orbera’s product labeling and physician training materials, and these were approved by FDA and implemented in June 2017. The labeling changes included additions to the “Warnings” and “Possible Complications” sections and an update to the “Clinical Evaluations…” sub-section within the “Adverse Events” history for Orbera.
In August 2017, the FDA issued a second update to alert health care providers of five reports of unanticipated deaths that occurred since 2016 in patients with a liquid-filled intragastric balloon implant. Four of the deaths involved patients who had received an Orbera and had been self-reported by us to the FDA as part of our normal product surveillance process. Following this letter, we worked with the FDA to provide further updates regarding the risks of gastric and esophageal perforation, aspiration, and death and updated the label disclosure for these adverse events as well as the physician training material to provide more detailed descriptions of the patient symptoms that may indicate persistent (or refractory) intolerance, methods of assessing these patients, and recommendations for the management of symptoms and removal of the device.
In June 2018, the FDA approved new Orbera labeling and concurrent with their approval issued a third update to alert health care providers of the label updates and provide an update on new reports worldwide of unanticipated deaths that had been reported since their August 2017 letter to Health Care Providers. Four of the reported deaths in this third update involved patients who had received our IGB product. In each case, the occurrence had been self-reported by us to the FDA as part of our normal product surveillance process. In the period from January 1, 2008 through March 30, 2020, there were 31 reported deaths of patients while they had an Orbera which is an incident rate of less than 0.02% based on the more than 165,000 Orbera balloons distributed during that same time period.
In April 2020, the FDA issued a fourth update to healthcare providers upon the successful completion of the Orbera PAS. The FDA advised physicians to consider the PAS results and emphasized that patients should be instructed to recognize the symptoms of potentially life-threatening conditions.
Competition
We are the leading manufacturer of devices for full thickness endoscopic suturing currently on the market in the U.S. or outside the U.S. Other competing technologies for closure during certain GI applications are offered by large and established manufacturers in the GI space including Boston Scientific Corporation, Olympus Medical, Endo Tools Therapeutics S.A., Steris (US Endoscopy) and Cook Medical. Endomina offers a device cleared for endoscopic suturing in the U.S. and in some markets outside the U.S. USGI Medical Inc. manufactures a suture anchor technology for gastric plication and EndoTools offers a device cleared for endoscopic suturing. Outside the U.S., there are a variety of local and regional competitive intragastric balloon manufacturers including SC MedSil, Medicone, Allurion Technologies and Spatz Laboratories. In the U.S., there are two other manufacturers with an intragastric balloon approved by the FDA at this time: ReShape Lifesciences, Inc. and Spatz FGIA Inc.
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We are the only manufacturer with a device authorized for performing ESG and endoscopic bariatric revision. We face competition from other interventional therapies for the treatment of obesity. Traditional treatments for weight loss include medications and bariatric surgeries. Recently, a new class of weight-loss medications has come to the market. These medications, which include semaglutide and tirzepatide, offer significantly higher efficacy than prior medications, and these medications are anticipated to achieve widespread utilization. These other therapies are primarily surgical in nature, such as sleeve gastrectomy and gastric bypass. Sleeve gastrectomy is a surgical weight-loss procedure in which the stomach is reduced to about 15% of its original size by the longitudinal resection and removal of a large portion of the stomach along the greater curvature. The result is a sleeve or tube-like structure. The procedure permanently alters the stomach although weight regain after a few years is common. Gastric bypass surgery refers to a surgical procedure in which the stomach is divided into a small upper pouch excluding the much larger lower residual stomach and then the small intestine is rerouted to connect to the small upper pouch. The procedure leads to a marked reduction in the functional volume of the stomach, accompanied by an altered physiological and physical response to food. Both procedures are normally performed laparoscopically and rely upon surgical staplers as their principal surgical tool. As a result, these procedures are supported by the suppliers of surgical staplers, the largest of whom are Johnson & Johnson (Ethicon) and Medtronic (Covidien).
Sales and Distribution
We currently market and sell our products principally to providers of medical services and procedures including hospitals, outpatient surgical centers, clinics and physicians through an employee sales force in the U.S., Australia and certain countries in Europe. In addition, we sell products to third party distributors in certain markets where we have regulatory clearance for our products but do not have employees. In total, our products are offered in over 75 countries. No single customer represents 10% or more of our total revenue.
Obesity procedures that utilize our Endoscopy products are often cash pay procedures which means the patient must pay for the procedures out of pocket, although there are exceptions. Revisions of prior bariatric surgery using endoscopic suturing are often receiving reimbursement from select payors for patients treated at specific hospitals in the U.S. Some of these same hospitals have also established relationships with select payors for the reimbursement of ESG procedures. Other times, reimbursement occurs on a case-by-case basis following a review of the patient’s specific situation. Medical procedures that utilize endoscopic suturing products in the treatment of GI complications generally receive reimbursement, but coverage can vary by country, state and procedure performed. IGB treatment is reimbursed in some countries for patients who meet certain criteria.
Manufacturing and Product Supply
We operate a manufacturing facility in the Coyol Free Trade Zone in Alajuela, Costa Rica that performs assembly of select components of the OverStitch system, and final assembly of our new X-Tack System and IGB products. We also have the ability to manufacture select product components and sub-assemblies at our engineering facility in Austin, Texas. We manage all aspects of product supply through our operations team based in Austin, Texas and in our Costa Rica facility. In addition, we rely on several third-party suppliers to provide other OverStitch system components. We have identified several gross margin improvement projects intended to lower our product costs and improve capacity utilization of our manufacturing facility over the next three to five years.
We believe that our existing manufacturing facilities give us the necessary physical capacity to produce sufficient quantities of products to meet anticipated demand for at least the next twelve months. Our manufacturing facility is certified by the International Organization for Standardization, or ISO, and operates under the FDA’s good manufacturing practice requirements for medical devices set forth in the Quality System Regulation (“QSR”).
Intellectual Property
We have developed and acquired significant know-how and proprietary technology, upon which our business depends. To protect our know-how and proprietary technology, we rely on trade secret laws, patents, copyrights, trademarks and confidentiality agreements and contracts. However, these methods afford only limited protection. Others may independently develop substantially equivalent proprietary information or technology, gain access to our trade secrets or disclose or use such secrets or technology without our approval.
We protect trade secrets and proprietary knowledge in part through confidentiality agreements with employees, consultants and other parties. We cannot assure you that our trade secrets will not become known to or be independently developed by our competitors.
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As of December 31, 2022, we own over 100 U.S. patents and 170 foreign patents. Our U.S. patents have expiration dates ranging from 2023 to 2037 and our foreign patents have expiration dates ranging from 2023 to 2034 subject to the payment of the requisite renewal fees. We also own 20 pending U.S. patent applications and 27 pending foreign patent applications. We believe patents will be issued pursuant to such applications but cannot guarantee it. Moreover, neither the timing of any issuance, the scope of protection, nor the actual issue date of these pending applications can be forecasted with precision. Where we have acquired or licensed patent rights from third parties, we are generally required to pay royalties. While our patents are an important element of our products and future product development, our business as a whole is not significantly dependent on any one patent.
In 2009, we entered into an Intellectual Property Assignment Agreement, with Olympus Corporation and the “FTE Group” comprised of The Johns Hopkins University, Mayo Foundation for Medical Education and Research, The University of Texas Medical Branch, MUSC Foundation for Research Development and the Chinese University of Hong Kong, whereby the FTE Group has assigned to us a Joint Research Agreement with Olympus Corporation, including their rights in certain inventions, patents and IP rights developed by the FTE Group under the Joint Research Agreement, which relate to the field of flexible endoscopy and minimally invasive surgery. Olympus Corporation has retained rights as a joint owner of certain inventions and related patents developed jointly by the FTE Group and Olympus Corporation under the Joint Research Agreement and retained a license granted by the FTE Group to Olympus Corporation to the inventions and related patents developed by the FTE Group under the Joint Research Agreement. The patents covered by the agreement pertain to endoscopic procedures and endoscopic suturing devices that relate to the OverStitch products and may also be incorporated into potential new products that we may develop in the future. As consideration for the assignment, we are obligated to pay to each of Olympus and the FTE Group one half of a royalty in the low single digits on net sales of our products covered by the patents, which royalty shall be reduced if related patents have expired or no longer exist. In addition, we have the right to sublicense our rights under the Joint Research Agreement to the patents and technologies. The term of the Intellectual Property Assignment Agreement is through and until termination. The agreement may be terminated upon written notice a) by Olympus if we materially breach any material terms that pertain to Olympus and the breach is not cured within 30 days after notice, b) by the FTE Group if we materially breach any of the material terms that pertain to the FTE Group and the breach is not cured within 30 days after notice or c) by us if Olympus materially breaches any material terms that pertain to Olympus and the breach is not cured within 30 days after notice.
Following the Lpath Merger, we also own 10 U.S. and 11 foreign issued patents and 2 pending U.S. and 2 foreign patent applications relating to technologies and inventions developed by Lpath prior to the Lpath Merger (the “Lpath IP”). The Lpath IP is not aligned with our current business activities. In January 2018, we entered into a royalty-bearing License Agreement with Echelon Biosciences, Inc., (“Echelon”) under which Echelon may manufacture and sell certain antibody products covered by the Lpath IP for non-clinical research use only, clinical diagnostics and immunohistochemistry. In January 2018 we also entered into a Technology Transfer Agreement with Resolute Pharma, Inc. (“Resolute”) whereby we transferred certain scientific and research materials to Resolute and granted Resolute a license to certain patent rights related to the Lpath IP. Under the terms of the agreement with Resolute, Resolute has obligations to develop and commercialize licensed products and we maintain rights to terminate the agreement if certain development and commercialization milestones are not met. Under the agreement, Resolute is responsible to pay for any ongoing costs and fees associated with the Lpath IP, and we are entitled to a royalty for any revenues related to the Lpath IP including sales of licensed products, and a Tech Transfer Fee of $0.75 million.
Government Regulation
The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change.
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the U.S. will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, (or “FD&C Act”) also referred to as a 510(k) clearance, or approval from the FDA of a premarket approval (“PMA”) application. Both the 510(k) clearance and PMA processes can be resource intensive, expensive and lengthy, and require payment of significant user fees, unless an exemption is available.
Device Classification
Under the FD&C Act, medical devices are classified into one of three classes - Class I, Class II or Class III-depending on the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness.
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Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General Controls, which require compliance with the applicable portions of the QSR, facility registration and product listing, reporting of adverse events and malfunctions and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include performance standards, guidelines and postmarket surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent,” as defined in the statute, to either:
•a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted, or
•another commercially available, similar device that was cleared through the 510(k) process.
To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence.
After a 510(k) notice is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured.
Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.
After a device receives 510(k) clearance, any modification, including modification to or deviation from design, manufacturing processes, materials, packaging and sterilization that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, may require a new 510(k) clearance or, depending on the modification, could require a PMA application. 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 requires a new 510(k) clearance or approval of a PMA application for any modifications to a previously cleared product, the applicant may be required to cease marketing or recall the modified device until clearance or approval is received. In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the requisite 510(k) or PMA application(s).
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. A manufacturer can also submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable devices, in addition to those deemed novel and not substantially equivalent following the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General Controls and Special Controls described above. Therefore, these devices are subject to the PMA application process, which is generally more costly and time consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use.
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The Investigational Device Process
In the U.S., absent certain limited exceptions, human clinical trials intended to support medical device clearance or approval require an Investigational Device Exemption (“IDE”) application. Some types of studies deemed to present “non-significant risk” are deemed to have an approved IDE once certain requirements are addressed and IRB approval is obtained. If the device presents a “significant risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to commencing the human clinical trials. 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 application must be approved in advance by the FDA for a specified number of subjects. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. There can be no assurance that submission of an IDE will result in the ability to commence clinical trials, and although the FDA’s approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria.
All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations for institutional review board approval and for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant marketing approval or clearance of a product or a specific indication for use. The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application or clearance of a 510(k), for numerous reasons, including, but not limited to, the following:
•the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
•patients do not enroll in clinical trials at the rate expected;
•patients do not comply with trial protocols;
•patient follow-up is not at the rate expected;
•patients experience adverse events;
•patients die during a clinical trial, even though their death may not be related to the products that are part of the trial;
•device malfunctions occur with unexpected frequency or potential adverse consequences;
•side effects or device malfunctions of similar products already in the market that change the FDA’s view toward approval of new or similar PMAs or clearance of a 510(k) or result in the imposition of new requirements or testing;
•institutional review boards and third-party clinical investigators may delay or reject the trial protocol;
•third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, investigator agreement, investigational plan, good clinical practices, the IDE regulations or other FDA or IRB requirements;
•third-party investigators are disqualified by the FDA;
•data collection, monitoring and analysis is not performed in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans, or otherwise fail to comply with the IDE regulations governing responsibilities, records and reports of sponsors of clinical investigations;
•third-party clinical investigators have significant financial interests related to us or our study such that the FDA deems the study results unreliable, or the company or investigators fail to disclose such interests;
•regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;
•changes in government regulations or administrative actions;
•the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; or
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•the FDA concludes that our trial design is unreliable or inadequate to demonstrate safety and efficacy.
The PMA Approval Process
Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. The FDA considers a PMA or PMA supplement to have been voluntarily withdrawn if an applicant fails to respond to an FDA request for information (e.g., major deficiency letter) within a total of 360 days. Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. Prior to approval of a PMA, the FDA may conduct a bioresearch monitoring inspection of the clinical trial data and clinical trial sites, and a QSR inspection of the manufacturing facility and processes. Overall, the FDA review of a PMA application is to take 180 days, although the review generally takes between one and three years, or longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
•the device may not be shown safe or effective to the FDA’s satisfaction;
•the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval;
•the manufacturing process or facilities may not meet applicable requirements; and
•changes in FDA approval policies or adoption of new regulations may require additional data.
If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data are submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements may be required for modification to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, components, materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA application and may or may not require as extensive technical or clinical data or the convening of an advisory panel, depending on the nature of the proposed change.
In approving a PMA application, as a condition of approval, the FDA may also require some form of postmarket study or surveillance, whereby the applicant follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer term safety and effectiveness data for the device. The FDA may require postmarket surveillance for certain devices approved under a PMA or cleared under a 510(k) notification, such as implants or life-supporting or life-sustaining devices used outside a device user facility, devices where the failure of which would be reasonably likely to have serious adverse health consequences, or devices expected to have significant use in pediatric populations. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use.
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Pervasive and Continuing FDA Regulation
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements continue to apply. These include:
•the FDA’s QSR, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process;
•labeling regulations, unique device identification requirements and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses;
•advertising and promotion requirements;
•restrictions on sale, distribution or use of a device;
•PMA annual reporting requirements;
•PMA approval or clearance of a 510(k) for product modifications;
•medical device reporting (“MDR”), regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
•medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the U.S. Federal Food, Drug and Cosmetic Act that may present a risk to health;
•recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death;
•unique device identifier and device tracking requirements; and
•post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
•We have registered with the FDA as a medical device manufacturer and have obtained authorization to manufacture from the FDA. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA Office of Compliance within the Center for Devices and Radiological Health to determine our compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of our suppliers.
Other U.S. Healthcare Laws
Our business is regulated by laws pertaining to healthcare fraud and abuse including anti-kickback laws and false claims laws, and other healthcare laws. Violations of these laws are punishable by significant administrative, criminal and civil penalties, including, damages, disgorgement, monetary fines, possible exclusion from participation in federal and state healthcare programs, such as Medicare and Medicaid, imprisonment, and integrity oversight and reporting obligations.
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Anti-Kickback Statute
The federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the furnishing, recommending, purchasing, leasing, ordering, or arranging for, a good or service for which payment may be made under a federal healthcare program such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, including payments to physicians or other providers, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments and providing anything of value at less than fair market value. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, but the exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection. These exceptions and safe harbors exist for various types of arrangements, including certain investment interests, leases, personal service arrangements, discounts and management contracts. The failure of a particular activity to comply with all requirements of an applicable safe harbor regulation does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of the facts and circumstances. Activities and business arrangements that do not fully satisfy each applicable exception or safe harbor may result in increased scrutiny by government enforcement authorities such as the Office of the Inspector General (“OIG”).
Additionally, the intent standard under the federal Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA) to a stricter standard such that a person or entity no longer needs to have actual knowledge of the federal Anti-Kickback Statue or specific intent to violate it in order to have committed a violation. Rather, if “one purpose” of the renumeration is to induce referrals, the federal Anti-Kickback Statute is violated. In addition, the ACA codified case law that a claim that includes items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (“FCA”) (discussed below).
Further, certain states have adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by government healthcare programs such as the Medicare and Medicaid programs and do not include comparable exceptions and/or safe harbors to those provided by the federal Anti-Kickback Statute.
Federal False Claims Act
The FCA prohibits, among other things, knowingly filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from the federal government. A claim that is filed pursuant to an unlawful kickback may be a false claim under this law and, in a number of cases, manufacturers of medical products have entered into settlements based on FCA allegations that their financial relationships with customers “caused” these customers to submit false claims. When an entity is determined to have violated the FCA, it may be required to pay up to three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim. Private individuals can file suits under the FCA on behalf of the government. These lawsuits are known as “qui tam” actions, and the individuals bringing such suits, sometimes known as “relators” or, more commonly, “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. Since complaints related to “qui tam” actions are initially filed under seal, the action may be pending for some time before a defendant is even aware of such action.
HIPAA
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created new federal crimes, including: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. The false statements statute prohibits 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. A violation of this statute is a felony and may result in fines or imprisonment.
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), also protects the security and privacy of individually identifiable health information maintained or transmitted by certain healthcare providers, health plans and healthcare clearinghouses and their business associates as well as their covered subcontractors. HIPAA restricts the use and disclosure of patient health information, including patient records. Although we believe that HIPAA does not apply directly to us, most of our customers have significant obligations under HIPAA, and we intend to cooperate with customers and others to ensure compliance with HIPAA with respect to patient information. Depending on the facts and circumstances, we could be subject to significant penalties if we violate HIPAA. Failure to comply with HIPAA obligations can result in civil fines and/or criminal penalties. Some states have also enacted rigorous laws or regulations protecting the security and privacy of patient information.
Transparency Reporting
In March 2010, the U.S. Congress enacted the ACA.
The Physician Payments Sunshine Act, which is part of the ACA, requires certain manufacturers of drugs, biologics, devices and medical supplies covered under Medicare and Medicaid to record payments and transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain non-physician healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals as well as ownership and investment interests held by physicians and their immediate family members and to report this data to Centers for Medicare & Medicaid Services, for subsequent public disclosure. Similar reporting requirements have also been enacted in several states, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with healthcare professionals. In addition to reporting, some states such as Massachusetts and Vermont impose an outright ban on certain gifts to physicians. Failure to report may result in civil or criminal fines and/or penalties.
In recent years, the federal government and several states have enacted legislation requiring biotechnology, pharmaceutical and medical device companies to establish marketing compliance programs and file periodic reports on sales, marketing and other activities. Similar legislation is being considered in other states.
Coverage, Reimbursement and Healthcare Reform
Patients in the U.S. and elsewhere generally rely on third-party payors to reimburse part or all of the costs associated with their healthcare treatment. Accordingly, market acceptance of our products is dependent on the extent to which third-party coverage and reimbursement is available from third-party payors, which can differ significantly from payor to payor and may change from time to time. Further, from time to time, typically on an annual basis, payment amounts are updated and revised by third-party payors. In cases where the cost of certain of our products are recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed or paid directly by the patient, these updates could directly impact the demand for our products.
All third-party payors, whether governmental or commercial, whether inside the U.S. or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods include prospective payment systems, bundled payment models, capitated arrangements, group purchasing, benefit redesign, pre-authorization processes and requirements for second opinions prior to major surgery. These cost-control methods also potentially limit the amount that healthcare providers may be willing to pay for our products. Therefore, coverage or reimbursement for medical devices may decrease in the future. In addition, consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.
Federal and state governments in the U.S. and outside the U.S. may enact legislation to modify the healthcare system which may result in increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. These reform measures may limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payors are willing to pay. The resulting pricing pressure from our hospital and ambulatory surgical center (“ASC”) customers due to cost sensitivities resulting from healthcare cost containment pressures and reimbursement changes could decrease demand for our products, the prices that customers are willing to pay and the frequency of use of our products, which could have an adverse effect on our business.
Moreover, in the U.S., there have been several presidential executive orders, congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products.
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International Regulation
Our business is also subject to regulation in each of the foreign countries in which our products are sold. Many of the regulations applicable to our products in these countries are similar to those of the FDA.
In order to place a medical device in the European market, a CE mark must be obtained. To obtain a CE Mark, medical devices must meet certain minimum standards of safety and quality and, depending on which class of medical device they fall into, as such classes are defined in the MDR for the new regime, they may need to undergo an appropriate conformity assessment procedure conducted by a Notified Body. A Notified Body will, amongst other things, assess the quality management systems of the manufacturer and verify that the subject device conform to the requirements set out in the relevant legislation. Once the appropriate conformity assessment procedure for the medical device has been completed, a declaration of conformity will be created and the manufacturer will affix the CE mark to the device. The device can then be marketed throughout the European Economic Area (being the Member States of the EU, together with Norway, Iceland and Liechtenstein). Notified bodies may perform surveillance and unannounced audits at the manufacturer and critical suppliers with respect to the devices covered by the certificates issued by them. If non-conformities raised during the audits are not remedied in a timely manner by the manufacturer, the notified body may (partially or wholly) suspend or withdraw the certificate concerned.
The European Union (“EU”) requires that Apollo Endosurgery’s devices comply with the Medical Device Directive. The Medical Device Directive was replaced by the Regulation 2017/745 on Medical Devices, or the MDR, effective as of May 26, 2021. The MDR contains additional requirements beyond those required to comply with the directives they replace, and often require the submission of more detailed data to support approval. Notably, the requirements for clinical evidence and postmarket surveillance are more rigorous. All affected companies must comply with the MDR as of May 26, 2021, specifically the transition requirements dealing with registration, post-market surveillance, market surveillance and vigilance reporting. The company was audited by its Notified Body in February 2022, resulting in successful verification that the Quality Management System meets the current requirements of the MDR. Our legacy products (which includes all products excluding X-Tack) have completed Notified Body review and were transitioned to CE Mark under the MDR in November 2022. X-Tack is currently in review with the Notified Body.
In the EU, we are also required to maintain certain ISO certifications in order to sell products and are subject to regulations and periodic review from various regulatory bodies in other countries where our products are sold. Lack of regulatory compliance in any of these jurisdictions could limit our ability to distribute products in these countries. Additionally, we are subject to foreign laws and regulations governing the marketing and promotion of our products including transparency reporting obligations.
Foreign Corrupt Practices Act
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Many of our customer relationships outside of the U.S. are, either directly or indirectly, with governmental entities and employees (such as physicians at state-owned or state-operated hospitals) and are therefore subject to various anti-bribery laws.
Other Regulations
We are subject to various international, federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development and manufacturing activities. Specifically, the manufacture of our products is subject to compliance with various international and federal laws and regulations and by various foreign, state and local agencies.
Employee Management and Retention
Employees
As of December 31, 2022, we had 139 employees in the U.S. and 142 outside the U.S. None of our employees are (i) represented by a labor union or (ii) are party to a collective bargaining agreement. We believe that we have good relationships with our employees.
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Code of Business Conduct and Business Ethics
We are dedicated to conducting our business consistent with the highest standard of business ethics. Each employee receives and agrees to follow the Apollo Endosurgery Code of Business Conduct and Ethics. Employees are encouraged to discuss any related concerns with management or report concerns anonymously through an Ethics Helpline.
Talent Management & Development
We believe that our employees are the foundation of our business and we are committed to the development and retention of our workforce.
Compensation Philosophy
To ensure we are able to attract, retain and develop high performing teams, we engage external compensation advisors to guide our efforts in developing cash and equity rewards programs that are competitive with our peer companies.
Other Benefits
We offer competitive health and welfare programs to support our employees and their families’ physical, mental, and financial well-being.
COVID-19 Health and Safety
The health and safety of our employees is a key focus at our Company. In response to the COVID-19 pandemic, the Company established safety protocols, facility enhancements, and work from home strategies to protect our employees. Some of our employees continue to work remotely. Employees that work on site are required to adhere to applicable protocols and to report and document exposures, all following guidelines issued by the Centers for Disease Control or mandated by local regulations.
Information About Our Executive Officers
The following table sets forth below information about our executive officers as of March 30, 2023.
| Name | Age | Position(s) | ||||||||||||
| Charles McKhann | 54 | Chief Executive Officer and President | ||||||||||||
| Jeffrey Black | 54 | Chief Financial Officer and Secretary | ||||||||||||
| Christopher Gostout | 72 | Chief Medical Officer | ||||||||||||
| Mike Gutteridge | 47 | Vice President, International Sales and Marketing | ||||||||||||
| John Molesphini | 65 | Executive Vice President, Operations | ||||||||||||
Charles McKhann’s biography is included under the section titled “Board of Directors” in Part III, Item 10 of this Annual Report on Form 10-K.
Jeffrey Black. Since August 2021, Mr. Black has served as our Chief Financial Officer. From March 2017 to April 2021, Mr. Black served as Executive Vice President and Chief Financial Officer of Alphatec Holdings, Inc., a medical technology company. From September 2015 to March 2017, he served as Chief Financial Officer of Applied Proteomics, Inc, a non-invasive, proteomics-based diagnostics company. From April 2014 to September 2015, he served as Chief Financial Officer of AltheaDx, a pharmacogenetics diagnostics company. Mr. Black is a member of the Board of Directors of Cellana, Inc., an algae bioproducts company. Mr. Black received his B.S. in Business from the University of Arizona.
Dr. Christopher J. Gostout, M.D. Since January 2017, Dr. Gostout has served as the Chief Medical Officer of Apollo. Between August 2013 and December 31, 2016, Dr. Gostout served as a consultant to Apollo. From 1983 to 2016, Dr. Gostout served in the Mayo Clinic in the Division of Gastroenterology and Hepatology. From 2005 to December 2016, he maintained a joint appointment in the Department of Surgery. In July 2000, he became a Professor of Medicine in the Mayo Clinic College of Medicine and the Director of the Developmental Endoscopy and Research Unit in 1998. Dr. Gostout holds a B.S. in Biology from Villanova University and a M.D. from the State University of New York Downstate Medical Center.
Mike Gutteridge. Since March 2016, Mike Gutteridge has served in numerous leadership roles at Apollo, including most recently as Vice President of International Sales and Marketing since December 2017. Prior to that role, Mr. Gutteridge served as our Vice President of Sales and Marketing for Europe, Middle East, and Africa. Prior to that role, Mr. Gutteridge held a Senior Leadership position within Smith and Nephew and ArthroCare and now has 29 years of healthcare experience, 21 of which have been within medical devices.
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John Molesphini. Since April 2018, Mr. Molesphini has served as Executive Vice President, Operations of Apollo. From January 2011 to April 2018, Mr. Molesphini served as Vice President, Manufacturing Engineering for ArthroCare Corporation, a medical devices company. Mr. Molesphini holds a B.S. in Management Engineering from Rensselaer Polytechnic Institute and an M.B.A. from the University of Michigan.
Available Information
We file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as applicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, proxy statements and other information electronically with the SEC. Through a link on our website, we make copies of our periodic and current reports, amendments to those reports, proxy statements and other information available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information found on, or accessible through, our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
We have identified the following additional risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.
Risks Related to Our Proposed Transaction with Boston Scientific
Failure to complete, or delays in completing, the Merger with Boston Scientific announced on November 29, 2022 could materially and adversely affect our results of operations and our stock price.
On November 29, 2022, we entered into the Merger Agreement with Boston Scientific pursuant to which, upon the terms and subject to the conditions of the Merger Agreement, if all of the conditions to closing are satisfied or waived, Merger Sub, and indirect wholly owned subsidiary of Boston Scientific, will merge with and into Apollo, with the separate corporate existence of Merger Sub thereupon ceasing and Apollo continuing as the surviving company and an indirect wholly owned subsidiary of Boston Scientific. The consummation of the Merger is subject to certain closing conditions and a number of the conditions are not within our control, and may prevent, delay, or otherwise materially and adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to successfully consummate the Merger as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the Merger to be consummated include, but are not limited to, the following:
•the Merger may be subject to certain legal restraints or challenge under applicable antitrust law outside the United States and may also be subject to scrutiny under U.S. antitrust law, even following the expiration of the initial HSR waiting period;
•we would not realize any or all of the potential benefits of the Merger, including any synergies that could result from combining our financial and proprietary resources with those of Boston Scientific, which could have a negative effect on the price of our common stock;
•under some circumstances, we may be required to pay a termination fee to Boston Scientific of $19.0 million;
•we will remain liable for significant transaction costs, including legal, accounting, financial advisory, and other costs relating to the Merger regardless of whether the Merger is consummated;
•we may experience negative reactions from financial markets or the trading price of our common stock may decline to the extent that the current market price for our stock reflects a market assumption that the Merger will be completed;
•the attention of our management may have been diverted by the Merger;
•we could be subject to litigation related to any failure to complete the Merger;
•the potential loss of key personnel during the pendency of the Merger as employees may experience uncertainty about their future roles with us following completion of the Merger;
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•the potential loss of, and negative reactions from physicians, patients, payors, suppliers, hospitals, surgical centers partners and distributors, and other business partners, including those with which we are seeking to establish business relationships, due to uncertainties about the Merger, and;
•under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger, which restrictions could adversely affect our ability to conduct our business as we otherwise would have done if we were not subject to these restrictions.
The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Merger is not consummated and one or more of these events occur, such as payment of termination fees to Boston Scientific or other significant transaction costs in connection with the Merger, our cash balances and other outstanding indebtedness at that time could be materially and adversely impacted and our options for sources of financing or refinancing could be more limited than if we had not pursued the Merger. If the Merger is not completed, there can be no assurance that these risks will not materialize and will not materially and adversely affect our stock price, business, financial condition, results of operations or cash flows.
Uncertainty about the Merger or negative publicity related to the Merger may adversely affect relationships with existing or prospective physicians, patients, payors, hospitals, surgical centers and distributors, suppliers, employees and other business partners, whether or not the Merger is completed.
In response to the announcement of the Merger, existing or prospective physicians, patients, payors, suppliers, and employees and other business partners may:
•delay, defer, or cease their agreements or arrangements with, or providing products or services to, us or the combined company;
•delay or defer other decisions concerning us or the combined company; or
•seek alternative relationships with third parties or otherwise seek to change the terms on which they do business with us or the combined company.
Any such delays or changes to terms could materially harm our business or, if the Merger is completed, the business of the combined company.
In addition, as a result of the Merger, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, we may not be able to attract and retain key employees to the same extent that we have been in the past and key employees may depart because of issues relating to such uncertainty or a desire not to remain with the combined company following the completion of the Merger.
The pendency of the Merger has resulted in and may continue to result in publicity and other public statements about us and the proposed combination. Such publicity or public statements, particularly if negative or adverse, may also result in investigations by regulatory authorities, legislators and law enforcement officials or in legal claims. Addressing any adverse publicity, governmental scrutiny, investigation or enforcement or other legal proceedings is time consuming and expensive and can divert the time and attention of our senior management from the day-to-day operation of our business and execution of our other strategic initiatives. Further, regardless of the factual basis for the assertions being made or the ultimate outcome of any investigation or proceeding, any negative publicity can have an adverse impact on our reputation and on the morale and performance of our employees and on our relationships with regulatory authorities. It may also have an adverse impact on our ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on our business, financial condition, and results of operations.
Losses of physicians, patients, payors, suppliers, employees, other business partners or other important strategic relationships from any of the events described above could have a material adverse effect on our business, results of operations and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Merger for any reason, including delays associated with obtaining requisite regulatory approvals.
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The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect a business combination with us.
Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, initiate, induce or knowingly encourage or knowingly facilitate any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an alternative transaction proposal or to engage in discussions or negotiations with third parties regarding any alternative transaction proposal. Such restrictions could discourage or deter a third party that may be willing to pay more than Boston Scientific for the outstanding capital stock of Apollo from considering or proposing such an acquisition of Apollo.
Lawsuits have been filed against us and the members of our board of directors arising out of the Merger.
Putative stockholder complaints have been and may in the future be filed against us, our board of directors, Boston Scientific, Boston Scientific's board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such claims. Lawsuits that have been or may be filed against us, our board of directors, Boston Scientific or Boston Scientific’s board of directors could divert the attention of our management and employees from our day-to-day business, otherwise adversely affect our business, results of operations, and financial condition, and otherwise materially and adversely affect the completion or delay the timing of the completion of the proposed transaction with Boston Scientific.
The ability to complete the Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or the combined company or could cause either party to abandon the Merger.
Completion of the Merger is conditioned upon, among other things, the expiration or termination of the required waiting period (and any extension thereof) applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, or the HSR Act, and required consents, approvals, non-disapprovals and other authorizations under certain foreign antitrust or competition laws or foreign investment laws. While the waiting period under the HSR Act expired on January 19, 2023, we cannot provide any assurance that we or Boston Scientific will obtain the necessary consents, approvals, non-disapprovals and other authorizations or that the U.S. antitrust authorities will not take action under antitrust laws in respect of the pending Merger.
At any time before or after consummation of the Merger, notwithstanding expiration of the waiting period under the HSR Act, the FTC or DOJ could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. At any time before or after the completion of the Merger, and notwithstanding expiration of the waiting period under the HSR Act, any state or foreign jurisdiction could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of one or both of the parties, requiring the parties to license or hold separate assets or terminate existing relationships and contractual rights, or requiring the parties to agree to other remedies. Private parties may also seek to take legal action under the antitrust laws under certain circumstances, including by seeking to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals. We cannot be certain that a challenge to the Merger will not be made or that, if a challenge is made, we will prevail.
Risks Related to Our Business
We have incurred significant operating losses since inception and may not be able to achieve profitability.
We have incurred net losses since our inception in 2005. For the years ended December 31, 2022 and 2021, we had net losses of $39.8 million and $24.7 million, respectively. As of December 31, 2022, we had an accumulated deficit of $337.3 million. To date, we have funded our operations primarily through equity offerings, the issuance of debt instruments, and from sales of our products. We have devoted substantially all of our resources to the acquisition of products, the research and development of products, sales and marketing activities and clinical and regulatory initiatives to obtain regulatory approvals for our products. Our ability to generate sufficient revenue from our existing products, and to transition to profitability and generate consistent positive cash flows is uncertain. We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all. We expect that our operating expenses may increase as we continue to build our commercial infrastructure, develop, enhance and commercialize our products and incur additional costs associated with being a public company. As a result, we may incur operating losses for the foreseeable future and may never achieve profitability.
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Our long-term growth depends on our ability to successfully develop the endobariatric weight loss and therapeutic endoscopy markets and successfully commercialize our Endoscopy products.
It is important to our business that we continue to build a market for therapeutic endoscopy procedures within the gastroenterology and bariatric communities. Our Endoscopy products offer non-surgical and minimally invasive solutions and technology that enable new options for physicians treating their patients who suffer from a variety of gastrointestinal conditions, including obesity. However, this is a new market and developing this market is expensive and time-consuming and may not be successful due to a variety of factors including lack of physician adoption, patient demand, or both. Many of our products are designed to work in cooperation with third party equipment such as flexible endoscopes whose design, specifications and continued availability is outside of our control. Changes to the design or specifications, withdrawals from the market, limited availability or other changes that limit the use and acceptance of such third party equipment may limit the market for our products or make our existing products obsolete. Even if we are successful in developing additional products in the Endoscopy market, the success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
•properly identify and anticipate physician and patient needs;
•effectively train physicians on how to use our products and achieve good patient outcomes;
•effectively communicate with physicians, payors and patients and educate them on the benefits of Endoscopy procedures;
•achieve adoption of procedures for the use of our products in a timely manner, including for procedures that may not receive third party insurance coverage or reimbursement;
•develop clinical data that demonstrate the safety and efficacy of the procedures that use our products;
•obtain the necessary regulatory clearances or approvals for new products, product enhancements or product indications;
•market products in compliance with the regulations of the FDA and other applicable regulatory authorities;
•receive adequate insurance coverage and reimbursement for procedures performed with our products; and
•train our sales and marketing team to effectively support our market development efforts.
If we are unsuccessful in developing and commercializing the therapeutic endoscopy market, our ability to increase our revenue will be impaired and our business, results of operations, financial condition and prospects will be materially adversely affected.
A weakening of U.S. and international macroeconomic conditions, including, but not limited to, inflation and recessionary impacts, may harm our sales, profitability and results of operations.
Adverse economic conditions in the U.S. and international markets, including recent macroeconomic uncertainty and challenges and inflationary pressures resulting in part from the COVID-19 pandemic and governmental and regulatory responses to its effects, have negatively affected and may continue to negatively affect our revenues and operating results. Inflation rates in the U.S. have recently increased to levels not seen in decades resulting in federal action to increase interest rates, affecting capital markets, and reducing discretionary consumer spending. Our Endoscopy products, such as the Intragastric Balloon products and Apollo ESG systems, have limited reimbursement, and in most cases are not currently reimbursable by governmental or other health care plans and instead are partially or wholly paid for directly by patients. Sales of our products have been and may continue to be negatively affected by adverse economic conditions impacting consumer spending, including among others, recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures, inflationary pressures, increased taxation, higher unemployment, lower consumer confidence in the economy, disasters or disease outbreaks, such as the COVID-19 pandemic, geopolitical events (such as the conflict between Ukraine and Russia), higher consumer debt levels, lower availability of consumer credit, higher interest rates, and hardships relating to declines in the housing and stock markets which have historically caused consumers to reassess their spending choices and reduce their likelihood to pursue elective surgical procedures. Any continuing reduced consumer demand due to adverse economic or market conditions could have a material adverse effect on our business, cause sales and profitability to suffer, reduce operating cash flow and result in a decline in the price of our common stock. Adverse economic and market conditions could also have a negative impact on others, such as creditors, third-party contractors and suppliers, causing them to fail to meet their obligations to us. Foreign exchange fluctuations have also negatively impacted and may continue to negatively impact our revenue from international markets.
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Our business has been and likely will continue to be adversely affected by the COVID-19 pandemic.
The global spread of the COVID-19 pandemic and measures introduced by local, state and federal governments to contain the virus and mitigate its public health effects have significantly impacted and may continue to impact the global economy, our business and our industry. We continue to monitor our operations and government mandates and may elect or be required to limit customer use of our products to comply with government orders to address the public healthcare needs arising from the COVID-19 pandemic. The disruptions to our activities and operations have negatively impacted and may continue to negatively impact our business, operating results and financial condition. There is a risk that future government actions, including the orders and restrictions described above, that are intended to contain the spread of COVID-19 will have a negative impact on jurisdictions in which we market and sell out products or the world economy at large, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.
The widespread pandemic has resulted, and may continue to result, in significant disruption of global financial markets, which could negatively affect our liquidity, and macroeconomic conditions.
Restrictions on the ability to travel in certain jurisdictions, social distancing policies, orders and other restrictions, including those described above, and recommendations and fears of COVID-19 spreading within medical centers have caused and may in the future cause both patients and providers to delay or cancel procedures that use our devices, which has harmed our sales, results of operations and financial condition. There can be no assurances that patients or providers will continue with procedures that use our devices if there are any future community outbreaks of COVID-19. Our distributors have periodically deferred and may continue to defer their purchases of our products due to the COVID-19 pandemic. Health systems and other healthcare providers in our markets that provide procedures that use our products have also suffered financially and operationally and may not be able to return to pre-pandemic levels of operations. New variants or outbreaks of the virus have caused health systems and other healthcare providers in our markets to restrict or limit procedures using our devices or have experienced reductions in or cancellations of planned procedures by patients, which have harmed and may continue to harm our sales and growth. Further, quarantines or government reaction or shutdowns for COVID-19 could disrupt our supply chain. Travel and import restrictions or supply chain disruptions may also disrupt our ability to manufacture or distribute our devices and may materially increase the cost of raw materials and finished goods. Any import or export or other cargo restrictions related to our products or the raw materials used to manufacture our products would restrict our ability to obtain raw materials, manufacture and ship products and harm our business, financial condition and results of operations.
In addition, the conduct of clinical trials required to maintain the regulatory status of certain of our products have been and may in the future be affected by the COVID-19 pandemic. For example, enrollment for our Orbera365 CE post approval study has been and likely will continue to be delayed due to the pandemic. Some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. We have had to prioritize key growth and operational projects over others in the past due to capital resource constraints resulting from reduced sales levels during the COVID-19 pandemic and may in the future need to make similar choices, which may negatively impact our growth and operational projects.
Our sales and marketing personnel often rely on in-person and onsite access to healthcare providers. While hospitals and healthcare providers have generally relaxed access restrictions, prior restrictions have harmed our sales and marketing efforts, and renewed restrictions, including due to variant strains of the virus, would have a negative impact on our sales and results of operations. An increase of COVID-19-related hospital admissions, including due to variant strains of the virus, may overload hospitals with unexpected patients, thereby delaying further procedures that use our devices but that are deemed elective by the hospital.
The global outbreak of COVID-19 continues to be volatile and rapidly evolving causing our business to be highly uncertain and unpredictable. We do not yet know the full extent of any impacts on our future business or the global economy as a whole, and the duration, continued spread and severity of the pandemic continues to be uncertain, including due to the spread of new variants or mutant strains of the virus as well as future spikes of COVID-19 infections. In addition, actions to contain the disease or treat its impact, the development, availability, and widespread acceptance of effective vaccines and treatments, further restrictions on travel, and the duration, timing and severity of the impact on customer spending, including any recession resulting from the pandemic, continue to be uncertain. However, these effects have harmed our business, financial condition and results of operations since the beginning of the pandemic and could have a material and negative impact on our future operations, sales and ability to continue as a going concern.
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Our future growth may depend on physician adoption and recommendation of procedures utilizing our products.
Our ability to sell our products depends on the willingness of our physician customers to adopt our products and to recommend corresponding procedures to their patients. Physicians may not adopt our products unless they determine that they have the necessary skills to use our products and, based on their own experience, clinical data, communications from regulatory authorities and published peer-reviewed research, that our products provide a safe and effective treatment option. Even if we are able to raise favorable awareness among physicians, physicians may be hesitant to change their medical treatment practices and may be hesitant to recommend procedures that utilize our products for a variety of reasons, including:
•existing preferences for competitor products or with alternative medical procedures and a general reluctance to change to or use new products or procedures;
•lack of experience or proficiency with our products;
•time and skill commitment that may be necessary to gain familiarity with a new product or new treatment;
•a perception that our products are unproven, unsafe, ineffective, experimental or too expensive;
•reluctance for a related hospital or healthcare facility to approve the introduction of a new product or procedure;
•lack of adequate coverage and reimbursement for procedures performed with our products;
•a preference for an alternative procedure that may afford a physician or a related hospital or healthcare facility greater remuneration; and,
•the development of new weight loss treatment options or competitive products, including pharmacological treatments or dietary software applications, that are less costly, less invasive, or more effective.
Our future growth depends on patient awareness of and demand for procedures that use our products.
Many of the procedures that utilize our products are elective in nature and demand for our products is driven significantly by patient awareness and preference for the procedures that use our products. We provide patient education materials about our products and related procedures where allowed by local law and consistent with our product regulatory indications through various forms of media. However, the general media, social media and other forms of media outside of our control as well as competing organizations may distribute information that presents our products and related procedures as being unproven, unsafe, ineffective, experimental, or otherwise unfavorable to our products and related procedures. If patient awareness and preference for procedures is not sufficient or is not positive, our future growth will be impaired. In addition, our future growth will be impacted by patient outcomes and the level of patient satisfaction achieved from procedures that use our products. If patients who undergo treatment using our product are not satisfied with their results, our reputation and that of our products may suffer. Even if we are able to raise favorable awareness among patients, patients may be hesitant to proceed with a medical treatment for various reasons including:
•perception that our products are unproven or experimental;
•reluctance to undergo a medical procedure;
•previous long-term failure with other weight loss programs;
•reluctance of a prospective patient to commit to long-term lifestyle changes;
•out of pocket cost for an elective procedure; and
•alternative treatments or competitive products, including pharmacological products, or procedures that are perceived to be more effective or less expensive.
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Our future growth depends on developing clinical data that demonstrates the safety and efficacy of our products and the procedures that use our products.
If clinical or pre-clinical trials with our products and the procedures that use our products do not result in positive outcomes for patients, fail to show meaningful patient benefit or fail or to achieve certain end points, the development of these procedures would be adversely impacted which could negatively impact the sales of our products, operations and financial condition. In March of 2021, the FDA granted a Breakthrough Device Designation for the Orbera Intragastric Balloon specifically for use in treating patients with BMI between 30 and 40 kg/m2 with noncirrhotic nonalcoholic steatohepatitis (NASH) with liver fibrosis. Orbera is currently approved by the FDA as a weight loss aid for adults suffering from obesity, with a body mass index (BMI) ≥30 and ≤40 kg/m2, who have tried other weight loss programs, such as following supervised diet, exercise, and behavior modification programs, but who were unable to lose weight and/or keep it off. Expanding the approval for Orbera will require the development of additional clinical data to support regulatory submissions to the FDA or foreign regulatory authorities. We cannot guarantee that we will be able to develop a study model that is acceptable to the FDA or that we can contract with an investigator who can timely initiate, enroll and complete such a study at a reasonable cost and who will complete such a study in a reasonable period of time.
Further, with any clinical or pre-clinical study relating to our products, we cannot guarantee that the results of any such study will be timely finalized and made public or that the results of any study will be viewed as favorable by regulatory authorities, physicians, patients or payors. For example, in 2017, we entered into a clinical trial agreement with The Mayo Clinic in Rochester, Minnesota to undertake the MERIT trial to evaluate the long-term safety and efficacy of Endoscopic Sleeve Gastroplasty (“ESG”) compared to efficacy endpoints set forth in a consensus statement of the American Society for Gastrointestinal Endoscopy (“ASGE”) and the American Society of Metabolic Bariatric Surgery (“ASMBS”) and its impact on obesity related comorbidities in patients with obesity and BMI range of 30 to 45 kg/m2. ESG is an endoscopic procedure that involves the creation of plications in the stomach, through a series of stacked suture-based plications, to reduce stomach volume; the plications form a sleeve, which reduces stomach capacity and slows gastric emptying to induce weight loss. Adverse events that may occur during or following an ESG procedure include the following: pharyngitis/sore throat, nausea, vomiting, abdominal pain and/or bloating, hemorrhage, hematoma, conversion to laparoscopic or open procedure, stricture, infection, sepsis, pharyngeal and/or esophageal perforation, esophageal and/or pharyngeal laceration, intra-abdominal (hollow or solid) visceral injury, aspiration, acute inflammatory tissue reaction and death. Additional clinical risks may be identified as more clinical data on ESG is developed and analyzed. In July of 2022, the results of the MERIT trial were published in The Lancet.
With respect to the outcomes of the MERIT trial, we cannot assure you that the published data will be viewed as favorable by physicians, patients, regulatory agencies or payors, or that subsequent clinical studies of the ESG will demonstrate positive efficacy or safety outcomes. A failure to achieve clinical outcomes that are viewed as favorable would negatively impact our business.
Our future growth depends on obtaining and maintaining adequate coverage and reimbursement for procedures performed with our products.
If hospitals, surgeons, and other healthcare providers are unable to obtain and maintain coverage and reimbursement from third-party payors for procedures performed using our products, adoption of our products may be delayed, and the expansion of our business would be limited. Maintaining and growing sales of our products depends significantly on the availability of adequate coverage and reimbursement from third-party payors, including government programs such as Medicare and Medicaid, private insurance plans, and managed care programs. Hospitals, surgeons, and other healthcare providers that purchase or use medical devices generally rely on third-party payors to pay for all or part of the costs and fees associated with the procedures performed with these devices.
Adequate coverage and reimbursement for procedures performed with our products is central to the acceptance of our current and future products. We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of payment, or if reimbursement levels are insufficient to support use of our products or compensate physicians for their time spent diagnosing patients and performing procedures using our products.
Market acceptance of our products in foreign markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance. We may not obtain additional international coverage and reimbursement approvals in a timely manner, if at all. Our failure to receive such approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.
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We may not be able to successfully introduce new products or indications to the market in a timely manner.
Our future financial performance will depend in part on our ability to develop and manufacture new products or to acquire new products in a cost-effective manner, to introduce these products to the market on a timely basis and to achieve market acceptance of these products. Factors which may result in delays of new product introductions include capital constraints, research and development delays, supply chain constraints, lack of personnel with sufficient experience or competence, delays in acquiring regulatory approvals or clearances, including obtaining regulatory approval for new indications for use, delays in closing acquisition transactions, or delays in receiving necessary approval from a hospital or healthcare facility to introduce a new product or procedure. Future product introductions may fail to achieve expected levels of market acceptance including physician adoption, patient awareness or both. Factors impacting the level of market acceptance include the timeliness of our product introductions, the effectiveness of medical education efforts, the effectiveness of patient awareness and educational activities, successful product pricing strategies, available financial and technological resources for product promotion and development, the ability to show clinical benefit from future products, the scope of the indicated use for new products and the availability of coverage and reimbursement for procedures that use future products.
The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
The products we currently market have been approved or cleared by the FDA and other foreign regulatory bodies for specific indications. We train our marketing and direct sales force to not promote our products for uses outside of the FDA-approved or cleared indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those approved or cleared by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our products, use improper techniques, ignore or disregard product warnings, contraindications or other information provided in training materials or product labeling, fail to obtain adequate training, or fail to inform patients of the risks associated with procedures that utilize our products, potentially leading to injury and an increased risk of product liability claims. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. Some of our products have cleared indications for general use and the FDA or foreign regulatory bodies may request clinical evidence to support a specific intended use, or determine that promotional activity, educational materials or training relating to a specific intended use constitutes off-label promotion. If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or we could be subject to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.
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We are dependent on certain suppliers, vendors and manufacturers, and supply or service disruptions could materially adversely affect our business and future growth.
From time to time, we have experienced supply constraints and may experience them in the future. If the supply of materials from our suppliers or provision of services from our vendors were to be interrupted or if we experience delays or interruptions from our manufacturers, including due to the COVID-19 pandemic, replacement or alternative sources might not be readily obtainable. Our products are sourced from a variety of suppliers and manufacturers, and these suppliers and manufacturers further depend on many component providers and raw material suppliers. If our suppliers experience unanticipated quality issues or fail to supply components that meet design specifications, or if our contract sterilizers experience delays or shutdowns, we may experience manufacturing delays or product quality issues that may erode customer confidence in our products and negatively affect our sales. As product sales increase, we have experienced times of temporary supply and vendor disruption for a variety of reasons and this has caused delays in our fulfillment of customer orders. For example, we have experienced production and inventory shortages for OverStitch as a result of supply shortages from component suppliers from time to time. Continued interruptions or shortages in these inputs or services, or future unexpected interruptions and shortages, could harm our business, financial condition and results of operations. If such a condition were to persist, our business could suffer as our reputation with customers could be damaged and eventually could lead to reduced future demand for our products. An inability to continue to source materials or components, or receive services, from any of our suppliers, vendors or manufacturers could be due to reasons outside of our direct control, such as regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier or manufacturer, labor disputes or shortages at the supplier and unexpected demands or quality issues. We may also face disputes with our current or previous suppliers and vendors. In any of these cases, we could face a delay of several months to identify and qualify alternative suppliers and service providers with regulatory authorities, as we do not currently have supplier or vendor transition plans. In addition, the failure of our third-party suppliers and service providers to maintain acceptable quality requirements could result in the recall of our products.
Manufacturing of our products requires capital equipment and a well-trained workforce. The sourcing of new manufacturing or supply capacity can require significant lead time. If demand increases faster than we expect, or if we are unable to produce the quantity of goods that we expect with our current suppliers and manufacturers, we will not be able to adequately address demand for our products and our revenues and results of operations would suffer.
If we are required to replace a vendor, a new or supplemental filing with applicable regulatory authorities may be required before the product could be sold with a material or component supplied by a new supplier or manufacturer. The regulatory approval process may take a substantial period of time and we cannot assure investors that we would be able to obtain the necessary regulatory approval for a new material to be used in products on a timely basis, if at all. This could create supply disruptions that would materially adversely affect our business. For example, in instances where we are changing our supplier of a key component of a product, we will need to ensure that we have sufficient supply of the component while the change is reviewed by regulatory authorities.
We are dependent on warehouses and service providers in the United States, Australia and the Netherlands for product logistics, order fulfillment and distribution support that are owned and operated by third parties. Our ability to supply products to our customers in a timely manner and at acceptable commercial terms could be disrupted or continue to be disrupted by factors such as fire, earthquake or any other natural disaster, work stoppages or information technology system failures that occur at these third-party warehouse and service providers.
It is difficult to forecast future performance, which may cause operational delays or inefficiency.
We create internal operational forecasts to determine requirements for components and materials used in the manufacture of our products and to make production plans. Our limited commercial experience, changes in the market or demand for our products, the launch of new products with no sales history, strategic shifts in or initiatives for our business and operations, macroeconomic uncertainty, including the effects on inflation and foreign exchange fluctuations, as well as the COVID-19 pandemic, may make it difficult for us to accurately predict future production requirements. If we forecast inaccurately, this may cause us to have shortfalls or backorders that may negatively impact our reputation with customers and cause them to seek alternative products, or could lead us to have excessive inventory, scrap or similar operational and financial inefficiency that could harm our business. We also have limited experience operating our business under economic conditions characterized by strategic shifts in or initiatives for our business and operations, macroeconomic uncertainty, including the effects on inflation and foreign exchange fluctuations, high inflation or in economic recessions. As a result, we may not be able to adequately anticipate and plan given our limited experience operating our business under such volatile macroeconomic conditions. Certain of our longer-term strategic initiatives may also be obstructed or have unintended effects in the event of an economic recession, which we may not be able to predict.
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We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
Our industry is highly competitive, subject to change and significantly affected by new product introductions and activities of other industry participants.
These industry participants may enjoy several competitive advantages, including:
•greater financial and human capital resources;
•significantly greater name recognition;
•established relationships with physicians, referring physicians, customers and third-party payors;
•additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage; and
•established sales, marketing and worldwide distribution networks.
If another company successfully develops an approach for the treatment of gastrointestinal conditions, including obesity, that is less invasive or more effective than our current product offerings, sales of our products would be significantly and adversely affected. Furthermore, novel, recently approved drug therapies for weight loss have the potential to negatively impact the market for endoscopic weight loss procedures.
We may be unable to successfully integrate or expand operations and processes in connection with acquisitions or we may be unable to efficiently transfer divested assets.
In the future, should we grow or acquire new assets or businesses, we expect to incrementally hire and train new personnel and implement appropriate financial and managerial controls, systems and procedures in order to effectively manage our growth and integrate newly acquired operations and processes. In the future, should we divest assets or portions of our business, we will need to implement financial and managerial controls and procedures to efficiently manage the divestiture of such assets and the transition of such business to an acquirer. Failure to successfully manage the integration of newly acquired assets or business or to efficiently transition divested assets to an acquirer could adversely affect our business.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices and drug products. This risk exists even if a device or product is approved or cleared for commercial sale by the FDA and manufactured in facilities regulated by the FDA, or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our product candidates could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our products contribute to, or merely appear to or are alleged to have contributed to, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against us. Further, because we provided certain transition services, including manufacturing support, to ReShape for our divested Surgical Product line through December 2020, we may be subject to product liability claims from sales of Surgical products by ReShape, over which we have limited to no control. Product liability claims may be brought against us by patients and their family members, health care providers or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
•litigation costs;
•distraction of management’s attention from our primary business;
•the inability to commercialize our products or, if approved or cleared, our product candidates;
•decreased demand for our products or, if approved or cleared, product candidates;
•impairment of our business reputation;
•product recall or withdrawal from the market;
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•withdrawal of clinical trial participants;
•substantial monetary awards to patients or other claimants; or
•loss of revenue.
While we may attempt to manage our product liability exposure by proactively addressing potentially non-conforming product before it enters distribution, issuing formal field safety notices when pertinent new information becomes available, and when necessary, recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse effect on our business.
In addition, although we maintain product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in insurance costs and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, general liability insurance, property insurance and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating expenses will increase by the same amount. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without coverage from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
If our facilities or the facility of a supplier become inoperable, we will be unable to continue to research, develop, manufacture, and commercialize our products and, as a result, our business will be harmed.
We do not have redundant facilities. We perform substantially all of our manufacturing in a single location in Costa Rica or at contract manufacturer locations in the United States. Any manufacturing facility and equipment would be costly to replace and would require substantial lead time to repair or replace. Manufacturing facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, flooding, fire, earthquakes, volcanic activity and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of reserve raw materials and finished product, may result in the inability to continue manufacturing our products during such periods and the loss of customers, or harm to our reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
Our ability to maintain our competitive position depends on our ability to attract and retain highly qualified personnel.
We believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel. Retaining and recruiting people with the appropriate skills is particularly challenging as the economy in general continues to recover from the COVID-19 pandemic resulting in competition for the human resources necessary to operate our business successfully. All of our officers and other employees are at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any of our key personnel, including changes in our management team, likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and would harm our business.
We cannot assure you we will be able to maintain our workforce or to replace any departing personnel on favorable or commercially reasonable terms, if at all. Loss of personnel may negatively impact our ability to support business activities in the future.
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If we are unable to manage and maintain our direct sales and marketing organizations, we may not be able to generate anticipated revenue.
Our operating results are directly dependent upon the sales and marketing efforts of our employees. If our direct sales representatives fail to adequately promote, market and sell our products, our sales may suffer. In order to generate our anticipated sales, we will need to maintain a qualified and well-trained direct sales organization. As a result, our future success will depend largely on our ability to hire, train, retain and motivate skilled sales managers and direct sales representatives. Because of the competition for their services, we cannot assure you we will be able to hire and retain direct sales representatives on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales. Additionally, new hires require training and take time before they achieve full productivity. If we fail to train new hires adequately, new hires may not become as productive as may be necessary to maintain or increase our sales and we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition. In addition, we may change our sales approach in certain markets from direct sales to healthcare providers to sales to distributors who then resell our products. If we were to change our sales approach in a given market, our product sales price in the affected market would be reduced which would lower our revenue and gross margin and the resulting reduction in our operating expense may not be sufficient to offset this reduction in our gross margin.
If we fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
If our internal controls over financial reporting are found to be insufficient, our independent registered public accounting firm, which audits our financial statements, may issue an adverse opinion on the effectiveness of internal control over financial reporting.
A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In the event that a material weakness is identified, we cannot assure you that we will be able to identify and implement measures that will be sufficient to remediate any such material weakness or that future material weaknesses will not occur.
If we fail to remediate an identified material weakness or identify new material weaknesses in our internal controls over financial reporting, investors may lack confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected regardless of whether material inaccuracies are determined to exist in our reported financial statements. If material inaccuracies are determined to exist in our financial statements or we are unable to report our financial statements on a timely basis, we could also become subject to investigations by Nasdaq, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation and financial condition or divert financial and management resources from our regular business activities.
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Risks Related to U.S. Regulatory Review and Approval of Our Products
Our products are subject to extensive regulation by the FDA, including the requirement to obtain premarket approval and the requirement to report adverse events and violations of the U.S. Federal Food, Drug and Cosmetic Act that could present significant risk of injury to patients. Even though we have received FDA approval of our PMA applications and 510(k) clearances to commercially market our products, we will continue to be subject to extensive FDA regulatory oversight.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the U.S. Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other pre-amendment, 510(k)-exempt, 510(k) cleared products, or PMA-approved products that have subsequently been down-classified. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the De Novo process. A manufacturer can also submit a petition for a direct De Novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk. Of our products, Orbera is a class III product and has been approved through the FDA’s PMA process and our suture-based products are class II products and have been cleared through the 510(k) and De Novo processes.
High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. In addition, although FDA has granted PMA approval for our class III products, holding those approvals in good standing requires ongoing compliance with FDA reporting requirements and conditions of approval including the completion of lengthy and expensive post market approval studies. Despite the time, effort and cost required to obtain approval, there can be no assurance that we will be able to meet all FDA requirements to maintain our PMA approvals or that circumstances outside of our control may cause the FDA to withdraw our PMA approvals.
Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our manufacturing facility are possible.
If we fail to comply with U.S. federal and state healthcare fraud and abuse or data privacy and security laws and regulations, we could be subject to significant penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in governmental healthcare programs and the curtailment of our operations, any of which could adversely impact our reputation and business operations.
Our industry is subject to numerous U.S. federal and state healthcare laws and regulations, including, but not limited to, anti-kickback, false claims, privacy and transparency laws and regulations. Our relationships with healthcare providers and entities, including but not limited to, physicians, hospitals, ambulatory surgery centers, group purchasing organizations and our international distributors are subject to scrutiny under these laws. Violations of these laws or regulations can subject us to significant penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs and the curtailment of our operations. Healthcare fraud and abuse regulations are complex and subject to evolving interpretations and enforcement discretion, and even minor irregularities can potentially give rise to claims that a statute or regulation has been violated. The laws that may affect our ability to operate include, but are not limited to:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid;
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•the federal false claims laws, including the FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent; knowingly making using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government;
•the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented, a claim to a federal healthcare program that the person knows, or should know, is for an item or service that was not provided as claimed or is false or fraudulent;
•the federal Health Insurance Portability and Accountability Act of 1996, and the federal Health Information Technology for Economic and Clinical Health Act of 2009, each as amended, and their implementing regulations, which impose requirements upon covered healthcare providers, health plans and healthcare clearinghouses and their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information as well as their covered subcontractors relating to the privacy, security, and transmission of health information;
•HIPAA also prohibits, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and 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.
•the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections;
•the federal Foreign Corrupt Practices Act, which prohibits corrupt payments, gifts or transfers of value to foreign officials; and
•foreign or U.S. state law equivalents of each of the above federal laws
While we do not submit claims for reimbursement to payors and our customers make the ultimate decision on how to submit claims, from time-to-time, we may be asked for reimbursement guidance by our customers. Failure to comply with any of these laws, or any action against us for alleged violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.
We have entered into consulting agreements with physicians, including some who use our products and may influence the ordering and use of our products. While we believe these transactions were structured to comply with all applicable laws, including state and federal anti-kickback laws, to the extent applicable, should the government take the position that these transactions are prohibited arrangements that must be restructured or discontinued, we could be subject to significant penalties. The medical device industry’s relationship with healthcare providers, including physicians is under increasing scrutiny by the OIG, the DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general and other government agencies could significantly harm our business.
To enforce compliance with the healthcare regulatory laws, federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time and resource consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to onerous additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
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In addition, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. The provision of the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, commonly referred to as the federal Physician Payment Sunshine Act, as well as similar state and foreign laws, impose obligations on medical device manufacturers to annually report certain payments and other transfers of value provided, directly or indirectly, to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. Failure to comply with any of these state, federal, or foreign transparency and disclosure requirements could subject us to significant fines and penalties. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and reporting requirements in multiple jurisdictions increase the possibility that we may fail to comply fully with one or more of these requirements.
Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
Most of these laws apply to not only the actions taken by us, but also actions taken by our distributors. We have limited knowledge and control over the business practices of our distributors, and we may face regulatory action against us as a result of their actions which could have a material adverse effect on our reputation, business, results of operations and financial condition.
In addition, the scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of the Company, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
Healthcare cost containment pressures could result in pricing pressure which could have an adverse effect on our business.
All third-party payors, whether governmental or commercial, whether inside the U.S. or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods include prospective payment systems, bundled payment models, capitated arrangements, group purchasing, benefit redesign, pre-authorization processes and requirements for second opinions prior to major surgery. These cost-control methods also potentially limit the amount that healthcare providers may be willing to pay for our products. Therefore, coverage or reimbursement for medical devices may decrease in the future. In addition, consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.
Federal and state governments in the U.S. and outside the U.S. may enact legislation to modify the healthcare system which may result in increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. These reform measures may limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payors are willing to pay. The resulting pricing pressure from our hospital and ambulatory surgical center (“ASC”) customers due to cost sensitivities resulting from healthcare cost containment pressures and reimbursement changes could decrease demand for our products, the prices that customers are willing to pay and the frequency of use of our products, which could have an adverse effect on our business.
We cannot predict the likelihood, nature, or extent of health reform initiatives that may arise from future legislation or administrative action.
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Restrictive reimbursement practices of third-party payors could decrease the demand for our products, the prices that customers are willing to pay and the number of procedures performed using our products, which could have an adverse effect on our business.
Patients in the United States and elsewhere generally rely on third‑party payors to reimburse part or all of the costs associated with their healthcare treatment. Accordingly, market acceptance of our products is dependent on the extent to which third‑party coverage and reimbursement is available from third-party payors, which can differ significantly from payor to payor and may change at any time. Adequate reimbursement coding, coverage, and payment may be required to support the future growth of some of our products. Inadequate coverage and negative reimbursement policies for our products could affect their adoption and our future revenue. Even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future. If we are unable to obtain and thereafter maintain sufficient third‑party coverage and reimbursement for our products and/or procedures in which our products are used, the commercial success of our products may be limited, and our financial condition and results of operations may be materially and adversely affected.
Further, from time to time, typically on an annual basis, payment amounts are updated and revised by third-party payors. In cases where the cost of certain of our products are recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed or paid directly by the patient, these updates could directly impact the demand for our products. We cannot predict how pending and future healthcare legislation will impact our business, and any changes in coverage and reimbursement that further restricts coverage of our products or lowers reimbursement for procedures using our products could materially affect our business.
Modifications to our marketed products may require new 510(k) or De Novo clearances or PMA approvals, or may require us to cease marketing or recall the modified products until clearances or approvals are obtained.
Modifications to our products may require new regulatory approvals or clearances, including 510(k) or premarket approvals, additional approvals before foreign regulatory authorities, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA and other regulatory authorities outside the United States require device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. For example, a manufacturer may determine that a modification does not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, a given regulatory authority, such as the FDA or a notified body, can review a manufacturer’s decision and may disagree and on its own initiative determine that a new clearance or approval is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If a regulatory authority disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products, re-introduce pre-modified product back into the specific market, and harm our operating results. In addition, a regulatory authority in one country may not agree with the conclusion of a regulatory authority of another country. In these circumstances, we may be subject to significant enforcement actions.
If we determine that a modification to an FDA-cleared device could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, then we must file for a new 510(k) clearance or possibly De Novo, down classification, or a premarket approval application. Where we determine that modifications to our products require a new 510(k) or De Novo clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the EU, we must notify our EU Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Obtaining clearances and approvals can be a time consuming process, and 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 sales.
For our class III devices, new PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes to the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. There is no guarantee that the FDA will grant PMA approval of our future products and failure to obtain necessary approvals for our future products would adversely affect our ability to grow our business. Delays in receipt or failure to receive approvals, the loss of previously received approvals, or the failure to comply with existing or future regulatory requirements could reduce our sales, profitability and future growth prospects.
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Expanding the indications of our marketed products may require new 510(k) or PMA approvals or regulatory approvals from foreign regulatory authorities.
Expanding the indications for our products may require new regulatory approvals or clearances, including 510(k) or PMA approvals. In the event that we pursue the approval of expanded indications for a product, the FDA or foreign regulatory authorities may require a separate filing such as a 510(k) or PMA. We may not be successful in obtaining additional marketing authorization, clearance, of approvals for expanded indications for other products or procedures that utilize our products.
If our products contribute to a serious injury or death, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a serious injury or death or has malfunctioned in a way that would likely cause or contribute to serious injury or death if the malfunction of the device were to recur. As required per the FDA Code of Federal Regulations (21 CFR) Part 803, we have established procedures and processes for documentation and evaluation of all complaints relative to reporting requirements. As with all device manufacturers, we have 30 days from “becoming aware” of an incident to submit to FDA a MDR for an event that reasonably suggests that a device has or may have caused or contributed to the incident, or five work days for an event designated by the FDA or an event that requires remedial action to prevent an unreasonable risk of substantial harm to the public health. As part of this assessment we conduct a complaint investigation of each reported Adverse Event. In the event that an investigation is inconclusive (i.e., the investigation cannot confirm whether or not our product was a cause of an Adverse Event), our policy and practice is to default in favor of reporting events to the FDA. If we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products or for which we cannot confirm whether or not our product caused or contributed to the adverse event also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
The FDA may issue safety alerts in response to its review of reported Adverse Events that do not require voluntary corrective actions or agency enforcement but that still negatively affect our product marketing efforts. For instance, in February of 2017, the FDA issued an update to alert health care providers of reported adverse events of liquid-filled intragastric balloons including several dozen incidents of balloon hyperinflation and, separately, a set of reports of acute pancreatitis. In August of 2017, the FDA issued a second update to alert health care providers of five reports of unanticipated deaths that had been reported since 2016 in patients with liquid-filled intragastric balloons, four of which had received our IGB. In June 2018, the FDA issued a new update to alert health care providers of five additional reports worldwide of unanticipated deaths that had been reported since the August 2017 letter to Health Care Providers and also announced the approval of labeling changes for the Orbera Balloon System. Four of the additional mentioned reported deaths involved patients who had received our IGB product. In each case, the occurrence had been self-reported by us to the FDA as part of our normal product surveillance process. Neither the FDA’s August 2017 letter to Health Care Providers nor the June 2018 letter to Health Care Providers indicates that the patient deaths were directly and solely related to the intragastric balloon product or the insertion procedures. However, both letters to Health Care Providers subjected us to adverse publicity that harmed our business. In April 2020, the FDA issued a new update to Health Care Providers following the completion of the Orbera post approval study, which emphasized certain clinical risks of the Orbera balloon. The FDA has full authority to issue these updates or letters and to choose to include or exclude key context and facts based solely on their regulatory discretion and may from time to time issue new letters or updates in the future. These types of letters, and updates to existing letters, can be reviewed by regulatory authorities worldwide, who may then require formal Field Safety Notices to communicate labeling updates to customers. Making these notifications requires significant time and resources, distract from other projects, and may harm our reputation.
Our international operations must comply with local laws and regulations that present certain legal and operating risks, which could adversely impact our business, results of operations and financial condition.
We currently operate in the U.S., Costa Rica, Australia and various European countries and our products are approved for sale in over 75 different countries; our activities are subject to U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance.
Other laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. FCPA, as well as export control laws and economic sanctions laws. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant costs and disruption of business associated with an internal and/or government investigation, criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or debarment from government contracting.
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Our international operations present the same risks as presented by our U.S. operations plus unique risks inherent in operating in foreign jurisdictions. These unique risks include:
•foreign regulatory approval which could result in delays leading to possible insufficient inventory levels;
•foreign currency exchange rate fluctuations;
•reliance on sales people and distributors;
•pricing pressure and differing reimbursement regimes that we may experience internationally;
•competitive disadvantage to competitors who have more established business and customer relationships in a given market;
•reduced or varied intellectual property rights available in some countries;
•economic instability of certain countries or geopolitical events, including the ongoing conflict between Russia and Ukraine;
•the imposition of additional U.S. and foreign governmental controls, regulations and laws;
•changes in duties and tariffs, license obligations, importation requirements and other non-tariff barriers to trade;
•inflationary pressures;
•scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on the Company; and
•laws and business practices favoring local companies.
If we experience any of these events, our business, results of operations and financial condition may be harmed.
If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain approval or clearance, and the manufacturing processes, reporting requirements, post-market clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers are required to comply with the QSR. The QSR covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to QSR requirements in the U.S. or experience delays in obtaining necessary regulatory approvals or clearances, this could delay production of our products and lead to fines, difficulties in obtaining regulatory approvals or clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
In addition, the FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by the Company or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspection observations or product safety issues, could result in any of the following enforcement actions:
•untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
•unanticipated expenditures to address or defend such actions;
•customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
•operating restrictions, partial suspension or total shutdown of production;
•refusing or delaying our requests for regulatory approvals or clearances of new products or modified products;
•withdrawing PMA approvals that have already been granted;
•refusal to grant export approval for our products; or
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•criminal prosecution.
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in a failure to produce our products on a timely basis and in the required quantities, if at all.
Our products and operations are required to comply with standards set by foreign regulatory bodies, and those standards, types of evaluation and scope of review differ among foreign regulatory bodies. For example, audits are routinely performed by our Notified Body to ensure we are meeting by the Quality System requirements for Europe, which are organized in many other countries outside of Europe as well, notably Canada, Brazil, Australia and Japan. If we fail to comply with any of these standards adequately or if changes to our manufacturing or supply practices require additional regulatory approval, a foreign regulatory body may take adverse actions or cause delays within their jurisdiction similar to those within the power of the FDA. Any such action or circumstance may harm our reputation and business, and could have an adverse effect on our business, results of operations and financial condition.
Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.
We may, under our own initiative, recall a product if any material deficiency in a device is found. In addition, the FDA and similar foreign governmental authorities can require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of voluntary recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
U.S. legislative, FDA or global regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after 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. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
Moreover, organizational changes within the FDA as well as recent and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current 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.
In addition, on May 25, 2017, the new EU Medical Devices Regulation (“MDR 2017”) was published and was scheduled to become effective on May 26, 2020. On April 17, 2020, the European Parliament approved the delay of the effectiveness of MDR 2017 until May 26, 2021. MDR 2017 repeals and replaces the EU Medical Devices Directive (“MDD”) and changes certain obligations of medical device manufacturers with product in the EU and subjects higher risk medical devices to additional scrutiny during the conformity assessment process. The new regulations will among other things:
•add new rules on placing devices on the market and reinforce post-market surveillance once they are available;
•establish explicit provisions on defining the responsibilities of EU economic actors (e.g., manufacturer, importer(s) and distributor(s)) for the follow-up of the quality, performance and safety of devices placed on the market;
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•require the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
•set up a central database (EUDAMED) to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
•add rules for the assessment of certain high-risk devices which may have to undergo an additional check by experts before they are placed on the market;
•modify or increase clinical evidence requirements necessary to maintain existing CE marks
Accordingly, we were required to update our quality system to conform to certain requirements of MDR 2017 by May 2021. However, at this time only three of the six EUDAMED modules described by MDR 2017 are fully operational and their use is voluntary. Currently, the remaining modules of Vigilance, Clinical Investigation & Performance Studies and Market Surveillance are under development and will be released when the entire EUDAMED system is declared fully functional. We cannot predict when this may take place or how long any delays will last. As such, the quality system updates required for us to comply with MDR 2017 cannot be fully implemented at this time. There remains uncertainty on how some new provisions are to be addressed.
Additionally, existing regulatory filings must be reviewed again by Notified Bodies as part of the transition of CE Mark certificates from the current MDD to the new MDR 2017 requirements. In November of 2022, we transitioned our legacy products to CE Mark under the MDR requirements. The new CE Certificates were issued by British Standards Institute and are valid for five years. The X-Tack is currently in review by the Notified Body and the precise timing or certainty of CE Mark for this product is currently unknown.
In order to continue to sell our products in Europe, we must maintain our CE marks and continue to comply with MDR 2017. Our failure to continue to comply with applicable foreign regulatory requirements, including meeting additional clinical evidence requirements and complying with regulatory requirements administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our Notified Body, which could impair our ability to market products in the EEA in the future. Any changes to the membership of the EU, such as the departure of the United Kingdom (Brexit), may impact the regulatory requirements for the impacted countries and impair our business operations and our ability to market products in such countries.
We are also subject to regulations and periodic review from various regulatory bodies in other countries where our products are sold. Lack of regulatory compliance in any of these jurisdictions could limit our ability to distribute products in these countries. A number of countries outside of Europe consider the CE Mark status of a medical device when making their decisions to grant a license for said product. In many countries, we rely significantly on independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products.
If the third parties on which we rely to conduct our clinical trials and to assist us with post market studies do not perform as contractually required or expected, we may not be able to maintain regulatory approval for our products or obtain reimbursement for our products.
We often must rely on third parties, such as medical institutions, clinical investigators, contract research organizations and contract laboratories to conduct our clinical trials and provide data or prepare deliverables for our PMA post market studies or CE Mark post-approval studies required to keep our market approvals in good standing as well as clinical studies designed to obtain the clinical data necessary to garner reimbursement from private and government payors. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain, analyze, and report is compromised due to the failure to adhere to applicable clinical protocols or regulatory requirements or for other reasons, our clinical activities or clinical trials may be extended, delayed, suspended or terminated, and we may be at risk of losing our regulatory approvals, fail to obtain desired regulatory approvals or fail to obtain reimbursement for our products or the procedures that use our products, which could harm our business.
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Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.
We are subject to a variety of federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous materials. Liability under environmental laws can be joint and several and without regard to comparative fault, and environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Although we believe that our activities conform in all material respects with environmental laws, there can be no assurance that violations of environmental and health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. The failure to comply with past, present or future laws could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations. We also expect that our operations may be affected by other new environmental and health and safety laws on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws, they will likely result in additional costs, and may require us to change how we manufacture our products, which could have a material adverse effect on our business.
Failure to comply with the U.S. FCPA and similar laws associated with any activities outside the U.S. could subject us to penalties and other adverse consequences.
We are subject to the U.S. FCPA, and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates. We may face significant risks if we fail to comply with the FCPA and other similar foreign antibribery laws. Although we have implemented safeguards and training, including company policies requiring our employees, distributors, consultants and agents to comply with the FCPA and similar laws, our international operations nonetheless present a risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or distributors, because these parties are not always subject to our control. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our reputation, business, operating results and financial condition.
Risks Related to Our Intellectual Property
Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.
Our success depends significantly on our ability to protect our proprietary rights to the technologies and inventions used in, or embodied by, our products. To protect our proprietary technology, we rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, as well as nondisclosure, confidentiality and other contractual restrictions in our supply, consulting and employment agreements. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.
Patents
The process of applying for patent protection itself is time consuming and expensive and we cannot assure investors that all of our patent applications will issue as patents or that, if issued, they will issue in a form that will be advantageous to us. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings.
We own numerous issued patents and pending patent applications that relate to our products and methods of using our products, as well as individual components of our products. If any of our patents are challenged, invalidated or legally circumvented by third parties, and if we do not own other enforceable patents protecting our products, competitors could market products and use processes that are substantially similar to, or superior to, ours, and our business will suffer. In addition, the patents we own may not be sufficient in scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes comparable to ours without infringing on our intellectual property rights. We may also determine from time to time to discontinue the payment of maintenance fees, if we determine that certain patents are not material to our business.
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We may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office (“USPTO”), or become involved in opposition, derivation, reexamination, inter partes review, post-grant review, or other patent office proceedings or litigation, in the U.S. or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to the Company, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.
Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.
Furthermore, we do not have patent rights in certain foreign countries in which a market may exist in the future, and the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products.
Trademarks
We rely on our trademarks as one means to distinguish our products from the products of our competitors and have registered or applied to register many of these trademarks. Our trademark applications may not be approved, however. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks.
Trade Secrets and Know-How
We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective.
Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.
We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.
The medical device industry has been characterized by frequent and extensive intellectual property litigation. Additionally, the bariatric and therapeutic endoscopy markets are competitive. Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. If our products or methods are found to infringe, we could be prevented from manufacturing or marketing our products. In the event that we become involved in such a dispute, we may incur significant costs and expenses and may need to devote resources to resolving any claims, which would reduce the cash we have available for operations and may be distracting to management. We do not know whether our competitors or potential competitors have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our products.
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Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, alleging our infringement of a competitor’s patents, we could be prevented from marketing our products in one or more foreign countries. We may also initiate litigation against third parties to protect our own intellectual property. Our intellectual property has not been tested in prior litigation. If we initiate litigation to protect our rights, we run the risk of having our intellectual property rights adjudicated, invalidated, or limited in scope, which would undermine our competitive position.
Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, expensive and time-consuming and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, treble damages and attorneys’ fees, and prohibit us from using technologies essential to our products, any of which would have a material adverse effect on our business, results of operations and financial condition. If relevant patents held by other parties are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our products unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon our products altogether. As a result, our ability to grow our business and compete in the market may be harmed.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of these former employers or competitors. In addition, we may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement and litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products or information that is essential to our business operations, if such technologies, features or information are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies, features or information that are important or essential to our products or business operations would have a material adverse effect on our business and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products and conduct business, which could have an adverse effect on our business, results of operations and financial condition.
Risks Related to Our Capital Requirements and Finances
We have substantial indebtedness which contain restrictive covenants that may limit our operating flexibility and our failure to comply with the covenants and payment requirements of our indebtedness may subject us to increased interest expenses, lender consent and amendment costs or adverse financial consequences.
In December 2021, we borrowed $35.0 million principal amount of debt under a term loan facility (“Term Loans”) with Innovatus Capital Partners, LLC (“Innovatus”). We used $35.0 million of the proceeds to repay the existing senior secured credit facility. Our outstanding debt is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates without Innovatus’s consent. We therefore may not be able to engage in any of the foregoing transactions until our current debt obligations are paid in full or we obtain the consent of the lender. In addition, we are required to prepare our financial statements and receive audits on our annual financial statements in a timely manner, meet certain financial ratio requirements and pay interest and principal when due. Furthermore, under the Innovatus Term Loans our interest rate is tied to the Wall Street Journal Prime Rate. We do not hedge this variable rate exposure to the Wall Street Journal Prime Rate and in the event of an increase in the Wall Street Journal Prime Rate, we will be required to pay greater interest expenses, which may be material and have an adverse effect on our net loss and financial condition.
We are eligible to draw up to an additional aggregate $40.0 million under the Term Loans between July 1, 2023 and December 31, 2024, upon the achievement of certain minimum revenue thresholds. We are also eligible to draw an additional $25.0 million to finance certain approved acquisitions between June 30, 2022 and June 30, 2024. If we are unable to meet the required thresholds, then we may not be able to access these additional borrowings.
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To the extent that our operating trends do not enable us to meet our financial and restrictive covenant requirements, we are unable to pay interest or principal when due or we are unable to meet other covenants and requirements contained within our credit agreements, we may default under such agreement. A default under any such agreements could result in further increases in consent or amendment fees to our lender, further increases in interest costs, the imposition of additional constraints on borrowing by our lender or potentially more serious liquidity constraints and adverse financial consequences, including reductions in the value of our common stock or the necessity of seeking protection from creditors under bankruptcy laws. To remedy issues we may encounter with meeting our debt obligations, or for other purposes, we may find it necessary to seek further refinancing of our indebtedness, and may do so with debt instruments that are more costly than our existing instruments (and which will rank senior to our common shareholders), or we may issue additional securities which may dilute the ownership interests or value of our existing shareholders.
We cannot assure you that we will be able to generate sufficient cash flows or revenue to meet the financial covenants or pay the principal and interest on our debt. Furthermore, we cannot assure you that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.
We may need to raise substantial additional capital to fund our operations, including:
•expand the commercialization of our products;
•fund our operations and clinical studies;
•continue our research and development activities;
•support and expand ongoing manufacturing activities;
•defend or enforce, in litigation or otherwise, our patent and other intellectual property rights and any claims that we infringe on third-party patents or other intellectual property rights;
•address legal or enforcement actions by the FDA or other governmental agencies and remediate underlying problems;
•commercialize our new products in development, if any such products receive regulatory clearance or approval for commercial sale; and
•acquire companies or products and in-license products or intellectual property.
Any future funding requirements will depend on many factors, including:
•market acceptance of our products;
•the scope, rate of progress and cost of our clinical studies;
•the cost of our research and development activities;
•the cost of filing, defending and enforcing our patent or other intellectual property rights, in litigation or otherwise and any claims that our product infringes third-party patents or other intellectual property rights;
•the cost of defending, in litigation or otherwise, products liability claims;
•the cost and timing of additional regulatory clearances or approvals;
•the cost and timing of establishing additional sales, marketing and distribution capabilities;
•the scope, rate of progress and cost to expand ongoing manufacturing activities;
•costs associated with any product recall that may occur;
•the effect of competing technological and market developments;
•the extent to which we acquire or invest in products, technologies and businesses;
•the costs of operating as a public company; and
•the ability of third-parties to pay future invoices and obligations.
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If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs.
We cannot be certain that additional funding will be available on acceptable terms, if at all. In particular, the continuing impact of the COVID-19 pandemic is highly uncertain as to the availability of additional funding and the underlying terms of such funding. In addition, United States and global equity markets have recently been extremely volatile and unpredictable, reflecting in part a general concern regarding the global economy. In addition, this volatility has also affected the ability of business to obtain credit and to raise money in the capital markets. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage medical device, pharmaceutical and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
•the timing of, and our ability to close, the potential Boston Merger, as well as changes in factors that influence and the timing or likelihood of closing the potential Boston Merger;
•a slowdown in the medical device industry or the general economy, including due to macroeconomic uncertainty, inflationary pressures, and continuing effects of the COVID-19 pandemic;
•foreign exchange fluctuations;
•inability to obtain adequate supply of the components for any of our products or inability to do so at acceptable prices;
•performance of third parties on whom we may rely, including for the manufacture of the components for our products, including their ability to comply with regulatory requirements;
•the results of our current and any future clinical trials of our devices;
•unanticipated or serious safety concerns related to the use of any of our products;
•the entry into, or termination of, key agreements, including key commercial partner agreements;
•the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights or defend against the intellectual property rights of others;
•announcements by us, our commercial partners or our competitors of new products or product enhancements, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;
•competition from existing technologies and products or new technologies and products that may emerge;
•the loss of key employees;
•changes in estimates or recommendations by securities analysts, if any, who may cover our common stock;
•general and industry-specific economic conditions that may affect our research and development expenditures;
•the high proportion of shares and convertible or exchangeable securities held by affiliates;
•exercises or conversions of our outstanding warrants or convertible notes, respectively;
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•general economic and market conditions, including effects of inflationary pressures and a recessionary economic environment;
•changes in the structure of health care payment systems and insurance coverage related to our products and procedures that utilize our products; and
•period-to-period fluctuations in our financial results.
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
We will continue to incur significant legal, accounting and other expenses including costs associated with public company reporting requirements. We also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and The Nasdaq Stock Market LLC. Our executive officers, service providers and other personnel will need to devote substantial time to these rules and regulations. These rules and regulations require significant legal and financial compliance costs and make some other activities more time consuming and costly. These rules and regulations may also make it difficult and expensive for us to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers of the Company, which may adversely affect investor confidence and could cause our business or stock price to suffer.
Anti-takeover provisions in our charter documents and under Delaware General Corporate Law could make an acquisition of the Company more difficult and may prevent attempts by our stockholders to replace or remove Company management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition or a change in management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.
We do not anticipate that we will pay any cash dividends in the foreseeable future.
The current expectation is that we will retain future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain, if any, for the foreseeable future. In addition, our ability to pay dividends is limited by covenants in our credit agreement. Additionally, we are a holding company, and our ability to pay dividends will be dependent upon our subsidiaries’ ability to make distributions, which may be restricted by covenants in our credit agreement or any future contractual obligations.
Future sales and issuances of our common stock or other securities may result in significant dilution or could cause the price of our common stock to decline.
We cannot predict what effect, if any, sales of our shares in the public market or the availability of shares for sale will have on the market price of our common stock. However, if certain of our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. In addition, shares of common stock that are subject to outstanding options will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
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In January 2023, all outstanding principal amount of our convertible debt was converted into new shares of common stock. The exercise of some or all of our outstanding pre-funded warrants may also dilute the ownership interests of existing stockholders. Any sales in the public market of any shares of our common stock issuable upon such exercise, including pursuant to our registration statement on Form S-3 with respect to shares underlying these convertible securities, could negatively impact prevailing market prices of our common stock. In addition, the anticipated exercise of the pre-funded warrants into shares of our common stock or a combination of cash and shares of our common stock could depress the price of our common stock.
We also expect that additional capital may be needed in the future to fund our operations. To raise capital, we have sold and may in the future sell common stock, preferred stock, convertible securities or such other equity securities in one or more transactions at prices and in a manner we determine from time to time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
The limited public float and trading volume for our common stock may have an adverse impact and cause significant fluctuation of market price.
As of December 31, 2022, a substantial number of the outstanding shares of our common stock was held by a relatively small number of stockholders. In addition, our officers, directors, and members of management acquire stock or have the potential to own stock through previously granted equity awards. Consequently, our common stock has a relatively small float and low average daily trading volume, which could affect a stockholder’s ability to sell our stock or the price at which it can be sold. In addition, future sales of substantial amounts of our common stock in the public market by those larger stockholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock could be difficult for a stockholder to liquidate.
Our amended and restated certificate of incorporation and amended and restated bylaws designate the Court of Chancery of the State of Delaware and, the federal district courts of the United States of America as the exclusive forums for substantially all disputes between us and our stockholders, which will restrict our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation and amended and restated bylaws each provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee of the corporation to the corporation or the corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine.
The provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. Our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
These exclusive choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find the exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could harm our business.
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General Risk Factors
Our business and operations would suffer in the event of system failures, security breaches or cyber-attacks.
Our computer systems, as well as those of various third parties on which we rely, including those of contractors, consultants, and law and accounting firms, may sustain damage from computer viruses, unauthorized access, data breaches, phishing attacks, cyber criminals, natural disasters, terrorism, war and telecommunication and electrical failures. We rely on our third-party providers to implement effective security measures and identify and correct for any such failures, deficiencies, or breaches. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. We may in the future experience material system failures or security breaches that could cause interruptions in our operations or result in material disruption of our product development programs. 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 personal, confidential or proprietary information we could incur liability.
If we experience significant disruptions in our or our third-party service providers’ information technology systems, our business may be adversely affected.
We depend on information technology systems for the efficient functioning of our business, including but not limited to accounting, data storage, compliance, sales operations, inventory management and product support applications. Information technology systems are also critical to enabling employees to work remotely. A number of information technology systems in use to support our business operations are owned and/or operated by third-party service providers over whom we have no or very limited control, and upon whom we have to rely to maintain business continuity procedures and adequate security controls to ensure high availability of their information technology systems and to protect our proprietary information.
While we will attempt to mitigate interruptions, they could still occur and disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions to our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.
From time to time, we perform business improvements or infrastructure modernizations or use service providers for key systems and processes. If any of these initiatives are not successfully or efficiently implemented or maintained, they could adversely affect our business and our internal control over financial reporting.
The ability to protect our or our third-party service providers’ information systems and electronic transmissions of sensitive and/or proprietary data from data corruption, cyber-based attacks, security breaches or privacy violations is critical to the success of our business.
We rely on information technology networks and systems, including the Internet, to securely process, transmit and store electronic information, including personal information of our customers and prospective product end-users. A security breach of this infrastructure, including physical or electronic break-ins, computer viruses, malware attacks by hackers and similar breaches, may cause all or portions of our or our third-party providers’ systems to be unavailable, create system disruptions or shutdowns, and lead to erasure of critical data and software or unauthorized disclosure of confidential information which could harm our business and which may not be effectively mitigated by our insurance programs.
We and our various third-party providers make investments and take measures to protect our systems and data, but there can be no guarantee that any such measures, to the extent they are in place, will be effective. In addition, a security breach or privacy violation that leads to disclosure of consumer information (including personally identifiable information, protected health information, or personal data of EU residents) could violate or subject us to remediation and liability under federal, state and foreign laws that protect personal data, resulting in increased costs or loss of revenue.
In addition, future interpretations and applications of consumer and data protection laws in the U.S., Europe and elsewhere, such as the EU General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act (the “CCPA”), may be inconsistent with our data practices. If so, this could result in government-imposed fines, orders or guidance requiring that we change our data practices, which could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our principal executive offices are located in an 11,808 square foot facility in Austin, Texas. The term of the lease for our Austin facility extends through March 31, 2026. Our principal office in Austin houses research and development, sales, marketing, finance and administrative activities. We operate an approximate 22,000 square foot manufacturing facility in the Coyol Free Trade Zone in Alajuela, Costa Rica. The term of the lease for our Costa Rica facility extends through September 30, 2028. Additionally, we have a research and development facility in Austin, Texas and sales and marketing offices in Italy and the United Kingdom. We believe that our facilities are currently adequate for our needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings. The results of such legal proceedings and claims cannot be predicted with certainty, and regardless of the outcome, legal proceedings could have an adverse impact on our business because of defense and settlement costs, diversion of resources and other factors.
Between January 5, 2023, and January 20, 2023, five complaints were filed by purported stockholders of the Company related to the Merger. The first complaint was filed on January 5, 2023, in the United States District Court for the Southern District of New York and is captioned O’Dell v. Apollo Endosurgery, Inc., et al., Case No. 1:23-cv-00077 (the “O’Dell Complaint”). The second complaint was filed on January 9, 2023, in the United States District Court for the Southern District of New York and is captioned Gillespie v. Apollo Endosurgery, Inc., et al., Case No. 1:23-cv-00178 (the “Gillespie Complaint”). The third complaint was filed on January 12, 2023, in the United States District Court for the Southern District of New York and is captioned Elliot v. Apollo Endosurgery, Inc., et al., Case No. 1:23-cv00285 (the “Elliot Complaint”). The fourth complaint was filed on January 13, 2023, in the United States District Court for the District of Delaware and is captioned Moore v. Apollo Endosurgery, Inc., et al., Case No. 1:23-cv-00044-UNA (the “Moore Complaint”). The aforementioned four complaints are collectively referred to as the “Federal Complaints”. The Federal Complaints name the Company and each member of the board of directors of the Company, collectively referred to as the “Apollo Defendants”, as defendants. The Federal Complaints allege violations of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder against all Apollo Defendants and allege violations of Section 20(a) of the Exchange Act against the members of the board of directors of the Company in connection with the disclosures made by the Apollo Defendants related to the Merger. The Federal Complaints allege that Apollo’s preliminary proxy statement filed on Schedule 14A with the SEC on December 30, 2022, or the definitive proxy statement filed on Schedule 14A with the SEC on January 10, 2023 (“Proxy Statement”), omitted or misrepresented material information therein. The Federal Complaints seek, among other relief, (i) injunctive relief preventing the consummation of the Merger, unless and until certain information, as requested in the Federal Complaints, is disclosed, (ii) rescission and/or rescissory damages in the event the Merger is consummated, (iii) other damages purportedly suffered as a result of the alleged material omissions or misstatements, (iv) an order directing the Apollo Defendants to issue a proxy statement that does not contain any untrue statements of material fact and that states all material facts required to be included in it or necessary to make the statements contained therein not misleading, (v) an award of plaintiff’s costs and disbursements of the action, including reasonable attorneys’ and expert fees and expenses, and (vi) other and further equitable relief as the court may deem just and proper. The Gillespie Complaint was voluntarily dismissed on January 23, 2023. The O’Dell Complaint, Elliot Complaint and Moore Complaint were all voluntarily dismissed on February 14, 2023.
The fifth complaint was filed on January 20, 2023, in the District Court of Travis County, Texas, and is captioned Cheryl Lacoff v. John Barr, et al., Case No. D-1-GN-23-000357 (the “Lacoff Complaint”). The Lacoff Complaint names the Apollo Defendants and Boston Scientific as defendants. The Lacoff Complaint alleges violations of Texas Government Code § 4008.053 and Texas common law based on alleged omissions and/or misrepresentations in the Proxy Statement. The Lacoff Complaint seeks, among other relief, (i) injunctive relief preventing and/or rescinding the vote on the Merger, (ii) declarations that Apollo has violated the Texas Government Code, that the Apollo Defendants are jointly and severally liable thereunder, and that the Apollo Defendants and Boston Scientific fraudulently or negligently misrepresented and/or omitted material facts in the Proxy Statement, (iii) an order directing the Apollo Defendants and Boston Scientific to make supplemental disclosures or enjoining or unwinding the Merger if they do not, (iv) rescission and/or rescissory damages, (v) an award of interest, attorneys’ fees, expert fees and other costs, and (vi) other relief as the court may find just and proper. The Lacoff Complaint was voluntarily dismissed with prejudice on February 16, 2023.
In addition, the Company received seven demand letters (the “Demand Letters”), including two Demand Letters that attach draft complaints, from purported stockholders of the Company, which generally seek that certain allegedly omitted information from the Proxy Statement be disclosed. The Company issued supplemental disclosures on February 1, 2023, which it believes moot the allegations in the Demand Letters.
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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 Information
Our common stock is listed for trading on the Nasdaq Global Market under the symbol “APEN”.
As of March 15, 2023, there were approximately 93 stockholders of record of our common stock. Certain shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Dividend Policy
We have never paid or declared any cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future, and we intend to retain all available funds and any future earnings to fund the development and expansion of our business. In addition, our ability to pay dividends is limited by covenants in our credit agreement. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.
Issuer Purchases of Equity Securities
The following table presents our repurchases of common stock during the three months ended December 31, 2022:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| November 1 - 30 | 15,060 | $ | 6.46 | — | — | |||||||||||||||||||||
| Total | 15,060 | $ | 6.46 | — | — | |||||||||||||||||||||
(1) Represents the number of shares withheld to satisfy employee tax obligations associated with the net settlement of equity awards.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion includes both historical information and forward-looking statements based upon current expectations that involve risk, uncertainties and assumptions. Our actual results may differ materially from management’s expectations and those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the continuing impact of the COVID-19 pandemic and macroeconomic uncertainty as well as those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. “Apollo,” Orbera®, OverStitch®, X-Tack®, OverStitch Sx™, Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™, Apollo REVISE Sx™, the Apollo logo and other trademarks, service marks and trade names of Apollo are registered marks of Apollo Endosurgery, Inc. in the U.S. and other jurisdictions.
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Overview
We are a medical technology company primarily focused on the development of next-generation, minimally invasive medical devices to advance gastrointestinal therapeutic endoscopy designed to treat a variety of gastrointestinal conditions, including closure of gastrointestinal defects, managing gastrointestinal complications, and weight loss as a treatment of obesity. Our Endoscopy product portfolio consists of the OverStitch® Endoscopic Suturing System, the OverStitch Sx™ Endoscopic Suturing System, X-Tack® Endoscopic HeliX Tacking System, Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ systems (collectively “ESS”) and ORBERA® Intragastric Balloon (“IGB”). Our products are used by gastroenterologists and bariatric surgeons in a variety of settings to treat multiple gastrointestinal conditions including closure of acute perforations and chronic fistulas; tissue closure after the removal of abnormal lesions in the esophagus, stomach or colon (also known as endoscopic submucosal dissections, endoscopic mucosal resections and endoscopic full thickness resections); treatment of swallowing disorders (peroral endoscopic myotomy); and esophageal stent fixation and obesity.
We have offices in the United Kingdom and Italy that oversee commercial activities outside the U.S. (“OUS”) and a products manufacturing facility in Costa Rica. All other activities are managed and operated from facilities in Austin, Texas.
Since its market introduction in 2008, over 100,000 OverStitch units have been sold for procedures worldwide. Historically, we estimate that approximately 60% of OverStitch uses in the United States have been for advanced gastrointestinal therapies. The other uses were for endoscopic sleeve gastroplasty (“ESG”) approximately 25%, and bariatric revision, approximately 15%. Outside the United States, we estimate that the majority of OverStitch uses, approximately 65%, were for ESG. The other uses outside the United States were for bariatric revision, approximately 20%, and for advanced gastrointestinal therapies, approximately 15%. The procedural mix has shifted, and we expect will continue to shift, to a higher percentage of endobariatric procedures.
Recent research suggests that there may be a significant untapped market for applying the OverStitch Sx™ Endoscopic Suturing System, or OverStitch, to obesity treatments, including endoscopic revisions of bariatric surgeries. In the aggregate, over 200 published investigator-initiated clinical trials, involving over 6,500 ESG procedures and conducted by a variety of physicians around the world, have consistently demonstrated clinically significant excess body weight loss (in excess of 50%) and low complication rates (0.8%). In another recently conducted randomized controlled trial, participants were assigned to either an ESG procedure or an ESG procedure plus taking the weight loss drug semaglutide. Patients in the ESG-only arm demonstrated an 18.7% total body weight loss at 12 months and patients undergoing ESG and taking semaglutide had an average of 25.2% total body weight loss. We believe these results demonstrate the potential for a meaningfully expanded market opportunity for obesity treatment given the currently limited use in the United States of OverStitch for ESG and bariatric revision, as well as the ability for ESG to be performed in individuals with lower body mass indices, or BMI, thereby making the option available to more people.
In July 2022, we received marketing authorization for the Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ systems through the FDA’s De Novo Classification process. The Apollo ESG and Apollo ESG Sx Systems are intended to be used by trained gastroenterologists or surgeons to facilitate weight loss in adults with obesity with Body Mass Index (BMI) between 30 and 50 kg/m2 who have not been able to lose weight or maintain weight loss through more conservative measures. The Apollo REVISE and Apollo REVISE Sx Systems are intended to be used by trained gastroenterologists or surgeons that perform bariatric procedures to facilitate weight loss in adult patients with obesity with BMI between 30 and 50 kg/m2 by enabling transoral outlet reduction (TORe) as a revision to a previous bariatric procedure. The De Novo was approved largely based on the MERIT trial, a multi-center, prospective randomized clinical trial evaluating the safety and effectiveness of ESG compared to a medically monitored regimen of diet and healthy lifestyle.
In the third quarter 2022, we began education, marketing and training programs to increase awareness, use and adoption of Apollo ESG™, Apollo ESG Sx™, Apollo REVISE™ and Apollo REVISE Sx™ in weight loss procedures in the U.S. We have initiated a limited launch and completed our first commercial sales of Apollo ESG™ and Apollo REVISE™ in the first quarter of 2023.
Recent Developments
In November 2022, the Company entered into a definitive merger agreement to be acquired by Boston Scientific Corporation (“Boston Scientific”), a global medical technology leader, in an all-cash transaction with an enterprise value of approximately $615 million. The Merger was approved by our stockholders on February 9, 2023. The consummation of the Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. Upon the completion of the transaction, Apollo will become a wholly-owned subsidiary of Boston Scientific.
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Business and Macroeconomic Conditions
After the COVID-19 pandemic began in March 2020, our business, financial condition, and results of operations were disrupted by the various measures to contain the pandemic, primarily during 2020. Demand for our products and our business generally recovered and been sustained over levels at the beginning of the COVID-19 pandemic in 2020, though there can be no assurance that recovery will continue or that current demand levels will be sustained. In particular, new variants or outbreaks of the virus have caused and may in the future cause health systems and other healthcare providers in our markets to restrict or limit procedures, which have harmed and may continue to harm our sales recovery or growth and result in fluctuation of our product sales. We cannot assure you that our recovery in sales will be indicative of future results or that we will not experience future sales or business disruptions due to COVID-19, including variants, which could be significant. See Item 1A. Risk Factors—Risks Related to Our Business—Our business will be adversely affected by the effects of the recent COVID-19 outbreak.
Macroeconomic uncertainty, including inflationary pressures, supply chain challenges and foreign exchange fluctuations, as well as geopolitical events such as the war in Ukraine, have also resulted and may continue to result in challenges to our business and results of operations and may harm our ability to predict our future results and performance. Our Endoscopy products, such as the Intragastric Balloon products and Apollo ESG systems, have limited reimbursement, and in most cases are not currently reimbursed by governmental or other health care plans and instead are partially or wholly paid for directly by patients. Sales of our products have been and may continue to be negatively affected by adverse economic conditions impacting consumer spending, including among others, inflationary pressures and higher interest rates, which have historically caused consumers to reassess their spending choices and reduce their likelihood to pursue elective surgical procedures. Foreign exchange fluctuations have also negatively impacted and may continue to negatively impact our revenue from international markets.
Financial Operations Overview
Revenues
Our principal source of revenues are sales of our endoscopy products. The majority of our sales come from direct markets where sales are made to the final end customers, typically healthcare providers and institutions. In other markets, we sell our products to distributors who resell our products to end users. Revenues between periods will be impacted by several factors, including new COVID-19 variants or outbreaks, physician procedures and therapy preferences, patient procedures and therapy preferences, buying patterns of distributors, other market trends, the stability of the average sales price we charge or realize on products and changes in foreign exchange rates used to translate foreign currency denominated sales into U.S. dollars, which have recently come under pressure and have impacted and may continue to impact our reported OUS revenue, and inflationary pressures and macroeconomic uncertainty and their effect on consumer demand for the procedures that use our products.
Other revenue includes amounts recognized for our freight charged to customers, manufacturing services, and our digital aftercare support program, which we began to transfer to a third party at the beginning of 2021 and remaining deferred revenue will be fully recognized in the second quarter of 2023.
Cost of Sales
Cost of sales for purchased products consists of the actual purchase price from manufacturers plus an allocation of our internal manufacturing overhead cost. Cost of sales for products we manufacture include raw materials, labor, and manufacturing overhead. Raw materials used in our manufacturing activity are generally not subject to substantial commodity price volatility, and most of our manufacturing costs are incurred in U.S. dollars. Cost of sales also include royalties, shipping, warehousing, excess and obsolete inventory charges, inspection and related costs incurred in making our products available for sale or use. In periods of reduced production volume, unabsorbed manufacturing overhead costs are charged to expense when incurred.
Manufacturing overhead as a percentage of revenue between periods can fluctuate as a result of manufacturing rates and the degree to which manufacturing overhead is allocated to production during the period. We expect to continue to improve gross margins as we complete certain identified gross margin improvement projects and improve capacity utilization of our manufacturing facility.
Sales and Marketing Expense
Sales and marketing expense primarily consists of salaries, commissions, benefits and other related costs, including stock-based compensation, for personnel employed in sales, marketing and medical education. In addition, our sales and marketing expense includes costs associated with physician training, industry events, advertising and other promotional activities.
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General and Administrative Expense
General and administrative expense primarily consists of salaries, benefits and other related costs, including stock-based compensation, for personnel employed in corporate management, finance, legal, compliance, information technology and human resources. General and administrative expense also includes facility costs, insurance, audit fees, legal fees, bad debt expense and costs to develop and maintain our intellectual property portfolio.
Research and Development Expense
Research and development expense includes product development, clinical trial costs, reimbursement project costs, quality and regulatory compliance, consulting services, outside prototyping services, outside research activities, materials, and other costs associated with development of our products. Research and development expense also includes salaries, benefits and other related costs, including stock-based compensation expense, for personnel dedicated to these activities. Research and development expense may fluctuate between periods depending on the activity associated with our various product development, reimbursement project costs, and clinical obligations.
Amortization of Intangible Assets
Definite-lived intangible assets primarily consist of customer relationships, product technology, trade names, patents, trademarks and capitalized software. Intangible assets are amortized over the asset’s estimated useful life.
Merger-related Expense
Merger-related expense primarily consists of legal fees and other professional services, associated with the pending merger with Boston Scientific, incurred in the fourth quarter of 2022.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which management has prepared in accordance with existing U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. Management evaluates estimates and judgments on an ongoing basis. Estimates relate to aspects of our revenue recognition, valuation of intangible assets, long-lived assets and goodwill, going concern assessment, stock-based compensation, allowance for doubtful accounts, and inventory valuation. We base our estimates on historical experience and on various other factors that management believes 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. Our actual results may differ from these estimates under different assumptions or conditions.
The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our principal source of revenues is from the sale of our products to hospitals, physician practices and distributors. We utilize a network of employee sales representatives in the U.S. and a combination of employee sales representatives, independent agents and distributors in OUS markets. Revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in an exchange for those goods. Generally, these conditions are met upon product shipment. Customers generally have the right to return or exchange products purchased from us for up to thirty days from the date of product shipment. Distributors, who resell the products to their customers, take title to products and assume all risks of ownership at the time of shipment and are obligated to pay within specified terms regardless of when, if ever, they sell their products. At the end of each period, we determine the extent to which our revenues need to be reduced to account for expected rebates, returns and exchanges. We classify any shipping and handling cost billed to customers as revenue and the related expenses as cost of sales.
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Inventory Valuation
Inventory is stated at the lower of cost or net realizable value. Inventory costs include raw materials, inbound freight charges, warehousing costs, labor, and overhead expenses related to the Company’s manufacturing and processing facilities. The allocation of overhead costs requires significant estimates including the capitalization of related overhead costs and the utilization and efficiency of such cost inputs. Charges for excess and obsolete inventory are based on specific identification of excess and obsolete inventory items and an analysis of inventory items approaching expiration date. We evaluate the carrying value of inventory in relation to the estimated forecast of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. When quantities on hand exceed estimated sales forecasts, we record estimated excess and obsolescence charges to cost of sales. Our inventories are stated using the weighted-average cost approach, which approximates actual costs.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||||||||||||
| Dollars | % of Revenues | Dollars | % of Revenues | |||||||||||||||||||||||
| Revenues | $ | 76,856 | 100.0 | % | $ | 62,989 | 100.0 | % | ||||||||||||||||||
| Cost of sales | 34,429 | 44.8 | % | 28,030 | 44.5 | % | ||||||||||||||||||||
| Gross margin | 42,427 | 55.2 | % | 34,959 | 55.5 | % | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Sales and marketing | 36,009 | 46.9 | % | 24,311 | 38.6 | % | ||||||||||||||||||||
| General and administrative | 20,582 | 26.8 | % | 18,448 | 29.3 | % | ||||||||||||||||||||
| Research and development | 11,908 | 15.5 | % | 9,524 | 15.1 | % | ||||||||||||||||||||
| Amortization of intangible assets | 1,750 | 2.3 | % | 1,875 | 3.0 | % | ||||||||||||||||||||
| Merger-related expense | 3,600 | 4.6 | % | — | — | % | ||||||||||||||||||||
| Total operating expenses | 73,849 | 96.1 | % | 54,158 | 86.0 | % | ||||||||||||||||||||
| Loss from operations | (31,422) | (40.9) | % | (19,199) | (30.5) | % | ||||||||||||||||||||
| Other (income) expenses: | ||||||||||||||||||||||||||
| Interest expense, net | 4,671 | 6.1 | % | 8,318 | 13.2 | % | ||||||||||||||||||||
| Gain on forgiveness of PPP loan | — | — | % | (2,852) | (4.5) | % | ||||||||||||||||||||
| Other expense (income), net | 3,162 | 4.1 | % | (139) | (0.2) | % | ||||||||||||||||||||
| Net loss before income taxes | (39,255) | (51.1) | % | (24,526) | (39.0) | % | ||||||||||||||||||||
| Income tax expense | 584 | 0.8 | % | 156 | 0.2 | % | ||||||||||||||||||||
| Net loss | $ | (39,839) | (51.9) | % | $ | (24,682) | (39.2) | % | ||||||||||||||||||
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Revenues
Product sales by product group and geographic market for the periods shown were as follows:
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | % Increase / (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | OUS | Total Revenues | U.S. | OUS | Total Revenues | U.S. | OUS | Total Revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ESS | $ | 35,519 | $ | 18,333 | $ | 53,852 | $ | 25,917 | $ | 14,048 | $ | 39,965 | 37.0 | % | 30.5 | % | 34.7 | % | |||||||||||||||||||||||||||||||||||||||||
| IGB | 7,707 | 14,549 | 22,256 | 7,193 | 14,904 | 22,097 | 7.1 | % | (2.4) | % | 0.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 735 | 13 | 748 | 894 | 33 | 927 | (17.8) | % | (60.6) | % | (19.3) | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 43,961 | $ | 32,895 | $ | 76,856 | $ | 34,004 | $ | 28,985 | $ | 62,989 | 29.3 | % | 13.5 | % | 22.0 | % | |||||||||||||||||||||||||||||||||||||||||
| % Total revenues | 57.2 | % | 42.8 | % | 54.0 | % | 46.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues in 2022 were $76.9 million, compared to $63.0 million in 2021, an increase of 22.0% due to strong global demand for our ESS products. Our U.S. market total sales increased $10.0 million or 29.3% in 2022. U.S. ESS sales grew 37.0%, as we continue to see increased utilization and demand for our OverStitch product, moderate price increases, and higher demand for our X-Tack product. IGB also grew 7.1% in the U.S. due to higher demand for this elective procedure primarily in the first half of 2022. Total OUS sales increased $3.9 million, or 13.5%, in 2022 and were primarily driven by higher demand in our international distributor markets for both ESS and IGB products, offset by $2.1 million in unfavorable foreign currency translation impact and lower IGB sales in our OUS direct markets during 2022.
Direct market product sales accounted for approximately 78.0% of total product sales in 2022 compared to 79.6% in 2021.
Non-GAAP Product Sales Percentage Change in Constant Currency
To supplement our financial results, we are providing a non-GAAP financial measure, product sales percentage change in constant currency, which removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of our product sales. Product sales percentage change in constant currency is calculated by translating current foreign currency sales using last year’s exchange rate. This supplemental measure of our performance is not required by, and is not determined in accordance with GAAP.
Non-GAAP product sales percentage change in constant currency for the year ended December 31, 2022 were as follows:
| % Increase/Decrease in Constant Currency | ||||||||||||||||||||||||||||||||||||||
| OUS Reported | Foreign Exchange | Non-GAAP OUS | Non-GAAP Total Revenues | OUS | Total Revenues | |||||||||||||||||||||||||||||||||
| ESS | $ | 18,333 | $ | 1,285 | $ | 19,618 | $ | 55,137 | 39.7 | % | 38.0 | % | ||||||||||||||||||||||||||
| IGB | 14,549 | 768 | 15,317 | 23,024 | 2.8 | % | 4.2 | % | ||||||||||||||||||||||||||||||
| Total revenues | $ | 32,895 | $ | 2,053 | $ | 34,948 | $ | 78,909 | 20.6 | % | 25.3 | % | ||||||||||||||||||||||||||
We believe the non-GAAP financial measure included herein is helpful in understanding our current financial performance. We use this supplemental non-GAAP financial measure internally to understand, manage and evaluate our business, and make operating decisions. We believe that making non-GAAP financial information available to investors, in addition to GAAP financial information, may facilitate more consistent comparisons between our performance over time with the performance of other companies in the medical device industry, which may use similar financial measures to supplement their GAAP financial information. However, our non-GAAP financial measure is not meant to be considered in isolation or as a substitute for the comparable GAAP metric.
Cost of Sales
Costs of product sales for the periods shown were as follows:
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||||||||||||
| Dollars | % Total Revenues | Dollars | % Total Revenues | ||||||||||||||||||||
| Materials, labor and purchased goods | 23,842 | 31.0 | % | $ | 19,628 | 31.2 | % | ||||||||||||||||
| Overhead | 6,260 | 8.1 | % | 5,167 | 8.2 | % | |||||||||||||||||
| Other indirect costs | 4,327 | 5.7 | % | 3,235 | 5.1 | % | |||||||||||||||||
| Total cost of sales | $ | 34,429 | 44.8 | % | $ | 28,030 | 44.5 | % | |||||||||||||||
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Gross Margin
Gross margin was 55.2% for 2022 compared to 55.5% for 2021. The decline in gross margin as a percentage of revenue was primarily due to the impact of foreign currency changes on revenue, increased shipping costs, lower IGB product sales which have a higher gross margin profile, and a higher percentage of revenues from OUS distributors, which have a lower gross margin profile. These decreases were partially offset by the positive gross margin impact of cost improvement projects and price increases, primarily related to our OverStitch products.
Operating Expenses
Sales and Marketing Expense. Sales and marketing expense increased $11.7 million in 2022 as compared to 2021 primarily due to higher compensation, marketing spend, and increased travel compared to 2021 as we expanded our U.S. salesforce headcount and invested in our marketing programs and initiatives. We expect our marketing expenses to increase in future periods as we continue to invest in our marketing programs targeting sales growth.
General and Administrative Expense. General and administrative expense increased $2.1 million in 2022 as compared to 2021 primarily due to higher compensation, professional services, software costs and insurance coverage.
Research and Development Expense. Research and development expense increased $2.4 million in 2022 as compared to 2021 primarily due to higher compensation due to expansion of our team to address key clinical needs, continued product development, and enhancing capabilities in reimbursement and market access. We expect research and development expenses to increase in future periods as we continue to invest in our product pipeline and reimbursement initiatives.
Amortization of Intangible Assets. Amortization of intangible assets decreased $0.1 million in 2022 as compared to 2021 due to intangible assets that were fully amortized in the fourth quarter of 2022.
Merger-related Expense. In connection with the pending merger with Boston Scientific, we incurred expense of $3.6 million in the fourth quarter of 2022 primarily related to legal fees and other professional service fees.
Loss from Operations.
Loss from operations in 2022 was $31.4 million compared to $19.2 million in 2021, attributed to a $19.7 million increase in operating expenses noted above, offset in part by higher revenues in 2022.
Other Expenses
Interest Expense, net. Net interest expense decreased $3.6 million in 2022 primarily due to the extinguishment of our term loan with Solar in December 2021, including prepayment and final fees, and write-off of related deferred financing costs. We also had higher interest income due to the interest earned on the net proceeds from the issuance and sale of common shares of common stock in our October 2021 public offering.
Other Expense (Income), net. Other expense (income) primarily consists of realized and unrealized foreign exchange gains or losses on short-term intercompany loans denominated in the U.S. dollars payable by our foreign subsidiaries. Fluctuations in currency exchange rates resulted in an unrealized loss of $2.8 million in 2022 compared to the unrealized gain of $0.4 million in 2021.
Income Tax Expense. Income tax expense related to foreign income taxes on income generated in our OUS tax jurisdictions was $0.6 million in 2022 compared to $0.2 million in 2021.
Liquidity and Capital Resources
We have experienced operating losses since inception and have an accumulated deficit of $337.3 million as of December 31, 2022. To date, we have funded our operating losses and acquisitions through equity offerings, term loans, and the issuance of debt instruments. Our ability to fund future operations and meet debt covenant requirements will depend upon our level of future revenue and operating cash flow and our ability to access future draws on our existing credit facility, or additional funding through either equity offerings, issuances of debt instruments or both.
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Management believes its existing cash and cash equivalents, additional term loans available upon certain thresholds under the Term Loans and access to financing sources will be sufficient to meet covenant, liquidity and capital requirements for the next twelve months and beyond. Management periodically evaluates our liquidity requirements, alternative uses of capital, capital needs and available resources. Any future cash requirements will depend on many factors including market acceptance of our products, the cost of our research and development activities, the cost and timing of additional regulatory clearance and approvals, the cost and timing of identified gross margin improvement projects, the cost and timing of clinical programs and reimbursement projects, the ability to maintain covenant compliance with our lending facility, and the cost of sales, marketing, and manufacturing activities. We may be required to seek additional equity or debt financing. As a result of this process, we have in the past, and may in the future, explore alternatives to finance our business plan, including, but not limited to, sales of common stock, preferred stock, convertible securities or debt financings, reduction of planned expenditures, or other sources, although there can be no assurances that such additional funding could be obtained. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.
Cash Flows
The following table provides information regarding our cash flows for the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||||||||
| Net cash used in operating activities | $ | (31,262) | $ | (14,454) | ||||||||||
| Net cash (used in)/provided by investing activities | (2,745) | 1,561 | ||||||||||||
| Net cash provided by financing activities | 349 | 67,582 | ||||||||||||
| Effect of exchange rate changes on cash | (142) | (77) | ||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (33,800) | $ | 54,612 | ||||||||||
Operating Activities
Cash used in operating activities of $31.3 million for 2022 was primarily the result of a net loss of $39.8 million plus non-cash items of $15.5 million primarily related to depreciation, amortization, unrealized foreign exchange on intercompany loans, non-cash interest, and stock-based compensation. Additionally, cash used by operating assets and liabilities of $6.9 million primarily related to higher accounts receivable in correlation with the increase in revenues, increase in raw materials and finished goods inventory with the upward trend in sales, increase in certain prepaid items, which was partially offset by an increase in accounts payable and accrued expenses.
Cash used in operating activities of $14.5 million for 2021 was primarily the result of a net loss of $24.7 million plus non-cash items of $9.5 million primarily related to gain on forgiveness of PPP loan, depreciation, amortization, non-cash interest, and stock-based compensation. Additionally, cash used by operating assets and liabilities of $0.7 million primarily related to accounts receivable due to the increase in revenues, increase in inventory purchases, and the increase in certain prepaid expenses which was partially offset by changes in accounts payable and accrued expenses.
Investing Activities
Cash used in investing activities in 2022 was primarily related to equipment purchases and ongoing investments in our intellectual property portfolio. Cash provided by investing activities in 2021 was related to the installment payment received from the sale of the Surgical product line partially offset by investments in property and equipment and in our intellectual property portfolio.
Financing Activities
Cash provided by financing activities of $0.3 million for 2022 primarily related to proceeds from option exercises of $0.8 million, partially offset by shares withheld to satisfy the tax obligation in connection with vesting of restricted stock units of $0.5 million.
Cash provided by financing activities of $67.6 million for 2021 primarily related to net proceeds received from the issuance of common stock in October 2021 of $69.8 million, proceeds from option exercises of $2.5 million, partially offset by the prepayment and final fees of $3.2 million and the payment of deferred financing costs of $1.5 million for the Term Loan executed in December 2021.
Contractual and Other Obligations
Innovatus Term Loans. As of December 31, 2022, we had $35.0 million outstanding principal amount drawn under Term Loan A. See Note 9 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information.
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Solar Capital Exit Fee. We remain obligated to pay $1.9 million upon the earlier to occur of (i) certain exit or change in control events, including the proposed merger with Boston Scientific Corporation, or (ii) our achievement of trailing twelve-month revenue of $100.0 million.
Operating Leases. Our operating lease commitments related primarily to our office space. As of December 31, 2022, we had fixed lease payment obligations of $4.3 million, with $0.9 million expected to be paid within 12 months and the remainder thereafter. See Note 5 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information.
Recent Accounting Pronouncements
See Note 2(r) to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for a discussion of recently enacted accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item has been omitted as we qualify as a smaller reporting company as defined by Rule 12b-2 of the Exchange Act.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||||||
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Apollo Endosurgery, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apollo Endosurgery, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, 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 consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated 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 consolidated 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 consolidated 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 it relates.
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Inventory Valuation
As described in Notes 2 and 4 to the consolidated financial statements, the Company’s consolidated inventory balance was $18.2 million as of December 31, 2022. Inventory is stated at the lower of cost or net realizable value. The Company values inventories using the weighted average cost approach, which approximates actual costs. Valuation of inventory involves significant estimates relating to the capitalization of labor and overhead costs to the work in process and finished goods inventories as well as lower of cost or net realizable value considerations.
The valuation of inventories requires management to perform complex manual calculations using significant assumptions, including estimates related to the capitalization of labor and overhead costs as well as the utilization and efficiency of such cost inputs. This leads to a high degree of auditor judgment, and an increased extent of effort is required when performing audit procedures to test the reasonableness of the estimates and assumptions.
The following are the most relevant procedures we performed to address this critical audit matter:
•Evaluating management’s process used in determining the valuation of inventory, including:
◦Evaluating the methodology used by management to develop its estimate for reasonableness
◦Testing the accuracy and completeness of the data utilized by management to develop its estimate, by:
▪Sampling of transactions, in order to test actual costs incurred and the transfer of costs throughout the production process by obtaining evidence supporting the cost of raw materials, labor, and overhead.
▪Tracing the accumulation of costs to bills of materials and testing management’s average cost calculations based upon the underlying cost data.
◦Evaluating the reasonableness of the significant assumptions used by management, related to overhead cost allocation;
•Performing an analysis of standard overhead costs to actuals to assess the reasonableness of the adjustments to overhead for significant changes to actual costs incurred; and
•Developing an independent expectation of inventory valuation at the product level based on historic and standard costs as well as current year cost increases and comparing our expectations to management’s valuation for reasonableness.
/s/ Moss Adams LLP | ||||||||
| Denver, Colorado | ||||||||
| March 30, 2023 | ||||||||
| We have served as the Company’s auditor since 2020. | ||||||||
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APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2022 and 2021
(In thousands, except for share data)
| 2022 | 2021 | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 57,002 | $ | 90,691 | ||||||||||
Accounts receivable, net of allowance for doubtful accounts of $785 and $330, respectively | 14,991 | 10,078 | ||||||||||||
Inventory | 18,246 | 11,966 | ||||||||||||
Prepaid expenses and other current assets | 2,639 | 1,965 | ||||||||||||
Total current assets | 92,878 | 114,700 | ||||||||||||
Restricted cash | 1,010 | 1,121 | ||||||||||||
Property, equipment and right-of-use assets, net | 7,507 | 5,593 | ||||||||||||
Goodwill | 5,290 | 5,290 | ||||||||||||
Intangible assets, net of accumulated amortization of $16,248 and $14,814, respectively | 3,121 | 4,400 | ||||||||||||
Other assets | 425 | 424 | ||||||||||||
Total assets | $ | 110,231 | $ | 131,528 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 7,419 | $ | 4,584 | ||||||||||
Accrued expenses | 12,404 | 9,902 | ||||||||||||
Convertible debt (Note 8) | 19,713 | — | ||||||||||||
Total current liabilities | 39,536 | 14,486 | ||||||||||||
Long-term debt | 33,963 | 33,473 | ||||||||||||
| Convertible debt | — | 19,513 | ||||||||||||
| Long-term liabilities | 4,138 | 2,819 | ||||||||||||
Total liabilities | 77,637 | 70,291 | ||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||
Stockholders’ equity: | ||||||||||||||
Common stock; $0.001 par value; 100,000,000 shares authorized; 41,983,708 and 39,546,323 shares issued and outstanding at December 31, 2022 and 2021, respectively | 42 | 40 | ||||||||||||
Additional paid-in capital | 364,872 | 356,516 | ||||||||||||
Accumulated other comprehensive income | 4,974 | 2,136 | ||||||||||||
Accumulated deficit | (337,294) | (297,455) | ||||||||||||
Total stockholders’ equity | 32,594 | 61,237 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 110,231 | $ | 131,528 | ||||||||||
See accompanying notes to the consolidated financial statements.
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APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2022 and 2021
(In thousands, except for share data)
| 2022 | 2021 | |||||||||||||
Revenues | $ | 76,856 | $ | 62,989 | ||||||||||
Cost of sales | 34,429 | 28,030 | ||||||||||||
Gross margin | 42,427 | 34,959 | ||||||||||||
Operating expenses: | ||||||||||||||
Sales and marketing | 36,009 | 24,311 | ||||||||||||
General and administrative | 20,582 | 18,448 | ||||||||||||
Research and development | 11,908 | 9,524 | ||||||||||||
Amortization of intangible assets | 1,750 | 1,875 | ||||||||||||
Merger-related expense | 3,600 | — | ||||||||||||
Total operating expenses | 73,849 | 54,158 | ||||||||||||
Loss from operations | (31,422) | (19,199) | ||||||||||||
Other (income) expenses: | ||||||||||||||
Interest expense, net | 4,671 | 8,318 | ||||||||||||
Gain on forgiveness of PPP loan | — | (2,852) | ||||||||||||
Other expense (income), net | 3,162 | (139) | ||||||||||||
Net loss before income taxes | (39,255) | (24,526) | ||||||||||||
Income tax expense | 584 | 156 | ||||||||||||
Net loss | $ | (39,839) | $ | (24,682) | ||||||||||
Other comprehensive (loss)/income: | ||||||||||||||
Foreign currency translation | 2,838 | (793) | ||||||||||||
Comprehensive loss | $ | (37,001) | $ | (25,475) | ||||||||||
Net loss per share, basic and diluted | $ | (0.98) | $ | (0.82) | ||||||||||
| Shares used in computing net loss per share, basic and diluted | 40,650,039 | 30,243,264 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2022 and 2021
(In thousands, except for share data)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 25,819,329 | $ | 26 | $ | 276,569 | $ | 2,929 | $ | (272,773) | $ | 6,751 | |||||||||||||||||||||||||||
| Exercise of common stock options | 698,070 | 1 | 2,487 | — | — | 2,488 | ||||||||||||||||||||||||||||||||
| Exercise of common stock warrants | 2,668,247 | 3 | (1) | — | — | 2 | ||||||||||||||||||||||||||||||||
| Issuance of restricted stock and performance stock units | 433,172 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock for convertible debt interest | 244,861 | — | 1,229 | — | — | 1,229 | ||||||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs of $5,083 | 9,660,000 | 10 | 69,772 | — | — | 69,782 | ||||||||||||||||||||||||||||||||
| Conversion of convertible debt | 22,644 | — | 74 | — | — | 74 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,386 | — | — | 6,386 | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (793) | — | (793) | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (24,682) | (24,682) | ||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 39,546,323 | $ | 40 | $ | 356,516 | $ | 2,136 | $ | (297,455) | $ | 61,237 | |||||||||||||||||||||||||||
| Exercise of common stock options | 233,931 | — | 830 | — | — | 830 | ||||||||||||||||||||||||||||||||
| Exercise of common stock warrants | 1,633,526 | 2 | (2) | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of restricted stock and performance stock units | 414,803 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Shares forfeited for tax obligation in connection with restricted stock units | (87,803) | — | (481) | — | — | (481) | ||||||||||||||||||||||||||||||||
| Issuance of common stock for convertible debt interest | 242,928 | — | 1,226 | — | — | 1,226 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,783 | — | — | 6,783 | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | 2,838 | — | 2,838 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (39,839) | (39,839) | ||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | 41,983,708 | $ | 42 | $ | 364,872 | $ | 4,974 | $ | (337,294) | $ | 32,594 | |||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
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APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2022 and 2021
(In thousands)
| 2022 | 2021 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net loss | $ | (39,839) | $ | (24,682) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
Depreciation and amortization | 2,966 | 3,232 | ||||||||||||
Gain on forgiveness of PPP loan | — | (2,852) | ||||||||||||
Amortization of deferred financing costs | 456 | 1,419 | ||||||||||||
Non-cash interest | 1,929 | 1,575 | ||||||||||||
Provision for doubtful accounts receivable | 505 | 152 | ||||||||||||
Inventory impairment | 97 | 50 | ||||||||||||
Stock-based compensation | 6,783 | 6,386 | ||||||||||||
| Unrealized foreign exchange on intercompany payables | 2,779 | (444) | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | (5,589) | (2,332) | ||||||||||||
Inventory | (6,437) | (1,740) | ||||||||||||
Prepaid expenses and other assets | (686) | (1,251) | ||||||||||||
Accounts payable and accrued expenses | 5,774 | 6,033 | ||||||||||||
Net cash used in operating activities | (31,262) | (14,454) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Purchases of property and equipment | (2,268) | (1,195) | ||||||||||||
Purchases of intangibles and other assets | (477) | (261) | ||||||||||||
| Proceeds from sale of equipment | — | 17 | ||||||||||||
Divestiture of Surgical product line | — | 3,000 | ||||||||||||
Net cash (used in)/provided by investing activities | (2,745) | 1,561 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from exercise of stock options | 830 | 2,488 | ||||||||||||
| Proceeds from exercise of warrants | — | 2 | ||||||||||||
| Proceeds from issuance of common stock | — | 69,782 | ||||||||||||
| Proceeds from senior secured term loans | — | 35,000 | ||||||||||||
| Shares forfeited for tax obligation in connection with restricted stock units | (481) | — | ||||||||||||
Payments of deferred financing costs | — | (1,540) | ||||||||||||
| Repayments of senior secured notes | — | (38,150) | ||||||||||||
Net cash provided by financing activities | 349 | 67,582 | ||||||||||||
Effect of exchange rate changes on cash | (142) | (77) | ||||||||||||
Net increase in cash, cash equivalents and restricted cash | (33,800) | 54,612 | ||||||||||||
Cash, cash equivalents and restricted cash at beginning of year | 91,812 | 37,200 | ||||||||||||
Cash, cash equivalents and restricted cash at end of year | $ | 58,012 | $ | 91,812 | ||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||
Cash paid for interest | $ | 2,767 | $ | 6,550 | ||||||||||
Cash paid for income taxes | 343 | 272 | ||||||||||||
| Right-of-use assets recognized in exchange for lease obligations (non-cash) | 709 | (556) | ||||||||||||
| Gain on forgiveness of PPP loan (non-cash) | — | 2,852 | ||||||||||||
| Issuance of common stock for convertible debt interest (non-cash) | 1,226 | 1,229 | ||||||||||||
| Issuance of common stock for conversion of convertible debt (non-cash) | — | 74 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2022 and 2021
(In thousands, except for share data)
(1) Organization and Business Description
Apollo Endosurgery, Inc. is a Delaware corporation with both domestic and foreign wholly-owned subsidiaries. Throughout these Notes “Apollo” and the “Company” refer to Apollo Endosurgery, Inc. and its consolidated subsidiaries.
Apollo is a medical technology company primarily focused on the development of next-generation, minimally invasive medical devices to advance gastrointestinal therapeutic endoscopy. The Company develops and distributes devices that are used by surgeons and gastroenterologists for a variety of procedures related to gastrointestinal conditions including closure of gastrointestinal defects, managing gastrointestinal complications and weight loss as a treatment of obesity.
The Company’s core products include the OverStitch® Endoscopic Suturing System, the OverStitch Sx™ Endoscopic Suturing System, X-Tack® Endoscopic HeliX Tacking System (collectively “ESS”) and the Orbera® Intragastric Balloon System (“IGB”). All devices are regulated by the U.S. Food and Drug Administration (the “FDA”) or an equivalent regulatory body outside the U.S. In July 2022, the Company received FDA authorization for Apollo ESG™, Apollo REVISE™ and Apollo REVISE Sx™. To date, these are the first and only devices authorized by the FDA for endoscopic sleeve gastroplasty (“ESG”) and endoscopic bariatric revision.
In November 2022, the Company entered into a definitive merger agreement to be acquired by Boston Scientific Corporation (“Boston Scientific”), a global medical technology leader, in an all-cash transaction with an enterprise value of approximately $615,000. The Merger was approved by the Company’s stockholders on February 9, 2023. The consummation of the Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. Upon the completion of the transaction, Apollo will become a wholly-owned subsidiary of Boston Scientific.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. ("U.S. GAAP") 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 revenues and expenses during the reporting periods. Actual results are likely to differ from those estimates, and such differences may be material to the consolidated financial statements. Significant items subject to such estimates and assumptions include revenue recognition, going concern assessment, useful lives of intangibles and long-lived assets, long-lived asset and goodwill impairment, allowance for doubtful accounts, and valuation of inventory.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining maturity at date of purchase of three months or less to be cash equivalents.
(d) Restricted Cash
The Company entered into irrevocable letters of credit with four banks to secure obligations under lease agreements and performance based obligations. These letters of credit are secured by cash balances totaling $1,010 and $1,121 which are recorded in restricted cash on the consolidated balance sheet as of December 31, 2022 and 2021, respectively.
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(e) Accounts Receivable
The Company generally extends credit to certain customers without requiring collateral. The Company provides an allowance for doubtful accounts based on management’s evaluation of the collectability of accounts receivable. Accounts receivable are written off when it is deemed uncollectible. Accounts receivable of $32 and $454 were written off during the years ended December 31, 2022 and 2021, respectively.
(f) Inventory
Inventory is stated at the lower of cost or net realizable value. Inventory costs include raw materials, inbound freight charges, warehousing costs, labor, and overhead expenses related to the Company’s manufacturing and processing facilities. Charges for excess and obsolete inventory are based on specific identification of obsolete inventory items and an analysis of inventory items approaching expiration date. The Company records estimated excess and obsolescence charges to cost of sales. The Company’s inventories are stated using the weighted average cost approach, which approximates actual costs.
(g) Fair Value Measurements
The carrying amounts of the Company’s financial instruments, which primarily include cash and cash equivalents, and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company’s long-term debt is estimated by management to approximate $35,000 for both December 31, 2022 and 2021. The Company’s convertible debt is estimated by management to approximate $18,200 and $20,500 at December 31, 2022 and 2021, respectively. Management’s estimates are based on comparisons of the characteristics of the Company’s obligations, comparable ranges of interest rates on recently issued debt, and maturity. Such valuation inputs are considered a Level 3 measurement in the fair value valuation hierarchy.
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
(h) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, except for leasehold improvements, which are depreciated straight-line over the shorter of the estimated useful life or the life of the lease. Major renewals and betterments are capitalized. Validation costs (including materials and labor) that are required to bring machinery to working condition are capitalized. Expenditures for repairs and maintenance and minor replacements are charged to expense as incurred.
(i) Leases
Lease arrangements are generally recognized at lease commitment. Operating lease right-of-use assets and liabilities are recognized at commencement based on the present value of lease payments over the lease term, except for leases with an initial term of 12 months or less, for which lease expense is recognized as incurred over the lease term. Right-of-use assets represent the Company’s right to use an underlying asset during the reasonably certain lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease terms may include options to extend or terminate the lease when its reasonably certain that the Company will exercise that option. The Company primarily uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating lease right-of-use assets include any lease payments related to initial direct costs and prepayments and excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.
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(j) Goodwill and Other Intangible Assets
Goodwill is not amortized but is tested annually for impairment or more frequently if impairment indicators exist. For annual and interim goodwill impairment tests, the Company first assesses qualitative factors before performing a quantitative assessment of the fair value of a reporting unit. If it is determined on the basis of qualitative factors that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative impairment test is required. The Company’s evaluation of goodwill completed on December 31, 2022 and 2021 resulted in no impairment losses.
Definite-lived intangible assets consist of customer relationships, product technology, trade names, patents and trademarks and capitalized software which are amortized over their estimated useful lives. Costs to extend the lives of and renew patents and trademarks are capitalized when incurred.
(k) Valuation of Long-Lived Assets
Long-lived assets, including definite-lived intangible assets, are monitored and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of undiscounted cash flows is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flows may differ from actual cash flows. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment charge is recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. The Company’s evaluation of long-lived assets for the years ended December 31, 2022 and 2021 resulted in no impairment losses.
(l) Revenue Recognition
The Company’s principal source of revenues is from the sale of its products. Revenue is recognized when control of the promised goods is transferred to the customer, in an amount that reflects the consideration expected to be entitled to in an exchange for those goods. Generally, these are met under the Company’s agreements with most customers upon product shipment. This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment. The Company’s distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products.
Customers and distributors generally have the right to return or exchange products purchased from the Company for up to thirty days from the date of product shipment. At the end of each period, the Company determines the extent to which its revenues need to be reduced to account for expected returns and exchanges. Certain customers may receive volume rebates or discounts, which are accounted for as variable consideration. The Company estimates these amounts based on the expected amount to be provided to customers and reduces recognized revenues.
The Company records deferred revenues when cash payments are received in advance of the transfer of goods.
The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis. Accordingly, such amounts are excluded from revenues. Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales.
(m) Research and Development
Research and development costs are expensed as incurred.
(n) Stock-based Compensation Plans
The Company recognizes compensation costs for all stock-based awards based upon each award’s estimated fair value as determined on the date of grant. The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock option awards. The assumptions used in estimating the fair value of stock-based compensation awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgement. Compensation cost is recognized on a straight-line basis over the respective vesting period of the award. Adjustments for actual forfeitures are made in the period which they occur.
(o) Advertising
The Company expenses advertising costs as incurred. The Company incurred approximately $632 and $244 in advertising costs during the years ended December 31, 2022 and 2021, respectively.
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(p) Income Taxes
The Company accounts for deferred income taxes using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Temporary differences are then measured using the enacted tax rates and laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more-likely than-not to be realized. Determining the appropriate amount of valuation allowance requires management to exercise judgment about future operations.
In the ordinary course of business, there are many transactions for which the ultimate tax outcome is uncertain. The Company regularly assesses uncertain tax positions in each of the tax jurisdictions in which it has operations and accounts for the related consolidated financial statement implications. The amount of unrecognized tax benefits is adjusted when information becomes available or when an event occurs indicating a change is appropriate. The Company includes interest and penalties related to its uncertain tax positions as part of income tax expense.
(q) Foreign Currency
The Company translates foreign assets and liabilities at exchange rates in effect at the balance sheet dates, and the revenues and expenses using average rates during the year. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Exchange rate fluctuations on short-term intercompany loans are included in other expense in the consolidated statement of operations and comprehensive loss.
(r) Recent Accounting Pronouncements
In August 2020, Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity was issued, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU will become effective for the Company on January 1, 2024 and is not expected to have a material impact on the consolidated financial statements.
In May 2021, ASU No. 2021-04, Issuer’s Accounting for Certain Modifications of Exchanges of Freestanding Equity-Classified Written Call Options was issued to clarify the accounting for modifications or exchanges of freestanding equity-classified written call options, such was warrants, that remain equity classified after modification or exchange. This ASU became effective for the Company on January 1, 2022 and did not have a material impact on the consolidated financial statements.
(3) Concentrations
Consolidated financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and accounts receivable. At December 31, 2022, the Company’s cash and cash equivalents and restricted cash are held in deposit accounts at four different banks totaling $58,012. The Company has not experienced any losses in such accounts, and management does not believe the Company is exposed to any significant credit risk. Management further believes that credit risk in the Company’s accounts receivable is substantially mitigated by the Company’s evaluation process, relatively short collection terms, and the high level of creditworthiness of its customers. The Company continually monitors the compliance of its customers with the Company’s payment terms, but generally requires no collateral.
The Company had no concentrations greater than 10% of the Company’s net accounts receivable balance as of December 31, 2022 or 2021. The Company had no single customer that comprised more than 10% of the Company’s total revenues for the years ended December 31, 2022 and 2021.
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(4) Inventory
Inventory consists of the following as of December 31:
| 2022 | 2021 | |||||||||||||
| Raw materials | $ | 7,602 | $ | 3,442 | ||||||||||
| Work in progress | 1,862 | 965 | ||||||||||||
| Finished goods | 8,782 | 7,559 | ||||||||||||
| Total inventory | $ | 18,246 | $ | 11,966 | ||||||||||
The Company recorded an inventory impairment charge of $97 and $50 for the years ended December 31, 2022 and 2021, respectively. Finished goods included $55 and $120 of inventory on consignment at customer locations at December 31, 2022 and 2021, respectively.
(5) Property, Equipment and Right-of-Use Assets
Property and equipment consists of the following as of December 31:
Depreciable Lives | 2022 | 2021 | ||||||||||||||||||
| Equipment | 5 years | $ | 8,634 | $ | 7,472 | |||||||||||||||
| Right-of-use assets | 1 - 8 years | 4,101 | 3,459 | |||||||||||||||||
| Furniture, fixtures and tooling | 4 - 8 years | 2,014 | 1,855 | |||||||||||||||||
| Computer hardware | 3 - 5 years | 1,931 | 1,444 | |||||||||||||||||
| Leasehold improvements | 3 - 7 years | 2,098 | 2,059 | |||||||||||||||||
| Construction in process | 973 | 483 | ||||||||||||||||||
| 19,751 | 16,772 | |||||||||||||||||||
| Less accumulated depreciation | (12,244) | (11,179) | ||||||||||||||||||
| Property, equipment and right-of-use assets | $ | 7,507 | $ | 5,593 | ||||||||||||||||
The Company recorded depreciation expense of $1,209 and $1,355 for the years ended December 31, 2022 and 2021, respectively. There were no impairment charges for the years ended December 31, 2022 or 2021.
The Company has operating leases for office space in Texas, the United Kingdom, and Italy, and for the manufacturing facility in Costa Rica. The Company also has various operating lease agreements for vehicles.
As of December 31, 2022, the maturities of the Company’s operating lease liabilities are as follows:
| 2023 | $ | 917 | ||||||
| 2024 | 1,022 | |||||||
| 2025 | 998 | |||||||
| 2026 | 585 | |||||||
| 2027 | 428 | |||||||
| Thereafter | 328 | |||||||
| Total lease payments | 4,278 | |||||||
| Less imputed interest | (889) | |||||||
| Total operating lease liabilities | $ | 3,389 | ||||||
Operating lease liabilities of $543 and $2,846 are included in and , respectively, as of December 31, 2022. Operating lease expense and cash paid within operating cash flows for operating leases was $1,019 and $1,109 during 2022 and 2021, respectively. The weighted average remaining lease term was 4.5 years and the weighted average discount rate used to estimate the value of the operating lease liabilities was 10.9%. In September 2022, the Company extended the principal executive offices lease in Texas until March 2026, and in October 2022, the research and development facility lease in Texas was extended until April 2026.
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(6) Intangible Assets
Intangible assets consist of the following as of December 31:
Useful Life | 2022 | 2021 | ||||||||||||||||||
| Customer relationships | 9 years | $ | 8,301 | $ | 8,301 | |||||||||||||||
| Orbera technology | 12 years | 4,600 | 4,600 | |||||||||||||||||
| Trade names | 10 years | 1,700 | 1,700 | |||||||||||||||||
| Patents and trademarks | 5 years | 3,127 | 2,852 | |||||||||||||||||
| Capitalized software | 1 - 5 years | 1,641 | 1,438 | |||||||||||||||||
| 19,369 | 18,891 | |||||||||||||||||||
| Less accumulated amortization | (16,248) | (14,491) | ||||||||||||||||||
| Intangible assets, net | $ | 3,121 | $ | 4,400 | ||||||||||||||||
The Company recorded amortization expense of $1,757 and $1,877 during 2022 and 2021, respectively. Additionally, $275 and $256 related to the extension and renewal of patents and trademarks was capitalized during 2022 and 2021, respectively.
Amortization for the next five years is as follows:
| 2023 | $ | 1,158 | ||||||
| 2024 | 755 | |||||||
| 2025 | 684 | |||||||
| 2026 | 288 | |||||||
| 2027 | 236 | |||||||
| Total | $ | 3,121 | ||||||
(7) Accrued Expenses
consists of the following as of December 31:
| 2022 | 2021 | |||||||||||||
| Accrued employee compensation and expenses | $ | 5,682 | $ | 6,569 | ||||||||||
| Accrued professional service fees | 3,229 | 656 | ||||||||||||
| Accrued taxes | 875 | 437 | ||||||||||||
| Accrued interest | 607 | 613 | ||||||||||||
| Lease liability | 543 | 587 | ||||||||||||
| Accrued returns and rebates | 305 | 106 | ||||||||||||
| Other | 1,163 | 934 | ||||||||||||
| Total accrued expenses | $ | 12,404 | $ | 9,902 | ||||||||||
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(8) Convertible Debt
Convertible debt consists of the following as of December 31:
| 2022 | 2021 | |||||||||||||
| Convertible debt principal | $ | 20,446 | $ | 20,446 | ||||||||||
| Deferred financing costs | (733) | (933) | ||||||||||||
| Convertible debt | $ | 19,713 | $ | 19,513 | ||||||||||
In August 2019, the Company issued $20,000 aggregate principal amount of 6.0% convertible senior debentures (the “Convertible Debt”), primarily to existing stockholders and officers of the Company. Interest on the Convertible Debt is payable semi-annually in shares of the Company’s common stock on January 1 and July 1 of each year, at a rate of 6.0% per year. The number of shares of common stock required to settle the amount of interest payable will be based on the volume-weighted average price (“VWAP”) of the Company’s common stock for the 10 consecutive trading days immediately preceding the applicable interest payment date. However, in the event that the trailing 10-trading day VWAP of the Company’s common stock is less than $2.50 per share, interest accrued and payable for the applicable interest payment period will accrete to the principal amount then outstanding.
The Convertible Debt converts, at the option of the holders, into shares of the Company’s common stock at an initial conversion price of $3.25 per share, subject to adjustment. If the VWAP of the Company’s common stock has been at least $9.75 (subject to adjustment) for at least 20 trading days during any 30 consecutive trading day period, the Company may force the conversion of all or any part of the outstanding principal amount of the Convertible Debt, accrued and unpaid interest and any other amounts then owing, subject to certain conditions. On December 28, 2022, the forced conversion requirements were met and the Company notified the holders it was electing this conversion. In connection with this forced conversion, the Company converted $17,914 of the outstanding principal amount into 5,565,457 shares of the Company’s common stock in January 2023. Following this forced conversion, $2,531 of the principal amount remained outstanding due to beneficial ownership limitations contained in the debenture agreement at the time of forced conversion. However, the remaining principal amount was subsequently converted into 778,909 shares of the Company’s stock in January 2023 due to changes in the holder’s beneficial ownership at the time. Upon conversion in January 2023, the deferred financing costs were written off and included in additional paid-in capital.
Convertible debt was reclassified to current liabilities in December of 2022.
In January 2023, the Company issued 61,061 shares of the Company’s common stock to holders of the Convertible Debt in fulfillment of $607 of accrued interest as of December 31, 2022.
The Company issued 75,780 shares of the Company’s common stock to holders of the Convertible Debt in January 2022 in fulfillment of $613 of accrued interest as of December 31, 2021. In July 2022, the Company issued 167,148 additional shares of common stock for accrued interest of $613 as of June 30, 2022.
Interest expense on the Convertible Debt was $1,421 and $1,427 for the years ended December 31, 2022 and 2021, respectively.
(9) Long-Term Debt
Long-term debt consists of the following as of December 31:
| 2022 | 2021 | |||||||||||||
| Term loan facility | $ | 35,000 | $ | 35,000 | ||||||||||
| Deferred interest | 240 | 6 | ||||||||||||
| Deferred financing costs | (1,277) | (1,533) | ||||||||||||
| Long-term debt | $ | 33,963 | $ | 33,473 | ||||||||||
Term Loan Facility
In December 2021, the Company entered into a term loan facility agreement with Innovatus Capital Partners, LLC (“Innovatus”) to borrow up to $100,000 (the “Term Loans”) and drew the Term A Loan of $35,000. The Company is eligible to draw the Term B Loan of $15,000 between July 1, 2023 and December 31, 2023 and the Term C Loan of $25,000 between July 1, 2024 and December 31, 2024, in each case upon the achievement of certain minimum revenue thresholds. The Company is
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eligible to draw the Term D Loan of $25,000 to finance certain approved acquisitions between June 30, 2022 and June 30, 2024. The Term Loans mature on December 21, 2027, with principal payments beginning February 1, 2027, and bear interest at the greater of the Wall Street Journal Prime Rate or 3.25%, plus 4.0%. Principal payments are due on a straight-line basis after the interest-only period concludes. An additional 4.0% of the outstanding amount will be due at the end of the loan term. Prior to December 21, 2025, Innovatus will have the right to make a one-time election to convert up to 10.0% of the outstanding aggregate principal amount of the term loans into shares of common stock of the Company at a price per share equal to $11.50. The Term Loans include customary affirmative covenants and negative covenants. Additionally, it contains a minimum liquidity covenant, tested on a maintenance basis, and a minimum revenue covenant tested quarterly commencing the earlier of December 31, 2023 or the funding date of the Term B loan. The Company used $35,000 of the proceeds of the Term A Loan to repay the previous senior secured credit agreement in full, including interest.
Interest expense on the Company’s long-term debt was $3,592 and $7,137, including $2,044 of additional interest related to the prepayment and final fees repaid to the previous lender in 2021, for the years ended December 31, 2022 and 2021, respectively.
Principal payments of the Company’s long-term debt are as follows:
| 2023 - 2026 | $ | — | ||||||
| 2027 | 35,000 | |||||||
| Total | $ | 35,000 | ||||||
(10) Long-Term Liabilities
Included in other long-term liabilities as of December 31, 2022 and 2021 was $1,292 and $816, respectively, for the estimated non-current portion of the exit fee obligation to Solar Capital Ltd, which was reclassified from long-term debt in December 2021. The Company remains obligated to pay $1,925 upon the earlier to occur of (i) certain exit events specified in the Solar Term Loan Facility, including the proposed merger with Boston Scientific, or (ii) the Company’s achievement of trailing twelve-month revenue of $100,000. Interest expense accreted on this long-term liability was $475 for the year ended December 31, 2022.
(11) Stockholders' Equity
(a) Authorized Stock
The Company’s amended and restated certificate of incorporation, authorizes the Company to issue 115,000,000 shares of common and preferred stock, consisting of 100,000,000 shares of common stock with $0.001 par value and 15,000,000 shares of preferred stock with $0.001 par value. The Company has reserved common shares for issuance upon the exercise of the authorized and issued common stock options and warrants.
(b) Warrants
Warrants consist of the following as of December 31, 2022:
| Warrant Expiration Date | Number of shares | Exercise price per share | ||||||||||||
| Pre-funded - no expiration | 12,110,710 | $0.001 | ||||||||||||
During the year ended December 31, 2022, 1,633,794 of pre-funded warrants were exercised into 1,633,526 shares of common stock and 163,915 warrants expired. In the first quarter of 2023, 9,424,504 pre-funded warrants were exercised into 9,423,565 shares of common stock.
(12) Stock Option Plans
Plans
2017 Plan
The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) was approved in June 2017 by the Company’s stockholders. The 2017 plan covers employees, consultants, and nonemployee directors of the Company and provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance stock awards, performance cash awards, and other stock awards to purchase shares of the Company’s common stock. Options to date have been granted to employees at 100% of the fair value at the date of the grant. The fair value, vesting
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period, and expiration dates of the options granted are determined by the Board of Directors at the time of grant. The maximum term of options granted under the 2017 Plan is 10 years from the date of grant. Options generally vest over a period of time, typically not more than 5 years. The plan’s reserve is automatically increased by 4% of the total number of shares outstanding at the prior year end for a period of ten years. Shares subject to awards granted under the 2017 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2017 Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights or options exercised by means of a net exercise will be deducted from the shares available under the 2017 Plan.
Certain of the outstanding options were granted under prior equity incentive plans which are no longer in effect.
As of December 31, 2022, the Company has 219,379 shares of common stock reserved for issuance under the 2017 Plan.
During 2022, the Company transitioned to issuing majority of employees restricted stock units rather than stock options.
Stock Option Activity
A summary of the stock option activity under the Company’s 2017 Plan and Prior Plans (collectively, the “Equity Plans”) as of December 31, 2022 is presented below.
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Options outstanding, December 31, 2021 | 3,482,883 | $5.04 | 8.0 years | $12,307 | ||||||||||||||||||||||
| Options granted | 921,063 | $4.29 | ||||||||||||||||||||||||
| Options exercised | (233,931) | $3.54 | ||||||||||||||||||||||||
| Options forfeited | (140,458) | $4.59 | ||||||||||||||||||||||||
| Options outstanding, vested and expected to vest, December 31, 2022 | 4,029,557 | $4.97 | 7.6 years | $20,386 | ||||||||||||||||||||||
| Options exercisable | 2,165,916 | $4.88 | 6.7 years | $11,280 | ||||||||||||||||||||||
The fair value for options under the Equity Plans was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires estimating dividend yield, volatility, risk-free rate of return during the service period and the expected term of the award. The expected dividend yield assumption is based on the Company’s expectation of zero future dividend payouts. The volatility assumption is based on the historical volatilities of the Company’s common stock and of comparable public companies. The risk free rate of return assumption utilizes yields on U.S. treasury zero-coupon bonds with maturity that is commensurate with the expected term for awards issued to employees and the contractual term for awards issued to non-employees. The expected term is derived using the simplified method and represents the weighted average period that the stock awards are expected to remain outstanding.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31:
| 2022 | 2021 | |||||||||||||
| Risk free interest rate | 3.3% | 1.0% | ||||||||||||
| Expected dividend yield | —% | —% | ||||||||||||
| Estimated volatility | 82.8% | 81.1% | ||||||||||||
| Expected life | 6.0 years | 6.1 years | ||||||||||||
Additional information regarding options is as follows:
| 2022 | 2021 | |||||||||||||
| Stock-based compensation cost | $6,783 | $6,386 | ||||||||||||
| Weighted-average grant date fair value of options granted during the period | $3.07 | $4.40 | ||||||||||||
| Aggregate intrinsic value of options exercised during the period | $964 | $3,494 | ||||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on December 31, 2022 and the exercise prices of the options shown,
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multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on December 31, 2022 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.
Unrecognized compensation expense related to unvested options was approximately $5,874 at December 31, 2022, with a weighted-average remaining amortization period of less than 2.5 years.
A summary of the restricted stock unit activity, including performance-based stock units, under the Company’s Equity Plans as of December 31, 2022 is presented below:
| Units | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||||||||
| Restricted stock units outstanding, December 31, 2021 | 1,194,432 | $5.67 | $10,069 | ||||||||||||||
| Restricted stock units granted | 1,587,540 | $5.32 | |||||||||||||||
| Restricted stock units released | (414,803) | $5.48 | |||||||||||||||
| Restricted stock units forfeited | (128,601) | $4.48 | |||||||||||||||
| Restricted stock units outstanding, December 31, 2022 | 2,238,568 | $5.52 | $22,319 | ||||||||||||||
In March 2021, the Company awarded 707,278 performance-based restricted stock units to the Company’s chief executive officer in connection with the commencement of his employment. The performance-based restricted stock units vest in four equal tranches upon the achievement of revenue for the trailing four quarters equal to $50,000, $65,000, $80,000, and $95,000. The revenue milestone for the first and second tranche was achieved as of June 30, 2021 and March 31, 2022, respectively.
In August 2021, the Company awarded 80,000 time-based restricted stock units and 120,000 performance-based restricted stock units to the Company’s chief financial officer in connection with the commencement of his employment. The time-based restricted stock units vest in four equal tranches upon completion of each year of employment. The performance-based restricted stock units vest in three equal tranches upon the achievement of revenue for the trailing four quarters equal to $70,000, $90,000, and $110,000. The revenue milestone for the first tranche was achieved as of September 30, 2022.
In May 2022, shares of performance-based restricted stock units for the Company’s chief executive officer that vested were subject to statutory tax withholdings and the compensation committee of the Company’s board of directors authorized the Company to withhold share of common stock to settle the tax obligation, which resulted in a forfeiture of 66,553 shares of performance-based restricted stock units and 110,267 net shares of performance-based restricted stock units being issued during the year ended December 31, 2022.
In August 2022, shares of time-based restricted stock units for the Company’s chief financial officer that vested were subject to statutory tax withholdings and the compensation committee of the Company’s board of directors authorized the Company to withhold shares of common stock to settle the tax obligation, which resulted in a forfeiture of 6,190 shares of time-based restricted stock units and 13,810 net shares of time-based restricted stock units being issued during the year ended December 31, 2022.
In November 2022, shares of performance-based restricted stock units for the Company’s chief financial officer that vested were subject to statutory tax withholdings and the compensation committee of the Company’s board of directors authorized the Company to withhold share of common stock to settle the tax obligation, which resulted in a forfeiture of 15,060 shares of performance-based restricted stock units and 24,940 net shares of performance-based restricted stock units being issued during the year ended December 31, 2022.
Unrecognized compensation expense related to unvested restricted stock units and performance-based stock units was approximately $7,474 and $657, respectively, at December 31, 2022, with a remaining weighted-average amortization period of 2.9 years.
(13) Commitments and Contingencies
(a) Risk Management
The Company maintains various forms of insurance that the Company’s management believes are adequate to reduce the exposure to these risks to an acceptable level.
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(b) Employment Agreements
Certain executive officers are entitled to payments if they are terminated without cause or as a result of a change in control. Upon termination without cause, and not as a result of death or disability, each of such officers is entitled to receive a payment of base salary for to twenty-four months following termination of employment and such officer will be entitled to continue to receive coverage under medical and dental benefit plans for to twelve months or until such officer is covered under a separate plan from another employer. Upon a termination other than for cause or for good reason within twelve months following a change in control, each of such officers will be entitled to the same benefits as upon termination without cause and will also be entitled to certain acceleration of such officer’s outstanding unvested options at the time of such termination.
(c) Litigation
Management believes there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
(d) Purchase Commitment
During 2022, the Company entered into various one year noncancellable purchase agreements with our largest supplier to purchase raw materials in the normal course of business. As of December 31, 2022, the total outstanding purchase commitment was $2,885. Subsequently, in the first quarter of 2023, we entered into additional one year noncancellable purchase agreements with this same supplier for an additional $575 of raw materials.
(14) Defined Contribution Plan
The Company sponsors defined contribution plans for employees in the U.S. and Europe. The cost of these plans, including employer contributions, was $993 and $729 for the years ended December 31, 2022 and 2021, respectively.
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(15) Income Taxes
Income tax expense of $584 and $156 for the years ended December 31, 2022 and 2021, respectively, is composed of foreign income taxes on earnings generated by foreign subsidiaries.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes at December 31 are as follows:
| 2022 | 2021 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Capitalized transaction costs | $ | 212 | $ | 250 | ||||||||||
| Intangible assets | 1,342 | 1,205 | ||||||||||||
| Inventory valuation | 58 | 43 | ||||||||||||
| Research and development credit | 4,005 | 4,005 | ||||||||||||
| Interest expense carryforward | 5,810 | 4,980 | ||||||||||||
| Foreign timing differences | 633 | 624 | ||||||||||||
| Depreciable assets | 38 | 53 | ||||||||||||
| Other | 3,000 | 1,871 | ||||||||||||
| Net operating loss carryforwards | 62,314 | 57,739 | ||||||||||||
| 77,412 | 70,770 | |||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Unremitted foreign earnings | (426) | (448) | ||||||||||||
| (426) | (448) | |||||||||||||
| Total net deferred tax assets | 76,986 | 70,322 | ||||||||||||
| Less valuation allowance | (76,727) | (70,055) | ||||||||||||
| Net deferred tax assets (included in other assets) | $ | 259 | $ | 267 | ||||||||||
The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Company’s lack of earnings history and potential limitations pursuant to changes in ownership under Internal Revenue Code Section 382. The valuation allowance increased by $6,672 during the year ended December 31, 2022, primarily as a result of changes in net operating loss.
As of December 31, 2022, the Company has no unrecognized tax benefits or accrued interest or penalties associated with uncertain tax positions.
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The Company’s provision for income taxes differs from the expected tax expense amount computed by applying the statutory federal income tax rate of 21% to income before income taxes as a result of the following:
| 2022 | 2021 | |||||||||||||
| Tax at U.S. statutory rate | $ | (8,244) | $ | (5,150) | ||||||||||
| State taxes, net of deferred benefit | (1,192) | (783) | ||||||||||||
| Foreign tax rate differential | (206) | (260) | ||||||||||||
| Foreign taxes | 179 | (169) | ||||||||||||
| Permanent differences | 2,400 | (231) | ||||||||||||
| Transaction costs | 859 | — | ||||||||||||
| Other | 41 | (124) | ||||||||||||
| Deferred tax adjustment | 117 | (43) | ||||||||||||
| Unremitted foreign earnings | 20 | 27 | ||||||||||||
| Valuation allowance - current year | 6,610 | 6,889 | ||||||||||||
| Income tax expense | $ | 584 | $ | 156 | ||||||||||
Income tax expense consists of the following:
| 2022 | 2021 | |||||||||||||
| Current taxes: | ||||||||||||||
| U.S. state | $ | 3 | $ | 2 | ||||||||||
| International | 580 | 239 | ||||||||||||
| Total current income tax expense | 583 | 241 | ||||||||||||
| Deferred taxes: | ||||||||||||||
| International | 1 | (85) | ||||||||||||
| Total deferred income tax expense | 1 | (85) | ||||||||||||
| Income tax expense | $ | 584 | $ | 156 | ||||||||||
As of December 31, 2022, the Company had U.S. federal net operating loss carryforwards of approximately $259,638, of which $115,800 has an unlimited life and the remaining amount will expire in varying amounts beginning in 2025 if not utilized. The Company’s July 2017 stock offering qualified as an ownership change under section 382 which resulted in a reduction of $100,825 in the Company’s U.S. federal net operating losses that will not be utilizable in the future, thus federal net operating loss carryforwards available to the Company as of December 31, 2022 were $158,813. However, the Company’s deferred tax asset value for this section 382 reduction is not reflected in the table above until written off in a future tax return. There have been no additional section 382 reductions through December 31, 2022.
The deferred tax asset associated with net operating loss carryforwards has been offset by a valuation allowance due to the uncertainty that the Company will achieve taxable income necessary to utilize the net operating loss carryforward in the future.
The Company had state net operating loss carryforwards of approximately $132,987 which will begin to expire in varying amounts beginning in 2023, if not utilized. The Company had foreign net operating losses of approximately $2,455 which do not expire.
(16) Net Loss Per Share
The basic and diluted net loss per common share presented in the consolidated statement of operations and comprehensive loss is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Potentially dilutive shares, which include warrants for the purchase of common stock, convertible debt, restricted stock units, including performance-based stock units, and options outstanding under the Company’s equity incentive plans, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
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Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares on a weighted average basis):
Year Ended December 31 | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Warrants for common stock | 12,110,710 | 13,908,419 | ||||||||||||
| Convertible debt | 6,306,134 | 6,310,235 | ||||||||||||
| Common stock options | 3,675,760 | 3,094,197 | ||||||||||||
| Restricted stock units | 1,796,208 | 920,066 | ||||||||||||
| 23,888,812 | 24,232,917 | |||||||||||||
(17) Segment and Geographic Information
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
Product sales by product group and geographic market, based on the location of the customer, whether the U.S. or outside the U.S. (“OUS”) for the periods shown were as follows:
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | OUS | Total Revenues | % Total Revenues | U.S. | OUS | Total Revenues | % Total Revenues | |||||||||||||||||||||||||||||||||||||||||||
| ESS | $ | 35,519 | $ | 18,333 | $ | 53,852 | 70.1 | % | $ | 25,917 | $ | 14,048 | $ | 39,965 | 63.4 | % | ||||||||||||||||||||||||||||||||||
| IGB | 7,707 | 14,549 | 22,256 | 29.0 | % | 7,193 | 14,904 | 22,097 | 35.1 | % | ||||||||||||||||||||||||||||||||||||||||
| Other | 735 | 13 | 748 | 0.9 | % | 894 | 33 | 927 | 1.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 43,961 | $ | 32,895 | $ | 76,856 | 100.0 | % | $ | 34,004 | $ | 28,985 | $ | 62,989 | 100.0 | % | ||||||||||||||||||||||||||||||||||
| % Total revenues | 57.2 | % | 42.8 | % | 54.0 | % | 46.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Total distributor sales were 51.4% and 44.3% of total OUS revenues for the years ended December 31, 2022 and 2021, respectively. Sales in the next largest individual country outside the U.S. were 4.8% and 6.3% for the years ended December 31, 2022 and 2021, respectively.
The following table represents property, equipment and right-of-use assets based on the physical location of the asset:
| 2022 | 2021 | |||||||||||||
| U.S. | $ | 4,158 | $ | 1,855 | ||||||||||
| Costa Rica | 3,159 | 3,436 | ||||||||||||
| Other | 190 | 302 | ||||||||||||
| Total property, equipment and right-of-use assets, net | $ | 7,507 | $ | 5,593 | ||||||||||
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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 evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness and design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of December 31, 2022 our disclosure controls and procedures were effective at a reasonable assurance level.
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 Rule 13a-15(f) of the Exchange Act). Our management, including our Chief Executive Officer and Chief Financial Officer and oversight of our Board of Directors, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”). Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Attestation Report of the Independent Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Since we are a smaller reporting company and a non-accelerated filer, the rules of the Securities and Exchange Commission permits us to provide only management’s report on internal controls over financial reporting in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive and principal financial officers, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived 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, within Apollo have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
Our Board of Directors (the “Board”) presently has eight members and is divided into three classes. Each class has a three-year term. Vacancies on our Board may be filled only by persons elected by a majority of the remaining directors then in office. A director elected to the Board to fill a vacancy in a class, including vacancies created by an increase in the number of directors, shall serve for the remainder of the full term of that class and until the director’s successor is duly elected and qualified, subject to their earlier resignation or removal. There are currently no vacancies on our Board to be filled.
Set forth below is certain information for each director as of March 30, 2023.
| Name | Age | Position(s) | ||||||||||||
| John Barr | 66 | Chairperson, Class III director | ||||||||||||
| Charles McKhann | 54 | Chief Executive Officer and President, Class III director | ||||||||||||
| Sharon O'Keefe | 71 | Class III director | ||||||||||||
| Jeannette Bankes | 52 | Class II director | ||||||||||||
| R. Kent McGaughy, Jr. | 51 | Class II director | ||||||||||||
| William D. McClellan, Jr. | 63 | Class I director | ||||||||||||
| David C. Pacitti | 57 | Class I director | ||||||||||||
| Julie Shimer, Ph.D. | 70 | Class I director | ||||||||||||
Below is a brief biography of each director.
John Barr. Since March 2019, Mr. Barr has served as a member of our Board. From January 2018 through December 2021, Mr. Barr has served as an Operating Partner for Altamont Capital Partners, a private equity firm. From October 2014 through August 2017, Mr. Barr served as the chief executive officer of Surgical Specialties, Inc., a manufacturer of surgical instruments. From May 2012 through August 2013, Mr. Barr served as the President, Global Surgical at Bausch & Lomb Holdings Incorporated, an eye health products company. Mr. Barr previously served on the Board of Directors of Valeritas Holdings Inc., a medical technology company focused on the treatment of diabetes. Mr. Barr holds a B.S. in Bioengineering from the University of Pennsylvania and an M.B.A. from Northwestern University. We believe Mr. Barr’s qualifications to serve on our Board include his extensive leadership experience in the medical device and surgical products industries.
Charles McKhann. Since March 2021, Charles (Chas) McKhann has served as our Chief Executive Officer and President and a member of the Board of Directors. From October 2017 to November 2018, Mr. McKhann served as Chief Commercial Officer at ROX Medical, Inc., a medical device company. From July 2016 to April 2017, he served as Chief Commercial Officer of Torax Medical, Inc., a medical device company (acquired by Johnson & Johnson in February 2017). From January 2015 to July 2016, he served as Chief Commercial Officer of Intersect ENT, Inc., a publicly traded medical device company. In addition, from September 2012 to March 2021, he served as Managing Director of Vernon Consulting, Inc. Previously, Mr. McKhann was a strategy consultant at McKinsey & Company, a management consulting company. Mr. McKhann holds a B.A. in Political Sciences and Economics and an M.B.A. from Stanford University. We believe Mr. McKhann’s qualifications to serve on our Board include his position as our Chief Executive Officer and President and his extensive leadership experience in our industry.
Sharon O’Keefe. Since July 2022, Ms. O’Keefe has served as a member of our Board. Ms. O’Keefe currently serves as a Non-Executive Director at Convatec Group, a publicly traded global medical products and technologies company, and Adtalem Global Education, a publicly traded United States medical and healthcare education company. She most recently served as President of the University of Chicago Medical Center from 2011 to July 2020. She has also acted as Senior Vice President for Operations at the University of Maryland Medical System in Baltimore from 1989 to 1999, and as Executive Vice President and Chief Operating Officer at Boston’s Beth Israel Deaconess Medical Center from 1999 to 2002. She has held leadership roles with Barnes-Jewish Hospital and Loyola University Medical Center. Ms. O’Keefe has an M.S. in Nursing Administration from the Loyola University of Chicago, and a B.S. in Nursing from Northern Illinois University. We believe Ms. O’Keefe’s qualifications to serve on our Board include her extensive experience across the healthcare industry.
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Jeannette Bankes. Since March 2022, Ms. Bankes has served as a member of our Board. Since March 2019, Ms. Bankes has served as the President and General Manager of the Global Surgical Franchise at Alcon AG, a medical company specializing in eye care products. Prior to joining Alcon, Ms. Bankes served in leadership positions across multiple divisions and functions at Boston Scientific Corporation, a medical device manufacturer, from August 2004 to March 2019 including most recently as General Manager, Urology and Pelvic Health. Prior to joining Boston Scientific, Ms. Bankes also worked for Merck & Co., a multinational pharmaceutical company, for 12 years. Ms. Bankes holds a B.S. from Kutztown University. We believe Ms. Bankes’ qualifications to serve on our Board include her diverse experience in management positions in the biotechnology industry.
R. Kent McGaughy, Jr. Since January 2012, Mr. McGaughy has served as a member of our Board. Since 2005, Mr. McGaughy has served as a Managing Director at CPMG, Inc., a private investment firm, where he is a founding stockholder. Mr. McGaughy currently serves on the Board of Directors of Reata Pharmaceuticals Inc. and InstilBio. He holds a B.A. from The University of Texas (Plan II Honors, Summa Cum Laude and is a member of Phi Beta Kappa) and an M.B.A. from Harvard Business School. We believe Mr. McGaughy’s qualifications to serve on our Board include his extensive leadership as an investor in the medical technologies industry and his financial expertise.
William D. McClellan, Jr. Since May 2014, Mr. McClellan has served as a member of our Board. Since January 2018, Mr. McClellan has served as the Chief Financial Officer of Aerin Medical Inc. Since April 2016, Mr. McClellan has served as a financial management consultant to healthcare and life sciences companies, serving as the managing member of Goodwater Consulting, LLC. From June 2004 until June 2016, Mr. McClellan was the Chief Financial Officer and Executive Vice President, Finance at On-X Life Technologies Holdings, Inc., a medical device manufacturer. He currently serves on the Board of Directors of Reata Pharmaceuticals, Inc., a publicly-traded pharmaceutical company, and chairs its audit committee. Mr. McClellan received a B.B.A. in accounting from Abilene Christian University and is a Certified Public Accountant. We believe that Mr. McClellan’s qualifications to serve on our Board include his extensive finance and accounting expertise in the medical device industry and that he is a certified public accountant.
David C. Pacitti. Since November 2017, Mr. Pacitti has served as a member of our Board. Since 2015, Mr. Pacitti has served as the President of Siemens Medical Solutions USA, Inc. and Head of the Americas, Siemens Healthineers where he is responsible for leading the marketing, sales, service, and support functions in North America and Latin America, across the entire Healthineers portfolio, including medical imaging, laboratory diagnostics, therapy solutions, and services. From February 2006 to October 2015, Mr. Pacitti was with Abbott Vascular, a division of Abbott Laboratories, in a variety of commercial leadership roles. He serves as a member of the Board of Directors of the Advanced Medical Technology Association (AvaMed), the University City Science Center in Philadelphia, PA, the National Electrical Manufacturers Association (NEMA), and the Siemens Foundation. He is also a member of the CEO Council for Growth at the Chamber of Commerce for Greater Philadelphia, as well as the Children’s Hospital of Philadelphia Corporate Council, the GAVS Customer Advisory Board, the Medical University of South Carolina (MUSC) President’s Advisory Council and the NextGen Advisory Board for the University of Missouri. Mr. Pacitti received a B.A. in Economics from Villanova University. We believe Mr. Pacitti’s qualifications to serve on our Board include his extensive commercial expertise and medical device leadership experience.
Julie Shimer, Ph.D. Since May 2018, Dr. Shimer has served as a member of our Board. Dr. Shimer is currently a private investor and has 30 years of product development experience, including many years with major communications companies. Dr. Shimer currently serves on the Board of Directors of Avanos Medical, Inc. (formerly Halyard Health, Inc.), a medical technology company and Masimo Corp., a medical technology company, as well as one non-profit organization. From 2017 to 2020, Dr. Shimer served on the Board of Directors of Windstream Holdings, Inc., a voice and data network communications company. From 2007 to 2019, Dr. Shimer served on the Board of Directors of Netgear, Inc. and from 2013 to 2017, she served on the Board of Directors of Earthlink Holdings Corp. prior to its merger with Windstream. Dr. Shimer holds an M.S. and Ph.D. in Electrical Engineering from Lehigh University and a B.S. in Physics from Rensselaer Polytechnic Institute. We believe Dr. Shimer’s qualifications to serve on our Board include her industry knowledge and public company board experience.
Executive Officers
For information required by this Item relating to our executive officers, see “Information About Our Executive Officers” in Part I, Item 1 of this Annual Report on Form 10-K.
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Board Leadership Structure
Our Board has an independent Chairperson who has authority, among other things, to preside over Board meetings, including meetings of stockholders, and shall have such powers and duties as may, from time to time, be assigned by the Board. Accordingly, the Chairperson has substantial ability to shape the work of the Board. We believe that separation of the Chairperson and Chief Executive Officer positions reinforces the independence of the Board in its oversight of our business and affairs. In addition, we believe that having an independent Chairperson creates an environment that is more conducive to objective evaluation and oversight of management’s performance, increasing management accountability and improving the ability of our Board to monitor whether management’s actions are in our best interests and those of our stockholders. As a result, we believe that having an independent Chairperson can enhance the effectiveness of our Board as a whole.
Role of the Board in Risk Oversight
One of the Board’s key functions is informed oversight of our risk management process. Our Board does not have a standing risk management committee, but rather administers this oversight function directly through the Board as a whole, as well as through various Board standing committees that address risks inherent in their respective areas of oversight. In particular, our Board is responsible for monitoring and assessing strategic risk exposure, including a determination of the nature and level of risk appropriate for us. Our Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. Our Audit Committee also monitors compliance with certain legal and regulatory requirements. Our Nominating and Corporate Governance Committee monitors the effectiveness of our corporate governance guidelines, including whether they are successful in preventing illegal or improper liability-creating conduct. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.
Management periodically reports to the Board or relevant committee, which provides guidance on risk assessment and mitigation. Each committee charged with risk oversight reports to the Board on such matters. While our full Board of Directors has overall responsibility for evaluating key business risks, its committees monitor and report to our Board of Directors on certain risks. Our Audit Committee monitors our major financial, accounting, legal, compliance, investment, tax, cybersecurity and data privacy risks, and the steps our management has taken to identify and control these exposures, including by reviewing and setting guidelines, internal controls, and policies that govern the process by which risk assessment and management is undertaken. Our Audit committee also monitors compliance with legal, regulatory, and ethical compliance programs, and directly supervises our internal audit function.
Meetings of the Board of Directors
Our Board met twelve times during 2022. Each Board member in 2022 attended 75% or more of the aggregate number of meetings of the Board and of the committees on which he or she served held during the portion of the year for which he or she was a director or committee member.
As required under applicable Nasdaq listing standards, in 2022, our independent directors met five times in regularly scheduled executive sessions at which only independent directors were present.
Information Regarding Committees of the Board of Directors
Our Board has three committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each of the committees has authority to engage legal counsel or other experts or consultants, as it deems appropriate to carry out its responsibilities. Our Board has determined that each member of each committee meets the applicable Nasdaq rules and regulations regarding “independence” and each member is free of any relationship that would impair his or her individual exercise of independent judgment with regard to Apollo.
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The following table provides our committee membership for each Board committee.
| Name | Audit | Compensation | Nominating and Corporate Governance | |||||||||||||||||
| Charles McKhann | — | — | — | |||||||||||||||||
| Jeannette Bankes | — | X | — | |||||||||||||||||
| John Barr | X | — | X | |||||||||||||||||
| William D. McClellan, Jr. | X* | — | — | |||||||||||||||||
| R. Kent McGaughy, Jr. | X | X | — | |||||||||||||||||
Sharon O’Keefe (1) | — | — | X | |||||||||||||||||
David C. Pacitti (2) | — | X | X* | |||||||||||||||||
| Julie Shimer, Ph.D. | — | X* | — | |||||||||||||||||
Total meetings in 2022 | 8 | 5 | 4 | |||||||||||||||||
* Committee Chairperson
(1) Ms. O’Keefe was appointed to our Board in July 2022 to fill an existing vacancy.
(2) Mr. Pacitti was temporarily a member of the Compensation Committee in 2022.
Audit Committee
The Audit Committee was established by our Board to oversee our corporate accounting and financial reporting processes and audits of our financial statements. The Audit Committee’s responsibilities include, among other things:
•appointing our independent registered public accounting firm;
•evaluating the qualifications, independence and performance of our independent registered public accountants;
•reviewing and approving the audit and non-audit services to be performed by the independent registered public accountants;
•reviewing the design, implementation, adequacy and effectiveness of our internal accounting controls and our critical accounting policies;
•conferring with management and the independent registered public accountants regarding the effectiveness of internal control over financial reporting;
•discussing with management and the independent registered public accounting firm the results of our annual audit and the review of our quarterly unaudited financial statements;
•reviewing, overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
•reviewing and approving transactions between us and any related persons; and
•reviewing and evaluating, at least annually, the performance of the audit committee and its members including compliance of the audit committee with its charter.
The Audit Committee is currently comprised of three directors: Messrs. McClellan, Barr, and McGaughy. Mr. McClellan serves as the Chair of the Audit Committee. Our Board has adopted a written Audit Committee charter that is publicly available in the corporate governance section of our website at www.apolloendo.com.
Our Board reviews the definition of independence for Audit Committee members on an annual basis and has determined that Messrs. McClellan, Barr, and McGaughy satisfy the independence standards for such committee established by Rule 10A-3 under the Exchange Act, and other SEC and Nasdaq listing standards, as applicable, including Rule 5605(c)(2)(A)(i) and (ii) of the Nasdaq listing standards.
Our Board has also determined that Mr. McClellan qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. Our Board made a qualitative assessment of Mr. McClellan’s level of knowledge and experience based on a number of factors, including his formal education and experience as a chief financial officer.
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Report of the Audit Committee of the Board of Directors
The Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2022 with management of the Company. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC. The Audit Committee has also received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent accountants’ communications with the Audit Committee concerning independence, and has discussed with the independent registered public accounting firm the accounting firm’s independence. Based on the foregoing, the Audit Committee recommended to the Board that the audited financial statements be included in this Annual Report on Form 10-K for the year ended December 31, 2022.
Mr. William D. McClellan, Jr.
Mr. John Barr
Mr. R. Kent McGaughy, Jr.
The material in this report is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Compensation Committee
The Compensation Committee is currently comprised of three directors: Dr. Shimer, Mr. McGaughy and Ms. Bankes. Dr. Shimer serves as the Chair of the Compensation Committee. Dr. Shimer, Mr. McGaughy and Ms. Bankes are independent (as independence is currently defined in Rule 5605(d)(2) of the Nasdaq listing standards). Our Board has adopted a written Compensation Committee charter that is available to stockholders in the corporate governance section of our website at www.apolloendo.com.
The Compensation Committee acts on behalf of the Board to review, recommend for adoption and oversee our compensation strategy, policies, plans and programs, including:
•establishment of corporate and individual performance objectives relevant to the compensation of our executive officers, directors and other senior management and evaluation of performance in light of these stated objectives;
•review and recommend to the Board for approval of the compensation and other terms of employment or service, including severance and change-in-control arrangements, of our Chief Executive Officer and the other executive officers and directors; and
•administration of our equity compensation plans, pension and profit-sharing plans, deferred compensation plans and other similar plans and programs.
Each year, our Compensation Committee reviews with management our executive compensation tables and accompanying narrative disclosure and considers whether to recommend that it be included in proxy statements and other filings.
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Compensation Committee Processes and Procedures
Our Compensation Committee met five times in 2022. The agenda for each meeting is usually developed by the Chair of the Compensation Committee, in consultation with the Chief Executive Officer and the Vice President of Human Resources. The Compensation Committee meets regularly in executive session. However, from time to time, various members of management and other employees as well as outside advisors or consultants may be invited by the Compensation Committee to make presentations, to provide financial or other background information or advice or to otherwise participate in Compensation Committee meetings. The Chief Executive Officer may not participate in, or be present during, any deliberations or determinations of our Compensation Committee regarding his compensation or individual performance objectives. The charter of the Compensation Committee grants the Compensation Committee full access to all books, records, facilities and personnel of the Company. In addition, under the charter, the Compensation Committee has the authority to obtain, at the expense of the Company, advice and assistance from compensation consultants and internal and external legal, accounting or other advisors and other external resources that the Compensation Committee considers necessary or appropriate in the performance of its duties. The Compensation Committee has direct responsibility for the oversight of the work of any consultants or advisers engaged for the purpose of advising our Compensation Committee. In particular, the Compensation Committee has the sole authority to retain, in its sole discretion, compensation consultants to assist in its evaluation of executive and director compensation, including the authority to approve the consultant’s reasonable fees and other retention terms. Under the charter, the Compensation Committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the Compensation Committee, other than in-house legal counsel and certain other types of advisers, only after taking into consideration six factors, prescribed by the SEC and Nasdaq, that bear upon the adviser’s independence; however, there is no requirement that any adviser be independent.
In 2022, after taking into consideration the six factors prescribed by the SEC and Nasdaq described above, Apollo’s Compensation Committee engaged FW Cook as compensation consultants. FW Cook were selected because they are a well-known and respected national compensation consulting firm that commonly provides information, recommendations and other executive compensation advice to compensation committees and management. FW Cook developed recommendations that were presented to the Compensation Committee and ultimately, the Board for consideration. In 2022, the Compensation Committee requested that FW Cook:
•evaluate the efficacy of our existing compensation strategy and practices in supporting and reinforcing our long-term strategic goals; and
•assist in refining our compensation strategy and in developing and implementing an executive compensation program to execute that strategy.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for identifying, reviewing and evaluating candidates to serve as directors of our Board (consistent with criteria approved by the Board), reviewing and evaluating incumbent directors, selecting candidates for election to our Board, making recommendations to our Board regarding the membership of the committees of the Board, assessing the performance of management and our Board.
The Nominating and Corporate Governance Committee is comprised of three directors: Messrs. Barr, Pacitti and Ms. O’Keefe. Mr. Pacitti serves as Chair of the Nominating and Corporate Governance Committee. All members of our Nominating and Corporate Governance Committee are independent (as independence is currently defined in Rule 5605(a)(2) of the Nasdaq listing standards). Our Board has adopted a written Nominating and Corporate Governance Committee charter that is available to stockholders in the corporate governance section of our website at www.apolloendo.com.
The Nominating and Corporate Governance Committee believes that candidates for director should have certain minimum qualifications, including the ability to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. Our Nominating and Corporate Governance Committee also intends to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. However, our Nominating and Corporate Governance Committee retains the right to modify these qualifications from time to time. Candidates for director nominees are reviewed in the context of the current composition of the Board, the operating requirements of the Company and the long-term interests of stockholders. In conducting this assessment, our Nominating and Corporate Governance Committee typically considers diversity, age, skills and such other factors as it deems appropriate, given our current needs and the needs of our Board, to maintain a balance of knowledge, experience and capability.
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Our Board is also committed to a diverse board, and our Nominating and Corporate Governance Committee considers a broad range of backgrounds and experiences in considering nominees to the Board. In making determinations regarding nominations of directors, our Nominating and Corporate Governance Committee may take into account the benefits of diverse viewpoints and diversity with respect to professional background, education, race, ethnicity, gender, age and geography, as well as other individual qualities and attributes that contribute to the total mix of viewpoints and experience represented on the Board. Our Nominating and Corporate Governance Committee also considers these and other factors as it oversees the annual Board and committee evaluations. After completing its review and evaluation of director candidates, our Nominating and Corporate Governance Committee recommends to our full Board the director nominees for selection.
Board Diversity
The Board Diversity Matrix, below, provides the diversity statistics for our Board.
Board Diversity Matrix (As of March 30, 2023) | ||||||||
| Total Number of Directors | 8 | |||||||
| Female | Male | |||||||
| Part I: Gender Identity | ||||||||
| Directors | 3 | 5 | ||||||
| Part II: Demographic Background | ||||||||
| White | 3 | 5 | ||||||
| Board Diversity Matrix (As of March 31, 2022) | ||||||||
| Total Number of Directors | 8 | |||||||
| Female | Male | |||||||
| Part I: Gender Identity | ||||||||
| Directors | 2 | 6 | ||||||
| Part II: Demographic Background | ||||||||
| White | 2 | 6 | ||||||
In the case of incumbent directors whose terms of office are set to expire, our Nominating and Corporate Governance Committee reviews these directors’ overall service to the Company during their terms, including the number of meetings attended, level of participation, quality of performance and any other relationships and transactions that might impair the directors’ independence. In the case of new director candidates, our Nominating and Corporate Governance Committee also determines whether the nominee is independent for Nasdaq purposes, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The Nominating and Corporate Governance Committee then uses its network of contacts to compile a list of potential candidates, but may also engage, if it deems appropriate, a professional search firm. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates after considering the function and needs of the Board. The Nominating and Corporate Governance Committee meets to discuss and consider the candidates’ qualifications and then selects a nominee for recommendation to the Board by majority vote.
At this time, the Nominating and Corporate Governance Committee does not have a policy with regard to director candidates recommended by stockholders. Our Nominating and Corporate Governance Committee believes that it is in the best position to identify, review, evaluate and select qualified candidates for Board membership, based on the comprehensive criteria for Board membership approved by the Board.
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Stockholder Communications with the Board of Directors
The Board desires that the views of our stockholders be heard by the Board, its committees or individual directors, as applicable, and that appropriate responses be provided to stockholders on a timely basis. Stockholders wishing to formally communicate with the Board, any committee of the Board, the independent directors as a group or any individual director may send communications directly to us at Apollo Endosurgery, Inc. 1120 S. Capital of Texas Highway, Building 1, Suite 300, Austin, Texas 78746, Attention: Corporate Secretary. All clearly marked written communications, other than unsolicited advertising or promotional materials, are logged and copied, and forwarded to the director(s) to whom the communication was addressed. Please note that the foregoing communication procedure does not apply to (i) stockholder proposals pursuant to Exchange Act Rule 14a-8 and communications made in connection with such proposals or (ii) service of process or any other notice in a legal proceeding.
Code of Ethics
In February 2017, we adopted the Amended and Restated Code of Business Conduct and Ethics that applies to all officers, directors, employees and agents. The Amended and Restated Code of Business Conduct and Ethics is available in the corporate governance section of our website at www.apolloendo.com. If we make any substantive amendments to the Amended and Restated Code of Business Conduct and Ethics or grant any waiver from a provision of the Amended and Restated Code of Business Conduct and Ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.
Hedging Policy
We generally do not permit our Board of Directors, executive officers, and employees to engage in the trading of derivative securities, short sales, transactions in put or call options, hedging transactions, pledges, holding equity securities in margin accounts or other inherently speculative transactions relating to our equity securities.
DELINQUENT SECTION 16(A) REPORTS
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2022, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with except: one Form 3 was filed late on behalf of Mr. Gutteridge on March 1, 2022, one Form 3 and one Form 4 were filed late on behalf of Ms. Bankes both on June 16, 2022, and one Form 3 was filed late on behalf of Ms. O’Keefe on July 6, 2022.
ITEM 11. EXECUTIVE COMPENSATION
Our Compensation Committee evaluates the compensation of executive officers and makes recommendations regarding executive compensation to our Board for final approval. This evaluation may also be conducted by the full Board.
The major elements of our compensation program include:
•base salary;
•annual cash bonus incentive opportunities (target bonus) tied mostly to our performance;
•long-term equity based incentive awards, which includes time-vesting or performance-vesting options or restricted stock units;
•retirement benefits through a qualified defined contribution scheme (such as a 401(k) plan in the U.S.); and
•other benefit programs generally available to all U.S. and non-U.S. employees which are customary and appropriate for the country in which the employee is operating.
The Board and our Compensation Committee believes that these elements when combined are effective in achieving the overall objectives of our compensation program.
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We provide base salary based on the executive officers’ individual responsibilities and performance. Each named executive officer is generally eligible for annual cash bonuses. The majority of this annual cash bonus is based on our achievement of corporate financial and operational goals for the year. In addition, a lesser percentage of the annual cash bonus is based on individual responsibilities and performance. Long-term incentives in either the form of time-vesting stock options or performance-vesting stock options, or restricted stock units serve to attract and retain key executives and align the longer-term interest of our executive officers and stockholders. Long-term incentives are discretionary.
We structure our annual cash bonus program to reward our executive officers and employees based primarily on company performance (the corporate component) and, to a lesser degree, an assessment of the individual employee’s contribution or performance (the individual component). Our key financial or operational targets form the corporate component, which is reviewed and set annually. The individual component of the total cash bonus is based on an assessment of each individual’s personal performance as evaluated by such individual’s manager or, in the case of the Chief Executive Officer, by our Board. Annual cash incentives (both the corporate component and individual component) are paid at the discretion of our Board.
Summary Compensation Table
The following table shows, for the years ended December 31, 2022 and 2021, compensation awarded to, paid to, or earned by our principal executive officer and our two next most highly compensated executive officers for the fiscal year ended December 31, 2022. These executive officers are referred to herein as our named executive officers.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) (1) | Stock Awards ($) (1) | Nonequity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||||
Charles McKhann Chief Executive Officer | 2022 | 550,000 | — | 1,310,701 | 444,798 | 440,000 | (2) | 35,045 | (5) | 2,780,544 | ||||||||||||||||||||||||||||
| 2021 | 375,000 | — | 3,492,791 | 4,208,304 | 491,100 | 22,432 | 8,589,627 | |||||||||||||||||||||||||||||||
Jeffrey Black Chief Financial Officer | 2022 | 386,250 | — | 344,921 | 351,155 | 231,750 | (3) | 30,088 | (5) | 1,344,164 | ||||||||||||||||||||||||||||
| 2021 | 156,250 | — | 908,115 | 1,738,000 | 141,525 | 7,496 | 2,951,386 | |||||||||||||||||||||||||||||||
John Molesphini Executive Vice President, Operations | 2022 | 310,883 | — | 105,121 | 96,988 | 124,353 | (4) | 24,880 | (5) | 662,225 | ||||||||||||||||||||||||||||
| 2021 | 298,926 | — | 68,425 | 83,467 | 180,503 | 23,155 | 654,476 | |||||||||||||||||||||||||||||||
(1)Amounts reflect the grant date fair value for option and stock awards granted during 2022 and 2021 in accordance with FASB Topic ASC 718. The assumptions used in the calculation of values of the awards are set forth under Note 12 to our consolidated financial statements titled “Stock Option Plans”, Subsection (b) “Stock Option Activity” in this report. These amounts reflect the accounting cost for these equity awards and do not reflect the actual economic value that may be realized by the applicable named executive officers. Compensation for stock options will only be realized to the extent the market price of our common stock is greater than the exercise price of such option award.
(2)Mr. McKhann was eligible to receive a target bonus of up to 80% of his base salary in 2022 based upon the achievement of performance milestones. For performance year 2022, certain corporate performance metrics were achieved resulting in a multiplier of 100%, and Mr. McKhann received a cash bonus of $440,000.
(3)Mr. Black was eligible to receive a target bonus of up to 60% of his base salary of 2022 based upon the achievement of performance milestones. For performance year 2022, certain corporate and individual performance metrics were achieved resulting in a multiplier of 100%, and Mr. Black received a cash bonus of $231,750.
(4)Mr. Molesphini was eligible to receive a target bonus of up to 40% of his base salary in 2022 based upon the achievement of performance milestones. For performance year 2022, certain corporate and individual performance metrics were achieved resulting in a multiplier of 100%, and Mr. Molesphini received a cash bonus of $124,353.
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(5)Amounts for 2022 include (i) life insurance coverage premiums of $212, $212, and $212 made on behalf of Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively; (ii) health insurance premiums of $16,089, $16,132, and $11,051 paid on behalf of Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively; (iii) disability benefits premiums of $614, $614, and $614 paid on behalf of Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively; (iv) matching contributions to our 401(k) retirement of $12,200, $12,200, and $11,427 paid on behalf of Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively; (v) accidental death and dismemberment premiums of $90, $90, and $90 paid on behalf for Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively; (vi) mobile device charges of $840, $840, and $1,486 paid on behalf of Mr. McKhann, Mr. Black, and Mr. Molesphini, respectively, and (vii) financial planning services of $5,000 paid on behalf of Mr. McKhann.
Employment Agreements
Charles McKhann
In March 2021, Apollo entered into an employment agreement with Mr. McKhann in connection with his appointment as our Chief Executive Officer and President as well as a member of our Board. The agreement is for an unspecified term and entitled Mr. McKhann to an annual base salary, which has been amended by the Board of Directors, most recently to $572,000. The agreement also provides that he will be eligible to receive a target bonus equal to a percentage of his base salary (80% for 2022) upon the achievement of annual performance milestones. Pursuant to the terms of his employment agreement, upon termination of his employment without cause or his resignation for good reason (each as defined in the agreement), Mr. McKhann will receive (i) 12 months of base salary, (ii) any earned but unpaid bonus with respect to the prior year, (iii) a pro-rated amount of Mr. McKhann’s annual bonus with respect to the year of termination, (iv) acceleration of 12 months of vesting for the unvested portion of outstanding equity awards, (v) an extension of the period during which he is permitted to exercise his vested options until the earlier of the first anniversary of his termination of employment or the effective date of a change in control, (vi) an extension of the vesting period for the performance-based restricted stock units through the date of public release of financial results for the second full fiscal quarter following Mr. McKhann’s termination and (vii) reimbursement for continued medical coverage for 12 months. If the termination occurs within three months prior to or 12 months after a change in control, Mr. McKhann will receive (i) 12 months of base salary and any earned but unpaid bonus with respect to the prior year, (ii) his initial option grant and performance-based restricted stock unit grant will vest as follows (a) 50% of the unvested units will vest in full if the deemed value of our common stock in the change in control is at least two times but less than three times the closing price of our common stock at the original grant date, (b) 100% of the units will vest in full if the deemed value is over three times such closing price, and (c) if within 24 months following the change in control, the deemed value is at least 1.5 times such closing price but less than two times such closing price, 25% of the unvested units will vest in full, and (iii) 100% of any additional equity awards will immediately vest and become exercisable and (iv) Mr. McKhann will receive 50% of his annual bonus for the year of termination.
Jeffrey Black
In July 2021, Apollo entered into an employment agreement with Mr. Black in connection with his appointment as our Chief Financial Officer. The agreement is for an unspecified term and entitled Mr. Black to an annual base salary, which has been amended by the Board of Directors, most recently to $401,700. The agreement also provides that he will be eligible to receive a target bonus equal to a percentage of his base salary (60% for 2022) upon the achievement of annual performance milestones. Pursuant to the terms of his employment agreement, upon termination of his employment without cause or his resignation for good reason (each as defined in the agreement), Mr. Black will receive (i) 6 months of base salary, and (ii) any earned but unpaid bonus with respect to the prior year. If the termination occurs within three months prior to or 12 months after a change in control, Mr. Black will receive (i) 12 months of base salary and any earned but unpaid bonus with respect to the prior year, and reimbursement for continued medical coverage for 12 months (ii) 100% of his initial option grant and initial time-based restricted stock unit grant and any additional equity awards will immediately vest and become exercisable, (iii) his initial performance-based restricted stock unit grant will vest as follows (a) 50% of the unvested units will vest in full if the deemed value of our common stock in the change in control is at least 1.5 times such closing price but less than two times such closing price of our common stock at the original grant date, (b) 100% of the units will vest in full if the deemed value is over two times such closing price, and (iv) Mr. Black will receive an extension of the vesting period for the initial performance-based restricted stock units through the date of public release of financial results for the second full fiscal quarter following Mr. Black’s terminations.
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John Molesphini
In 2018, Apollo entered into an employment agreement with Mr. Molesphini in connection with his appointment as our Executive Vice President, Operations. The agreement is for an unspecified term and entitled Mr. Molesphini to an annual base salary, which has been amended from time to time by the Board of Directors, most recently to $323,318. The agreement also provides that he will be eligible to receive a target bonus equal to a percentage of his base salary (40% for 2022) upon the achievement of annual performance milestones. Upon the occurrence of a change in control, 50% of Mr. Molesphini’s outstanding eligible equity stock awards will vest in full. If the termination occurs within three months prior to or 12 months after a change of control, 100% of Mr. Molesphini’s outstanding eligible equity stock awards will vest in full and he will receive 12 months of base salary.
Outstanding Equity Awards at December 31, 2022
The following table presents the outstanding equity awards held by each of our named executive officers as of December 31, 2022:
| Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested * | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Securities Underlying Unexercised Options | Number of Shares or Units of Stock that Have not Vested | Market Value of Shares or Units of Stock that Have not Vested * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Grant Date | Option Exercise Price ($) | Option Expiration Date | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charles McKhann | 3/10/2021 | 5.95 | 3/10/2031 | 371,321 | 477,412 | (1) | — | $ | — | 353,638 | $ | 3,525,771 | (15) | ||||||||||||||||||||||||||||||||||||||||||||||
| 6/14/2022 | 3.95 | 6/14/2032 | — | 459,170 | (2) | 112,607 | $ | 1,122,692 | (9) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Jeff Black | 8/9/2021 | 8.69 | 8/9/2031 | 50,000 | 100,000 | (3) | 60,000 | $ | 598,200 | (10) | 80,000 | $ | 797,600 | (16) | |||||||||||||||||||||||||||||||||||||||||||||
| 6/14/2022 | 3.95 | 6/14/2032 | — | 120,834 | (2) | 88,900 | $ | 886,333 | (9) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| John Molesphini | 8/3/2018 | 7.75 | 8/3/2028 | 49,500 | — | (4) | — | $ | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| 5/7/2019 | 3.49 | 5/7/2029 | 27,747 | 3,226 | (5) | 4,971 | $ | 49,561 | (11) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| 5/7/2020 | 2.08 | 5/7/2030 | 53,345 | 8,604 | (6) | 13,828 | $ | 137,865 | (12) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| 3/10/2021 | 5.95 | 3/10/2031 | 7,275 | 9,352 | (7) | 10,521 | $ | 104,894 | (13) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| 2/25/2022 | 5.63 | 2/25/2032 | — | 26,539 | (8) | 17,227 | $ | 171,753 | (14) | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
* Amounts reflect the fair value of our common stock, based on the closing price of our shares of common stock as reported on Nasdaq on December 31, 2022, multiplied by the amount of shares shown in the column for the number of shares not yet vested.
(1)This stock option is an inducement grant under Nasdaq listing rule 5365(c)(4). Such options vested 25% on March 10, 2022, with the remainder vesting monthly through March 2025.
(2)Stock options will vest 25% on June 14, 2023, with the remainder vesting monthly through June 2026.
(3)Such options vested 25% on August 9, 2022, with the remainder vesting monthly through August 2025.
(4)The shares subject to this option are fully vested.
(5)Such options vested 25% on May 7, 2020, with the remainder vesting monthly through May 2023.
(6)Such options vested 33% on May 7, 2021, with the remainder vesting monthly through May 2023.
(7)Such options vested 25% on March 10, 2022, with the remainder vesting monthly through March 2025.
(8)Such options vested 25% on February 25, 2023, with the remainder vesting monthly through February 2026.
(9)Such awards vest 25% annually through June 2026.
(10)Such awards vest 25% annually through August 2025.
(11)Such awards vest 25% annually through May 2023.
(12)Such awards vest 33% annually through May 2023.
(13)Such awards vest 25% annually through March 2025.
(14)Such awards vest 25% annually through February 2026.
(15)These restricted stock units are an inducement grant under Nasdaq listing rule 5365(c)(4). Such awards vest in three equal tranches upon the achievement of revenue for the trailing four quarters equal to $65 million, $80 million, and $95 million. 176,820 awards vested in 2022 for the second revenue milestone that was met.
(16)Such awards vest in three equal tranches upon the achievement of revenue for the trailing four quarters equal to $70 million, $90 million, and $110 million. Such awards vested 33% in 2022 for the first revenue milestone that was met.
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Employment Benefits Plan
2006 Stock Option Plan and 2016 Equity Incentive Plan
In 2006 and 2016, we adopted the Private Apollo 2006 Stock Plan (the “2006 Plan”) and 2016 Equity Incentive Plan (the “2016 Plan”), respectively. At our 2017 annual meeting, the 2017 Equity Incentive Plan (the “2017 Plan”) was approved by our stockholders and replaced our 2016 Plan, which was the successor to the Private Apollo 2006 Stock Plan (collectively with the 2016 Equity Incentive Plan, the “Prior Plans”). Grants will no longer be made under the Prior Plans, but the Awards that remain outstanding will continue to be governed by the terms of the applicable Prior Plan and the applicable award agreement.
As of January 31, 2023, we had 62,785 options outstanding under the 2006 Plan, and 235,086 options outstanding under the 2016 Plan.
2017 Equity Incentive Plan
The 2017 Equity Incentive Plan (the “2017 Plan”) covers our employees, consultants, and nonemployee directors and provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance stock awards, performance cash awards, and other stock awards to purchase shares of our common stock. The vesting period, and expiration dates of the options granted are determined by the Board of Directors at the time of grant. The maximum term of options granted under the 2017 Plan is ten years from the date of grant. Options generally vest over a period of time, typically over not more than five years. The plan reserve will be automatically increased by 4% of the total number of shares outstanding at the prior year end for a period of ten years. Shares subject to awards granted under the 2017 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2017 Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights or options exercised by means of a net exercise will be deducted from the shares available under the 2017 Plan.
As of January 31, 2023, we had 4,767,883 options and awards outstanding under the 2017 Plan and 152,826 shares of common stock reserved for issuance under the 2017 Plan.
2022 Bonus Plan
In February 2022, the Board approved the 2022 Bonus Plan in which the Chief Executive Officer, as well as the Chief Financial Officer and other named executive officers participate. Pursuant to the terms of the 2022 Bonus Plan, each eligible employee’s target bonus will be comprised of an amount determined based upon the achievement by the Company of financial performance targets as approved by the Board and, other than our Chief Executive Officer, an additional amount determined based upon achievement of certain individual performance objectives.
Apollo 401(k) Plan
We have a defined contribution retirement plan in which all employees are eligible to participate. This plan is intended to qualify under Section 401(k) of the Code so that contributions by employees and by us to the plan and income earned on plan contributions are not taxable to our employees until withdrawn or distributed from the plan, and so that contributions, including employee salary deferral contributions, will be deductible by us when made. We currently provide matching contributions under this plan of 100% on the first 3% contributed by each employee and 50% on the next 2% contributed by each employee.
We also contribute to medical, disability and other standard insurance plans for our employees, including our named executive officers.
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Director Compensation
In June 2022, we amended and restated our non-employee director compensation policy, which became effective immediately, pursuant to which certain of our non-employee directors are eligible to receive compensation for service on our Board of Directors and committees of our Board of Directors as follows:
•a $45,000 annual retainer for service as a member of our Board;
•a supplemental annual retainer for the Chair of the Board and for the Chairs of each Board committee in the following amounts: $35,000 for the Chair of the Board; $20,000 for Chair of our Audit Committee; $15,000 for Chair of our Compensation Committee; and $10,000 for Chair of our Nominating and Corporate Governance Committee; and
•a supplemental annual retainer for each member of the following committees other than the Chairs, in the following amounts: $10,000 for members of our Audit Committee; $7,500 for members of our Compensation Committee and $5,000 for members of the Nominating & Corporate Governance Committee.
•an initial grant of either restricted stock units or options to purchase a number of shares of common stock having an aggregate value of $120,000 to each non-employee director, in each case upon election to our Board and, unless otherwise determined by the Board, the shares will vest on the one-year anniversary of the grant date; and
•an annual grant of either restricted stock units or options to purchase a number of shares of common stock having an aggregate value of $120,000 to each current non-employee director subject to this policy and, unless otherwise determined by the Board, the shares will vest on the one-year anniversary of the grant date.
Director Compensation Table
The following table sets forth compensation earned and paid to each Apollo non-employee director for service as a director during 2022.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (9) | Option Awards ($) (9) | All other compensation ($) | Total ($) | |||||||||||||||||||||||||||
Rick Anderson (1) | 21,937 | 54,554 | 56,185 | — | 132,676 | |||||||||||||||||||||||||||
Jeannette Bankes (2) | 35,833 | 90,281 | 74,295 | — | 200,409 | |||||||||||||||||||||||||||
John Barr (3) | 82,500 | 54,554 | 56,185 | — | 193,239 | |||||||||||||||||||||||||||
William D. McClellan, Jr. (4) | 58,750 | 54,554 | 56,185 | — | 169,489 | |||||||||||||||||||||||||||
R. Kent McGaughy, Jr (5) | 56,042 | 109,111 | — | — | 165,153 | |||||||||||||||||||||||||||
Sharon O’Keefe (6) | 24,313 | — | 230,002 | — | 254,315 | |||||||||||||||||||||||||||
David C. Pacitti (7) | 48,958 | 54,554 | 56,185 | — | 159,697 | |||||||||||||||||||||||||||
Julie Shimer, Ph.D. (8) | 53,750 | 54,554 | 56,185 | — | 164,489 | |||||||||||||||||||||||||||
(1)Mr. Anderson resigned from the Board in July 2022. As of December 31, 2022, Mr. Anderson had no options outstanding and no restricted stock units outstanding.
(2)Pursuant to our non-employee director compensation policy, Ms. Bankes receives a $45,000 annual retainer for services as a member of our Board and $7,500 for being a member of our Compensation Committee. Ms. Bankes also received an initial equity award in May 2022 in connection with her appointment to our Board pursuant to our non-employee director compensation policy then in effect. As of December 31, 2022, Ms. Bankes had 28,866 options outstanding, none of which were exercisable, and 17,641 restricted stock units outstanding.
(3)Pursuant to our non-employee director compensation policy, Mr. Barr receives a $45,000 annual retainer for services as a member of our Board, $35,000 supplemental retainer as Chairperson of the Board, $5,000 for being a member of our Nominating and Corporate Governance Committee, and $10,000 for being a member of our Audit Committee. As of December 31, 2022, Mr. Barr had 70,457 options outstanding, of which 51,124 were exercisable, and 14,224 restricted stock units outstanding.
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(4)Pursuant to our non-employee director compensation policy, Mr. McClellan receives a $45,000 annual retainer for services as a member of our Board and $20,000 supplemental retainer as Chairperson of our Audit Committee. As of December 31, 2022, Mr. McClellan had 85,715 options outstanding, of which 66,382 were exercisable, and 14,224 restricted stock units outstanding.
(5)Pursuant to our non-employee director compensation policy, Mr. McGaughy, Jr. receives a $45,000 annual retainer for services as a member of our Board, $10,000 for being a member of our Audit Committee, and $7,500 for being a member of our Compensation Committee. As of December 31, 2022, Mr. McGaughy, Jr. had 38,667 options outstanding, none of which were exercisable.
(6)Pursuant to our non-employee director compensation policy, Ms. O’Keefe receives a $45,000 annual retainer for services as a member of our Board and $5,000 for being a member of our Nominating and Corporate Governance Committee. Ms. O’Keefe also received an initial equity award in August 2022 in connection with her appointment to our Board pursuant to our non-employee director compensation policy. As of December 31, 2022, Ms. O’Keefe had 35,604 restricted stock units outstanding.
(7)Pursuant to our non-employee director compensation policy, Mr. Pacitti receives a $45,000 annual retainer for services as a member of our Board and $10,000 supplemental retainer as Chairperson of the Nominating and Corporate Governance Committee. Mr. Pacitti was also temporarily a member of the compensation committee during 2022, for which he received a prorated fee. As of December 31, 2022, Mr. Pacitti had 84,043 options outstanding, of which 64,710 were exercisable, and 14,224 restricted stock units outstanding.
(8)Pursuant to our non-employee director compensation policy, Dr. Shimer receives a $45,000 annual retainer for services as a member of our Board and $15,000 supplemental retainer as Chairperson of our Compensation Committee. As of December 31, 2022, Dr. Shimer had 77,298 options outstanding, of which 57,965 were exercisable, and 14,224 restricted stock units outstanding.
(9)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 each stock award or stock option granted computed in accordance with the provisions of FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 12 to our financial statements included in this report. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts reflect the accounting cost for these equity awards and do not reflect the actual economic value that may be realized by the applicable directors. Our directors will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options. Such awards will vest 100% on June 14, 2023, except for certain awards issued to Ms. Bankes and Ms. O’Keefe in connection with their appointments to the Board, which awards will vest on May 6, 2023 and August 5, 2023, respectively. Additionally, certain awards for Ms. Bankes are exercisable or vest on April 1, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership of our common stock as of January 31, 2023 by:
•each director and nominee for director;
•each of our named executive officers;
•each stockholder known by us to be beneficial owners of more than 5% of outstanding common stock; and
•all of our current directors and executive officers as a group.
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The table is based upon information supplied by officers, directors, and principal stockholders and Schedule 13G filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 48,336,823 shares outstanding on January 31, 2023, adjusted as required by rules promulgated by the SEC. In addition, certain of our greater than 5% stockholders hold pre-funded warrants to purchase shares of common stock which are subject to beneficial ownership limitations of 9.99% or 19.99%, as applicable. Reported beneficial ownership for such stockholders includes shares of common stock that each stockholder has the right to acquire under its Convertible Debentures and/or warrants within 60 days of January 31, 2023, subject to individual beneficial ownership limitations. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other stockholder. Unless otherwise indicated, the address for each beneficial owner is c/o Apollo Endosurgery, Inc., 1120 S. Capital of Texas Highway, Building 1, Suite 300, Austin, Texas 78746.
| Beneficial Ownership | ||||||||||||||
| Beneficial Owner | Number of Shares | Percentage of Total | ||||||||||||
5% Stockholders | ||||||||||||||
Entities affiliated with CPMG, Inc. (1) | 6,183,603 | 12.8% | ||||||||||||
Entities affiliated with Nantahala Capital Management, LLC (2) | 4,945,031 | 9.9 | ||||||||||||
Entities and persons affiliated with Neil Gagnon (3) | 4,188,037 | 8.7 | ||||||||||||
Laurence Lytton (4) | 4,990,968 | 9.9 | ||||||||||||
Stonepine Capital L.P. (5) | 4,017,518 | 8.2 | ||||||||||||
| Directors and Executive Officers | ||||||||||||||
Charles McKhann (6) | 665,684 | 1.4 | ||||||||||||
John Barr (7) | 80,982 | * | ||||||||||||
William D. McClellan, Jr. (8) | 93,407 | * | ||||||||||||
R. Kent McGaughy, Jr. (1) | 6,183,603 | 12.8 | ||||||||||||
David C. Pacitti (9) | 68,598 | * | ||||||||||||
Julie Shimer, Ph.D. (10) | 79,762 | * | ||||||||||||
Jeannette Bankes (11) | 12,950 | * | ||||||||||||
| Sharon O’Keefe | — | * | ||||||||||||
Jeffrey Black (12) | 163,125 | * | ||||||||||||
John Molesphini (13) | 207,085 | * | ||||||||||||
All current executive officers and directors as a group (12 persons) (14) | 7,978,890 | 16.1% | ||||||||||||
* Represents less than 1% of outstanding shares of our common stock.
(1)Amount includes (i) 675,181 shares of common stock held by Curlew Fund, LP; (ii) 45,594 shares of common stock held by Crested Crane Fund, LP; (iii) 3,687,781 shares of common stock held by Roadrunner Fund, LP; (iv) 400,675 shares of common stock held by Mallard Fund, LP; (v) 63,671 shares of common stock held by Kestrel Fund, LP.; and (vi) 1,310,701 shares of common stock held by Killdeer Fund, LP (collectively, the “CPMG Entities”). CPMG, Inc. is the general partner of each CPMG Entity and has voting and investment control over the shares beneficially owned by the CPMG Entities. R. Kent McGaughy, Jr., a member of our Board of Directors, is the managing director of CPMG, Inc. and, along with Antal Desai, are the sole shareholders and may be deemed to have sole voting and investment power with respect to the securities beneficially owned by the CPMG Entities. Mr. McGaughy disclaims beneficial ownership of the securities beneficially owned by the CPMG Entities except to the extent of any pecuniary interest therein. The address of the CPMG Entities is c/o CPMG, Inc., 4215 West Lovers Lane, Suite 100, Dallas, Texas 75209, Attn: John E. Bateman.
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(2)Amounts include 3,782,044 shares of common stock held by managed funds and/or separate accounts affiliated with Nantahala Capital Management, LLC. Pre-funded warrants issued in July 2020 held by Nantahala Capital Management, LLC and/or its managed funds and/or separate accounts may not be exercised to the extent that Nantahala Capital Management, LLC and/or its managed funds and/or separate accounts would beneficially own more than either 9.99% of our shares of common stock outstanding immediately after giving effect to the exercise. As a result, the figures presented above do not include 8,403,219 shares that Nantahala Capital Management, LLC and/or its managed funds and/or separate accounts have the right to acquire upon the exercise of pre-funded warrants. Nantahala Capital Management, LLC is a registered investment adviser and has been delegated the legal power to vote and/or direct the disposition of such shares as a general partner or investment manager and would be considered the beneficial owner of such shares. Wilmot Harkey and Daniel Mack are managing members of Nantahala Capital Management, LLC and may be deemed to have voting and dispositive power over the reported shares. The address of Nantahala Capital Management, LLC and the affiliated funds and separately managed accounts is c/o Nantahala Capital Management, LLC, 130 Main St., 2nd Floor, New Canaan, Connecticut 06840.
(3)Mr. Gagnon and affiliated entities may be deemed to have voting and dispositive power with respect to 4,188,037 shares of common stock. Mr. Gagnon is the managing member and principal owner of Gagnon Securities LLC, an investment manager for several customer accounts, foundations, partnerships and trusts (the “Accounts”). Mr. Gagnon and Gagnon Securities LLC may be deemed to share voting and dispositive power with respect to shares of common stock held by the Accounts, including the affiliated entities described above. Mr. Gagnon and Gagnon Securities LLC each expressly disclaims beneficial ownership of all securities held by the Accounts. Mr. Gagnon is also the chief executive officer of Gagnon Advisors, LLC, an investment manager to Gagnon Investment Associates, LLC (“GIA”), which may be deemed to share voting and dispositive power with respect to certain shares of common stock held by GIA. Mr. Gagnon and Gagnon Securities LLC each expressly disclaims beneficial ownership of all securities held by GIA. The address of Mr. Gagnon, Gagnon Investment Associates, LLC and the Accounts is c/o Gagnon Securities, LLC, 1370 Avenue of the Americas, 26th Floor, New York, New York 10019.
(4)Mr. Lytton has sole voting and dispositive power over 3,368,145 shares of common stock, which includes 2,532,978 shares held by Mr. Lytton, 1,622,823 shares that Mr. Lytton has the right to acquire upon the exercise of the pre-funded warrants issued in July 2020. The pre-funded warrants held by Mr. Lytton may not be converted or exercised, as applicable, to the extent that Mr. Lytton would beneficially own more than 9.99% of our shares of common stock outstanding immediately after giving effect to the conversion or exercise. As a result, the figures above do not include 297,177 shares that Mr. Lytton has the right to acquire upon the exercise of the pre-funded warrants. The address of Mr. Lytton is 467 Central Park West, New York, New York 10025.
(5)Amount includes 3,393,014 shares of common stock held by Stonepine Capital, L.P. and 624,504 shares that Stonepine Capital L.P. has the right to acquire upon the exercise of pre-funded warrants issued in July 2020. The pre-funded warrants may not be exercised, as applicable, to the extent that Stonepine Capital, L.P. and its affiliated entities would beneficially own more than 9.99% of our shares of common stock outstanding immediately after giving effect to such exercise. Stonepine Capital Management LLC is the general partner and investment advisor of investment funds, including Stonepine Capital, L.P., and controls its investment and voting decisions. Jon M. Plexico and Timothy P. Lynch share voting and dispositive power over the securities beneficially owned by Stonepine Capital, L.P. Each of Mr. Plexico and Mr. Lynch disclaims beneficial ownership of the shares beneficially owned by Stonepine Capital, L.P. except to the extent of any pecuniary interest therein. The address of Stonepine Capital, L.P. is c/o Stonepine Capital Management, LLC, 919 NW Bond Street, Suite 204, Bend, Oregon 97703.
(6)Consists of (i) 223,635 shares held directly and (ii) 442,049 shares issuable to Mr. McKhann pursuant to stock options exercisable within 60 days of January 31, 2023.
(7)Consists of (i) 29,858 shares held directly and (ii) 51,124 shares issuable to Mr. Barr pursuant to stock options exercisable within 60 days of January 31, 2023.
(8)Consists of (i) 27,025 shares held by the William D. McClellan & Jan McClellan CO-TTE McClellan Living Trust U/A and (ii) 66,382 shares issuable to Mr. McClellan pursuant to stock options exercisable within 60 days of January 31, 2023.
(9)Consists of (i) 3,888 shares held directly and (ii) 64,710 shares issuable to Mr. Pacitti pursuant to stock options exercisable within 60 days of January 31, 2023.
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(10)Consists of (i) 21,797 shares held directly and (ii) 57,965 shares issuable to Dr. Shimer pursuant to stock options exercisable within 60 days of January 31, 2023.
(11)Consists of (i) 9,533 shares issuable to Ms. Bankes pursuant to stock options exercisable within 60 days of January 31, 2023; and (ii) 3,417 shares issuable upon the settlement of vested restricted stock units held by Ms. Bankes within 60 days of January 31, 2023.
(12)Consists of (i) 103,750 shares held directly and (ii) 59,375 shares issuable to Mr. Black pursuant to stock options exercisable within 60 days of January 31, 2023.
(13)Consists of (i) 46,079 shares held directly; (ii) 153,192 shares issuable to Mr. Molesphini pursuant to stock options exercisable within 60 days of January 31, 2023; and (iii) 7,814 shares issuable upon the settlement of vested restricted stock units held by Mr. Molesphini within 60 days of January 31, 2023.
(14)Includes current directors and executive officers and nominees to our Board. For purposes of determining the number of shares beneficially owned by directors, and executive officers, as a group, any shares beneficially owned by more than one director or executive officer are counted only once.
Change in Control
As previously disclosed, on November 29, 2022, we entered into the Merger Agreement with Boston Scientific and Merger Sub providing for the acquisition of Apollo by Boston Scientific. The Merger was approved by our stockholders on February 9, 2023. The consummation of the Merger is subject to a number of closing conditions, including, among others, the receipt of certain regulatory approvals, as well as other customary closing conditions. See the section titled “Business — Proposed Acquisition by Boston Scientific” included under Part I, Item 1 of this Annual Report on Form 10-K for more information regarding the Merger.
Equity Compensation Plan Information
The following table provides certain information with respect to all our equity compensation plans in effect as of December 31, 2022.
| Name and Principal Position | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants, and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||||||||||||
| Equity compensation plans approved by security holders | 4,767,883 | (1) | $4.37 | (2) | 219,379 | (3) | |||||||||||||||||
| Equity compensation plans not approved by stockholders | 1,500,242 | (4) | $6.50 | (2) | — | ||||||||||||||||||
(1)Represents shares of common stock subject to outstanding options and restricted stock units under the 2017 Plan.
(2)Represents the weighted-average exercise price of outstanding stock options and excludes restricted stock units.
(3)Represents shares of common stock remaining available for future issuance under the 2017 Plan. No shares remain available for future issuance under the 2006 Plan or the 2016 Plan. The shares of common stock available for future issuance under the 2017 Plan will automatically increase on January 1st each year by 4 percent of the total number of outstanding shares of our common stock on December 31st of the preceding fiscal year unless the Board acts prior to January 1st to provide for a lesser number.
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(4)This row includes each of the Prior Plans we assumed in connection with our business combination with Lpath, Inc. in December 2016. Of these shares, as of December 31, 2022, (i) 62,785 options were issued and outstanding with a weighted-average exercise price of $2.82 per shares under the 2006 Plan and (ii) 235,086 options and restricted stock units were issued and outstanding with a weighted-average exercise price of $9.46 per share under the 2016 Plan. This row also includes the inducement grant under Nasdaq listing rule 5635(c)(4) made to Mr. McKhann. Refer to the outstanding equity awards at December 31, 2022 as described in “Summary Compensation Table” in Part III, Item 11.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Independence of the Board of Directors
As required under The Nasdaq Stock Market LLC (“Nasdaq”) listing standards, a majority of the members of a listed company’s Board must qualify as “independent,” as affirmatively determined by the Board. Our Board consults with our counsel to ensure that the Board’s determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of Nasdaq as in effect from time to time.
Consistent with these considerations, after review of all relevant identified transactions or relationships between each director, or any of his or her family members, and us, our senior management and our independent auditors, our Board has affirmatively determined that all our directors and nominees, with the exception of Charles McKhann, our Chief Executive Officer and President, are independent directors within the meaning of the applicable Nasdaq listing standards. In making this determination, our Board found that none of these directors or nominees for director had a material or other disqualifying relationship with Apollo.
Our Board considered the relationships between such directors and certain of our investors and determined that such relationships did not affect such directors’ independence under Nasdaq listing standards, or, where applicable, under SEC rules.
Family Relationships
There are no family relationships among any of the directors or executive officers.
Transactions with Related Persons
Described below are all transactions occurring since January 1, 2021 and all currently proposed transactions to which either we were a party and in which (i) the amounts involved exceeded or will exceed $120,000, and (ii) a director, executive officer, holder of more than 5% of our outstanding common stock, or any member of such person’s immediate family had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive Compensation”, Part III, Item 11. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions with unrelated third parties.
October 2021 Public Offering
In October 2021, we completed a registered public offering of our common stock pursuant to which we issued and sold 9,660,000 shares at a public offering price of $7.75 per share for aggregate proceeds of $74.9 million. The following table summarizes the number of shares of common stock purchased in our registered public offering by holders of more than five percent of our common stock.
| Name of Holder | Shares of Common Stock | |||||||
| Entities affiliated with Nantahala Capital Management, LLC | 1,000,000 | |||||||
Entities affiliated with CPMG, Inc. (1) | 683,871 | |||||||
| Stonepine Capital, L.P. | 400,000 | |||||||
(1) R. Kent McGaughy, Jr., a managing director of CPMG, Inc., is a member of our Board.
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Conversion of Convertible Debt
In January 2023, our outstanding 6.0% convertible notes due 2026 were automatically converted into approximately 5.6 million new shares of our common stock following satisfaction of certain conditions under the terms of such notes. As a result of such conversion, certain entities affiliated with CPMG, Inc. received approximately 2.2 million shares of our common stock upon the automatic conversion of approximately $7.4 million principal amount of notes (including accrued interest) held by CPMG, Inc. R. Kent McGaughy, Jr., a managing director of CPMG, Inc., is a member of the Board.
Indemnification
We provide indemnification to our directors and officers so that they will be free from undue concern about personal liability in connection with their service to us. Under our Amended and Restated Bylaws and Certificate of Incorporation, we are required to indemnify our directors and officers to the extent not prohibited under Delaware or other applicable law. We have also entered into indemnity agreements with certain officers and directors. These agreements provide, among other things, that we will indemnify the officer or director, under the circumstances and to the extent provided for in the agreement, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party by reason of his or her position as a director, officer or other agent of Apollo, and otherwise to the fullest extent permitted under Delaware law and our Amended and Restated Bylaws and Certificate of Incorporation.
Related Person Transactions Policy and Procedures
We have adopted a written Related Person Transactions and SEC Compliance Policy that sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of “related persons transactions.” For purposes of our policy only, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person are not covered by this policy. A related person is any executive officer, director, or more than 5% stockholder of the Company, including any of their immediate family members, and any entity owned or controlled by such persons.
Under the policy, where a transaction has been identified as a related person transaction, management must present information regarding the proposed related person transaction to our Audit Committee (or, where Audit Committee approval would be inappropriate, to another independent body of our Board) for consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits of the transaction to us and whether any alternative transactions were available. To identify related person transactions in advance, we rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related person transactions, our Audit Committee takes into account the relevant available facts and circumstances including, but not limited to (a) the risks, costs and benefits to us, (b) the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated, (c) the terms of the transaction, (d) the availability of other sources for comparable services or products and (e) the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the deliberations and approval. The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our Audit Committee consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our stockholders, as our Audit Committee determines in the good faith exercise of its discretion.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
The following table represents aggregate fees billed to us for the years ended December 31, 2022 and 2021, by Moss Adams LLP, our principal accountant.
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Audit Fees | $ | 485 | $ | 504 | |||||||
| Total Fees | $ | 485 | $ | 504 | |||||||
All fees described above were pre-approved by the Audit Committee.
We furnished the foregoing disclosure to Moss Adams LLP.
Pre-Approval Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of our Audit Committee’s approval of the scope of the engagement of the independent auditor or on an individual, explicit, case-by-case basis before the independent auditor is engaged to provide each service. The pre-approval of services may be delegated to one or more of our Audit Committee’s members, but the decision must be reported to the full Audit Committee at its next scheduled meeting.
Our Audit Committee has determined that the services other than audit services rendered by Moss Adams LLP during the fiscal year ended December 31, 2022 are compatible with maintaining the principal accountant’s independence.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a.Financial Statements and Financial Statement Schedules
i.Financial Statements
The financial statements of Apollo Endosurgery, Inc. listed below are set forth in Item 8 of this report for the year ended December 31, 2022:
ii.Financial Statement Schedules
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
b.Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit Number | Description of Document | Schedule / Form | File Number | Exhibit | Filing Date | |||||||||||||||||||||||||||
2.1++ | 8-K | 001-35706 | 2.1 | September 8, 2016 | ||||||||||||||||||||||||||||
| 2.2 | 8-K | 001-35706 | 2.1 | November 30, 2022 | ||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-35706 | 3.1 | June 13, 2017 | ||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-35706 | 3.2 | June 13, 2017 | ||||||||||||||||||||||||||||
| 4.1 | 10-Q | 001-35706 | 4.1 | May 4, 2017 | ||||||||||||||||||||||||||||
| 4.2 | 8-K | 001-35706 | 4.1 | September 22, 2014 | ||||||||||||||||||||||||||||
| 4.3 | S-4 | 333-214059 | 4.9 | October 11, 2016 | ||||||||||||||||||||||||||||
| 4.4 | 8-K | 001-35706 | 4.1 | August 16, 2019 | ||||||||||||||||||||||||||||
| 4.5 * | ||||||||||||||||||||||||||||||||
| 10.1 | Form 8-K | 001-35706 | 10.1 | November 30, 2022 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit Number | Description of Document | Schedule / Form | File Number | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.2 | Form 8-K | 001-35706 | 10.2 | December 7, 2020 | ||||||||||||||||||||||||||||
| 10.3 | 10-Q | 001-35706 | 10.1 | November 5, 2020 | ||||||||||||||||||||||||||||
| 10.4++ | Form 8-K | 001-35706 | 10.1 | July 22, 2020 | ||||||||||||||||||||||||||||
| 10.5 | Form 8-K | 001-35706 | 10.2 | July 22, 2020 | ||||||||||||||||||||||||||||
| 10.6 | Form 8-K | 001-35706 | 10.3 | July 22, 2020 | ||||||||||||||||||||||||||||
| 10.7# | 8-K | 001-35706 | 10.1 | February 22, 2022 | ||||||||||||||||||||||||||||
| 10.8# | 10-Q | 001-35706 | 10.1 | November 1, 2022 | ||||||||||||||||||||||||||||
| 10.9# | 10-Q | 001-35706 | 10.1 | August 2, 2022 | ||||||||||||||||||||||||||||
| 10.10# | 10-K | 001-35706 | 10.11 | March 1, 2018 | ||||||||||||||||||||||||||||
| 10.11# | 10-Q | 001-35706 | 10.2 | May 3, 2018 | ||||||||||||||||||||||||||||
| 10.12# | 8-K | 001-35706 | 10.1 | May 30, 2018 | ||||||||||||||||||||||||||||
| 10.13# | 10-Q | 001-35706 | 10.1 | November 1, 2021 | ||||||||||||||||||||||||||||
| 10.14# | 10-K | 001-35706 | 10.13 | February 25, 2021 | ||||||||||||||||||||||||||||
| 10.15# | 10-Q | 001-35706 | 10.2 | November 1, 2021 | ||||||||||||||||||||||||||||
| 10.16# | 10-Q | 001-35706 | 10.5 | August 8, 2018 | ||||||||||||||||||||||||||||
| 10.17# | 10-Q | 001-35706 | 10.6 | August 8, 2018 | ||||||||||||||||||||||||||||
| 10.18 | 10-Q | 001-35706 | 10.4 | August 8, 2018 | ||||||||||||||||||||||||||||
| 10.19 | 10-Q | 001-35706 | 10.2 | August 3, 2021 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit Number | Description of Document | Schedule / Form | File Number | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.20 | Form 8-K | 001-35706 | 99.1 | October 6, 2022 | ||||||||||||||||||||||||||||
| 10.21 | S-4 | 331-214059 | 10.20 | October 11, 2016 | ||||||||||||||||||||||||||||
| 10.22 | S-4 | 331-214059 | 10.21 | November 14, 2016 | ||||||||||||||||||||||||||||
| 10.23# | 8-K | 001-35706 | 10.1 | June 13, 2017 | ||||||||||||||||||||||||||||
| 10.24# | 8-K | 001-35706 | 10.2 | June 13, 2017 | ||||||||||||||||||||||||||||
| 10.25# | 8-K | 001-35706 | 10.3 | June 13, 2017 | ||||||||||||||||||||||||||||
| 10.26# | S-4 | 333-214059 | 10.2 | October 11, 2016 | ||||||||||||||||||||||||||||
| 10.27# | S-4 | 333-214059 | 10.1 | October 11, 2016 | ||||||||||||||||||||||||||||
| 10.28++ | 8-K | 001-35706 | 10.1 | August 16, 2019 | ||||||||||||||||||||||||||||
| 10.29 | 8-K | 001-35706 | 10.2 | August 16, 2019 | ||||||||||||||||||||||||||||
| 10.30 | 8-K | 001-35706 | 10.3 | August 16, 2019 | ||||||||||||||||||||||||||||
| 10.31 | 8-K | 001-35706 | 10.4 | August 16, 2019 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit Number | Description of Document | Schedule / Form | File Number | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.32^ | 10-K | 001-35706 | 10.31 | February 22, 2022 | ||||||||||||||||||||||||||||
| 21.1 | S-4 | 333-214059 | 21.1 | October 11, 2016 | ||||||||||||||||||||||||||||
| 23.1 * | ||||||||||||||||||||||||||||||||
| 31.1 * | ||||||||||||||||||||||||||||||||
| 31.2 * | ||||||||||||||||||||||||||||||||
| 32.1 * † | ||||||||||||||||||||||||||||||||
| 32.2 * † | ||||||||||||||||||||||||||||||||
| 101.INS* | XBRL Instance Document | |||||||||||||||||||||||||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained within Exhibit 101) | |||||||||||||||||||||||||||||||
____________
# Management contract or compensation plan or arrangement
* Provided herewith.
† In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
+ + Pursuant to Item 601 of Regulation S-K, the schedules to the applicable exhibit (identified therein) have been omitted from this report and will be furnished supplementally to the SEC upon request.
^ Certain identified information has been excluded from this exhibit because it is both not material and is the type that the registrant treats as private or confidential.
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ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
In accordance with the requirements of Section 13 on 15(k) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf on March 30, 2023 by the undersigned thereto.
| APOLLO ENDOSURGERY, INC. | |||||
| /s/ Charles McKhann | |||||
| Charles McKhann | |||||
| Chief Executive Officer | |||||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles McKhann and Jeffrey Black, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2023.
| Signature | Title | Date | ||||||||||||
| /s/ Charles McKhann | Chief Executive Officer and Director | March 30, 2023 | ||||||||||||
| Charles McKhann | (Principal Executive Officer) | |||||||||||||
| /s/ Jeffrey Black | Chief Financial Officer, Treasurer and Secretary | March 30, 2023 | ||||||||||||
| Jeffrey Black | (Principal Financial Officer) | |||||||||||||
| /s/ Chrissy Citzler-Carr | Controller | March 30, 2023 | ||||||||||||
| Chrissy Citzler-Carr | (Principal Accounting Officer) | |||||||||||||
| /s/ John Barr | Chairperson of the Board | March 30, 2023 | ||||||||||||
| John Barr | ||||||||||||||
| /s/ Jeannette Bankes | Director | March 30, 2023 | ||||||||||||
| Jeannette Bankes | ||||||||||||||
| /s/ Julie Shimer | Director | March 30, 2023 | ||||||||||||
| Julie Shimer | ||||||||||||||
| /s/ William D. McClellan, Jr. | Director | March 30, 2023 | ||||||||||||
| William D. McClellan, Jr. | ||||||||||||||
| /s/ R. Kent McGaughy, Jr. | Director | March 30, 2023 | ||||||||||||
| R. Kent McGaughy, Jr. | ||||||||||||||
| /s/ David C. Pacitti | Director | March 30, 2023 | ||||||||||||
| David C. Pacitti | ||||||||||||||
107
| /s/ Sharon O’Keefe | Director | March 30, 2023 | ||||||||||||
| Sharon O’Keefe | ||||||||||||||
108