UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
(述明或其他司法管轄權 公司或組織) |
(稅務局僱主 |
（主要行政辦公室地址） |
(郵政編碼) |
註冊人的電話號碼，包括區號：(
根據該法第12(B)條登記的證券：
每個班級的標題 |
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交易 符號 |
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註冊的每個交易所的名稱 |
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用複選標記表示註冊人(1)是否在過去12個月內(或註冊人被要求提交此類報告的較短時間內)提交了1934年《證券交易法》第13條或15(D)節要求提交的所有報告，以及(2)在過去90天內是否符合此類提交要求。
用複選標記表示註冊人是否在過去12個月內(或在註冊人被要求提交此類文件的較短時間內)以電子方式提交了根據S-T規則第405條(本章232.405節)要求提交的每個交互數據文件。
用複選標記表示註冊人是大型加速申報公司、加速申報公司、非加速申報公司、較小的報告公司或新興成長型公司。請參閱《交易法》第12b-2條規則中「大型加速申報公司」、「加速申報公司」、「較小申報公司」和「新興成長型公司」的定義。
大型加速文件服務器 |
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☐ |
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加速文件管理器 |
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☐ |
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☒ |
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規模較小的報告公司 |
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新興成長型公司 |
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如果是一家新興的成長型公司，用複選標記表示註冊人是否已選擇不使用延長的過渡期來遵守根據《交易所法》第13(A)節提供的任何新的或修訂的財務會計準則。
用複選標記表示註冊人是否是空殼公司(如《交易法》第12b-2條所定義)。是☐ 沒有
截至2024年11月11日，登記人已
選項卡內容
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頁面 |
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第一部分： |
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項目1. |
1 |
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1 |
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2 |
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3 |
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4 |
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5 |
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項目2. |
26 |
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項目3. |
34 |
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項目4. |
34 |
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第二部分。 |
35 |
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項目1. |
35 |
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第1A項。 |
35 |
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項目2. |
80 |
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項目3. |
81 |
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項目4. |
81 |
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第五項。 |
81 |
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第六項。 |
81 |
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i
關於前瞻性陳述的特別說明
這份Form 10-Q季度報告包含有關我們和我們的行業的前瞻性陳述，涉及重大風險和不確定因素。除本Form 10-Q季度報告中包含的歷史事實的陳述外，其他所有陳述，包括有關我們的戰略、未來財務狀況、未來運營、預計成本、前景、計劃、管理目標和預期市場增長的陳述，均爲前瞻性陳述。在某些情況下，您可以通過「可能」、「將會」、「應該」、「應該」、「預期」、「計劃」、「預期」、「可能」、「打算」、「目標」、「項目」、「考慮」、「相信」、「估計」、「預測」、「潛在」、「目標」、「目標」、「尋求」等詞語來識別前瞻性陳述。或「繼續」或這些詞語的否定或其他與我們的期望、戰略、計劃或意圖有關的類似術語或表述。本季度報告中關於Form 10-Q的前瞻性陳述包括但不限於以下陳述：
我們警告您，上述列表不包含本季度報告中10-Q表格中的所有前瞻性陳述。
你不應該依賴前瞻性陳述作爲對未來事件的預測。本季度報告中包含的前瞻性陳述主要基於我們目前對未來事件和趨勢的預期、估計、預測和預測，我們認爲這些事件和趨勢可能會影響我們的業務、財務狀況、經營業績和前景。儘管我們認爲我們對本Form 10-Q季度報告中包含的每個前瞻性陳述都有合理的依據，但我們不能保證前瞻性陳述中反映的未來結果、活動水平、業績或事件和情況將會實現或根本不會發生。這些前瞻性陳述中描述的事件的結果受題爲「風險因素」一節和本季度報告Form 10-Q中其他部分所描述的風險、不確定性和其他因素的影響。此外，我們的運營環境競爭激烈，變化迅速。新的風險和不確定因素不時出現，我們無法預測所有可能對本10-Q表格季度報告中的前瞻性表述產生影響的風險和不確定因素。前瞻性表述中反映的結果、事件和情況可能無法實現或發生，實際結果、事件或情況可能與前瞻性表述中描述的大不相同。
本季度報告中10-Q表格中的前瞻性陳述僅與截至陳述之日的事件有關。我們沒有義務更新本10-Q表格季度報告中的任何前瞻性陳述，以反映本10-Q表格季度報告日期之後的事件或情況，或者反映新信息或非預期事件的發生，法律要求的除外。我們可能實際上無法實現前瞻性陳述中披露的計劃、意圖或期望，您不應過度依賴我們的前瞻性陳述。我們的前瞻性陳述並不反映我們可能進行的任何未來收購、合併、處置、合資企業或投資的潛在影響。
ii
此外，「我們相信」的聲明和類似聲明反映了我們對相關主題的信念和觀點。這些聲明基於截至本季度報告10-Q表格日期我們可獲得的信息，雖然我們相信此類信息構成了此類聲明的合理基礎，但此類信息可能是有限的或不完整的，並且我們的聲明不應被解讀爲表明我們已經對所有潛在可用的相關信息進行了詳盡的調查或審查。這些陳述本質上是不確定的，我們警告您不要過度依賴這些陳述。
您應該閱讀本10-Q表格季度報告以及我們在本10-Q表格季度報告中引用的文件，並已作爲註冊聲明的證據提交，本10-Q表格季度報告是註冊聲明的一部分，完全了解我們的實際未來結果可能與我們的預期存在重大差異。我們通過這些警示性陳述來限定本季度報告中10-Q表格中的所有前瞻性陳述。
iii
第一部分金融信息
伊特M 1.財務報表。
CeriBell公司
圓錐體緻密的資產負債表
(以千爲單位，不包括每股和每股數據)
(未經審計)
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9月30日， |
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12月31日， |
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2024 |
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2023 |
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資產 |
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流動資產 |
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現金及現金等價物 |
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$ |
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$ |
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應收賬款淨額 |
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庫存 |
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當前合同成本 |
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預付費用和其他流動資產 |
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流動資產總額 |
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財產和設備，淨額 |
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經營性租賃使用權資產 |
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合同成本，長期 |
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其他非流動資產 |
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總資產 |
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$ |
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$ |
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負債、可贖回可轉換優先股和股東虧損 |
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流動負債 |
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應付賬款 |
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$ |
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$ |
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應計負債 |
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合同負債，流動 |
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應付票據，當期 |
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— |
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經營租賃負債，流動 |
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其他流動負債 |
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流動負債總額 |
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長期負債 |
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長期應付票據 |
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— |
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長期合同負債 |
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其他長期負債 |
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長期經營租賃負債 |
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長期負債總額 |
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總負債 |
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$ |
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$ |
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可贖回可轉換優先股，$ |
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授權股份： |
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已發行和發行股份： |
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總清算偏好美元 |
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股東虧損額 |
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普通股，$ |
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授權股份： |
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已發行和發行股份： |
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額外實收資本 |
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累計赤字 |
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( |
) |
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( |
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股東總虧損額 |
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( |
) |
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( |
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總負債、可贖回可轉換優先股和股東虧損 |
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$ |
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$ |
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附註是這些簡明財務報表的組成部分。
1
CeriBell公司
操作員的精簡陳述離子與綜合損失
(以千爲單位，不包括每股和每股數據)
(未經審計)
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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2024 |
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2023 |
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收入 |
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產品收入 |
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$ |
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$ |
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$ |
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$ |
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訂閱收入 |
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總收入 |
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收入成本 |
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售出商品的產品成本 |
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收入的訂閱成本 |
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收入總成本 |
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毛利 |
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業務費用 |
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研發 |
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銷售和營銷 |
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一般和行政 |
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總運營支出 |
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運營虧損 |
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( |
) |
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( |
) |
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( |
) |
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( |
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利息開支 |
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( |
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( |
) |
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( |
) |
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( |
) |
認購證負債公允價值變化 |
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( |
) |
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( |
) |
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( |
) |
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— |
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其他收入，淨額 |
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所得稅撥備前損失 |
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( |
) |
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( |
) |
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( |
) |
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( |
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所得稅費用準備 |
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— |
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— |
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— |
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( |
) |
淨虧損和綜合虧損 |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
普通股股東每股淨虧損： |
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基本及攤薄 |
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( |
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( |
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( |
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( |
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用於計算歸屬於普通股股東的每股淨虧損的加權平均股數： |
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基本及攤薄 |
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附註是這些簡明財務報表的組成部分。
2
CeriBell公司
可贖回康弗的濃縮陳述優先股和股東赤字
(單位：千，共享數據除外)
(未經審計)
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可贖回可兌換 |
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普通股 |
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額外 |
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積累 |
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股東合計 |
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股份 |
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量 |
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股份 |
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面值 |
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資本 |
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赤字 |
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赤字 |
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餘額2023年12月31日 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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根據股票期權行使發行普通股 |
|
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— |
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— |
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— |
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— |
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股票補償 |
|
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— |
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— |
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— |
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— |
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— |
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淨虧損 |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
餘額2024年3月31日 |
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
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|||||
根據股票期權行使發行普通股 |
|
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— |
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— |
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— |
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— |
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股票補償 |
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— |
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— |
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— |
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— |
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— |
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淨虧損 |
|
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
餘額2024年6月30日 |
|
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
|||||
根據股票期權行使發行普通股 |
|
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— |
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— |
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|
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— |
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||||
股票補償 |
|
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— |
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— |
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— |
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— |
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— |
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淨虧損 |
|
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
餘額2024年9月30日 |
|
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
|||||
|
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可贖回可兌換 |
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普通股 |
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額外 |
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積累 |
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股東合計 |
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股份 |
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量 |
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股份 |
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面值 |
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餘額2022年12月31日 |
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根據股票期權行使發行普通股 |
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股票補償 |
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餘額2023年3月31日 |
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根據股票期權行使發行普通股 |
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股票補償 |
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淨虧損 |
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餘額2023年6月30日 |
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根據股票期權行使發行普通股 |
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— |
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股票補償 |
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淨虧損 |
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餘額2023年9月30日 |
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附註是這些簡明財務報表的組成部分。
3
CeriBell公司
凝聚態現金流金額
(in數千）
(未經審計)
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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經營活動的現金流 |
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淨虧損 |
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對淨虧損與經營活動中使用的現金淨額進行的調整： |
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折舊及攤銷費用 |
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非現金租賃費用 |
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基於股票的補償費用 |
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債務貼現攤銷 |
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認購證負債公允價值變化 |
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財產、設備和記錄儀處置損失 |
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經營資產和負債變化： |
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應收賬款淨額 |
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庫存 |
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預付費用和其他流動資產 |
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合同費用 |
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其他非流動資產 |
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應付賬款 |
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應計負債和其他流動負債 |
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合約負債 |
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用於經營活動的現金淨額 |
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投資活動產生的現金流 |
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購買錄音機部件和錄音機 |
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購置財產和設備 |
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投資活動所用現金淨額 |
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融資活動現金流量 |
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根據股票期權行使行使普通股的收益 |
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發行債券所得款項 |
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債務發行成本 |
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支付延期IPO發行成本 |
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( |
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融資活動提供的現金淨額 |
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現金和現金等價物淨減少 |
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( |
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期初現金及現金等價物 |
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期末現金和現金等價物 |
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$ |
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$ |
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補充披露現金流量信息 |
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支付利息的現金 |
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$ |
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$ |
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爲換取經營租賃義務而獲得的使用權資產 |
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$ |
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$ |
— |
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應付賬款和應計費用中包括的財產和設備 |
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$ |
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$ |
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記錄儀組件包含在應付賬款和應計費用中 |
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$ |
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$ |
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未付延期IPO發行成本計入應付賬款和應計負債 |
|
$ |
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$ |
— |
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附註是這些簡明財務報表的組成部分。
4
塞裏貝爾公司
不是精簡財務報表
(未經審計)
組織和業務
CeriBell，Inc.(「本公司」)於2014年8月29日在特拉華州註冊爲Brain Stethcope，Inc.，並於2015年8月11日更名爲CeriBell，Inc.，並保留其在加利福尼亞州桑尼維爾的主要辦事處。該公司是一家商業階段的醫療技術公司，專注於改變對患有嚴重神經疾病的患者的診斷和管理。
該公司開發了Ceribell系統，這是一種新型的護理點腦電(EEG)平台，專門爲解決急性護理環境中患者未得到滿足的需求而設計。通過將專有、高度便攜和可快速部署的硬件與複雜的人工智能(AI)驅動的算法相結合，Ceribell系統能夠對患有神經疾病的患者進行快速診斷和持續監測。
首次公開募股
緊接本公司於2024年10月15日首次公開招股結束前，本公司所有可贖回可轉換優先股股票均已轉換爲本公司普通股。
2024年10月15日，公司完成首次公開募股
流動性
截至2024年9月30日和2023年12月31日，公司的主要流動資金來源爲
自成立以來，該公司的運營虧損和運營現金流爲負。2024年9月30日和2023年12月31日，公司累計虧損1美元
於2024年2月6日，本公司與硅谷銀行(First-Citizens Bank&Trust Company，「SVB」)(作爲貸款人)和Horizon Technology Finance Corporation(「Horizon」)(作爲貸款人和抵押品代理)簽訂了一項風險貸款和擔保協議(「VLSA」)。VLSA提供了#美元的定期貸款承諾。
VLSA由公司的所有資產擔保，不包括知識產權。
5
至宣佈發生違約事件，並要求公司立即償還本金總額的所有未償還金額，外加應計利息，並取消爲獲得此類債務而授予的抵押品的抵押品贖回權。
與VLSA同時，公司與SVB簽署了一項貸款和擔保協議，以獲得高達$的高級循環信貸額度
2024年10月15日，該公司完成了首次公開募股，獲得了約美元的總收益
根據公司目前的運營計劃，公司相信其現有的現金和現金等價物將足以支付公司計劃的運營費用和資本支出需求，至少在這些財務報表發佈之日起的未來12個月內。
然而，公司的經營活動產生的現金可能低於預期，或高於預期的資本支出、收入成本或運營支出，可能需要籌集額外資本爲運營、進一步的研發活動提供資金，或收購、投資或許可其他業務、資產或技術。公司未來的資本需求將取決於許多因素，包括市場對公司產品的接受程度、開發新產品的成本和速度以及支持銷售增長的成本。
2.主要會計政策摘要
陳述的基礎
所附財務報表乃根據美國公認會計原則(「公認會計原則」)及美國證券交易委員會(「美國證券交易委員會」)的規則及條例編制。
未經審計的中期財務報表按照與年度財務報表相同的基準編制，管理層認爲，這些調整反映了公司截至2024年9月30日的財務狀況、截至2024年9月30日和2023年9月30日的三個月和九個月的經營業績以及截至2024年9月30日和2023年9月30日的九個月的現金流量的所有調整，其中只包括公平陳述公司截至2024年9月30日的財務狀況和截至2023年9月30日的九個月的現金流量所必需的正常經常性調整。截至2023年12月31日的簡明資產負債表來自經審計的年度財務報表，但不包含年度財務報表中的所有腳註披露。這些中期財務業績不一定代表整個財政年度或任何後續中期的預期結果，應與公司於2024年10月10日提交給美國證券交易委員會的最終招股說明書(日期爲2024年10月10日)中的年度財務報表一併閱讀，該招股說明書是根據修訂後的1933年證券法(「證券法」)第424(B)條於2024年10月11日提交給美國證券交易委員會的(「招股說明書」)。
反向拆分股票
於2024年10月4日，本公司修訂並重述其經修訂及重述的公司註冊證書，以
預算的使用
按照公認會計准則編制財務報表要求管理層作出估計和假設，以影響在財務報表之日報告的資產和負債數額以及報告期內報告的費用數額。實際結果可能與這些估計和假設不同，這種差異可能會對公司的財務狀況和經營結果產生重大影響。重大估計和假設包括但不限於認股權證的估值、公司普通股的估值(在首次公開募股之前)以及爲計入基於股票的補償而對公司購買普通股的期權的估值。
6
C
本公司將收購日三個月或以下到期日購買的所有高流動性投資視爲現金等價物。截至2024年9月30日和2023年12月31日，現金和現金等價物包括企業現金支票帳戶、活期存款帳戶和貨幣市場基金。
應收帳款
公司按發票金額記錄應收賬款。公司對公司可能無法收回的任何應收賬款保留信貸損失準備金。本公司根據應收賬款的賬齡、客戶的預期支付能力和收款歷史、當前的經濟狀況以及其他可能影響客戶支付能力的因素，對應收賬款進行個別估計。本公司根據現有的最佳事實和情況作出判斷，並將應收賬款減少到預期收回的金額，計入應收金額的準備金。信貸損失準備是無關緊要的，計入資產負債表上的應收賬款。
庫存
存貨以成本或可變現淨值中的較低者入賬，後者按先進先出的原則近似於實際成本。庫存成本包括直接材料、直接人工和正常製造費用。公司採用第三方代工廠現場完成材料部件的製造和組裝。最終的質量檢驗和包裝在公司總部進行。在質量檢驗和包裝之前，庫存被認爲是零部件材料。本公司定期評估所有存貨的可回收性，以確定是否需要進行減值調整。本公司在評估本公司存貨的可回收性時，評估相關的成品商業組合及其他一般報廢及減值標準，並主要根據對預測需求的估計，記錄超額、過期及過時存貨的撥備。在確定這些撥備時需要作出判斷，與預測數量相比，產品需求的時間或水平的變化可能會導致在未來爲過剩、過期和過時的庫存記錄額外的撥備。
財產和設備，淨額
財產和設備按成本減去累計折舊和攤銷列報。維護和維修在發生時計入費用，租賃改進計入資本化。當資產報廢或以其他方式處置時，成本和累計折舊及攤銷將從資產負債表中扣除，由此產生的任何收益或虧損將反映在已實現期間的經營報表中。折舊和攤銷按下表按資產的估計使用年限採用直線法計算：
固定資產類別 |
|
預計使用壽命 |
傢俱和固定裝置 |
|
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計算機設備和軟件 |
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實驗室和製造設備 |
|
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租賃權改進 |
|
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使用權資產和租賃負債
公司在一開始就確定一項安排是否爲租約或包含租約。本公司在其資產負債表上確認經營租賃負債，代表未來租賃付款的現值和任何期限大於
可贖回可轉換優先股和認股權證
可贖回可轉換優先股的流通股持有人沒有規定的贖回權；然而，可贖回可轉換股票的持有人有權在出售、租賃、轉讓、獨家許可或以其他方式處置公司的全部或幾乎所有資產或知識產權、另一實體通過任何重組、合併或合併方式收購公司的情況下獲得優先付款，而在緊接收購之前，公司的股東未能至少持有該公司
7
控制， 所有可贖回可轉換優先股的股份均已在所附所有期間的資產負債表中以永久股本以外的形式列報。
此外，公司還發行了獨立認股權證，以購買可贖回的可轉換優先股。該等認股權證目前可行使，幷包括在隨附的資產負債表上的其他長期負債內。可贖回可轉換優先股權證須於每個資產負債表日重新計量，而公允價值的任何變動均在營業及全面損失表中確認爲營業外收益的組成部分。該公司使用布萊克-斯科爾斯期權定價模型來確定認股權證的公允價值。
信用風險集中
可能使公司面臨集中信用風險的金融工具主要包括現金和現金等價物以及應收賬款。該公司的現金和現金等價物投資於支票帳戶和貨幣市場基金。到目前爲止，該公司還沒有出現任何虧損。
該公司的應收賬款完全來自向位於美國的客戶銷售產品和認購。該公司對其客戶的財務狀況進行定期評估，通常不需要客戶提供抵押品。從歷史上看，信貸損失並不嚴重。在截至2024年或2023年9月30日的三個月和九個月內，沒有客戶佔公司收入的10%。截至2024年9月30日或2023年12月31日，沒有客戶佔公司應收賬款餘額的10%。
銀行倒閉、涉及有限流動性的事件、違約、不良表現或其他影響金融機構的不利事態發展，或對此類事件的擔憂或傳言，可能會導致流動性約束。銀行倒閉或金融或信貸市場的其他不利狀況影響到本公司維持餘額的金融機構，可能會對流動性和財務業績產生不利影響。不能保證公司超過聯邦存款保險公司(「FDIC」)或其他類似保險限額的存款將得到美國或適用的外國政府的支持，也不能保證與公司有業務往來的任何銀行或金融機構能夠從其他銀行、政府機構獲得所需的流動性，或在發生破產或流動性危機時通過收購獲得所需的流動性。該公司的現金和現金等價物主要以貨幣市場基金形式持有。
其他非流動資產
其他非流動資產包括客戶所在地的記錄器、記錄器部件和記錄器，以及非流動存款。記錄器的估計使用壽命爲三年，當記錄器在客戶地點投入使用時開始折舊。
8
推遲IPO發行成本
遞延IPO發行成本，包括與首次公開募股相關的法律費用、諮詢費和會計費用，被資本化。遞延IPO發售成本將於發售完成後抵銷發售所得款項。該公司擁有
長期資產減值準備
每當事件或環境變化顯示某項資產的賬面值可能無法收回時，本公司便會審核其長期資產，主要是物業及設備及使用權資產的減值。回收能力是通過將賬面金額與資產預期產生的未來現金流進行比較來衡量的。如該等資產被視爲減值，應確認的減值以該資產的賬面價值超過該資產的公允價值的金額計量。到目前爲止，還沒有確認的長期資產的此類減值。
收入成本
收入成本包括與公司產品製造相關的直接和間接成本，以及公司Clarity和EEG門戶訂閱服務的託管成本。直接成本包括髮帶成本、客戶地點錄音機的折舊以及與公司員工進行的組裝和測試相關的成本。間接成本包括分配給員工成本和設施成本的間接費用。庫存採購和產品運輸產生的運輸和處理費用以及關稅在營業報表和綜合損失表中計入收入成本。
有關細分市場和地理區域的信息
公司以以下方式經營和管理其業務
許可協議
該公司已經與斯坦福大學達成了一項許可內協議，根據該協議，該公司應支付與根據許可內技術獲得的收入相關的低至個位數的專利使用費百分比，但須支付最低金額。特許權使用費義務在發生或超過最低特許權使用費期間時，在營業和全面虧損報表中作爲收入成本支出，並不是實質性的。估計未來的最低還款額不到#美元。
關聯方交易
該公司向公司董事兼聯合創始人Parvizi博士支付諮詢服務和相關費用報銷費用，並在經營報表和全面損失中記錄了一般和行政費用等金額。相關費用 Parvizi博士是美元
研究與開發
研究和開發成本在發生的期間內計入運營。研發成本包括但不限於工資、人事和基於股票的補償費用、實驗室用品、諮詢費用和分配的管理費用，包括租金、設備、折舊和水電費。
知識產權成本
獲得、保護和維護專利的成本，包括與提交和起訴專利申請有關的成本，由於支出收回的不確定性而計入費用。與專利有關的支出金額在經營報表和綜合損失報表中歸類爲一般費用和行政費用。
9
廣告費
公司將廣告費用計入發生的費用。廣告費用爲美元
普通股股東應占每股淨虧損
每股普通股基本淨虧損的計算方法是，普通股股東應占淨虧損除以當期已發行普通股的加權平均股數，不考慮潛在的稀釋證券。每股攤薄淨虧損的計算方法是，普通股股東應占淨虧損除以當期已發行普通股和潛在攤薄證券的加權平均數。就稀釋每股淨虧損計算而言，可贖回可轉換優先股、股票期權及按轉換後基準購買可轉換優先股的認股權證被視爲潛在攤薄證券。每股普通股股東應占基本及攤薄淨虧損按照參與證券所需的兩類方法列報，因爲可贖回可轉換優先股因參與普通股股息而被視爲參與證券。可贖回可轉換優先股的持有者沒有合同義務分擔公司的損失。因此，淨虧損完全歸因於普通股股東。由於該公司報告了所有期間的淨虧損，稀釋後的每股普通股淨虧損與這些時期的每股普通股基本淨虧損相同。
基於股票的薪酬
本公司根據ASC 718對員工和非員工獎勵的股票薪酬進行覈算，薪酬-股票薪酬。ASC 718要求使用基於公允價值的方法確認與所有基於服務的股票支付相關的成本的補償費用，包括股票期權。
該公司使用Black-Scholes期權估值模型估計授予日授予員工的期權的公允價值。這種基於股票的薪酬費用估值模型要求公司對計算中使用的變量做出假設和判斷，包括公司股票的價值、公司普通股的預期波動率、預期期限(基於必需服務期和合同期限的中點和歷史行使行爲的平均值)、無風險利率和預期股息。
綜合損失
綜合損失包括淨損失以及除股東交易和經濟事件之外的股東赤字的其他變化。截至2024年9月30日和2023年9月30日的三個月和九個月，淨虧損與綜合虧損無差異。
所得稅
本公司確認遞延稅項資產和負債爲已包括在本公司資產負債表和所得稅申報表中的事件的預期未來稅務後果。遞延稅項資產及負債乃根據財務報表賬面值與資產及負債及虧損及貸記結轉的稅基之間的差額厘定，並採用預期於差額撥回時生效的已制定稅率。本公司評估其遞延稅項資產的變現能力，並在部分或全部遞延稅項資產可能無法變現的情況下記錄估值撥備。
本公司根據管理層對報告日期的事實、情況和信息的評估，評估其所得稅頭寸並記錄稅收優惠。該公司根據ASC 740-10中的指導對所得稅中的不確定性進行了會計處理，該指導要求對財務報表確認和在納稅申報單中採取或預期採取的納稅立場進行衡量時，更有可能設定一個門檻。對於那些更有可能維持稅收優惠的稅務頭寸，本公司記錄了最大金額的稅收優惠，在與完全了解所有相關信息的稅務機關最終達成和解時實現的可能性超過50%。對於那些不太可能維持稅收優惠的所得稅頭寸，財務報表中不會確認任何稅收優惠。本公司將不確定稅種的利息和罰金歸類爲所得稅費用。
10
最近採用的會計公告
2020年8月，FASB發佈了ASU 2020-06，債務--帶有轉換和其他期權的債務(分專題470-20)和衍生工具和套期保值--實體自有權益中的合同(分專題815-40)：實體自有權益中可轉換票據和合同的會計。修正案簡化了某些具有負債和股權特徵的金融工具的會計處理，包括可轉換工具和實體自有股權合同。新準則要求實體提供更多關於可轉換工具的條款和特徵、工具在實體財務報表中的報告方式以及可能影響如何評估實體與這些工具相關的未來現金流的金額或時間的事件、條件和情況的信息。在……上面
最近發佈的尚未採用的會計公告
2023年11月，FASB發佈了ASU 2023-07分部報告--對可報告分部披露的改進。修訂擴大了分部披露，要求披露定期提供給首席運營決策者(CODM)的重大分部支出、其他分部項目的金額和描述、允許公司披露一種以上分部損益衡量標準，並要求所有年度分部披露都包括在中期內。修正案不改變實體如何確定其經營部門、彙總這些經營部門或應用量化閾值來確定其應報告的部門。修正案適用於2023年12月15日之後的財政年度和2024年12月15日之後的財政年度內的過渡期。允許及早領養。採用ASU 2023-07只會影響公司的披露。
2023年12月，FASB發佈了ASU 2023-09號，對所得稅披露進行了改進。修正案擴大了所得稅披露要求，要求實體披露(I)稅率調節中的具體類別，(Ii)符合數量門檻的調節項目的額外信息，以及(Iii)按司法管轄區分列的已繳納稅額。這些修正案從2024年12月15日之後的財年開始生效。允許及早領養。採用ASU 2023-09只會影響本公司的披露，本公司正在評估採用新披露要求的效果。
2024年11月，FASB發佈了美國會計準則第2024-03號，對損益表費用進行了分解。修正案要求在損益表正面的某些費用標題中包含有關特定費用類別(庫存採購、員工薪酬、折舊、攤銷和損耗)的更詳細信息。本ASU適用於2026年12月15日之後的財年，以及2027年12月15日之後的財年內的過渡期。允許及早領養。這些修正可以(1)前瞻性地適用於在本ASU生效日期之後的報告期內發佈的財務報表，或者(2)追溯到財務報表中列報的所有以前的期間。我們目前正在評估這一ASU將對我們的披露產生的影響。
收入確認
本公司根據ASC 606確認收入，與客戶簽訂合同的收入. ASC 606確立了在向客戶轉讓承諾的貨物或服務時確認收入的原則，其數額反映了爲交換這些貨物或服務而收到的預期對價。ASC 606的核心原則是確認收入，以描述向公司客戶轉讓承諾的商品或服務。
在主題606項下，公司通過下列步驟確認收入：
11
收入在將承諾產品的控制權轉讓給客戶時確認，金額反映了預期爲換取這些產品而收到的對價。本公司簽訂的合同包括一個或多個產品，這些產品通常能夠區分並作爲個人履約義務覈算，此外，每月訂閱費通常能夠區分並作爲個人履約義務覈算。
確定和履行履行義務
該公司的收入來自通過其在美國各地的直銷隊伍向醫療集團和醫院銷售其產品。在某個時間點履行的公司合同中的履約義務包括銷售給客戶的腦電髮帶和腦電記錄器。該公司在某一時刻將控制權移交給客戶後，確認與訂閱和EEG髮帶分開銷售的EEG記錄器的收入。隨着時間的推移，公司合同中履行的履約義務包括EEG門戶網站和Clarity軟件即服務(SaaS)訂閱產品。對於其清晰度和門戶訂閱產品，公司在客戶有能力消費並從其訪問訂閱中獲得好處的期間內按比例確認收入，這通常是按月進行的。該公司的Clarity訂閱包括客戶在訂閱期限內使用腦電記錄儀。本公司在與客戶的安排中將與認購一起使用的腦電記錄器確定爲經營租賃部分，並在與客戶的安排中將認購確定爲非租賃部分，公司認爲這是主要的。租賃和非租賃收入部分具有類似的收入確認模式，因此，本公司可以選擇不將租賃和非租賃部分分開的實際權宜之計。因此，總體安排在ASC 606項下計入。
與客戶合同相關的對價包括固定金額和可變金額。可變對價包括折扣、回扣、積分、激勵、處罰或其他類似項目。可以變化的對價金額少於
公司在交易價格中不包括銷售稅，作爲一種會計政策選擇，從客戶那裏收取的銷售稅和其他稅額扣除相關匯入的金額後計入。
履約義務是合同中承諾將獨特的商品或服務轉移給客戶的承諾，是根據公認會計准則確認收入的基礎。爲確定合同的適當收入確認方法，本公司評估是否應將兩個或更多合同合併並計入一份合同，以及合併後的合同或單一合同是否應計入一份以上的履約義務。這種評估需要判斷，決定將一組合同合併或將合併後的合同或單一合同分成多個履約義務，可能會改變特定期間記錄的收入和利潤數額。
收入的分類
下表提供了按所提供產品和服務的性質分列的與客戶合同收入的信息(單位：千)：
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截至9月30日的三個月裏， |
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|
截至9月30日的九個月裏， |
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||||||||||
|
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2024 |
|
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2023 |
|
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2024 |
|
|
2023 |
|
||||
腦電記錄器和腦電髮帶，時間點 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
隨時間推移，EEG門戶和Clarity訂閱 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
總收入 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
目前，該公司的客戶僅在美國。
合同費用
該公司將被認爲是獲得客戶合同的增量的銷售佣金資本化，並在估計的受益期內攤銷這些佣金。爲了確定遞延佣金的受益期，公司評估佣金的類型、相關利益的性質以及其安排的具體事實和情況。該公司通過考慮客戶的平均壽命來確定收購初始認購合同所支付的佣金的受益期，一般假定客戶壽命爲三年。該公司至少每年對這些假設進行評估，並定期審查是否發生了可能影響受益期的事件或環境變化。
12
該公司已選擇利用實際的權宜之計來支出攤銷期限不到一年的銷售佣金，並將被認爲是獲得攤銷期限超過一年的合同的增量成本的銷售佣金資本化。
13
下表提供了資本化合同成本的細目（單位：千）：
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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||||||||||
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2024 |
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2023 |
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2024 |
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2023 |
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||||
年初合同成本餘額 |
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$ |
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$ |
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$ |
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$ |
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||||
年內資本化的合同成本 |
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|
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|
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|
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||||
年內攤銷的合同成本 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
截至期末的合同成本 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
合同責任和履行義務
合同負債包括從客戶處收到的主要用於Clarity SaaS訂閱的預付款。與從客戶收到的預付款相關的合同負債爲美元
下表提供了合同負債細目(以千計)：
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截至9月30日的三個月裏， |
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|
截至9月30日的九個月裏， |
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||||||||||
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2024 |
|
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2023 |
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|
2024 |
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2023 |
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||||
期初合同負債餘額 |
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$ |
|
|
$ |
|
|
$ |
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|
$ |
|
||||
本期間的額外合同負債收入 |
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||||
本期間確認的合同負債餘額 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
期末餘額 |
|
$ |
|
|
$ |
|
|
$ |
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|
$ |
|
||||
公司選擇不將其確認的收入金額等於公司有權開具發票金額的合同納入未履行的履行義務。
ASC 820，公允價值計量和披露，將公允價值定義爲在計量日市場參與者之間的有序交易中出售資產所收到的價格或轉讓負債所支付的價格。ASC 820建立了公允價值層次結構，區分了（1）根據從獨立來源獲得的市場數據制定的市場參與者假設（可觀察輸入）和（2）實體自己對根據情況下可用的最佳信息制定的市場參與者假設的假設（不可觀察輸入）。公允價值層級由三個級別組成，最高優先級爲活躍市場上相同資產或負債的未經調整的報價（第1級），最低優先級爲不可觀察輸入（第3級）。ASC 820下公允價值層次結構的三個級別描述如下：
1級-這一水平包括在資產或負債計量日期可獲得的活躍市場的報價(未調整)。公允價值層次結構賦予1級投入最高優先級。
2級-這一水平包括截至報告日期通過與市場數據的關聯直接或間接可觀察到的投入，包括活躍市場中類似資產和負債的報價以及非活躍市場中的報價。第2級亦包括使用不需要重大判斷的模型或其他定價方法進行估值的資產和負債，因爲模型中使用的輸入假設，如利率和波動率因素，得到了來自活躍報價市場的幾乎整個金融工具期限的容易觀察到的數據的證實。
3級-這一水平由難以觀察到的投入組成，這些投入得到很少或沒有市場活動的支持，並反映了重大管理判斷的使用。這些價值通常是使用定價模型確定的，而定價模型的假設利用了管理層對市場參與者假設的估計。
在厘定公允價值時，本公司採用估值技術，最大限度地利用可觀察到的投入及儘量減少不可觀察到的投入，並在評估公允價值時考慮交易對手的信用風險。
14
資產和負債的公允價值
下表爲公司按公允價值等級計算的金融資產和負債，按公允價值(千)計量：
2023年12月31日 |
|
1級 |
|
|
2級 |
|
|
3級 |
|
|
總 |
|
||||
資產 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
現金等價物： |
|
|
|
|
|
|
|
|
|
|
|
|
||||
貨幣市場基金 |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
總資產， 按公平值 |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
負債 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
令狀責任 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
總負債， 按公允價值計算 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
2024年9月30日 |
|
1級 |
|
|
2級 |
|
|
3級 |
|
|
總 |
|
||||
資產 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
現金等價物： |
|
|
|
|
|
|
|
|
|
|
|
|
||||
貨幣市場基金 |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
總資產， 按公允價值計算 |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
負債 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
令狀責任 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
總負債， 按公平值 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
公司應付票據的公允價值按攤銷成本列賬，接近其公允價值。
公司用於衡量貨幣市場基金公允價值的估值技術源自相同資產或負債在活躍市場上的報價，歸類爲第一級。
購買公司可贖回可轉換優先股的認股權證的價值取決於幾乎沒有或沒有市場數據的投入，特別是公司股票的價值。因此，認股權證的估值被歸類爲第三級。當決定將一種金融工具歸類爲第三級時，該決定是基於不可觀察投入對整體公允價值計量的最低重要性水平。然而，除了不可觀察到的投入外，第三級金融工具通常還包括可觀察到的投入(即被主動引用並可向外部來源確認的組成部分)。因此，在經營報表和全面虧損報表中確認的公允價值變動損益部分歸因於確認的第三級方法中的可觀察因素。權證包括在資產負債表上的其他長期負債中。公允價值可能會根據未來的市場狀況發生重大變化。
認股權證負債的公允價值是根據布萊克-斯科爾斯期權定價模型確定的，該模型使用了以下假設，以及對相關優先股估值的估計：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
預期期限(以年爲單位) |
|
|
|
|
||||
預期波幅 |
|
|
|
|
||||
無風險利率 |
|
|
|
|
||||
股息率 |
|
|
— |
|
|
|
— |
|
庫存
庫存由以下內容組成(以千爲單位)：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
組件材料 |
|
$ |
|
|
$ |
|
||
成品 |
|
|
|
|
|
|
||
總 |
|
$ |
|
|
$ |
|
||
15
財產和設備，淨額
財產和設備由以下組成（以千計）：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
傢俱和固定裝置 |
|
$ |
|
|
$ |
|
||
計算機設備和軟件 |
|
|
|
|
|
|||
實驗室和製造設備 |
|
|
|
|
|
|
||
租賃權改進 |
|
|
|
|
|
|||
在建工程 |
|
|
|
|
|
|||
總資產和設備 |
|
|
|
|
|
|
||
減去：累計折舊和攤銷 |
|
|
|
|
|
|
||
財產和設備，淨額 |
|
$ |
|
|
$ |
|
||
折舊和攤銷費用爲#美元
其他非流動資產
其他非流動資產由以下各項組成（以千計）：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
客戶地點的記錄儀 |
|
$ |
|
|
$ |
|
||
減：客戶地點記錄儀的累計折舊 |
|
|
( |
) |
|
|
( |
) |
客戶地點的記錄儀，淨 |
|
|
|
|
||||
記錄儀及相關組件 |
|
|
|
|
|
|
||
遞延IPO成本 |
|
|
|
|
— |
|
||
遞延債務融資成本 |
|
|
|
|
— |
|
||
其他非流動資產 |
|
|
|
|
|
|
||
非流動資產總額 |
|
$ |
|
|
$ |
|
||
記錄儀折舊費用爲美元
應計負債
應計負債包括以下內容（單位：千）：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
應計獎金和工資總額 |
|
$ |
|
|
$ |
|
||
累算佣金 |
|
|
|
|
|
|
||
專業費用和其他費用 |
|
|
|
|
|
|
||
其他 |
|
|
|
|
|
|||
總 |
|
$ |
|
|
$ |
|
||
該公司爲其員工提供了一項遞延稅儲蓄計劃，通常稱爲401（k）計劃。員工繳款從工資支票中扣除，並在每個工資期後幾天自動從公司的支票帳戶中提取並存入參與者的退休帳戶。出現
16
訴訟
當管理層認爲可能發生負債且損失金額可以合理估計時，公司會記錄負債撥備。該公司目前不是任何訴訟的一方。法律費用在發生期間列爲費用。 截至2023年12月31日和2024年9月30日，有幾個
新的經營租賃
2024年5月，該公司簽訂了一項運營租賃協議，在加利福尼亞州桑尼維爾增加辦公和倉庫空間。租賃於2024年6月1日開始，當時公司獲得了該物業的早期使用。租約將於2027年1月31日終止。
該公司的ROU資產與其在加利福尼亞州桑尼維爾租賃的公司辦公室和倉庫有關。與租賃相關的補充資產負債表信息如下（單位：千）：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
經營租賃 |
|
|
|
|
|
|
||
經營性租賃使用權資產 |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
經營租賃負債，流動 |
|
|
|
|
|
|||
長期經營租賃負債 |
|
|
|
|
|
|
||
經營租賃負債總額 |
|
$ |
|
|
$ |
|
||
加權平均剩餘租賃年限(年) |
|
|
|
|
|
|||
加權平均剩餘折扣率 |
|
|
% |
|
|
% |
||
該公司根據不可取消的經營租賃租賃辦公空間和倉庫空間。
|
|
9月30日， |
|
|
經營租賃： |
|
2024 |
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
未貼現的租賃付款總額 |
|
|
|
|
推定利息 |
|
|
( |
) |
租賃淨負債 |
|
$ |
|
|
租賃項下確認的租賃費用，包括物業管理的額外租金費用、經營租賃成本和可變租賃成本，爲美元
該公司與租賃相關的現金付款爲美元
17
2024年定期貸款
考慮到2024年本金償還時間表及未來營運現金流需求，自2024年2月6日起，本公司與Horizon Technology Finance Corporation(「Horizon」)作爲貸款人、抵押品代理及硅谷銀行(「SVB」)作爲貸款人(統稱「貸款人」)簽署了一份風險貸款及擔保協議(「VLSA」)。本公司及貸款人同意對現有的Horizon定期貸款安排進行再融資，該貸款安排亦修訂(其中包括)現有Horizon定期貸款的償還條款及到期日，由
在簽署VLSA後，該公司提取了全部第一批#美元。
這筆定期貸款應付給貸款人12英鎊。
SVB貸款的年利率爲浮動年利率(如《華爾街日報》所刊登)，但下限爲
在簽署VLSA時，公司向貸款人支付了#美元
VLSA被視爲貸款銀團，SVB的貸款被確定爲新貸款。Horizon貸款的發放被視爲對未償還定期貸款的修改。該公司利用Horizon貸款所得款項償還未償還本金#美元。
高級循環融資機制
於2024年2月，本公司亦與SVB簽訂貸款及擔保協議(「LSA」)，以獲得最高達$的優先循環信貸額度
循環貸款的年利率是浮動的，按最優惠利率加
本公司在LSA和VLSA項下的發行成本分配如下：(1)$
18
和債務發行成本採用實際利率法在票據期限內攤銷。實際利率乃
LSA和VLSA具有基於淨負債和某些基於收入的比率的相互關聯的條款和財務契約。發生違約事件後，定期貸款和循環貸款的利息可能會增加
截至2024年9月30日，該公司遵守了LSA和VLSA項下的債務契約。
應付票據包括以下內容(以千爲單位)：
|
|
9月30日， |
|
|
12月31日， |
|
||
|
|
2024 |
|
|
2023 |
|
||
應付票據本金 |
|
$ |
|
|
$ |
|
||
期末費用增加 |
|
|
|
|
|
|||
未攤銷債務發行成本 |
|
|
( |
) |
|
|
( |
) |
應付票據的賬面價值 |
|
$ |
|
|
$ |
|
||
VLSA的抵押品包括公司所有資產（不包括知識產權）的擔保權益。
根據公司修訂和重述的公司證書，公司有權頒發
截至 2023年12月31日，指定且未發行的可贖回可轉換優先股如下：
|
|
數量 |
|
|
數量 |
|
|
|
|
|
清算 |
|
|
淨載運 |
|
|||||
|
|
股份 |
|
|
已發行股份 |
|
|
清算 |
|
|
偏好 |
|
|
價值 |
|
|||||
系列 |
|
授權 |
|
|
和傑出的 |
|
|
偏好 |
|
|
每股 |
|
|
(in數千） |
|
|||||
種子 |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
C-1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
C-NV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
總 |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
截至2024年9月30日，指定且未發行的可贖回可轉換優先股如下：
|
|
數量 |
|
|
數量 |
|
|
|
|
|
清算 |
|
|
淨載運 |
|
|||||
|
|
股份 |
|
|
已發行股份 |
|
|
清算 |
|
|
偏好 |
|
|
價值 |
|
|||||
系列 |
|
授權 |
|
|
和傑出的 |
|
|
偏好 |
|
|
每股 |
|
|
(in數千） |
|
|||||
種子 |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
C-1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
C-NV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
總 |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
可贖回可轉換優先股的流通股持有人並無明文規定的贖回權利；但可贖回可轉換股票的持有人有權在出售、租賃、轉讓、獨家特許或其他處置本公司全部或幾乎所有資產或知識產權、另一實體以任何重組、合併或合併方式收購本公司(其後本公司股東於緊接收購前未能持有所產生實體至少50%的投票權)或本公司清盤、解散或清盤(「視爲清盤事件」)時獲得優先付款。
19
可贖回可轉換優先股股東的權利、優先和特權如下：
投票
除了C-NV系列可贖回可轉換優先股的無投票權持有人外，可贖回可轉換優先股的持有人有權就普通股股東有權投票的所有事項進行投票。對於普通股持有人有表決權的任何事項，可贖回可轉換優先股持有人和普通股持有人作爲一個類別一起投票。可贖回可轉換優先股的每一持有人有權獲得與其持有的普通股可轉換成的普通股數量相等的表決權。擁有多數有表決權股份的持有者可以選舉所有董事。
紅利
當董事會宣佈時，公司應宣佈C系列優先股的股息(「C系列股息」)，年利率爲$
當董事會宣佈時，公司應宣佈B系列優先股的股息(「B系列股息」)，年利率爲$
當董事會宣佈時，公司應宣佈A系列優先股的股息(「A系列股息」)，年利率爲$
在支付或撥備支付A系列億和C系列股息後，當董事會宣佈時，公司應按持有者持有的普通股和優先股的數量按比例宣佈普通股和優先股的股息。爲此目的，每位優先股持有者將被視爲持有最大數量的普通股，然後在轉換該持有者持有的所有優先股後發行。到目前爲止，還沒有宣佈分紅。
清算
如果發生任何清算，包括公司自願或非自願的被視爲流動性事件、解散或清盤，C系列可贖回可轉換優先股的持有人有權優先於將公司的任何資產分配給普通股、B系列、A系列和種子可贖回可轉換優先股的持有人，金額相當於以下金額中的較大者：$
20
在完成C系列的全額分配後，B系列的持有人有權優先於將公司的任何資產分配給持有普通股、A系列和種子可轉換優先股的持有人，數額等於以下金額中的較大者：
在完成對C系列和B系列可贖回可轉換優先股股東的全額分配後，A系列和種子可轉換優先股的持有人有權優先於將公司的任何資產分配給普通股持有人，就A系列可轉換優先股的每股股票，獲得相當於$
如果合法可供分配的資產不足以覆蓋A系列和系列種子可贖回優先股持有人作爲一個類別欠下的金額，這些資產應按A系列和系列種子可贖回可轉換優先股持有人在資金充足時應收到的全部金額的比例同等優先和按比例分配。
在完成對C系列、B系列、A系列和系列種子可贖回優先股持有人的全額分配後，公司可供分配給股東的所有剩餘資產將根據各自持有的普通股數量按比例分配給普通股和系列種子可贖回可轉換優先股持有人(爲此，將系列種子可贖回可贖回優先股的股份視爲已按當時有效的換股價格轉換爲普通股)。
轉換
每一股可贖回可轉換優先股可根據持有人的選擇權轉換爲普通股數量，該數量等於可贖回可轉換優先股的原始發行價除以轉換價格，但須根據稀釋事件進行調整。在轉換時，C-NV系列可轉換優先股的持有者可以選擇以相同的條件獲得無投票權的普通股或普通股。原始發行價相當於$
每股可轉換優先股將按當時的有效轉換率自動轉換爲普通股：(I)在緊接公司總收益超過#美元的符合條件的普通股公開發行結束之前
該公司於2024年10月15日結束首次公開募股，所有已發行的可轉換優先股均已轉換爲普通股。
權證
本公司已在債務融資的同時發行認股權證，見附註9。所有認股權證目前均可全部或部分行使，並於2030年、2032年及2034年到期。
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系列 |
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系列 |
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總 |
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餘額2023年12月31日 |
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每份期權的行使價格 |
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$ |
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$ |
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已發行的認股權證 |
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— |
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餘額2024年9月30日 |
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每份期權的行使價格 |
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$ |
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$ |
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21
可贖回可轉換優先股權證負債計入其他長期負債。截至2024年9月30日和2023年9月30日的三個月和九個月，以及截至2023年12月31日的一年，權證負債的價值變化彙總如下表(以千爲單位)。
下表列出了認股權證負債的公允價值活動(以千計)：
餘額2022年12月31日 |
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$ |
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餘額2023年12月31日 |
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$ |
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||
發行認股權證 |
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發行認股權證 |
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認股權證公允價值變動 |
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認股權證公允價值變動 |
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平衡，2023年9月30日 |
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$ |
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餘額2024年9月30日 |
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$ |
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該等認股權證須於每個資產負債表日重新計量，而公允價值的任何變動於經營報表及全面虧損中確認爲認股權證負債的公允價值變動。在首次公開募股完成之前，認股權證將轉換爲認股權證，以購買公司普通股的股份。若該等認股權證以前並無行使，且如一股股份的公平市價高於當時有效的認股權證的行使價格，則該等認股權證應被視爲在緊接到期前自動行使。
自2024年2月6日起，本公司、Horizon和SVB簽訂了一項
普通股
本公司獲授權發行
每當資金和資產合法可用且經董事會宣佈時，普通股持有人就有權獲得股息，但須遵守已發行的可贖回可轉換優先股持有人的優先權利。截至2024年9月30日和2023年12月31日,
截至 2024年9月30日和2023年12月31日，公司爲未來發行預留普通股如下：
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9月30日， |
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12月31日， |
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2024 |
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2023 |
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系列種子可贖回可轉換優先股的轉換 |
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A系列可贖回可轉換優先股的轉換 |
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B系列可贖回可轉換優先股的轉換 |
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C系列可贖回可轉換優先股的轉換 |
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B系列認股權證的轉換 |
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C-1系列權證的轉換 |
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2014年計劃下的未完成選擇 |
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2024年EIP下的未完成選項 |
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— |
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2024年EIP下的傑出RSU |
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— |
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根據2014年計劃爲未來發行保留的備選方案 |
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— |
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根據《2024年企業投資促進計劃》爲未來發行預留的期權 |
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— |
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總 |
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22
股票激勵計劃
2014年，公司董事會通過了2014年股票激勵計劃(「2014計劃」)，根據該計劃，公司可向員工、董事和顧問授予激勵性股票期權(「ISO」)、非法定股票期權(「NQ」)、限制性股票、限制性股票單位(RSU)、股票增值權(「SAR」)、股息等價權、績效股票單位(PSU)和績效股票。到目前爲止，只授予了ISO和NQ兩個獎項。董事會決定獎勵的條款和條件，包括要授予的獎勵的數量和授予時的歸屬標準。每項期權的期限應在期權協議中載明；但期限不得超過
2024年4月23日，公司董事會終止2014年度計劃，通過《2024年度股權激勵計劃》(以下簡稱《2024 EIP》)。一個集合
根據這些計劃開展的活動如下：
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加權 |
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骨料 |
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數量 |
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加權 |
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剩餘 |
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固有的 |
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選項 |
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行使價 |
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壽命(年) |
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(千人) |
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2023年12月31日餘額 |
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$ |
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授予的期權 |
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行使的期權 |
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( |
) |
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被沒收的期權 |
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( |
) |
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2024年9月30日餘額 |
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已發行、已歸屬和預計將於2024年9月30日歸屬的股份 |
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可於2024年9月30日行使的股份 |
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$ |
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基於股票的薪酬
截至2024年9月30日，與2014年計劃和2024年EIP項下未歸屬期權相關的未確認補償成本總額爲美元
期權獎勵包括基於績效的獎勵，該獎勵取決於績效目標的實現情況。對於受績效目標約束的期權，公司在有可能實現績效條件時確認費用。這些基於表現的獎項代表着
該公司使用布萊克-斯科爾斯期權定價模型估計了股票期權的公允價值。基於服務的股票期權的公允價值在獎勵的必要服務期內按直線攤銷。
授予的員工股票期權的公允價值是使用以下加權平均假設估計的：
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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2024 |
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2023 |
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預期期限(以年爲單位) |
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預期波幅 |
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% |
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% |
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% |
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% |
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無風險利率 |
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% |
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% |
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% |
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% |
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股息率 |
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23
預期期限是根據必要服務期限和合同期限的中點以及歷史行使行爲的平均值計算的。預期股價波動假設是通過研究行業同行的歷史波動來確定的，因爲公司沒有任何公司普通股的交易歷史。隨着更多有關公司普通股的歷史數據可用，公司將繼續分析歷史股價波動和預期期限假設。無風險利率假設是基於美國國庫券，其期限與公司股票期權的預期期限一致。預期股息假設是基於公司的歷史和不派發股息的預期。
該公司的股票薪酬支出總額如下(以千計)：
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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2024 |
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2023 |
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銷售和營銷 |
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$ |
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$ |
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$ |
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$ |
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一般和行政 |
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研發 |
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基於股票的薪酬總支出 |
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$ |
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$ |
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$ |
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$ |
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已歸屬期權的總公允價值爲美元
歸屬於公司普通股股東的每股基本淨虧損是通過歸屬於公司普通股股東的淨虧損除以期內已發行普通股的加權平均股數計算得出的。每股稀釋淨虧損與所列所有年度的每股基本淨虧損相同，因爲考慮到公司在所列每個期間的淨虧損狀況，潛在稀釋項目的影響是反稀釋的。
24
下表列出了每股基本淨虧損和稀釋後淨虧損的計算方法(單位爲千，每股數據除外)：
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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2024 |
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2023 |
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普通股股東應占淨虧損 |
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$ |
( |
) |
|
$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
加權平均流通股、基本股和稀釋股 |
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每股基本和稀釋後淨虧損 |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
|
$ |
( |
) |
以下具有潛在稀釋作用的已發行證券已被排除在已發行加權平均股的計算之外，因爲此類證券因報告的損失而具有反稀釋影響（以普通股等值股爲單位，單位：千）:
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截至9月30日的三個月裏， |
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截至9月30日的九個月裏， |
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2024 |
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2023 |
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2024 |
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2023 |
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可贖回可轉換優先股 |
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權證 |
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未行使的股權計劃股票期權 |
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總 |
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該公司的有效稅率爲
截至2024年9月30日和2023年9月30日的三個月和九個月，該公司已評估了所有可用的證據，無論是積極的還是消極的，包括歷史收入水平、與未來應稅收入估計相關的預期和風險，並確定其淨遞延所得稅資產更有可能無法實現。由於遞延所得稅資產實現的不確定性，公司繼續對其淨遞延所得稅資產保持全額估值撥備。
25
伊特m 2。管理層對財務狀況和經營結果的討論和分析。
以下對我們財務狀況和經營成果的討論和分析應與我們未經審計的財務報表和本10-Q表格其他部分包含的相關附註以及我們已審計的財務報表和相關附註以及在我們根據1933年證券法根據第424(B)條提交給美國證券交易委員會的日期爲2024年10月10日的最終招股說明書中以「管理層對財務狀況和經營成果的討論和分析」標題下的討論一併閱讀,於2024年10月11日修訂的(「證券法」)(「招股章程」)。除了歷史財務信息外，以下討論還包含前瞻性陳述，反映了我們涉及重大風險和不確定性的計劃、估計和信念。我們的實際結果可能與前瞻性陳述中討論的結果大不相同。可能導致或導致這些差異的因素包括本季度報告中關於Form 10-Q的下文和其他部分討論的因素，特別是在「風險因素」和「有關前瞻性陳述的特別說明」中。
概述
我們是一家商業階段的醫療技術公司，專注於改變患有嚴重神經疾病的患者的診斷和管理。我們開發了Ceribell系統，這是一種新型的護理點腦電(EEG)平台，專門設計用於解決急性護理環境中患者未得到滿足的需求。通過將專有、高度便攜和可快速部署的硬件與複雜的人工智能(「AI」)支持的算法相結合，Ceribell系統能夠對患有神經疾病的患者進行快速診斷和持續監測。
我們最初的重點是成爲急性護理環境中癲癇發作檢測和管理的護理標準，在這種情況下，傳統腦電系統的技術和操作限制導致癲癇診斷嚴重延誤，患者護理和臨床結果不佳，並給醫院和醫療保健系統帶來沉重的經濟負擔。通過使EEG更容易獲取，並通過人工智能的力量實現持續監測，Ceribell系統使臨床醫生能夠在急性護理環境中更快速、更準確地診斷和管理有癲癇風險的患者，從而改善患者結果，並提高醫院和付款人的經濟效益。截至2024年9月30日，Ceribell系統已被500多個活躍帳戶採用，範圍從頂級學術中心到小型社區醫院，並已用於護理超過10萬名患者。有關如何衡量患者護理和臨床結果的信息，請參閱招股說明書中的「業務-市場概述-在急性護理環境下管理癲癇發作的挑戰」。
我們專門設計了Ceribell系統，以解決傳統腦電在急性護理環境中的侷限性，並改善癲癇發作高風險重症患者的臨床結果。Ceribell系統將專有的高度便攜性硬件與人工智能算法集成在一起，以幫助檢測和管理癲癇發作。我們的硬件由一次性柔性頭帶和袖珍型電池驅動的記錄器組成，用於捕獲和無線傳輸腦電信號。該硬件使用簡單，經過大約一小時的培訓後，任何非專業醫療保健專業人員都可以在幾分鐘內應用。記錄器捕獲的腦電波數據由我們專有的人工智能供電癲癇發作檢測算法Clarity進行解釋，該算法可持續監測患者的腦電波信號，並支持臨床醫生對癲癇發作活動的實時評估。
We are currently focused on Ceribell EEG becoming the standard of care for the detection and management of seizures in the acute care setting. There are approximately 5,800 acute care facilities in the United States that we believe could benefit from our system. We intend to expand the size of our direct sales organization in the United States to support our efforts to drive further adoption and utilization of the Ceribell System. While our current commercial focus is on the United States, we have received a CE Mark for the Ceribell System in Europe, and we intend to pursue additional regulatory clearances in Europe within two to four years and, in the future, elsewhere outside of the United States. We also plan to engage in market access initiatives in attractive international regions in which we see significant opportunity.
We manage all aspects of manufacturing, supply chain, and distribution of the headband and recorder from our facilities in Sunnyvale, California. Contract manufacturers in China assemble the Ceribell headband, with final inspection and labelling completed at our California facilities. We have dual sources for major components of the headband. The components for our recorder are procured from various suppliers and shipped to our facilities for final testing and assembly.
Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, research and development activities, obtaining FDA clearances and other regulatory achievements, business planning, raising capital, establishing and maintaining our intellectual property portfolio, conducting direct sales efforts and marketing initiatives, conducting clinical studies, and providing general and administrative support for these operations.
26
As of September 30, 2024, we had an accumulated deficit of $154.4 million. To date, we have funded our operations primarily through proceeds from the sale of shares of our redeemable convertible preferred stock, term loan proceeds, and cash generated from the sale of headbands and subscriptions. As of September 30, 2024, we had $14.1 million in cash and cash equivalents. For the period from our inception through September 30, 2024, we had received aggregate gross proceeds of $151.0 million from sales of our common stock, convertible notes, and redeemable convertible preferred stock and $35.0 million from term loans. In February 2024, we executed a Venture Loan and Security Agreement (“VLSA”) with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (“SVB”), as a lender, and Horizon Technology Finance Corporation (“Horizon”), as a lender and collateral agent of $50.0 million. The Company drew $20.0 million of the $50.0 million term loan commitment at closing with a $30.0 million term loan commitment remaining. The Company used a portion of the proceeds to pay the remaining principal and end-of-term fee of prior term loan as well as the fees associated with the VLSA. Net proceeds were $7.6 million. Concurrent with the VLSA, we also entered into a Loan and Security Agreement with SVB for a senior revolving line of credit of up to $10.0 million (“Revolving Facility”).
Based on our current operating plan, we believe that the net proceeds from our IPO, together with the expected cash generated from revenue transactions with customers and our existing cash and cash equivalents, will be sufficient to fund our planned operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. We may experience lower than expected cash generated from operating activities or greater than expected capital expenditures, cost of revenue, or operating expenses, and may need to raise additional capital to fund operations, further research and development activities, or acquire, invest in, or in-license other businesses, assets, or technologies.
We have incurred operating losses since the commencement of our operations and we expect to continue to incur losses as we grow and continue the transition to operating as a public company.
Our Business Model
Key Factors Affecting Our Results of Operations and Performance
We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations for the foreseeable future. These factors include:
27
Components of our Results of Operations
Revenue
We generate revenue from two recurring sources. Product revenue is generated by the sale of our disposable headbands that are intended for single patient use. Subscription revenue is generated by monthly subscription fees charged to our hospital customers for use of Clarity, recorders, and our portal. Revenue from sales of headbands is recognized at a point in time upon transfer of control of the product. We generally recognize subscription revenue ratably over the related contractual term beginning on the date that the system is made available to a customer. Our revenue fluctuates primarily based on the number of active accounts and the volume of headband usage.
We expect that our revenue will continue to fluctuate quarter-to-quarter due to a variety of factors, including the potential success of our sales force in extending adoption of the Ceribell System to new accounts and expanding the utilization of our system in existing accounts. For purposes of managing our business, we do not separately track increases in revenue solely attributable to new accounts. We may experience fluctuations in the number of headbands used by our customers based on seasonal factors that impact the number of patients in the acute care setting. For example, the number of patients in the intensive care unit is typically lower during the summer months.
Cost of Revenue
Cost of revenue consists primarily of the cost of materials and labor to manufacture headbands and depreciation of the manufacturing cost of recorders, as well as third-party hosting fees and personnel-related expenses for our subscription cost of revenue. Cost of revenue also includes expenses related to manufacturing overhead comprising compensation for personnel, manufacturing supervision, facilities, utilities, quality assurance, property tax, and certain direct costs such as tariffs and shipping costs. As we acquire new customers and existing customers increase their use of our product and software, we expect that our cost of revenue will continue to increase.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors that may cause gross margins to fluctuate. These include the product mix between product and subscription revenues, potential increases to sales prices, the timing of our acquisition of new customers, renewals of and follow-on sales to existing customers, costs associated with third-party hosting fees, costs associated with third party manufacturing and supply chain purchases of inventory, and other direct costs such as tariffs and shipping. We expect our gross margin to remain relatively constant over the short term and to increase over the long term as we focus on optimizing our manufacturing processes and to the extent our production volume increases, our fixed manufacturing costs would be spread over a larger number of units, thereby reducing our per-unit manufacturing costs. Our gross margin may fluctuate from period to period, based upon the factors described above and in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
28
Operating Expenses
Research and Development
Research and development expenses are incurred in connection with the advancement of the Ceribell System with the goal to improve and expand on our existing system and indications. Research and development expenses consist primarily of engineering, product development, regulatory activities, consulting services, materials, depreciation, and other costs associated with products and technologies being developed. These expenses include employee and non-employee compensation, including benefits, stock-based compensation, supplies, materials, consulting, related travel expenses, and facilities expenses. Our research and development team includes clinical study experts as well as hardware and software engineers with deep expertise in mechanical and electrical engineering, data science, AI, embedded software design, and cloud-based data and security architecture. We invest in research and development efforts with the goal of driving continuous improvements in our current system and solutions and expanding the clinical application of our system and AI algorithms, in the acute care setting and beyond. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized and are recognized as expense as the goods are delivered or as related services are performed.
We record research and development expenses in the periods in which they are incurred. Costs for certain activities, such as clinical studies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and collaborators.
We expect our research and development expenses to increase as we continue to improve and optimize our algorithm, leverage our platform to expand indications, and develop products for use beyond the acute care setting.
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related costs, including salaries, commissions, bonuses, benefits, travel, and stock-based compensation as well as investments in marketing initiatives to increase market awareness of our technology and the prevalence of seizures in critically ill patient populations, including expenses related to travel, conferences, trade shows, and consulting services.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size of our sales organization and market penetration in the United States, seek to expand indications, and potentially establish an international presence by pursuing marketing authorizations and engaging in other market access initiatives in international regions in which we see significant potential opportunity. However, we expect sales and marketing expenses to decrease as a percentage of revenue primarily as, and to the extent that, our revenue grows.
General and Administrative
General and administrative expenses consist primarily of personnel expenses, including salaries, benefits, and stock-based compensation expense for personnel in executive, finance, accounting, commercial operations, legal, human resource, IT, and administrative functions. General and administrative expenses also include direct or allocated expenses for rent and maintenance of facilities and insurance, not otherwise included in research and development expenses, sales and marketing expenses, or cost of revenue, as well as professional fees for legal, patent, and consulting services.
We expect that our general and administrative expenses will increase in the foreseeable future as we increase our headcount to support the continued growth of our business. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, compliance, director and officer insurance, investor and public relations, and tax-related services associated with maintaining compliance with the rules and regulations of the SEC and standards applicable to companies listed on a national securities exchange. However, we expect general and administrative expenses to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
Interest and Other Income (Expense), net
Interest and other income (expense), net is primarily interest income on our cash and cash equivalents, interest expense on our term loans, and change in the fair value of the warrant liability. Interest expense primarily consists of interest on our term loans and a non-cash interest charge related to amortization of debt issuance costs. Gains and losses related to the change in fair value of the redeemable convertible preferred stock warrant liability issued as a part of our term loans are recognized in the income statement each quarter until the warrants are exercised, expire, or become exercisable into shares of common stock.
29
Provision for Income Taxes
To date, we have not recorded any U.S. federal or state income tax expense. We have recorded deferred tax assets for U.S. federal income taxes for which we provide a full valuation allowance. These deferred tax assets primarily include net operating loss carryforwards and we expect to maintain this full valuation allowance for the foreseeable future as it is not more likely than not the deferred tax assets will be realized based on our history of losses.
Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023
The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenue |
|
$ |
13,321 |
|
|
$ |
8,764 |
|
|
$ |
4,557 |
|
|
|
52 |
% |
Subscription revenue |
|
|
3,874 |
|
|
|
2,847 |
|
|
|
1,027 |
|
|
|
36 |
% |
Total revenue |
|
|
17,195 |
|
|
|
11,611 |
|
|
|
5,584 |
|
|
|
48 |
% |
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product cost of goods sold |
|
|
2,096 |
|
|
|
1,777 |
|
|
|
319 |
|
|
|
18 |
% |
Subscription cost of revenue |
|
88 |
|
|
108 |
|
|
|
(20 |
) |
|
|
-19 |
% |
||
Total cost of revenue |
|
|
2,184 |
|
|
|
1,885 |
|
|
|
299 |
|
|
|
16 |
% |
Gross profit |
|
|
15,011 |
|
|
|
9,726 |
|
|
|
5,285 |
|
|
|
54 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
3,395 |
|
|
|
2,308 |
|
|
|
1,087 |
|
|
|
47 |
% |
Sales and marketing |
|
|
12,524 |
|
|
|
9,592 |
|
|
|
2,932 |
|
|
|
31 |
% |
General and administrative |
|
|
9,029 |
|
|
|
4,990 |
|
|
|
4,039 |
|
|
|
81 |
% |
Total operating expenses |
|
|
24,948 |
|
|
|
16,890 |
|
|
|
8,058 |
|
|
|
48 |
% |
Loss from operations |
|
|
(9,937 |
) |
|
|
(7,164 |
) |
|
|
(2,773 |
) |
|
|
39 |
% |
Interest and other income (expense), net |
|
|
(480 |
) |
|
|
110 |
|
|
|
(590 |
) |
|
NM* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss before provision for income taxes |
|
|
(10,417 |
) |
|
|
(7,054 |
) |
|
|
(3,363 |
) |
|
|
48 |
% |
Provision for income taxes |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(10,417 |
) |
|
$ |
(7,054 |
) |
|
$ |
(3,363 |
) |
|
|
48 |
% |
30
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenue |
|
$ |
35,932 |
|
|
$ |
24,561 |
|
|
$ |
11,371 |
|
|
|
46 |
% |
Subscription revenue |
|
|
10,978 |
|
|
|
7,533 |
|
|
|
3,445 |
|
|
|
46 |
% |
Total revenue |
|
|
46,910 |
|
|
|
32,094 |
|
|
|
14,816 |
|
|
|
46 |
% |
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product cost of goods sold |
|
|
6,073 |
|
|
|
4,762 |
|
|
|
1,311 |
|
|
|
28 |
% |
Subscription cost of revenue |
|
325 |
|
|
285 |
|
|
|
40 |
|
|
|
14 |
% |
||
Total cost of revenue |
|
|
6,398 |
|
|
|
5,047 |
|
|
|
1,351 |
|
|
|
27 |
% |
Gross profit |
|
|
40,512 |
|
|
|
27,047 |
|
|
|
13,465 |
|
|
|
50 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
9,649 |
|
|
|
6,307 |
|
|
|
3,342 |
|
|
|
53 |
% |
Sales and marketing |
|
|
33,812 |
|
|
|
28,107 |
|
|
|
5,705 |
|
|
|
20 |
% |
General and administrative |
|
|
23,876 |
|
|
|
14,293 |
|
|
|
9,583 |
|
|
|
67 |
% |
Total operating expenses |
|
|
67,337 |
|
|
|
48,707 |
|
|
|
18,630 |
|
|
|
38 |
% |
Loss from operations |
|
|
(26,825 |
) |
|
|
(21,660 |
) |
|
|
(5,165 |
) |
|
|
24 |
% |
Interest and other income (expense), net |
|
|
(1,054 |
) |
|
|
481 |
|
|
|
(1,535 |
) |
|
NM* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss before provision for income taxes |
|
|
(27,879 |
) |
|
|
(21,179 |
) |
|
|
(6,700 |
) |
|
|
32 |
% |
Provision for income taxes |
|
— |
|
|
|
(11 |
) |
|
|
11 |
|
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(27,879 |
) |
|
$ |
(21,190 |
) |
|
$ |
(6,689 |
) |
|
|
32 |
% |
* Not Meaningful
Comparison of the Three and Nine Months Ended September 30, 2024 and 2023
Revenue
Product revenue for the three and nine-months period ended September 30, 2024, increased $4.6 million and $11.4 million, or 52% and 46%, respectively, compared to the same periods of fiscal year 2023. Product revenue growth is primarily driven by the addition of new customers and an increase in utilization of headbands and resulting headband sales, driven by continued customer education that resulted in increased awareness and adoption of our products.
Subscription revenue for the three and nine-months period ended September 30, 2024, increased $1.0 million and $3.4 million, or 36% and 46%, respectively, compared to the same periods of fiscal year 2023. Subscription revenue growth is primarily driven by an increase in adoption of subscriptions.
Cost of Revenue
Product cost of revenue for the three and nine-months period ended September 30, 2024, increased $0.3 million and $1.3 million, or 18% and 28%, respectively, compared to the same periods of fiscal year 2023 The increase in cost of goods sold for products was primarily due to an increase in headband sales to new and existing active accounts, partially offset by a decrease in the unit cost of materials.
Subscription cost of revenue for the three and nine-months period ended September 30, 2024, decreased $0.02 million and increased $0.04 million, or (19)% and 14%, respectively, compared to the same periods of fiscal year 2023. The increase in subscription cost of revenue was primarily due to increased hosting costs for new active accounts for subscriptions and incremental recorder depreciation associated with new subscriptions.
31
Gross Profit and Gross Margin
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross profit |
|
$ |
15,011 |
|
|
$ |
9,726 |
|
|
$ |
5,285 |
|
|
|
54 |
% |
Gross margin |
|
|
87 |
% |
|
|
84 |
% |
|
|
|
|
|
3 |
% |
|
Product gross profit |
|
|
11,225 |
|
|
|
6,987 |
|
|
|
4,238 |
|
|
|
61 |
% |
Product gross margin |
|
|
84 |
% |
|
|
80 |
% |
|
|
|
|
|
4 |
% |
|
Subscription gross profit |
|
|
3,786 |
|
|
|
2,739 |
|
|
|
1,047 |
|
|
|
38 |
% |
Subscription gross margin |
|
|
98 |
% |
|
|
96 |
% |
|
|
|
|
|
2 |
% |
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross profit |
|
$ |
40,512 |
|
|
$ |
27,047 |
|
|
$ |
13,465 |
|
|
|
50 |
% |
Gross margin |
|
|
86 |
% |
|
|
84 |
% |
|
|
|
|
|
2 |
% |
|
Product gross profit |
|
|
29,859 |
|
|
|
19,799 |
|
|
|
10,060 |
|
|
|
51 |
% |
Product gross margin |
|
|
83 |
% |
|
|
81 |
% |
|
|
|
|
|
2 |
% |
|
Subscription gross profit |
|
|
10,653 |
|
|
|
7,248 |
|
|
|
3,405 |
|
|
|
47 |
% |
Subscription gross margin |
|
|
97 |
% |
|
|
96 |
% |
|
|
|
|
|
1 |
% |
|
Gross profit increased $5.3 million and $13.5 million, or 54% and 50%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods of fiscal year 2023. The increase is primarily due to increased revenue and decreased cost of goods sold per unit, as non-variable costs are allocated among a larger number of units.
Operating Expenses
Research and Development Expenses
Research and development expenses increased $1.1 million or 47%, for the three months ended September 30, 2024, compared to the same period of fiscal year 2023. The increase was primarily due to an increase of $0.6 million in personnel and related expenses directly associated with an increase in headcount, as well as an increase of $0.4 million in clinical study and professional expenses.
Research and development expenses increased $3.3 million or 53%, for the nine months ended September 30, 2024, compared to the same period of fiscal year 2023. The increase was primarily due to an increase of $1.9 million in personnel and related expenses directly associated with an increase in headcount, as well as an increase of $1.3 million in clinical study and professional expenses.
Sales and Marketing Expenses
Sales and marketing expenses increased $2.9 million, or 31%, for the three months ended September 30, 2024, respectively, compared to the same periods of fiscal year 2023. The increase was primarily due to an increase in personnel and related expenses directly associated with an increase in headcount.
Sales and marketing expenses increased $5.7 million, or 20%, for the nine months ended September 30, 2024, respectively, compared to the same periods of fiscal year 2023. The increase was primarily due to an increase in personnel and related expenses directly associated with an increase in headcount.
General and Administrative Expenses
General and administrative expenses increased $4.0 million or 81%, for the three months ended September 30, 2024, compared to the same period of fiscal year 2023. The increase was primarily due to an increase of $2.1 million in personnel and related expenses directly associated with an increase in headcount, as well as an increase of $1.7 million in legal, accounting, and professional service fees related to our transition to a public company.
General and administrative expenses increased $9.6 million or 67%, for the nine months ended September 30, 2024, compared to the same period of fiscal year 2023. The increase was primarily due to an increase of $5.7 million in personnel and related expenses directly associated with an increase in headcount, as well as an increase of $3.1 million in legal, accounting, and professional service fees related to our transition to a public company, and an increase of $0.4 million in increased software expenses.
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Interest and Other Income (Expense), net
Interest and other income (expense), net decreased $0.6 million for the three months ended September 30, 2024 as compared to the same period for fiscal year 2023. The decrease was primarily due to a decrease of $0.4 million interest income related to a decrease in cash and $0.2 million in other expense as a result of the change in fair value of the warrant liability.
Interest and other income (expense), net decreased $1.5 million for the nine months ended September 30, 2024 as compared to the same period for fiscal year 2023. The decrease was primarily due to a decrease of $0.9 million interest income related to a decrease in cash and $0.4 million in other expense as a result of the change in fair value of the warrant liability.
Cash Flows
The following table shows a summary of our cash flows for each of the periods presented:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in thousands) |
|
|||||
Net cash used in operating activities |
|
$ |
(25,068 |
) |
|
$ |
(22,484 |
) |
Net cash used in investing activities |
|
$ |
(1,105 |
) |
|
$ |
(1,080 |
) |
Net cash provided by financing activities |
|
$ |
5,788 |
|
|
$ |
644 |
|
Operating Activities
Net cash used in operating activities during the nine months ended September 30, 2024, consisted primarily of our net loss of $27.9 million, offset by non-cash charges of stock-based compensation of $3.2 million, depreciation and amortization of $1.1 million, and the change in fair value of our redeemable convertible preferred stock warrants. Additionally we had a net increase in operating assets of $3.6 million and a net decrease in operating liabilities of $1.5 million. Net operating assets increased due to the timing of inventory purchases and accounts receivable due to the overall increase in sales in the nine months ended September 30, 2024. Net operating liabilities decreased primarily due to timing of payments.
Net cash used in operating activities during the nine months ended September 30, 2023, consisted primarily of our net loss of $21.2 million, offset by non-cash charges of stock-based compensation of $1.9 million and depreciation and amortization of $0.9 million. Additionally we had a net increase in operating assets of $4.9 million and a net decrease in operating liabilities of $0.8 million. Net operating assets increased due to the timing of inventory purchases and accounts receivable due to the overall increase in sales in the nine months ended September 30, 2023. Net operating liabilities decreased primarily due to timing of payments.
Investing Activities
Net cash used in investing activities during both the nine months ended September 30, 2024 and 2023 was $1.1 million, and consisted of purchases of equipment and recorders provided to customers.
Financing Activities
Net cash provided in financing activities during the nine months ended September 30, 2024, consisted primarily of $0.9 million in proceeds from the exercise of options, $2.8 million in payments of deferred initial public offering costs, and $7.6 million in net proceeds from debt issuance.
Net cash provided in financing activities during the nine months ended September 30, 2023, consisted primarily of $0.6 million in proceeds from the exercise of options.
Contractual Obligations and Commitments
Our contractual obligations at September 30, 2024 include:
Debt — Principal payments required on long-term debt outstanding at September 30, 2024, was $20.0 million. Please refer to the section titled “Liquidity” in Note 1 for a discussion of changes in commitments.
Operating leases — As of September 30, 2024, estimated contractual obligations for operating lease payments were $2.8 million due within 28 months.
Critical Accounting Estimates
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Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and the disclosure of our contingent liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
See Note 2 to our financial statements elsewhere in these financial statements for information about our significant accounting policies and how estimates are involved in the preparation of our financial statements. There have been no material changes to our significant accounting policies and estimates as described in the Prospectus.
Recently Issued Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements applicable to our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended September 30, 2024 by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management team, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal controls over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, the effectiveness of any internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to completely eliminate all potential for misconduct. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in any cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Legal Proceedings
From time to time, we may be involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together, materially and adversely affect our business, financial condition, or results of operations. Future litigation may be necessary to defend ourselves, our partners, and our customers by determining the scope, enforceability, and validity of third-party proprietary rights, to establish our proprietary rights or for other matters. Involvement in such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of legal expenses and settlement costs, diversion of management attention, and resources and other factors.
Item 1A. Risk Factors.
Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking information based on our current expectations. Because our business is subject to many risks and our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect our business, financial condition, results of operations, and prospects. This discussion should be read in conjunction with the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations. The occurrence of any of the events or developments described below could have a material adverse effect on our business, financial condition, results of operations, and prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Business and Industry Risk Factors
We have a limited operating history and have experienced periods of significant business changes in a short time, making it difficult for you to evaluate our business and future prospects. If we are unable to manage our business and any fluctuations in our business effectively, our business and growth prospects could be materially and adversely affected.
We were founded in 2014 and began selling Ceribell headbands, recorders, and portal access in 2018. Since our formation in 2014, we have achieved several key operational milestones that we believe position us for continued growth and success, including our receipt of 510(k) clearance from the FDA for our recorder and headband in 2017, our first commercial sales in 2018, our receipt of 510(k) clearance from the FDA for an early version of Clarity in 2019, growing to over 100 employees in 2021 and growing to over 200 employees in 2023. However, we have a limited operating history, which makes evaluation of our future prospects difficult. Since inception, we have had periods of significant growth in revenue and employees which have required us to scale the size of our organization as our business has rapidly changed. Any growth that we experience in the future will require us to further expand our sales and marketing and research and development personnel (including those with clinical, software and hardware expertise), our manufacturing operations, and our general and administrative infrastructure. While our quarterly revenues have generally increased each quarter since our commercial launch, our results of operations have fluctuated in the past, and our future quarterly and annual results of operations may fluctuate as we focus on increasing the demand for our products. We may need to make business decisions that could adversely affect our results of operations and prospects, such as modifications to our pricing and reimbursement strategy, business structure, or operations.
The challenges we face in managing our business, including the changing reimbursement, regulatory and competitive landscapes, place significant demands on our management, financial, operational, manufacturing, technological, and other resources, and we expect that managing our business will continue to place significant demands on our management and other resources and will require us to continue developing and improving our operational, financial and other internal controls, reporting systems, and procedures. In particular, continued growth increases the challenges involved in a number of areas, including recruiting and retaining sufficient skilled personnel, providing adequate training and supervision to maintain our high-quality product standards and regulatory compliance, and preserving our culture and values. We have also had, and may in the future experience, delays with onboarding new accounts due to scheduling and other logistical issues. We may not be able to address these challenges in a cost-effective manner, or at all. As we grow, we may also need to invest significant resources to improve and expand our manufacturing capabilities and technology, and we may not be able to do so in a cost-effective manner or at all. We cannot assure you that any changes in scale, related quality, or compliance assurance, including those related to any future additional indications for the Ceribell System, will be successfully implemented or that appropriate personnel will be available to facilitate the management of and changes to our business. Failure to implement necessary
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quality and compliance procedures, transition to new manufacturing processes or supply chains, or hire or maintain necessary personnel could result in higher costs or an inability to meet demand. In addition, our business is affected by general macroeconomic and business conditions around the world, including the impacts of inflation, increased interest rates, market instability, geopolitical conditions and conflicts, health crises, and natural disasters. If we do not effectively manage our business through the various challenges we face, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements, or maintain high-quality products, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We have a history of net losses, and we expect to incur additional substantial losses in the foreseeable future.
We have incurred net losses since inception, and we expect to incur additional substantial losses in the foreseeable future. We incurred net losses of $10.4 million and $7.1 million for the three months ended September 30, 2024 and 2023, respectively, and $27.9 million and $21.2 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $154.4 million. We also expect our operating expenses to increase in future periods, and if our revenue growth does not increase to more than offset these anticipated increases in our operating expenses, we may not be able to achieve or maintain profitability, and our business, financial condition, results of operations, and prospects will be harmed. Since inception, we have spent significant amounts to develop the Ceribell System and related algorithms, to fund clinical studies, to develop and build our manufacturing capacities, to scale our commercial operations, and to recruit and retain key talent.
We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies, including increasing expenses as we continue to grow our business. We expect our operating expenses to increase significantly over the next several years as we continue to expand our operations and infrastructure and continue to develop the Ceribell System and related algorithms, including for any future additional indications. In addition to the anticipated costs of growing our business, we also expect to incur additional legal, accounting, and other expert expenses as we grow. These investments may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, they may not result in increased revenue or growth in our business. If our growth rate were to decline significantly or become negative, it could adversely affect our business, financial condition, results of operations, and prospects.
We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain or increase profitability. Our prior losses, combined with potential future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We depend on sales from the use of the Ceribell System for our revenue. If we are unable to successfully achieve substantial market acceptance and adoption of the Ceribell System, or any of our future products, or if confidence in our products is diminished, our business, financial condition, results of operations, and prospects would be harmed.
We expect that revenue from sales of the Ceribell System will continue to account for almost all of our revenue for the foreseeable future. Continued and widespread market acceptance of alternatives to conventional EEG systems, particularly in the acute care setting, is critical to our future success. The size of our customer base and our ability to acquire new customers is critical to our success as well. Thus, our commercial success will depend in large part on further adoption of the Ceribell System by hospital customers and healthcare professionals and an increase in the number of patients evaluated with it in the acute care setting, as well as on our ability to retain existing customers. Existing customers may choose to terminate or not renew their subscriptions, typically on 30 days’ notice to us without payment of a penalty or termination fee, and we may not be able to replace any customers that elect to terminate or not renew their subscriptions.
Various factors can contribute to our ability to effectively engage and retain customers and their use of our products. For example, hospitals and healthcare professionals may be reluctant to purchase or use the Ceribell System due to familiarity with conventional EEG systems that are well-established and known to them, and because they must continue to use conventional EEG systems outside of the acute care setting. Our ability to grow sales of the Ceribell System and drive market acceptance will depend on successfully conveying to hospitals and healthcare professionals the benefits of the Ceribell System in the acute care setting compared to the standard of care, which includes conventional EEG systems. If healthcare professionals do not perceive our products to be useful, effective, reliable, and trustworthy, or if we are unable to provide sufficient training to healthcare professionals or harmonize our products with hospital information technology systems, we may not be able to attract or retain customers. Healthcare professionals may perceive the Ceribell System to be less useful if they do not subscribe for access to the Clarity algorithm as part of their use of the Ceribell System, whether because of incremental cost, lack of familiarity or trust in the algorithm's diagnostic accuracy, or if, for similar reasons, they do not rely on the Clarity algorithm (including automated alerts) to interpret the EEG results produces by the Ceribell System. In addition, negative clinical research results or publicity or an adverse change to published or unpublished guidelines or recommendations from third parties (including, without limitation, medical societies) relating to the use, clinical benefit, or risk profile of the Ceribell System or other AI-enabled devices, or reduced montage EEGs or rapid EEGs in general, could result in negative perceptions by healthcare professionals
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and affect our brand and reputation. For example, Villamar et al. (2023), a study that retrospectively reviewed EEG recordings for 21 patients who were admitted to a medical intensive care unit after cardiac arrest, found that the Clarity algorithm that was in use at the time of the study did not detect seizures in the four patients who were experiencing them. While we constantly work to improve our algorithm and overall system, the technologies we work with are novel and complex, and we cannot assure you that there will not be additional negative reports on the Ceribell System in the future. Further, customers who are dissatisfied with their experiences with the Ceribell System as well as competitors may post negative reviews on social media, and we have been, and may in the future become, the subject of blog, forum, or other postings that contain negative statements about us and may be inaccurate. Any negative publicity, whether real or perceived, disseminated by word-of-mouth, the general media, electronic or social networking platforms, competitor materials, or other methods, could harm our reputation and brand and could severely diminish consumer confidence in our products. Further, a shortage of neurologists or other clinicians (if any) available to read the results of the Ceribell System, could negatively affect the timely assessment of data from the Ceribell System. Lack of support for our products from healthcare professionals can affect how receptive physicians will be to use our products for their patients and could result in decreased demand for our products. Negative healthcare professional perception could also render us less attractive to future hospital customers, which could result in decreased sales of our products. A number of other factors, including the impacts of economic conditions and regulatory changes on hospital budgets and spending patterns, could potentially negatively affect new customer acquisitions and demand for our products.
We operate in a highly competitive industry, and competitive pressures could have a material adverse effect on our business, financial condition, results of operations, and prospects.
The market for EEG alternatives is competitive in terms of development, availability, pricing, product quality, and time-to-market. Our primary competition is from conventional EEG systems, which are used in the majority of hospitals in the United States that have resources to purchase and support EEG systems. These competitors have greater name and brand recognition, greater market share, greater resources, stronger financial profiles, and may have larger sales forces than we do, as well as legacy status among hospitals. For example, the two primary conventional EEG providers in the United States are Natus and Nihon Kohden, both of which have much longer operating histories than we do. We also face competition from companies that provide or are developing rapid EEG systems, including Nihon Kohden and a number of smaller companies, that can be used in the acute care and other settings (e.g., home and ambulance), or EEG systems specifically for use in the acute care setting, and conventional EEG providers may also seek to develop additional EEG systems. Our competitors may be able to offer products similar or superior to ours at a more attractive price than we can. Our competitors could also be better positioned to serve certain segments of our market, which could create additional price pressure. In light of these factors, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. As a result, our competitors may be able to offer products that are more technologically advanced, cost-effective, or attractive than the Ceribell System, and even if the Ceribell System is more effective than our competitors’ products, current or potential customers may accept competitive products, including conventional EEG systems and rapid EEG systems that can be used in multiple settings, in lieu of purchasing and using our products. In addition, because the Ceribell System is supplemental to, and not a replacement for, conventional EEG systems for rapid acute care diagnosis, customers may view our products as an additional expense and choose to purchase and maintain only conventional EEG systems. If we are unable to successfully compete, our business, financial condition, results of operations, and prospects could be materially and adversely affected.
Adapting our manufacturing and production capacities to evolving patterns of demand is expensive, time-consuming, and subject to significant uncertainties. We may not be able to adequately predict existing customer trends and may be unable to adjust our production and inventory levels in a timely manner.
We market the Ceribell System directly to potential customers in the United States, where we face the risk of significant changes in the demand for our products, including demand for our disposable headbands based on usage rates. If demand decreases, we will need to implement capacity and cost reduction measures involving restructuring costs. If demand increases, we will be required to make capital expenditures related to increased production and expenditures to hire and train production, sales and marketing, and product support personnel. This would put pressure on our internal and third-party manufacturing capabilities. For example, a sudden increase in demand could require increased production of components, such as our disposable headbands that are intended for single patient use, so that our customers can timely deliver care to their patients. Adapting to changes in demand inherently lags behind the actual changes because it takes time to identify the change the market is undergoing and to implement any measures to take as a result. Finally, capacity adjustments are inherently risky because there is imperfect information, and sales trends may rapidly intensify, ebb, or even reverse. We may be unable to accurately or timely predict trends in demand and customer behavior or to take appropriate measures to mitigate risks and react to opportunities resulting from such trends. Any inability in the future to identify or to adequately and effectively react to changes in demand could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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In addition, we may experience challenges managing the inventory of components of the Ceribell System, which can lead to excess inventory. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which could impact our gross margins. Reserves and write-downs for discounts, promotions, and excess inventory are recorded based on our strategic plans and forecast of future demand. Actual future demand could be less than our forecast, which may result in additional reserves and write-downs in the future, or actual demand could be stronger than our forecast, which may result in a reduction to previously recorded reserves and write-downs in the future and increase the volatility of our operating results.
We are dependent on international manufacturers and suppliers, which exposes us to foreign operational risks that may harm our business.
We rely on manufacturers and suppliers that are based outside of the United States, including in China, to supply components used in the manufacturing of our products and complete the primary assembly and initial inspection of our headbands.
Our reliance on an international supply chain and operations exposes us to risks and uncertainties, including:
If any of these risks were to materialize, it could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We source and manufacture a substantial number of our products from third-party suppliers and manufacturers in China, which exposes us to risks inherent in doing business in China.
We currently source and manufacture a substantial number of our products from third-party suppliers and manufacturers in China. We rely on two primary contract manufacturers in China to complete the manufacturing, primary assembly, and inspection of our headband. In addition, we have a team of contractors who are employed by an agency in China and perform monitoring and quality inspection services at the facilities of our manufacturers in China.
Our third-party suppliers and manufacturers in China expose us to political, legal, and economic risks. Our operations and the operations of our third-party suppliers and manufacturers in China may be adversely affected by deterioration of the U.S.-China relationship; adverse changes in U.S. economic and political policies relating to China (and vice versa), such as policies favoring domestically manufactured products; and changes in the United States and Chinese laws and regulations such as those related to, among other things, sanctions, taxation, import and export restrictions, tariffs, environmental protection, land use rights, intellectual property,
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currency controls, network security, labor and human rights practices, privacy, public health, and other matters. For example, in December 2021, the U.S. Congress enacted the Uyghur Forced Labor Prevention Act in an effort to prevent what it viewed as forced labor and human rights abuses in the Xinjiang Uyghur Autonomous Region (“XUAR”). If it is determined that our third-party suppliers and manufacturers produce or manufacture our components or products wholly or in part from the XUAR, then we could be prohibited from importing such components or products into the United States. In addition, the political, legal, and economic climate in China, both nationally and regionally, is fluid and unpredictable. Chinese trade regulations are in a state of flux, and we or our third-party suppliers and manufacturers in China may become subject to additional taxation, tariffs, and duties, including retaliatory trade restrictions. Sustained uncertainty about or worsening of tensions between the United States and China could also result in a global economic slowdown and long-term changes to global trade. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition, results of operations, and prospects could be materially and adversely affected.
In addition, with the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Our results of operations will be materially and adversely affected if the labor costs of our suppliers and manufacturers increase significantly and are passed on to us. In addition, our manufacturers and suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China, which would negatively affect our manufacturers’ and suppliers’ ability to meet our needs. Any of these events may materially and adversely affect our business, financial condition, results of operations, and prospects.
If we cannot innovate at the pace of our competitors, we may not be able to develop or exploit new technologies in time to remain competitive.
For us to remain competitive, it is essential to be at the forefront of new technologies, including in the rapidly evolving area of AI. If we are unable to meet customer demands for new technology, or if the technologies we introduce are viewed less favorably than our competitors’ products, our results of operations and future prospects may be negatively affected. To meet our customers’ needs in these areas, we must continuously work on our product design, develop our algorithms, and invest in and develop new technologies. We will also need to anticipate customer demand with respect to these technologies and which technological advances are most desirable in the EEG monitoring products and any future additional products we market. This need will result in requiring our employees to continue learning and adapting to new technologies, and us competing for highly skilled talent in a competitive market. Our operating results depend to a significant extent on our ability to anticipate and adapt to technological changes in the EEG monitoring market, maintain innovation, maintain a strong product pipeline, and reduce or maintain low costs for producing high-quality EEG monitoring products. Any inability to do so could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Any future sales in international markets will subject us to additional costs and risks that may have a material adverse effect on our business, financial condition, results of operations, and prospects.
To date, all of our sales have been to customers in the United States. We intend to enter into international markets in the future, and there are significant costs and risks inherent in conducting business in international markets. Upon our expansion into foreign markets, we will be subject to new business risks, in addition to regulatory risks. See the risk factor titled, “We face risks related to obtaining necessary foreign regulatory clearance or approvals.” In addition, expansion into foreign markets will impose additional burdens on our executive and administrative personnel, finance and legal teams, sales and marketing teams, and general managerial resources.
We have limited experience with international regulatory regimes and market practices, and we may not be able to penetrate or successfully generate sales in new markets. We may also encounter difficulty expanding into international markets because of limited brand recognition in certain parts of the world, leading to delayed acceptance of our products by potential customers in these international markets. In addition, international markets may have different reimbursement pathways that present additional challenges and make those markets less commercially viable. If we are unable to expand internationally and manage the complexity of international sales operations successfully, it could have a material adverse effect on our business, financial condition, results of operations, and prospects. If our efforts to introduce our products into foreign markets are not successful, we may have expended significant resources without realizing the expected benefit. Ultimately, the investment required for expansion into foreign markets could exceed the results of operations generated from this expansion.
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If we fail to attract and retain senior management and other key personnel, our business may be materially and adversely affected.
Our success depends in part on our continued ability to attract, retain, and motivate highly qualified management, sales and marketing, and research and development personnel, including those with hardware expertise and software expertise, in particular in the area of AI. We are highly dependent upon our senior management team as well as our senior technology personnel. We have experienced, and may in the future experience, planned or unplanned departures of members of our senior management team or senior technology personnel. Any loss of services, whether planned or unplanned, of any of the members of our senior management team could adversely affect our business until a suitable replacement can be found.
Competition for qualified personnel in the medical device field in general and the EEG field specifically is intense, due to the limited number of individuals who possess the training, skills, and experience required by our industry. We intend to continue to review and, where necessary, strengthen our senior management as the needs of our business develop, including through internal promotion and external hires. However, there may be a limited number of people with the requisite competencies to serve in these positions, and we cannot assure you that we will be able to locate or employ such qualified personnel on terms acceptable to us or at all. We also face significant competition for personnel where our main office is located in the San Francisco Bay Area. To attract and maintain key personnel, we need to remain competitive in our “total rewards” offers to employees, including attractive cash compensation, equity, and benefits packages. While we regularly assess market trends for any changes in compensation across all functions, we need to remain diligent in our compensation benchmarking, especially for key personnel, to ensure we are providing attractive offers to new employees and compensating existing employees well. Therefore, the loss of one or more of our key personnel, whether planned or unplanned, or our failure to attract and retain additional key personnel, could have a material adverse effect on our business, financial condition, results of operations, and prospects. In addition, to the extent we hire personnel from competitors, we have been, and may in the future be, subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.
If we fail to maintain our culture, our business may be negatively affected.
Maintaining a positive company culture is necessary to enable us to retain and hire key talent and have a cohesive, aligned employee base. Our ability to maintain this culture will directly affect the continued growth and success of our company. Our culture could face sustainability challenges as we continue to grow. Potential obstacles include reduced adoption of our culture by new employees, limited ability to maintain consistency of culture within business teams, and failure to attract and retain leaders who are mission-minded and support our culture.
If we are unable to successfully develop new products and effectively manage their introduction or improve our existing products, our business may be adversely affected.
We must successfully manage introductions of new or enhanced products or new or enhanced features of the Ceribell System and Clarity, including those related to any future indications in addition to seizure. Introductions of new products or features of the Ceribell System and Clarity could also adversely impact the sales of our existing products to customers. For instance, the introduction or announcement of a new or advanced Ceribell System could shorten the life cycle of our existing devices or reduce demand for them, potentially reducing any benefits of successful new product or enhancement introductions and leading to challenges in managing the inventory of existing products. In addition, new or enhanced products may have higher manufacturing, marketing, information technology, or other costs than our existing products, or lower market acceptance, which could negatively impact our gross margins and operating results. As the technological complexity of our products increases, the infrastructure to support our products, such as our design and manufacturing processes and technical support for our products, may also become more complex. Accordingly, if we fail to effectively manage introductions of new or advanced products, our business may be adversely affected.
We spend significant amounts on marketing and brand-building initiatives to acquire and retain customers, which may not be successful or cost effective.
We spend significant amounts in marketing initiatives to increase market awareness of the Ceribell System and the prevalence of seizures in critically ill patient populations. Through our marketing and educational efforts, we reinforce the prevalence and severity of non-convulsive status epilepticus, the importance of prompt diagnosis and treatment, and the limitations of conventional EEG systems in the acute care setting. We believe our marketing programs are essential to increasing adoption of our system and expanding the use of EEG monitoring to a greater number of at-risk patients.
While we have developed robust marketing initiatives, we may fail to identify marketing opportunities that satisfy our anticipated return on marketing spend or accurately predict customer acquisition or product-related concerns. If any of our marketing efforts prove less successful than anticipated in attracting new or retaining existing customers, we may not be able to recover our marketing spend, and our rates of customer acquisition and/or customer retention may fail to meet market expectations, which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Our marketing efforts may not result in increased sales of our products, and we may be unable to compete effectively in the long term.
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In addition, we believe that building a strong brand and developing and achieving broad awareness of the Ceribell System is critical to achieving market success. If any of our brand-building activities prove less successful than anticipated, or such activities are inhibited by negative perceptions on the part of healthcare professionals, including with respect to AI-enabled devices or reduced montage EEG in general, or the safety, reliability and efficacy of the Ceribell System, it could have a material adverse impact on our ability to attract new and retain existing customers and on the use of our products by existing customers. If this were to occur, we might not be able to recover our brand-building spend, and our rates of customer acquisition and retention and product usage could fail to meet market expectations, any of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our products are complex to design and manufacture and can contain defects. The production and sale of defective products could adversely affect our business, financial condition, results of operations, and prospects. If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit sales of our products.
The Ceribell System contains highly complex electronic and other components which are sourced from external third parties, and there is an inherent risk that defects may occur in the production of any of our products. We rely on the suppliers’ internal procedures designed to minimize risks that may arise from quality issues, and perform quality checks ourselves, but there can be no assurance that we or our suppliers will be able to eliminate or mitigate occurrences of these issues and associated liabilities. In addition to the risk of product returns by our customers due to product defects, we face exposure to product liability claims in the event that any of our devices are alleged to have resulted in personal injury, over- or under-reporting of seizures resulting in inappropriate diagnosis or treatment, damage to property, or other harm. We may be sued if any of our devices allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing, sale, or use. For example, Clarity is not designed to detect all short seizures, and users of the Ceribell System could allege that failure to detect all short seizures is a defect. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers or limitations inherent in the product, negligence, strict liability, and a breach of warranty. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit sales of our products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the sale of our current or any future products we develop. Although we currently carry product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient funds to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. The production and sale of defective products in the future could have a material adverse effect on our business, financial condition, results of operations, and prospects.
The size and expected growth of our addressable market has not been established with precision, and may be smaller than we estimate.
Our estimates of the addressable market for our current products and any future products are based on a number of internal and third-party estimates and assumptions, including the prevalence of seizures in the acute care setting and additional indications we intend to expand into, and the level of underutilization of EEG in the acute care setting. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct. As a result, our estimates of the addressable market for our current or future products may prove to be incorrect. If the actual number of patients who would benefit from our products and services, the price at which we can sell future products or services or the addressable market for our products or services is smaller than we estimate, it could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Alternative technologies or therapies addressing seizure, non-convulsive status epilepticus or other indications we intend to expand into could materially adversely affect our business, financial condition, results of operations, and prospects.
If medical research were to lead to the discovery of alternative therapies or technologies that address seizure, status epilepticus or other indications we intend to expand into in a way that is or is perceived to be more accurate, reliable, cost-effective, or otherwise improved relative to the Ceribell System, for example through alternative monitoring or testing technologies, medication, or therapies, the demand for our products could decrease significantly, leading to a material adverse effect on our business, financial condition, results of operations, and prospects.
We may in the future be deemed to manufacture or contract to manufacture products that contain conflict minerals.
We may in the future be deemed to manufacture or contract to manufacture products that contain certain minerals that have been designated as “conflict minerals” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, in future periods, we may be required to diligence the origin of such minerals and disclose and report whether or not such minerals originated in the Democratic Republic of the Congo or adjoining countries. The implementation of these new requirements could adversely affect the sourcing, availability, and pricing of materials used in the manufacture of our products. In addition, we may incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any relevant minerals and metals used in our products.
Our continued rapid growth could strain our personnel resources and infrastructure, and if we are unable to manage the anticipated growth of our business, our business, financial condition, results of operations, and prospects could be materially adversely effected.
We have experienced rapid growth in business. Any growth that we experience in the future will pose challenges to our organization, requiring us to expand our sales, marketing, manufacturing, and general and administrative infrastructure. In addition to the need to scale our operational capacity, future growth will impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees. Rapid expansion in personnel could impact our capacity to manufacture, market, sell, and support our products, which could result in inefficiencies and unanticipated costs and disruptions to our operations. Additionally, rapid expansion could pose challenges to retaining our existing employees, for example, by requiring us to rely on overtime to increase capacity that could, in turn, result in greater employee attrition and/or a loss in productivity during the process of recruiting and training additional resources and add to our operating expenses. In addition, rapid and significant growth may strain our administrative and operational infrastructure, financial and management controls, and reporting systems and procedures. Our ability to manage our business and growth will depend on our ability to continue to improve our infrastructure, controls, systems, and procedures at a pace consistent with our growth. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business, financial condition, results of operations, and prospects may be materially adversely affected.
Macroeconomic conditions could materially adversely affect our business, financial condition, results of operations, and prospects.
Macroeconomic conditions, such as high inflationary pressure, changes to monetary policy, high interest rates, volatile currency exchange rates, credit and debt concerns, decreasing consumer confidence and spending, including capital spending, concerns about the stability and liquidity of certain financial institutions, the introduction of or changes in tariffs or trade barriers, and global recessions can adversely impact demand for our products, which could negatively impact our business, financial condition, results of operations, and prospects. Recent macroeconomic conditions have been adversely impacted by geopolitical instability and military hostilities in multiple geographies and monetary and financial uncertainties.
The impacts of these macroeconomic conditions, and the actions taken by governments, central banks, companies, and consumers in response, have resulted in, and may continue to result in, higher inflation in the United States and globally, which is likely, in turn, to lead to an increase in costs and may cause changes in fiscal and monetary policy, including additional increases in interest rates. Other adverse impacts of recent macroeconomic conditions have been, and may continue to be, supply chain constraints, logistics challenges, liquidity concerns in the broader financial services industry, and fluctuations in labor availability.
In a higher inflationary environment, we may be unable to raise the prices of our products sufficiently to keep up with the rate of inflation. A higher inflationary environment can also negatively impact raw material, component, and logistics costs that, in turn, may increase the costs of producing and distributing our products. In addition, inflation also affects our customers' purchasing power and thus could indirectly impact our revenues.
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Hospitals, in particular, are experiencing and may continue to experience financial and operational pressures as a result of staffing shortages, the supply chain environment, and high inflation, which could impact their ability to access capital markets and other funding sources, increase the cost of funding, or impede their ability to comply with debt covenants, all of which could impede their ability to provide patient care and impact their profitability. To the extent that hospitals face financial pressures, delayed access, or loss of access to uninsured deposits, reductions in government spending or higher interest rates, hospitals’ ability or willingness to spend on equipment may be adversely impacted, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Also, we have experienced, and may continue to experience, supply chain constraints, including difficulties obtaining a sufficient supply or increased prices of component materials used in our products. Increased interest rates may make access to credit more difficult, which may result in the insolvency of key suppliers, which would exacerbate supply chain challenges. Such supply chain constraints could cause us to fail to meet product demand or maintain our margins.
Risk Related to Regulatory Matters
If adequate reimbursement becomes unavailable for the diagnostic tests using our products, it could diminish our sales or affect our ability to sell the Ceribell System profitably.
Diagnostic tests performed with the Ceribell System are generally reimbursed under existing physician and hospital codes. Our ability to increase sales of the Ceribell System depends, in significant part, on the availability of adequate coverage and reimbursement from third-party payers, including governmental payers (such as the Medicare and Medicaid programs in the United States), managed care organizations, and private health insurers. Third-party payers decide which diagnostic tests they will cover and establish reimbursement rates for those tests. We do not bill any third-party payers for the Ceribell System. Instead, we invoice healthcare providers and the cost is bundled into the reimbursement received by healthcare providers for the tests using the Ceribell System.
We expect the Ceribell System will continue to be purchased by hospitals who will then seek reimbursement from third-party payers. Reimbursement for the hospital services during an inpatient stay generally is made under a prospective payment system that is determined by a classification system known as diagnosis-related groups, which are assigned using a number of factors including the principal diagnosis, major procedures, discharged status, patient age, and complicating secondary diagnoses, among other things. In August 2023, CMS approved an NTAP under the Medicare inpatient prospective payment system for our newest Clarity algorithm, effective October 1, 2023. The NTAP designation for a product lasts for no more than three years for a specific indication. Once our new Clarity algorithm is no longer eligible for NTAP, the additional cost associated with the use of our products could affect our customers’ profit margin. In light of the potential additional associated cost, some of our target customers may be unwilling to adopt our products and some of our existing customers may terminate their contracts with us.
While third-party payers currently cover and provide reimbursement for tests using the Ceribell System, we can give no assurance that these third-party payers will continue to provide coverage and adequate reimbursement, or that current reimbursement levels for the tests will continue. Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, no uniform policy of coverage and reimbursement for tests using our products exists among third-party payers. Therefore, coverage and reimbursement for tests using our products can differ significantly from payer to payer. Other competitive products may be more widely covered or subject to different reimbursement policies and requirements, which could impact demand for our products.
Furthermore, the overall amount of reimbursement available for EEG monitoring and seizure diagnosis could decrease in the future. We cannot be sure that the reimbursement amounts available for hospital services and tests using the Ceribell System will not reduce or otherwise negatively impact the demand for our products. Further, coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future. Failure by users of the Ceribell System to obtain adequate reimbursement for these tests would have a material adverse effect on our business, financial condition, results of operations, and prospects.
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The continued commercialization of our products depends in part on the extent to which governmental authorities and health insurers provide coverage and adequate reimbursement levels. Failure to obtain and maintain coverage and adequate reimbursement for our products could limit our ability to market those products and decrease our ability to generate revenue.
While third-party payers generally currently cover and provide reimbursement for diagnostic tests using the Ceribell System, there is significant uncertainty related to the insurance coverage and reimbursement of newly approved and launched products. In the United States, third-party payers, including private and governmental payers, such as the Medicare and Medicaid programs, play an important role in determining the extent to which new devices will be covered. The Medicare and Medicaid programs increasingly are used as models in the United States for how private payers and other governmental payers develop their coverage and reimbursement policies for medical devices. Some third-party payers may require pre-approval of coverage for new or innovative devices before they will reimburse healthcare providers who use such devices.
In addition, customers that use our products may be subject to reimbursement claim denials upon submission of their claims. Customers may also be subject to recovery of overpayments if a payer makes payment for the claim and subsequently determines that the payer’s coding, billing, or coverage policies were not followed. These events, or any other decline in the amount payers are willing to reimburse our customers, could make it difficult for existing customers to continue using or to adopt our products and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins will decrease, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Obtaining coverage and reimbursement can be a time-consuming process that could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to satisfy governmental and other third-party payers that diagnostic tests using our products should be covered and reimbursed. In addition, payers continually review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and tests. There can also be no assurance that third-party payer policies will provide coverage for tests using our products.
Further, we believe that future coverage and reimbursement may be subject to increased restrictions, such as additional prior authorization requirements, both in the United States and in international markets, which may impact utilization of our products and have a material adverse effect on our business, financial condition, results of operations, and prospects. In Europe, reimbursement is entirely regulated at member state level, varies significantly between countries, and member states are facing increased pressure to limit public healthcare spending. Third-party coverage and reimbursement for our products or any of our products in development for which we may receive regulatory clearance, certification, or approval may not be available or adequate in either the United States or international markets. If demand for our products is adversely affected by third-party reimbursement policies and decisions, it could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to certain federal and state fraud and abuse laws and transparency laws, and any failure to comply could subject us to substantial penalties or other adverse consequences. In addition, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims, and transparency laws regarding payments and other transfers of value made to physicians and other healthcare professionals. Our business practices and relationships with providers are subject to scrutiny under these laws. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:
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These laws and regulations, among other things, constrain our business, marketing and other promotional and research activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians, or other potential purchasers of our products. In particular, these laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements, as well as interactions with healthcare professionals through consultant arrangements, product training, sponsorships, or other activities. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare and other laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices, including arrangements with teleneurology providers and customers for the provision of remote EEG interpretation services or agreements we have entered into with physicians who are paid, in part, in the form of stock or stock options, do not comply with current or future statutes, regulations, agency guidance, or case law involving applicable fraud and abuse or other healthcare laws and regulations. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, governmental authorities may possibly conclude that our business practices may not comply with healthcare laws and regulations.
To enforce compliance with the healthcare regulatory laws, certain 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. We may be subject to private qui tam actions brought by individual whistleblowers on behalf of the federal or state governments, with potential liability under the federal False Claims Act including mandatory treble damages and significant per-claim penalties. In addition, as a result of these investigations and qui tam actions, we may have to agree to 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 a material adverse effect on our business, financial condition, results of operations, and prospects. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to.
If our operations are found to be in violation of any of the federal and state laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to significant penalties, including significant criminal, civil, and administrative penalties, damages, fines, exclusion from participation in government programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputation harm, oversight if we become subject to a consent decree or corporate integrity agreement, or disgorgement, and we could be required to curtail, restructure or cease our operations. Any of the foregoing consequences will have an adverse effect on our business, financial condition, results of operations, and prospects.
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Our employees, consultants and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employees, consultants, and other commercial partners and business associates may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless, or negligent conduct or other unauthorized activities that violate the regulations of the FDA and other regulators (both domestic and foreign), including those laws requiring the reporting of true, complete, and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws, and regulations in the United States and internationally or laws that require the true, complete, and accurate reporting of financial information or data. In particular, sales, marketing, and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing, and other abusive practices. It is not always possible to identify and deter misconduct by our employees, consultants, and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal, and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, oversight if we become subject to a consent decree or corporate integrity agreement, and curtailment of operations, any of which could adversely affect our business, financial condition, results of operations, and prospects. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees and reputational harm, and divert the attention of management in defending ourselves against any of these claims or investigations.
Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could have a material adverse effect on our business, financial condition, results of operations, and prospects.
In the United States, there have been and continue to be a number of legislative and regulatory initiatives to contain healthcare costs. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the diagnostic tests associated with the use of our products. The cost containment measures that payers and providers are instituting and the effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our products.
By way of example, in the United States, the Affordable Care Act (the “ACA”) made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Among other ways in which it may affect our business, the ACA implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through bundled payment models; and expanded the eligibility criteria for Medicaid programs. There have been executive, judicial, and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. The Budget Control Act of 2011, among other things, reduced Medicare payments to providers, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2032, unless additional Congressional action is taken. In addition, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
We expect additional state and federal healthcare policies and reform measures to be adopted in the future, any of which could limit reimbursement for healthcare products and services or otherwise result in reduced demand for our products or additional pricing pressure and have a material adverse effect on our industry generally and on our customers. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may negatively affect our business, financial condition, results of operations, and prospects. The continuing efforts of the government, insurance companies, managed care organizations, and other payers of healthcare services to contain or reduce costs of healthcare may adversely affect our ability to set a price that we believe is fair for our products, our ability to generate revenue and achieve or maintain profitability, and the availability of capital.
Any changes of, or uncertainty with respect to, future coverage or reimbursement rates could affect demand for our products, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Our relationships with contracted physicians to provide remote EEG interpretation services to certain customers must be structured in compliance with state laws prohibiting the corporate practice of medicine or fee splitting and could be found to violate such laws.
Our relationships with physicians providing remote EEG interpretation services to certain customers may implicate certain state laws that generally prohibit non-professional entities from providing licensed medical services or exercising control over licensed physicians or other healthcare professionals (such activities generally referred to as the “corporate practice of medicine”) or engaging in certain practices such as fee-splitting with such licensed professionals. The interpretation and enforcement of these laws vary significantly from state to state. There can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on our business, financial condition, results of operations, and prospects. Regulatory authorities, state boards of medicine, state attorneys general, and other parties may assert that, despite the agreements through which we operate, we are nonetheless engaged in the provision of medical services and/or that our arrangements with the physicians constitute the unlawful practice of medicine and/or fee-splitting. If a jurisdiction’s prohibition on the corporate practice of medicine or fee-splitting is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate our arrangements with our employed and contracted physicians to bring our activities into compliance with such laws. A determination of non-compliance, or the termination of or failure to successfully restructure these relationships, could result in disciplinary action, penalties, damages, fines, and/or a loss of revenue, any of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. State corporate practice and fee-splitting prohibitions also often impose penalties on healthcare professionals for aiding in the improper rendering of professional services, which could discourage physicians from providing reading services to our customers with whom we contract.
Our products and operations are subject to extensive government regulation and oversight in the United States, and our failure to comply with applicable requirements could harm our business.
Our products are regulated as medical devices in the United States. Medical devices and their manufacturers and product developers are subject to extensive regulation in the United States, including by the FDA. The FDA regulates, among other things, with respect to medical devices: design, development, and manufacturing; testing, labeling, content, and language of instructions for use and storage; clinical trials; product safety; establishment registration and device listing; marketing, sales, and distribution; premarket clearance, classification, and approval or certification; recordkeeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; post-market studies; and product import and export.
The regulations to which we are subject are complex, burdensome to understand and apply and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces its regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we or any of our contract manufacturers will be found compliant in connection with any future FDA or foreign inspections. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters; fines; injunctions; civil penalties; termination of distribution; import alerts; recalls or seizures of products; delays in the introduction of products into the market; total or partial suspension of production; refusal to grant future clearances or approvals; withdrawals or suspensions of clearances or approvals, resulting in prohibitions on sales of our products; and in the most serious cases, criminal penalties.
Failure to maintain marketing authorizations for our products, or to timely obtain necessary marketing authorizations for our future products, may have a material adverse effect on our business, financial condition, results of operations, and prospects.
In the United States, before we can market a new medical device, or a new use of, or other significant modification to an existing, marketed medical device, we must first receive either clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the “FDCA”), approval of a premarket approval application (“PMA”), or grant of a de novo classification request from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. 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. In the process of obtaining PMA approval, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing, and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices. In the de novo classification process, a manufacturer whose novel device under the FDCA would otherwise be automatically classified as Class III and require the submission and approval of a PMA prior to marketing is able to request down-classification of the device to Class I or Class II on the basis that the device presents a low or moderate risk. If the FDA grants the de novo classification request, the applicant will receive authorization to market the device. This device type may be used subsequently as a predicate device for future 510(k) submissions.
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The PMA approval, 510(k) clearance and de novo classification processes can be expensive, lengthy, and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can take longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Clinical data may also be required in connection with an application for 510(k) clearance or a de novo request. Despite the time, effort and cost, a device may not obtain marketing authorization by the FDA. We have obtained 510(k) clearances for our commercialized medical devices, and we must obtain marketing authorization for any future devices we develop, unless they are exempt. Marketing authorizations for any of our future products, if granted, may include significant limitations on the indicated uses for the device, which may limit the potential commercial market for the device.
In the United States, any modification to a medical device for which we have obtained marketing authorization may require us to submit a new 510(k) premarket notification and obtain clearance, to submit a PMA and obtain FDA approval, or to submit a de novo request prior to implementing the change. For example, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, generally requires a new 510(k) clearance or other marketing authorization. The FDA requires every manufacturer to make such determinations in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with a manufacturer’s decisions regarding whether new clearances or approvals are necessary. We may make modifications or add additional features in the future to our medical devices that we believe do not require a new 510(k) clearance, de novo request, or approval of a PMA. If the FDA disagrees with our determination and requires us to seek new marketing authorizations for the modifications for which we have concluded that new marketing authorizations are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain such marketing authorization, and we may be subject to significant regulatory fines or penalties. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our business.
The FDA can delay, limit or deny marketing authorization of a device for many reasons, including:
In September 2022, we received Breakthrough Device Designation from the FDA for the detection and monitoring of delirium using our Ceribell System. Breakthrough Device Designation provides certain benefits, including more interactive and timely communications with FDA staff, potential use of post-market data collection to facilitate expedited development and review, opportunities for more efficient and flexible clinical study design, and prioritized review of premarket submissions. However, there can be no guarantee that these benefits will materialize or significantly impact our development and regulatory approval process. We may not experience a faster development process, review, or approval compared to conventional FDA procedures. Breakthrough Device Designation does not alter the regulatory standards for marketing authorization or guarantee that we will ultimately obtain FDA clearance or approval for the detection and monitoring of delirium using our Ceribell System. Furthermore, the FDA may rescind Breakthrough Device Designation if it believes that the designation is no longer supported by data from our clinical development program. As with all FDA marketing authorizations, we will need to continue to comply with applicable regulations and standards, which may change over time.
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Our clinical testing process is complex, lengthy, can be expensive, and carries uncertain outcomes. Future trials and studies by us or others may fail to replicate positive results observed to date.
We conduct our own clinical studies and provide support for third party–initiated trials that evaluate different aspects of the Ceribell System. Clinical testing is difficult to design and implement, can take many years, can be expensive, and carries uncertain outcomes. The results of preclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current, planned, or future products may not be predictive of the results of later clinical trials or real-world performance, and interim results of a clinical trial do not necessarily predict final results. The data and results from our clinical studies do not ensure that we will achieve similar results in future clinical trials, are not head to head studies and not directly comparable with each other, as they have different sample sizes, designs, limitations, assumptions, and objectives, and are conducted on different patient populations at different sites by different researchers. In addition, as some of these studies are prospective studies, they may not reflect real-world performance. Some of our studies have not been peer reviewed or published, and peer reviewers may disagree with the methodologies or conclusions of such studies and may not deem them worthy of publication. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical trials have nonetheless failed to replicate results in later clinical trials, or have viewed such data in different ways than regulators. The risk that future trials and studies of the Ceribell System fail to replicate positive results observed to date is increased because most of our studies and trials are conducted on small samples, not powered for statistical significance, controlled for other clinical variables, or have other design limitations and almost all such studies were conducted or sponsored by us. Independent studies with larger samples or different designs may not replicate results observed to date. In addition, the performance of the Clarity algorithm is typically evaluated by comparing the algorithm results to a retrospective review of the EEG by a panel of neurologists. There is a high degree of inter-rater variability in the interpretation of EEGs by clinicians, such that Ceribell System study results may vary from study to study depending on the size and composition of the neurologist panel. Clinical studies or investigations on the Ceribell System have produced, and may in the future produce, negative or inconclusive results. Furthermore, others, including healthcare professionals and regulators, may perceive a conflict of interest with studies supported, sponsored, or funded by us or conducted by our employees or consultants, and may not find results of such studies to be compelling or credible. As a result of the foregoing, we may decide, or regulators may require us, to conduct additional clinical and nonclinical testing in addition to those we have planned. The initiation and completion of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our clinical trials for a number of reasons, which could adversely affect the costs, timing, or successful completion of our clinical trials, including related to the following:
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Any of these occurrences may significantly harm our business, financial condition, results of operations, and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing authorization of any medical device.
Patient enrollment in clinical trials, and completion of patient follow-up, if applicable, depend on many factors, including the size of the patient population, the nature of the trial protocol, the eligibility criteria for the clinical trial, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied. Patients participating in our clinical trials may drop out before completion of the trial or experience adverse medical events unrelated to an investigational device. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.
Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations, or guidelines, and are subject to oversight by these governmental agencies and IRBs, or other bodies at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our devices produced under current good manufacturing practice (“cGMP”) or similar foreign requirements, and other regulations applicable to the location where the clinical trial is conducted. We rely on third-party researchers and clinical trial sites, and may in the future rely on CROs, to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their actual performance. We depend on these third parties to conduct our clinical trials in compliance with good clinical practice (“GCP”), requirements. To the extent they fail to enroll participants for our clinical trials, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, trial delays or both. In addition, if we conduct clinical trials in other countries in the future, we may be subject to further delays and expenses as a result of increased shipment costs and additional regulatory requirements, and the engagement of non-U.S. third-party contractors may expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening, and medical care. See the risk factor titled, “We rely on third parties to conduct and support our preclinical studies and clinical trials. These third parties may not properly and successfully carry out their contractual duties or meet expected deadlines, which could harm our ability to obtain marketing authorization of or commercialize future products we develop.”
Interim, “top-line” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose interim, top-line or preliminary data from our clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial or additional data collected at a later time. We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, top-line, or preliminary results that we report may differ from future results of the same trial, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Interim, top-line, or preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the interim, top-line, or preliminary data we previously announced. As a result, interim, top-line, and preliminary data should be viewed with caution until the final data are available. Adverse differences between interim data and final data could significantly harm our business prospects. Further, disclosure of interim data by us or by our competitors could result in volatility in our share price.
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Further, others, including regulatory agencies or other bodies, may not accept or agree with our assumptions, estimates, calculations, conclusions, or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular trial, or the approvability or potential for commercialization of the particular medical device. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure. The interim, top-line, or preliminary data that we report may differ from final results, and regulatory authorities and other bodies may disagree with the conclusions reached, which may harm our ability to obtain marketing authorization for, and commercialize, our future products, which could harm our business, financial condition, results of operations, and prospects.
We are subject to ongoing regulatory review and scrutiny. Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.
We are subject to ongoing and extensive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, import, export, registration, and listing of devices. For example, medical device manufacturers must submit certain reports to the FDA and keep required records as a condition of obtaining and maintaining marketing authorization. These reports include information about failures and certain adverse events potentially associated with the device after its marketing authorization. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation.
Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. We have ongoing responsibilities under FDA regulations, and the FDA and state regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state regulatory authorities, which may include any of the following or other sanctions:
Any of these sanctions could result in negative publicity, higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition, results of operations, and prospects.
In addition, the FDA may change its marketing authorization policies affecting future products, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay marketing authorization of any products under development or impact our ability to modify any products authorized for market on a timely basis. Such changes may also occur in foreign jurisdictions where we may market our products in the future. Such changes could impose additional requirements upon us that could delay our ability to obtain future marketing authorizations, increase the costs of compliance, or restrict our ability to maintain any marketing authorizations we have obtained. See the risk factor titled, “Legislative or regulatory reforms in the United States may make it more difficult and costly for us to manufacture, market, or distribute our products, or to obtain marketing authorizations for any future products.”
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Our products must be manufactured in accordance with applicable laws and regulations, and we could be forced to recall our devices or terminate production if we fail to comply with these regulations.
In the United States, the methods used in, and the facilities used for, the manufacture of medical devices must comply with the FDA’s cGMPs for medical devices, known as the Quality System Regulation (“QSR”), which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing, and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures, and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors. Our products are also subject to similar state regulations governing manufacturing.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our medical devices. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things: warning letters or untitled letters; fines, injunctions, or civil penalties; suspension or withdrawal of marketing authorizations; seizures or recalls of our products; total or partial suspension of production or distribution; administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future clearances or approvals for our products or similar decisions by foreign regulatory authorities or notified bodies; clinical holds; refusal to permit the import or export of our products; and criminal prosecution of us, our suppliers, or our employees. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.
Our products may cause or contribute to adverse medical events which we may be required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition, results of operations, and prospects. In addition, the discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA, could have a negative impact on us.
It is possible that there may be side effects and adverse events associated with the use of our medical devices or any future devices we develop. For example, the Ceribell System has in certain instances issued false alarms, i.e., report seizure activity when there is no seizure, and in other instances has failed to report or under-reported seizure activity when there is seizure, and may continue to do so, all of which may lead to patients being misdiagnosed, receiving unnecessary medical procedures or treatments, or experiencing delays in receiving necessary medical procedures or treatments. Additionally, the headband used as part of the Ceribell System may cause skin irritation to patients or break down sooner than expected. The FDA’s medical device reporting regulations require us to assess reportability of adverse events that come to our attention and report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the event as well as the nature of the event. We may fail to report events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. The FDA may also disagree with our determinations that an event was not reportable. To date, we have not filed any medical device reports with the FDA. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our marketing authorizations, seizure of our products, or delay in obtaining marketing authorizations for our future products.
The FDA has the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects, or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new marketing authorizations for the device before we may market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, or civil or criminal fines.
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Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us, and negatively affect our sales. 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, business, financial condition, results of operations, and prospects.
The misuse or off-label use of our products may result in injuries that harm patients and lead to product liability suits, harm our reputation in the marketplace, or result in costly investigations, fines, or 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.
Our commercial products, and any marketing authorization we may receive for future products, are, and will be, limited to specified indications for use. Our sales and marketing personnel, as well as our direct sales force, are trained to not promote our devices for uses outside of the FDA-authorized indications for use, known as “off-label uses.” We cannot, however, prevent a healthcare professional from using our devices off-label, when in the healthcare professional’s independent professional judgment he or she deems it appropriate. There may be increased risk of injury to patients if healthcare professionals attempt to use our devices off-label, which could harm our reputation in the marketplace among healthcare professionals and patients.
If the FDA 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 subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine, or criminal penalties. It is also possible that other federal or state enforcement authorities might take action under other regulatory authority, such as false advertising and consumer protection laws, or false claims laws, 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.
In addition, healthcare professionals may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. For example, healthcare professionals may misuse our single use, disposable headbands by using them on more than one patient. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. As described above, product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizeable damage awards against us that may not be covered by insurance, all of which would have a material adverse effect on our business, financial condition, results of operations, and prospects.
Legislative or regulatory reforms in the United States may make it more difficult and costly for us to manufacture, market, or distribute our products, or to obtain marketing authorizations for any future products.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, the FDA may change its policies, adopt additional regulations, or revise existing regulations, or take other actions, which may prevent or delay marketing authorization of any future products under development or impact our ability to modify any products for which we have already obtained marketing authorizations on a timely basis. For example, on January 31, 2024, the FDA issued a final rule to amend the QSR, which establishes current good manufacturing practice requirements for medical device manufacturers, to align more closely with the International Organization for Standardization standards. This new final rule, referred to as the Quality Management System Regulation, will take effect on February 2, 2026. Accordingly, it is unclear the extent to which any other legislative or regulatory proposal, if adopted, could impose additional or different regulatory requirements on us that could increase the costs of compliance or otherwise create competition that may negatively affect our business.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may make it more difficult and costly to manufacture, market, or distribute our commercialized products, or may impose additional costs, lengthen marketing authorization review times, or make it more difficult to obtain marketing authorizations for any future products we develop. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action and we may not achieve or sustain profitability.
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We face risks related to obtaining necessary foreign regulatory clearance or approvals.
We intend to enter into international markets in the future. Upon our expansion into foreign markets, we will be subject to foreign regulatory requirements that we have limited experience with and vary widely from country to country and from the United States. The time required to obtain clearances or approvals required by other countries may be longer than that required for FDA clearance or approval, and requirements for such approvals may differ from FDA requirements. We may be unable to obtain regulatory approvals and may also incur significant costs in attempting to obtain foreign regulatory approvals. If we experience delays in receipt of approvals to market our products in new jurisdictions, or if we fail to receive these approvals, we may be unable to market our products in international markets in a timely manner, if at all, which could materially impact our international expansion and adversely affect our business as a whole. If any of these risks were to materialize, they could limit our expected international growth and profitability, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Failure to comply with the Foreign Corrupt Practices Act (the “FCPA”), economic and trade sanctions regulations, and similar laws could subject us to penalties and other adverse consequences.
We are subject to the FCPA and other laws in the United States and elsewhere that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. Certain suppliers and manufacturers of our devices and components of our devices are located in countries known to experience corruption. Business activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, contractors, or agents that could be in violation of various laws, including the FCPA and anti-bribery laws in these countries, even though these parties are not always subject to our control. While we have implemented policies and procedures designed to discourage these practices by our employees, consultants, and agents and to identify and address potentially impermissible transactions under such laws and regulations, we cannot assure you that none of our employees, consultants, and agents will take actions in violation of our policies, for which we may be ultimately responsible.
We are also subject to certain economic and trade sanctions programs that are administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists or terrorist organizations. For example, in December 2021, the U.S. Congress enacted the Uyghur Forced Labor Prevention Act in an effort to prevent what it views as forced labor and human rights abuses in the XUAR. If it is determined that our third-party suppliers and manufacturers produce or manufacture our components or products wholly or in part from the XUAR, then we could be prohibited from importing such components or products into the United States.
Failure to comply with any of these laws and regulations or changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may result in significant financial penalties or reputational harm, which could adversely affect our business, financial condition, results of operations, and prospects.
Risks Related to Our Reliance on Third Parties
Various factors outside our direct control may negatively impact our manufacturing of the Ceribell System, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We manufacture the Ceribell System at our manufacturing facilities in Sunnyvale, California, using headbands supplied by manufacturers located in China as well as components for our recorder procured from various suppliers, including suppliers in China, and shipped to our facility for final assembly. While we believe that we currently have adequate manufacturing capacity and supplies for our products sufficient to meet our demand forecasts, if demand for the Ceribell System increases more rapidly than we anticipate, if we encounter problems with one or more of our manufacturers, including as a result of trade restrictions related to China, or if we secure regulatory approval to commercialize our products in additional geographies or indications, we may need to xpand our manufacturing capabilities, qualify new suppliers, and/or outsource to other manufacturers.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our medical devices. The methods used in, and the facilities used for, the manufacture of medical devices sold in the United States must comply with the QSR. See the risk factor titled, “Our products must be manufactured in accordance with applicable laws and regulations, and we could be forced to recall our devices or terminate production if we fail to comply with these regulations.” Manufacturers of medical device products often encounter difficulties in production, including difficulties with production costs and yields, quality control, quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced FDA requirements, other federal and state regulatory requirements and foreign regulations, to the extent applicable. If we fail to have our products manufactured in compliance with the QSR, or if our or our suppliers’ manufacturing facilities suffer disruptions, supply chain issues, machine failures, slowdowns, or disrepair, we may not be able to fulfill customer demand and our business would be harmed.
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Any contamination of the controlled environment, equipment malfunction, supply issues, natural disasters (including wildfires or earthquakes, to which our manufacturing facility in Sunnyvale, California may be especially susceptible), public health emergencies, personnel issues, including human error, or failure to strictly follow procedures can significantly reduce our yield. A drop in yield can increase our cost to manufacture our products or, in more severe cases, require us to halt the manufacture of our products until the problem is resolved. Identifying and resolving the cause of a drop in yield can require substantial time and resources. In addition, if demand for our products shifts such that our manufacturing facilities are operated below our forecasts for an extended period, we may adjust our manufacturing operations to reduce fixed costs, which could lead to uncertainty and delays in manufacturing times and quality during any transition period.
The manufacturing and distribution of our products are technically challenging. Changes that our suppliers may make, or additional requirements from regulatory agencies, outside of our direct control, can have an impact on our processes, on quality and on the successful or timely delivery of our products to our customers. Mistakes and mishandling may occur, which can affect supply and delivery. As a result, our dependence on third-party, including single-source suppliers, subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, financial condition, results of operations, and prospects, including:
The occurrence of any of these issues could significantly harm our ability to manufacture our products and maintain sufficient quality standards, which would have a material adverse effect on our business, financial condition, results of operations, and prospects.
We depend on a limited number of manufacturers and suppliers in connection with the manufacture of the Ceribell System, which makes us vulnerable to supply shortages and price fluctuations that could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We source and rely upon components and sub-assemblies of the Ceribell System, as well as manufacturing services from approved manufacturers and suppliers, some of which are single-source suppliers.
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These components, sub-assemblies and services are critical to us, and there are relatively few alternative sources of supply. Our suppliers generally are not under long-term contracts with us, and may experience delays or issues, stop producing our components or sub-assemblies, increase the prices they charge us, or elect to terminate their relationships with us. In any of these cases, we could face a delay of several months to identify, perform appropriate testing and qualify alternative manufacturers and suppliers with regulatory authorities, as we currently have transition plans for some but not all of our manufacturers and suppliers. In addition, the failure of our third-party manufacturers and suppliers to maintain acceptable quality requirements could result in quality issues, including recalls of our products. If one of our manufacturers or suppliers fails to maintain acceptable quality requirements, we may have to identify and qualify a new manufacturer or supplier. Although we require our third-party manufacturers and suppliers to supply us with materials, components, and services that meet our specifications and comply with applicable provisions of the QSR and other applicable legal and regulatory requirements in our agreements and contracts, and we perform incoming inspection, testing, or other acceptance activities to ensure the materials and components meet our requirements, there is a risk that they may not supply components that meet our requirements or supply components in a timely manner.
The number of third-party manufacturers and suppliers with the necessary manufacturing and regulatory expertise and facilities to produce our device components is limited and certification of a new manufacturer or supplier may be complex and time consuming. Any delay or interruption would likely lead to a delay or interruption in our manufacturing operations. The inclusion of substitute components must meet our product specifications and could require us to qualify the new manufacturer or supplier with the appropriate regulatory authorities, including the FDA. The added time and cost to arrange for alternative manufacturers or suppliers could harm our business. New manufacturers of any planned product would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing the planned product. Obtaining the necessary FDA or international approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property or other proprietary rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs that may be passed on to us.
We rely on third parties to conduct and support our preclinical studies and clinical trials. These third parties may not properly and successfully carry out their contractual duties or meet expected deadlines, which could harm our ability to obtain marketing authorization of or commercialize future products we develop.
We utilize and depend upon independent investigators and collaborators, such as third-party researchers, medical institutions, and strategic partners, to conduct and support portions of our preclinical studies and clinical trials under agreements with us, and may in the future rely on CROs. For some clinical research projects, we provide funding and for others, such as those supported by grants, we only provide access to our data or supply the Ceribell System at a discount. The terms of these agreements generally include joint publication rights and sole ownership of background intellectual property, as well as indemnification and insurance terms so that risk of injury or damages claims is appropriately allocated, guidelines for dispute resolution to address conflicts, and grounds for contract termination by each party.
We negotiate budgets and contracts with these third parties and may not be able to do so on favorable terms, which may result in delays to our development timelines and increased costs. We have relied heavily on these third parties for our preclinical studies and expect to continue to do so, and we control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing, and completion of these preclinical studies and clinical trials and the management of data developed through preclinical studies and clinical trials than would be the case if we were relying entirely upon our own staff. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal and regulatory requirements, and scientific standards and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for medical devices in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites.
If we or any of these third parties fail to comply with applicable GCP regulations, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA or other bodies may require us to perform additional clinical trials. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the GCP regulations. In addition, our investigational devices must be produced in accordance with cGMP requirements known as the QSR. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the marketing authorization process. Moreover, our business may be implicated if any of these third parties violates federal, state or foreign fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.
Third parties conducting or supporting portions of our clinical trials are not our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our investigational products. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other product development activities, which could affect their performance on our
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behalf. These third parties may not successfully carry out their contractual duties or obligations or meet expected deadlines. They may need to be replaced or the quality or accuracy of the clinical data they obtain may be compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons. Accordingly, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain marketing authorizations for or successfully commercialize our future devices.
Switching or adding third parties to conduct or support portions of our preclinical studies and clinical trials involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays may occur, which could have an adverse impact on our product development, results of operations, and prospects.
We rely on relationships with contracted physicians to provide remote EEG reading services to certain customers.
We contract directly or indirectly with physicians to provide remote EEG reading services to certain customers. If these physicians terminate their contracts, we or our partners may not be able to contract with alternative physicians to provide such services in a timely manner, or at all, which would impact our ability to provide services to certain customers and could adversely affect our business, financial condition, results of operations, and prospects.
Data Privacy Risk Factors
Actual or perceived failures to comply with applicable data privacy and security laws, regulations, standards and other requirements could adversely affect our business, financial condition, results of operations, and prospects.
The global data protection landscape is rapidly evolving, and we, and the third-party service providers on which we rely, are or may become subject to numerous state, federal, and foreign laws, requirements, and regulations, as well as contractual obligations and research protocols governing the collection, use, disclosure, retention, processing, maintenance, transfer, and security of personal information, such as information that we and our third-party service providers collect in connection with the use and development of the Ceribell System and the Clarity algorithm and in clinical trials or studies, including patient EEG data. Implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards, or perception of their requirements may have on our business. This evolution may create uncertainty in our business; affect us or our service providers’ and contractors’ ability to operate in certain jurisdictions or to collect, store, transfer, use, process, and share personal information; necessitate the acceptance of more onerous obligations in our contracts; result in liability; impose additional costs on us; necessitate changes to our information technologies, systems and practices and those of third parties that process personal information on our behalf; and may require us to change our business model.
In the United States, numerous state and federal laws, regulations, standards, and other legal obligations, including consumer protection laws and regulations, which govern the collection, dissemination, use, access to, confidentiality, security, transfer, disclosure, and processing of personal information, including health-related information, could apply to our operations or the operations of our customers. For example, HIPAA imposes privacy, security, and breach notification obligations on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates that perform certain services that involve creating, receiving, maintaining, or transmitting individually identifiable health information for or on behalf of such covered entities, and their covered subcontractors. Among other requirements, HIPAA requires business associates to develop and maintain policies with respect to the protection of, use and disclosure of protected health information (“PHI”), including the adoption of administrative, physical, and technical safeguards to protect such information, certain notification requirements in the event of a breach of unsecured PHI, and requirements to report breaches of unsecured PHI to covered entities within 60 days of discovery of the breach by the business associate or its agents. Depending on the facts and circumstances, we could be subject to significant civil, criminal, and administrative fines and penalties and/or additional reporting and oversight obligations if found to be in violation of HIPAA.
Certain states have also adopted comparable privacy and security laws and regulations, which govern the privacy, collection, use, processing, disclosure, and protection of health-related and other personal information. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers. For example, the California Consumer Privacy Act, as amended by the California Privacy Rights Act (collectively, the “CCPA”) requires covered businesses that process the personal information of California residents to, among other things: (i) provide certain disclosures to California residents regarding the business’s collection, use, and disclosure of their personal information; (ii) receive and respond to requests from California residents to access, delete, and correct their personal information, or to opt out of certain disclosures of their personal information; and (iii) enter into specific contractual provisions with service providers that process California resident personal information on the business’s behalf. Additional compliance investment and potential business process changes may also be required. Similar laws have been passed in other states and are continuing to be proposed at the state and federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.
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We may in the future become subject to rapidly evolving data protection laws, rules and regulations in foreign jurisdictions, many of which have developed privacy and data protection requirements that impose requirements that differ substantially from those that apply within the United States. For example, in Europe, the European Union General Data Protection Regulation (the “EU GDPR”) went into effect in May 2018 and governs the collection, use, disclosure, transfer, and other processing of personal data of individuals within the European Economic Area (the “EEA”) and imposes stringent requirements for data processors and controllers of such personal data or in the context of their activities within the EEA. Companies that must comply with the EU GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant undertaking, whichever is greater. In addition to fines, a breach of the EU GDPR may result in regulatory investigations, reputational damage, orders to cease/ change our data processing activities, enforcement notices, assessment notices (for a compulsory audit), and/or civil claims (including class actions). The processing of “special category personal data” (such as personal data related to health and genetic information), which could become relevant to our operations in the context of our conduct of clinical trials, may also impose heightened compliance burdens under European data protection laws and is of interest to relevant regulators. Among other requirements, the EU GDPR regulates transfers of personal data subject to the EU GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the EEA, and the United States remains uncertain. In addition, since early 2021, after the end of the transition period following the United Kingdom’s departure from the European Union, the EU GDPR continues to apply in substantially equivalent form in the context of the United Kingdom under the United Kingdom General Data Protection Regulation and Data Protection Act 2018, which imposes separate but similar obligations to those under the EU GDPR and comparable penalties, including fines of up to £17.5 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. As we expand into foreign countries and jurisdictions, we will become subject to additional laws and regulations that will affect how we conduct business, and we expect the existing legal complexity and uncertainty regarding international personal data transfers to continue. Our operations could suffer additional costs, complaints and regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
The Federal Trade Commission (the “FTC”) also has authority to initiate enforcement actions against entities that mislead customers about HIPAA compliance, make deceptive statements about privacy and data sharing in privacy policies, fail to limit third-party use of personal health information, fail to implement policies to protect personal health information, or engage in other unfair practices that harm customers or that may violate Section 5 of the FTC Act. Even when HIPAA does not apply, failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce under the FTC Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business and the cost of available tools to improve security and reduce vulnerabilities.
Although we work to comply with applicable laws, regulations and standards, our contractual obligations, research protocols, and other obligations, any actual or perceived failure by us or our employees, representatives, contractors, consultants, or other third parties to comply with such requirements or adequately address data privacy and security concerns, even if unfounded, could result in, among other adverse impacts, damage to our reputation, loss of customer confidence in our security measures, withdrawal or withholding of customer consent for using patient data, government investigations, and enforcement actions and litigation and claims by third parties, any of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We may face risks associated with our use and development of artificial intelligence and machine learning models.
We use and develop AI, machine learning and automated decision-making technologies, including proprietary AI and machine learning algorithms and models (collectively, “AI Technologies”), throughout our business, and are making significant investments in this area. For example, we use AI Technologies to power our Clarity algorithm and drive continuous improvements in the performance of the Ceribell System. New products that we develop, including expansion into new indications, are also likely to incorporate AI Technologies.
We expect that increased investment will be required in the future to continuously improve our use and development of AI Technologies. As with many technological innovations, there are significant risks involved in developing, maintaining, and deploying these technologies and there can be no assurance that the usage of or our investments in such technologies will always enhance our products or be beneficial to our business, including our efficiency or results of operations.
In particular, if the models underlying our AI Technologies are: incorrectly designed or implemented; trained or reliant on incomplete, inadequate, inaccurate, biased, or otherwise poor quality data, or on data to which we do not have sufficient rights or in relation to which we and/or the providers of such data have not implemented sufficient legal compliance measures; used without sufficient oversight and governance to ensure their responsible use; misused or used outside of scope of applicable regulatory authorizations; and/or adversely impacted by unforeseen defects, technical challenges, cybersecurity threats, or material performance issues, the performance of our products and business, as well as our reputation and the reputations of our customers, could suffer or we
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could incur liability resulting from the violation of laws or contracts to which we are a party, regulatory enforcement actions, or civil claims.
For the Clarity algorithm, as well as for any potential future AI Technology driven products, performance of the algorithm is generally assessed by comparing the output of the algorithm against a clinically derived reference standard (“ground truth”) for a specified dataset. This applies to internal evaluation of an algorithm’s performance, supporting external presentations and publications, and testing to support regulatory submissions. The Clarity algorithm output will not always agree with the opinion of a qualified neurologist, and in some cases multiple qualified neurologists will not agree with each other. While we constantly work to improve our product and algorithm, the AI Technologies we work with are novel and complex, and we cannot assure you that our AI Technologies will be able to perform as intended under all circumstances.
For example, an earlier version of the Clarity algorithm was found to be unable to detect seizure or status epilepticus in certain ICU patients who had cardiac arrest. Further, the data that we use to train our AI Technologies includes data collected from EEGs performed on patients by our customers, and we are dependent upon our ability to obtain the right to use such patient data to continue to develop our products, including within appropriate time frames and on commercially reasonable terms. If we are unable to obtain sufficient rights to use such data under applicable regulatory frameworks or our agreements with our customers, or our customers were to withdraw or withhold their data from us, our ability to continue to develop our products and services to our customers, and our revenue prospects, could be materially adversely impacted.
The regulatory framework for AI Technologies is rapidly evolving as many federal, state and foreign government bodies and agencies have introduced or are currently considering additional laws and regulations. The FDA has issued guidance documents relating to the incorporation of AI Technologies into medical devices. In addition, existing laws and regulations may be interpreted in ways that would affect the operation of our AI Technologies. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards, or market perception of their requirements may have on our business and may not always be able to anticipate how to respond to these laws or regulations.
Certain existing legal regimes (e.g., relating to FDA submissions or data privacy) regulate certain aspects of AI Technologies, and new laws regulating AI Technologies are expected to enter into force in the United States in 2024. In the United States, the Biden administration issued a broad Executive Order on the Safe, Secure and Trustworthy Development and Use of Artificial Intelligence (the “2023 AI Order”), which sets out principles intended to guide AI design and deployment for the public and private sector and signals the increase in governmental involvement and regulation over AI Technologies. The 2023 AI Order established certain new requirements for the training, testing, and cybersecurity of sophisticated AI models and large-scale compute centers used to train AI models. The 2023 AI Order also instructed several other federal agencies to promulgate additional regulations within specific timeframes from the date of the 2023 AI Order regarding the use and development of AI Technologies. Agencies such as the Department of Commerce and the FTC have issued proposed rules governing the use and development of AI Technologies. Legislation related to AI Technologies has also been introduced at the federal level and is advancing at the state level. For example, the California Privacy Protection Agency is currently in the process of finalizing regulations under the CCPA regarding the use of automated decision-making. Such additional regulations may impact our ability to develop, use, and commercialize AI Technologies in the future.
It is possible that further new laws and regulations will be adopted in the United States and in other non-U.S. jurisdictions, or that existing laws and regulations, including competition and antitrust laws, may be interpreted in ways that would limit our ability to use AI Technologies for our business, or require us to change the way we use AI Technologies in a manner that negatively affects the performance of our system and business and the way in which we use AI Technologies. We may need to expend resources to adjust our system in certain jurisdictions if the laws, regulations, or decisions are not consistent across jurisdictions. Further, the cost to comply with such laws, regulations or decisions and/or guidance interpreting existing laws, could be significant and would increase our operating expenses (such as by imposing additional reporting obligations regarding our use of AI Technologies). Such an increase in operating expenses, as well as any actual or perceived failure to comply with such laws and regulations, could materially and adversely affect our business, financial condition, results of operations, and prospects.
Our business and operations may suffer in the event of information technology system failures, cyberattacks, or deficiencies in our cybersecurity.
We collect and maintain information in digital form that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store, transmit, and process large amounts of confidential information, including intellectual property, proprietary business information, preclinical and clinical trial data, and personal information of clinical trial participants, patients of our customers, and our employees and contractors (confidentially, “Confidential Information”). We may also share Confidential Information with our partners or other third parties in conjunction with our business. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such Confidential Information.
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Our information technology systems and those of our customers, third-party service providers, manufacturers, and other contractors or consultants are vulnerable to attack, damage and interruption from computer viruses and malware (e.g. ransomware), misconfigurations, “bugs” or other vulnerabilities, malicious code, natural disasters, terrorism, war, telecommunication and electrical failures, hacking, cyberattacks, phishing attacks and other social engineering schemes, employee theft or misuse, human error, unauthorized access, fraud, denial or degradation of service attacks, and sophisticated nation-state and nation-state-supported actors. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to our confidential information. There can also be no assurance that our and our customers’, third-party service providers’, contractors’, and consultants’ cybersecurity risk management programs and processes, including policies, controls, or procedures, will be fully implemented, complied with or effective in protecting our systems, networks, and Confidential Information.
Attacks upon information technology systems are increasing in their frequency, levels of persistence, sophistication, and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives and expertise. Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Even if identified, we may be unable to adequately investigate or remediate incidents or breaches due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.
We and certain of our customers and service providers may be subject to cyberattacks and security incidents from time to time. While we do not believe that we have experienced any significant system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss, corruption or unauthorized disclosure or misappropriation of our trade secrets, personal information, patient data collected from our customers or other Confidential Information or other similar disruptions. It could also expose us to risks, including an inability to provide our services and fulfill contractual demands, and could cause management distraction and the obligation to devote significant financial and other resources to mitigate such problems, which would increase our future information security costs, including through organizational changes, deploying additional personnel, reinforcing administrative, physical and technical safeguards, further training of employees, changing third-party vendor control practices, and engaging third-party subject matter experts and consultants and reduce the demand for our technology and services. If a security breach or other incident were to result in the unauthorized access to or unauthorized use, disclosure, release, or other processing of personal information, including the patient data of our customers, it may be necessary to notify individuals, governmental authorities, supervisory bodies, the media, and other parties pursuant to privacy and security laws and the costs associated with the investigation, remediation, and potential notification of the breach to third-parties and data subjects could be material.
Any adverse impact to the availability, integrity, or confidentiality of our or third-party information technology systems or Confidential Information, whether actual or perceived, could result in liability, legal claims, or proceedings (such as class actions), regulatory investigations and enforcement actions, fines, and penalties, negative reputational impacts that cause us to lose existing or future customers, and/or significant incident response, system restoration or remediation, and future compliance costs, any of which could materially and adversely affect our business, financial condition, results of operations, and prospects.
Our existing general liability and cyber liability insurance policies may not cover, or may cover only a portion of, any potential claims related to security breaches to which we are exposed or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. We also cannot be certain that our existing insurance coverage will continue to be available on acceptable terms or in amounts sufficient to cover the potentially significant losses that may result from a security incident or breach or that the insurer will not deny coverage of any future claim. Accordingly, if our cybersecurity measures, and those of our customers and service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks), and the mishandling of data, then our reputation, business, financial condition, results of operations, and prospects could be materially and adversely affected.
Risks Related to Our Intellectual Property
Our success will depend on our and our licensors’ ability to obtain, maintain, enforce, and protect our intellectual property rights.
Our success and ability to compete depends in part on our and our licensors’ ability to obtain, maintain, enforce, and protect issued patents, trademarks, trade secrets, and other intellectual property rights and proprietary technology in the United States and elsewhere. If we cannot adequately obtain, maintain, and enforce our intellectual property rights and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired in the marketplace and erode or negate any competitive advantage we may have and our ability to compete, which could harm our business and ability to achieve profitability and/or cause us to incur significant expenses. We generally seek to protect our proprietary position by filing patent applications that are important to our business. We also seek to protect our proprietary position by acquiring or in-licensing relevant issued patents or pending patent applications or other intellectual property or proprietary rights from third parties. If we are unable to obtain or maintain patent protection with respect to any proprietary technology, our business, financial condition, results of operations, and prospects could be materially harmed.
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We rely on a combination of contractual provisions, confidentiality procedures, and patent, trademark, copyright, trade secret and other intellectual property laws to protect the proprietary aspects of the Ceribell System, brand, technologies, trade secrets, know-how, and data. These legal measures afford only limited protection, and competitors or others may gain access to or use our intellectual property rights and proprietary information. In addition, patents have a limited lifespan. In the United States, for example, the natural expiration of a utility patent is generally 20 years from the earliest effective non-provisional filing date. Our success will depend, in part, on preserving our trade secrets, maintaining the security of our data and know-how, and obtaining, maintaining, and enforcing other intellectual property rights. We may not be able to obtain, maintain, and/or enforce our intellectual property or other proprietary rights necessary to our business or in a form that provides us with a competitive advantage.
The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, enforce, defend, or license all necessary or desirable patents or patent applications at a reasonable cost or in a timely manner, or in all jurisdictions. Moreover, pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless, and until, patents issue from such applications, and then only to the extent the issued claims cover relevant product, service, or the technology. There can be no assurance that our current or future patent applications will result in patents being issued or that our issued patents will afford sufficient protection against competitors or other third parties with similar products, services or technologies competitive with ours, nor can there be any assurance that the patents issued will not be infringed, designed around, or invalidated by third parties.
Even issued patents may later be found invalid or unenforceable or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of future protection for our and our licensors’ intellectual property or other proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive advantage. These uncertainties and/or limitations in our ability to properly protect the intellectual property or other proprietary rights relating to our products, services and technologies could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We cannot be certain that the claims in our U.S. pending patent applications, corresponding international patent applications and patent applications in certain foreign territories, or those of our licensors, will be considered patentable by the U.S. Patent and Trademark Office (the “USPTO”) courts in the United States or by the patent offices and courts in foreign countries, nor can we be certain that the claims in our future issued patents will not be found invalid or unenforceable if challenged. Our ability to obtain and maintain valid and enforceable patents depends in part on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Additionally, regardless of when filed, we may fail to identify relevant third-party patents or patent applications, or we may incorrectly conclude that a third-party patent is invalid or not infringed by our products, services, technologies, or activities. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in any of our owned or in-licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.
Failure to obtain, maintain, and/or enforce intellectual property rights necessary to our business and failure to protect, monitor and control the use of our intellectual property rights could negatively impact our ability to compete and cause us to incur significant expenses. The intellectual property laws and other statutory and contractual arrangements in the United States and other jurisdictions we depend upon may not provide sufficient protection in the future to prevent the infringement, use, violation or misappropriation of our patents, trademarks, data, technology, and other intellectual property rights by others, and may not provide an adequate remedy if our intellectual property rights are infringed, misappropriated, or otherwise violated by others.
The degree of future protection for our intellectual property rights is uncertain, and we cannot ensure that:
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If we fail to identify our patentable inventions or adequately protect our patent rights, the commercial value of our products, services or technologies may be adversely affected and our competitive position may be harmed.
We rely in part on our portfolio of issued patents and pending patent applications in the United States and other countries to protect our intellectual property and competitive position. However, it is also possible that we may fail to identify patentable aspects of inventions made in the course of the development, manufacture, and commercial activities conducted by or on behalf of us before it is too late to obtain patent protection on such inventions. If we fail to timely file for patent protection in any jurisdiction, we may be precluded from doing so at a later date. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, outside scientific collaborators, suppliers, consultants, advisors, and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, should we become a licensee of a third party’s patents or patent applications, depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing, and prosecution of patent applications, or to maintain or enforce the patents, covering technology in-licensed from third parties. Therefore, these patents and patent applications may not be prosecuted, maintained, and/or enforced in a manner consistent with the best interests of our business. While we generally apply for patents in those countries where we intend to make, have made, use, import, offer for sale, or sell our products or services or otherwise practice our technology, we may not accurately predict all of the countries where patent protection will ultimately be desirable. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from importing, using, manufacturing, and/or commercializing our own products or services, or otherwise practicing our own technology. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
The patent positions of companies, including our patent position, may involve complex legal and factual questions that have been the subject of much litigation in recent years, and, therefore, the scope of any patent claims that we have or may obtain cannot be predicted with certainty. Accordingly, we cannot provide any assurances about which of our patent applications will issue, the breadth of any resulting patent, whether any of the issued patents will be found to be infringed, invalid, or unenforceable or will be threatened or challenged by third parties, that any of our issued patents have, or that any of our currently pending or future patent applications that mature into issued patents will include, claims with a scope sufficient to protect our products, services, or technology. Our pending and future patent applications may not result in the issuance of patents or, if issued, may not issue in a form that will be advantageous to us. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. We cannot offer any assurances that the breadth of our issued patents will be sufficient to stop a competitor from developing, manufacturing, and commercializing one or more products, services, or technologies in a non-infringing manner that would be competitive with one or more of our products, services, or technologies, or otherwise provide us with any competitive advantage. Furthermore, any successful challenge to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for our commercial success. Further, there can be no assurance that we will have adequate resources to enforce our patents.
Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products or services. Patents, if issued, may be challenged, deemed unenforceable, invalidated, narrowed, or circumvented. Proceedings challenging our patents or patent applications could result in either loss of the patent, or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. Any successful challenge to our patents and patent applications could deprive us of exclusive rights necessary for our commercial success. In addition, defending such challenges in such proceedings may be costly. Thus, any patents that we own or in-license may not provide the anticipated level of, or any, protection against
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competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us, which in turn could affect our ability to develop, manufacture, commercialize, import, or otherwise use our products, services, or technologies.
Some of our patents and patent applications are and, may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third- party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products, services, or technologies. In addition, we may need the cooperation of any such co-owners of our patents to enforce such patents against third parties, and such cooperation may not be provided to us.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
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, renewal fees, annuity fees, and various other government fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent and/or applications and any patent rights we may obtain in the future. While an unintentional lapse of a patent or patent application 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 non-compliance 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 or our patent licensors fail to maintain the patents and patent applications that we in-license, we may not be able to stop a competitor from marketing products, services, or technologies that are the same as or similar to our products, services, or technologies, which would have a material adverse effect on our business, financial condition, results of operations, and prospects.
Changes in U.S. or foreign patent laws or their interpretations could diminish the value of our patents in general, thereby impairing our ability to protect our current and future products, services, or technologies, and could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our current or future patents.
Our ability to obtain patents and the breadth of any patents obtained is uncertain in part because, to date, some legal principles remain unresolved, and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and other countries. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property rights or narrow the scope of our patent protection, which in turn could diminish the commercial value of our products, services, and technologies.
Patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations.
In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we own or that we might obtain or license in the future. An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect our business, financial condition, results of operations, and prospects.
Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. Changes in patent laws and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them, or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or may obtain in the future. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. In addition, any protection afforded by foreign patents may be more limited than that provided under U.S. patent and intellectual property laws. We may encounter significant problems in enforcing and defending our intellectual property both in the United States and abroad. For example, if the issuance in a given country of a patent covering an invention is not followed by the issuance in other countries of patents covering the same invention, or if any judicial interpretation of the validity, enforceability or scope of the claims or the written description or enablement in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in other countries,
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our ability to protect our intellectual property rights in those countries may be limited. We cannot predict future changes in the interpretation of patent laws in the United States and other countries or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.
In June 2023, the European Unitary Patent system and the European Unified Patent Court (“UPC”) were launched. European patent applications now have the option, upon grant of a patent, of becoming a Unitary Patent which is subject to the jurisdiction of the UPC. In addition, conventional European patents, both already granted at the time the new system began and granted thereafter, are subject to the jurisdiction of the UPC, unless actively opted out. This was a significant change in European patent practice, and deciding whether to opt-in or opt-out of Unitary Patent practice entail strategic and cost considerations. The UPC provides third parties with a new forum to centrally revoke our European patents and makes it possible for a third party to obtain pan-European injunctions against us. It will be several years before we will understand the scope of patent rights that will be recognized and the strength of patent remedies that will be provided by the UPC. While we have the right to opt our patents out of the UPC over the first seven years of the court’s existence, doing so may preclude us from realizing the benefits of the UPC. Moreover, the decision whether to opt-in or opt-out of Unitary Patent status will require coordinating with co-applicants, if any, adding complexity to any such decision.
The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. For example, through its “Annual Special 301 Report on Intellectual Property,” the Office of the United States Trade Representative has been reporting on the adequacy and effectiveness of intellectual property protection in a number of foreign countries that are U.S. trading partners and their protection and enforcement of intellectual property rights. Placement of a country on the Priority Watch List indicates that particular problems exist in that country with respect to intellectual property protection, enforcement, or market access for persons relying on intellectual property rights. Countries placed on the Priority Watch List are the focus of increased bilateral attention concerning the specific problem areas. It is possible that we will not be able to enforce our intellectual property rights against third parties that misappropriate our proprietary technology in those countries.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending patents on our products, services, and technologies in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. The requirements for patentability may differ in certain countries, particularly in developing countries. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third-parties from practicing our inventions in all countries outside the United States or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products, services, or technologies and, further, may export otherwise infringing products, services, or technologies to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products, services, or technologies may compete with our products, services, or technologies, and our patents or other intellectual property rights may not be effective or sufficient to prevent such competition.
Various companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries may not favor the enforcement of patents and other intellectual property protection, particularly those relating to medical devices and related services and technologies, which could make it difficult for us to stop the infringement of our patents or marketing of competing products, services, and technologies in violation of our intellectual property and proprietary rights. In addition, some jurisdictions, such as Europe, Japan, and China, may have a higher standard for patentability than in the United States, including, for example, imposing a high standard for making claim amendments and for the submission of supplemental experimental data during patent examination. Under those heightened patentability requirements, we may not be able to obtain sufficient patent protection in certain jurisdictions even though the same or similar patent protection can be secured in the United States and other jurisdictions.
Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patent rights at risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. Various countries outside the United States, including certain countries in Europe, India, and China, have compulsory licensing laws under which a patent
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owner may be compelled to grant licenses to third parties. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected. In addition, many countries limit the enforceability of patents against government agencies or government contractors. As a result, a patent owner in such countries may have limited remedies in certain circumstances, which could materially diminish the value of such patent. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Further, the standards applied by the USPTO and foreign patent offices in granting patents are not always applied predictably. As such, we do not know the degree of world-wide uniform protection that we will have on our technologies and products in the future.
If we cannot successfully enforce our intellectual property rights, the commercial value of our products, services, or technologies may be adversely affected and our competitive position may be harmed.
Third parties, including our competitors, may currently, or in the future, infringe, misappropriate, or otherwise violate our issued patents or other intellectual property rights, and we may file lawsuits or initiate other proceedings to protect or enforce our patents or other intellectual property rights, which could be expensive, time-consuming, and unsuccessful. We regularly monitor for unauthorized use of our intellectual property rights and, from time to time, analyze whether to seek to enforce our rights against potential infringement, misappropriation, or violation of our intellectual property rights. However, the steps we have taken, and are taking, to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation, or violation of our intellectual property rights. In certain circumstances it may not be practicable or cost-effective for us to enforce our intellectual property rights fully, particularly in certain developing countries or where the initiation of a claim might harm our business relationships. We may also be hindered or prevented from enforcing our rights with respect to a government entity or instrumentality because of the doctrine of sovereign immunity. Our ability to enforce our patent or other intellectual property rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components or methods that are used in connection with their products, services, or technologies. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product, services, or technologies. Thus, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our products, services, and technologies. We may in the future become involved in lawsuits to protect or enforce our intellectual property rights. An adverse result in any litigation proceeding could harm our business. In any lawsuit we bring to enforce our intellectual property rights, a court may refuse to stop the other party from manufacturing, commercializing, using or importing the product, service, offering or technology at issue on grounds that our intellectual property rights do not cover, and the other party is not infringing, violating or otherwise misappropriating our intellectual property, through the manufacture, commercialization, use or importation of the product, service, offering or technology in question. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe, misappropriate, or otherwise violate their intellectual property rights. If we initiate legal proceedings against a third party to enforce a patent covering a product, service, offering or technology, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of patentable subject matter, novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from USPTO, or made a misleading statement, during prosecution. Mechanisms for such challenges include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). In a patent or other intellectual property proceeding, a court may decide that a patent or other intellectual property right of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims or other intellectual property narrowly or refuse to stop the other party from manufacturing, commercializing, using or importing the product, service, offering, or technology at issue on the grounds that our patents or other intellectual property do not cover the manufacture, commercialization, use, or importation of the product, service, offering, or technology in question. Furthermore, even if our patents or other intellectual property rights are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages and/or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market. An adverse result in any litigation or administrative proceeding could put one or more of our patents or other intellectual property rights at risk of being invalidated or interpreted narrowly, which could adversely affect our competitive business, financial condition, results of operations and prospects. Moreover, even if we are successful in any litigation, we may incur significant expense in connection with such proceedings, and the amount of any monetary damages may be inadequate to compensate us for damage as a result of the infringement and the proceedings.
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We may become a party to intellectual property litigation or administrative proceedings that could be expensive, time-consuming, and unsuccessful, and could interfere with our ability to develop, manufacture, commercialize, import, or otherwise use our products, services, or technologies.
Our commercial success depends, in part, on our ability to develop, manufacture, commercialize, import, or use our products, services, and technologies without infringing, misappropriating, or otherwise violating the intellectual property rights of third parties. Our industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. While we take steps to ensure that we do not infringe upon, misappropriate, or otherwise violate the intellectual property rights of others, there may be other more pertinent rights of which we are presently unaware.
Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights. The outcomes of such proceedings are uncertain and could have a negative impact on the success of our business. It is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be alleged to cover our products, services, and technologies, or that we may be accused of misappropriating third parties’ trade secrets or infringing third parties’ trademarks. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products, services, or technologies, including interference proceedings, post grant review, and inter partes review before the USPTO or equivalent foreign regulatory authority. Furthermore, we may also become involved in other proceedings, such as reexamination, derivation, or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. Because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents, which our current or future products, services, or technologies infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid and enforceable, and infringed by the use of our products, services, or technologies, which could have a negative impact on the commercial success of our current and any future products, services, or technologies. If we were to challenge the validity of any such third-party U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. We will have similar burdens to overcome in foreign courts in order to successfully challenge a third-party claim of patent infringement.
Our defense of any litigation or interference proceedings may fail and, even if successful, defending such claims brought against us would cause us to incur substantial expenses and distract our management and other employees. If such claims are successfully asserted against us, we could be forced to pay substantial damages. Further, if a patent infringement or other intellectual property rights-related lawsuit were brought against us, we could be forced, including by court order, to cease developing, manufacturing, commercializing, importing, or using the infringing product, service, or technology. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Although patent, trademark, trade secret, and other intellectual property disputes have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may not be able to obtain licenses on commercially reasonable terms or at all, in which event our business would be materially and adversely affected. Even if we were able to obtain a license, the rights may be non-exclusive, which could result in our competitors and other third parties gaining access to the same intellectual property. Ultimately, if we are unable to obtain such licenses or make any necessary changes to our products, services, or technologies, we could be forced to cease some aspect of our business operations, which could harm our business significantly.
A finding of infringement or an unfavorable interference or derivation proceedings outcome could prevent us from developing, manufacturing, commercializing, importing, or using our products, services, or technologies, or force us to cease some or all of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations, and prospects. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources and more mature and developed intellectual property portfolios. We could encounter delays in product introductions while we attempt to develop alternative products or technologies.
If third parties assert infringement, misappropriation, or other claims against our customers, these claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain
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licenses for the products, services, or technologies they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products, services, or technologies.
Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit, or otherwise interfere with our ability to make, use, sell, import, and/or export our products, services, or technologies. As the number of competitors in our market grows and the number of patents issued in this area increases, the possibility of patent infringement claims against us may increase. Moreover, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” purchase patents, and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products, services, or technologies and business operations infringe, misappropriate, or otherwise violate the intellectual property rights of others. These matters can be time-consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses or make substantial payments. In addition, we purchase product components, including hardware and software, from suppliers, and the design of these components may be outside of our direct control. These suppliers may not indemnify us in the event that a third party alleges the use of such components infringes its intellectual property rights.
Any lawsuits relating to intellectual property rights could subject us to significant liability for damages and invalidate our intellectual property. Any potential intellectual property litigation also could force us to do one or more of the following:
Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review, and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings). Such proceedings could result in revocation of or amendment to our patents in such a way that they no longer cover our products, services, or technologies. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose at least part, and perhaps all, of the patent protection on our products, services, or technologies. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects.
Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearing, motions, or other interim developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Even if we ultimately prevail, a court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may not be an adequate remedy. Furthermore, even if resolved in our favor, the monetary cost of such litigation and the diversion of the attention of our management could outweigh any benefit we receive as a result of the proceedings. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business. Any of the foregoing may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our core business, and harm our reputation.
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We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property rights.
We may also be subject to claims that our current or former employees, contractors, or other third parties have an ownership interest in our current or future patents, patent applications, or other intellectual property rights, including as an inventor or co-inventor. We may be subject to ownership or inventorship disputes in the future arising, for example, from conflicting obligations of employees, consultants, or others who were or are involved in developing our products, services, or technologies. Although it is our policy to require our employees and contractors who may be involved in the conception or development of inventions to execute agreements assigning such inventions and intellectual property rights therein to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops inventions that we regard as our own, and we cannot be certain that our agreements with such parties will be upheld in the face of a potential challenge, or that they will not be breached, for which we may not have an adequate remedy. The assignment of inventions may not be self-executing, or the assignment agreements may be breached, and litigation may be necessary to defend against these and other claims challenging inventorship or ownership of inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or the right to use, valuable intellectual property rights, and other owners may be able to license their interest in such intellectual property rights to other third parties, including our competitors. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
In addition, we may be subject to claims from third parties challenging inventorship or ownership of intellectual property rights we regard as our own, based on claims that our agreements with employees or consultants obligating them to assign their inventions and intellectual property rights therein to us are ineffective or in conflict with prior or competing contractual obligations to assign inventions and intellectual property rights therein to another employer, to a former employer, or to another person or entity. Many of our current and former employees and consultants were previously employed at or engaged by other medical device companies, including our competitors or potential competitors. Some of these employees and consultants have executed with such previous employment or engagements confidential information non-disclosure and non-use agreements and inventions assignment agreements, which may have included non-competition provisions. Although we try to ensure that such employees and consultants do not use or otherwise disclose confidential information or intellectual property rights of others in their work for us without such other person’s consent, we may be subject to claims that we or our current or former employees or consultants have, inadvertently or otherwise, infringed, violated, or otherwise misappropriated the confidential information or the intellectual property rights of these former employers, clients, or other third parties. To the extent that our current or former employees or consultants disclose or use confidential information or intellectual property rights owned by others in their work for us, disputes may arise as to the rights in any related or resulting inventions and litigation may be necessary to defend against these claims. It may also be necessary or we may desire to obtain a license to such third party’s intellectual property rights to settle any such claim; however, there can be no assurance that we would be able to obtain such license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages or a settlement payment, a court could prohibit us from manufacturing, commercializing, using or importing the product, service, or technology features or practicing other intellectual property rights that are essential to our business, which could have a material adverse effect on our competitive position as well as our business, financial condition, results of operations, and prospects. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management and our employees. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with collaborators, partners, services provides, or contractors. A loss of key personnel or their work product could hamper or prevent our ability to develop, manufacture, commercialize, import, or use our products, services, or technologies, which could materially and adversely affect our business, financial condition, results of operations, and prospects.
We depend on certain intellectual property rights that are licensed to us. We may be unsuccessful in licensing or acquiring intellectual property rights from third parties that may be necessary to develop, manufacture, commercialize, import, or use our current and/or future products, services, or technologies.
The “brain stethoscope” EEG sonification technology, which processes data and turns it into sound, that is used in the Ceribell System is protected by intellectual property rights that we in-license from Stanford University. See the section titled “Business—Stanford Agreement.” Our rights to use such intellectual property rights in our business are subject to the continuation of and our compliance with the terms of the license agreements between us and each of our licensors. In addition, the agreements under which we in-license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property that we have in-licensed, or in-license in the future, prevent, or impair our ability to maintain our licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Despite our best efforts, our current or future licensors might conclude that we materially breached our license agreements and might therefore terminate the license agreements, thereby removing our ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated, this could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.
A third party may hold intellectual property rights, including patent rights, that are important or necessary to the development, manufacture, commercialization, import or use of our current and/or future products, services, or technologies, in which case we would need to acquire or obtain a license to such intellectual property rights from such third party. A third party that perceives us to be a competitor may be unwilling to license or assign its intellectual property rights to us. In addition, the licensing or acquisition of third-party intellectual property rights is a competitive area, and other companies may also pursue similar strategies to license or acquire such third party’s intellectual property rights. Some of these companies may have a competitive advantage over us due to their size, capital resources and greater development, manufacturing, and commercialization capabilities. We also may be unable to license or acquire third party intellectual property rights on commercially reasonable terms that would allow us to make an appropriate return on our investment, or we may be unable to obtain any such license or acquisition at all. If we are unable to successfully license or acquire necessary third-party intellectual property rights, we may not be able to develop, manufacture, commercialize, import, or use our current and/or future products, services, or technologies, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
If we are unable to protect the disclosure and use of our confidential information and trade secrets, the value of our products, services, and technologies and our business and competitive position could be harmed.
In addition to patent protection, we also rely on other intellectual property rights, including trade secrets, know-how, and/or other proprietary information that is not patentable or that we elect not to patent. However, trade secrets can be difficult to protect, and some courts are less willing or unwilling to protect trade secrets. To protect and maintain the confidentiality of our trade secrets and other proprietary information, we rely heavily on confidentiality provisions that we have in contracts with our employees, consultants, collaborators, and other third parties. We generally enter into confidentiality and inventions assignment agreements with our employees, consultants, and applicable third parties upon their commencement of a relationship with us. However, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes, and we may not enter into such agreements with all employees, consultants, and third parties who have been involved in the development of our inventions. Although we generally require all of our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed, and any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets.
In addition, despite the protections we place on our intellectual property and our other proprietary rights, monitoring unauthorized use and disclosure by employees, consultants, and other third parties who have access to such intellectual property or other proprietary rights is difficult, and we do not know whether the steps we have taken to protect our intellectual property or other proprietary rights will be adequate. Therefore, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by such employees, consultants, advisors, or third parties, despite the existence of our protections, including non-disclosure and use restrictions. These agreements may not provide meaningful protection against the unauthorized disclosure or use or of our trade secrets, know-how, or other proprietary information in the event the unwanted use is outside the scope of the provisions of the contracts or in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how or other proprietary information that we fail to detect. There can be no assurances that such employees, consultants, advisors, or third parties will not intentionally or unintentionally breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by third parties, including our competitors. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that information to compete with us. In addition to contractual measures, we try to protect the confidential nature of our proprietary information by maintaining physical security of our premises and electronic security of our information technology systems. Such security measures may not, for example, in the case of misappropriation of a trade secret by an employee, consultant or other third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee, consultant, or other third party from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully.
If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition, results of operations, and prospects. In particular, a failure to protect our proprietary rights may allow competitors to copy our products, services, or technologies, which could adversely affect our pricing and market share. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products, services, or technologies that we consider proprietary. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade
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secret rights and related confidentiality, non-disclosure, and non-use provisions, and outcomes of such litigation are unpredictable. Enforcing a claim that a party illegally disclosed, used or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. While we use commonly accepted security measures, trade secret violations are often a combination of federal and state law in the United States, and the criteria for protection of trade secrets can vary among different jurisdictions. If the steps we have taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, some courts are less willing or unwilling to protect trade secrets and agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases. Finally, even if we were to be successful on the enforcement of our claims, we may not be able to obtain adequate remedies.
It is also possible that others may independently develop information or technologies that are the same as or similar to our trade secrets or other proprietary technologies and develop products, services, or technologies without obtaining access to our trade secrets or other proprietary information in which case we could not assert any intellectual property rights, including trade secret rights, against such parties in a manner that could prevent legal recourse by us. If we fail to obtain or maintain trade secret protection, or if any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or used by others without our consent or otherwise misappropriated, or if any such information was independently developed by a competitor, or if our competitors obtain our trade secrets or independently develop products, services, or technologies that are the same as or similar to ours, our competitive market position could be materially and adversely harmed.
If our trademarks and trade names are not adequately protected, we may not be able to build brand name recognition in our markets of interest and our competitive position may be harmed.
Our trademarks could be challenged, opposed, invalidated, infringed, and circumvented by third parties, and our trademarks could also be diluted, declared generic or descriptive, or found to be infringing on other marks. If any of the foregoing occurs, we could be forced to re-brand our company, products, services, or technologies, resulting in loss of brand recognition and requiring us to devote resources to advertising and marketing new brands, and suffer other competitive harm. Third parties may also adopt trademarks similar to ours, which could harm our brand identity and lead to market confusion. Further, there can be no assurance that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Certain of our current or future trademarks may become so well known by the public that their use becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.
We rely on our trademarks, trade names, and brand names, such as our Clarity mark, to distinguish our products, services, and technologies from the products, services, and technologies of our competitors, and have registered or applied to register many of these trademarks in the United States and certain countries outside the United States; however, we have not yet registered all of our trademarks in all of our current and potential markets. There can be no assurance that all of our trademark applications will be approved for registration. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and comparable agencies in many foreign jurisdictions, third parties have opposed and may oppose in the future further our trademark applications and may seek to cancel trademark registrations or otherwise challenge our use of the trademarks. Opposition or cancellation proceedings may be filed against our trademark filings in these agencies, and such filings may not survive such proceedings. While we may be able to continue the use of our trademarks in the event registration is not available, particularly in the United States, where trademark rights are acquired based on use and not registration, third parties may be able to enjoin the continued use of our trademarks if such parties are able to successfully claim infringement in court. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. Our trademarks or trade names may be infringed, circumvented, declared generic, or determined to be violating or infringing on other marks.
Our products contain third-party open source software components and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products, affect our ability to protect our proprietary information, and subject us to possible litigation.
Our products contain software tools licensed by third parties under open source software licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source software licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source software licenses contain requirements that the licensee make its source code publicly available if the licensee creates modifications or derivative works using such open source software, depending on the type of open source software the licensee uses and how the licensee uses it. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source software licenses, be required to make available the source code of certain of our proprietary software to the public for free. This could allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales and revenue. In addition, some companies that use third-party open source software have faced claims challenging their use of such open
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source software and their compliance with the terms of the applicable open source license. We may be subject to suits by third parties claiming ownership of what we believe to be open source software or claiming non-compliance with the applicable open source licensing terms. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise or attempt to compromise our technology platform and systems.
Although we typically review our use of open source software to avoid subjecting our products, services or technology to conditions we do not intend, the terms of many open source software licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products, services or technology. Moreover, our processes for monitoring and controlling our use of open source software in our products, services or technology may not be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our solutions on terms that are not economically feasible, to re-engineer our products, services, or technology, to discontinue the sale of our products, services, or technology if re-engineering could not be accomplished on a timely basis, to pay statutory or other damages to the license holder, or to make generally available, in source code form, our proprietary code, any of which could materially adversely affect our business, financial condition, results of operations, and prospects.
We are subject to certain manufacturing restrictions related to licensed intellectual property rights that were developed with the financial assistance of United States government grants.
Under the Bayh-Dole Act, the federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” in inventions produced with its financial assistance (“Government Funded Inventions”) for its own benefit. The Bayh-Dole Act provides federal agencies with march-in rights (“March-In Rights”), which allows a government agency, in specified circumstances, to require the patent owner or successors in title to the patent directed to such Government Funded Inventions (“Patent Owner”) to grant a “nonexclusive, partially exclusive or exclusive license” to a “responsible applicant or applicants,” which if exercised, would allow such government agency to require such Patent Owner to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a third-party designated by such agency. The Bayh-Dole Act also provides that the Patent Owner manufacture products embodying the respective Government Funded Inventions domestically in accordance with certain requirements. If this domestic manufacturing requirement is not met, the government agency that funded the relevant grant is entitled to exercise March-In Rights. We are subject to the Bayh-Dole Act with respect to licensed technology that was developed with United States government grants. Such licensed technology is used in our recorders. Further, we cannot be sure that if we acquire intellectual property rights in the future they will be free from government rights or regulations pursuant to the Bayh-Dole Act.
If we own, co-own, or in-license Government Funded Inventions that are critical to our business, our ability to enforce or otherwise exploit patents covering such technology may be adversely affected. Further, the exercise of March-In Rights, the requirement that we grant additional licenses to third parties, or the termination of our license of the relevant technologies could materially adversely affect our business, financial condition, results of operations and prospects. The restrictions of the Bayh-Dole Act may also limit our ability to manufacture our products in locations where it may be otherwise more favorable for us to do so, which could limit our ability to respond to competitive developments or otherwise adversely affect our results of operations. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Risks Relating to Financial and Accounting Matters
Our ability to use our net operating loss carryforwards and other tax attributes may be limited due to certain provisions of the Internal Revenue Code or state tax law.
We have incurred substantial losses during our history and may never achieve profitability. U.S. federal net operating loss carryforwards (“NOLs”) we generated in tax years through December 31, 2017 may be carried forward for 20 years and may fully offset taxable income in the year utilized, and federal NOLs we generated in tax years beginning after December 31, 2017 may be carried forward indefinitely but may only be used to offset 80% of our taxable income annually for tax years beginning after December 31, 2020. As of December 31, 2023, we had NOLs of approximately $105.0 million for federal income tax purposes and $104.8 million for state income tax purposes.
Realization of these NOLs depends on future taxable income, and there is a risk that our existing NOLs could expire unused and be unavailable to offset future taxable income, which could adversely affect our results of operations.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change federal NOLs and other tax attributes (such as tax credits) to offset its post-change taxable income and taxes may be limited. In general, an “ownership change” occurs if there is a greater than 50 percentage point change (by value) in a corporation’s equity ownership by certain stockholders over a rolling three-year period. Transactions that have occurred since our formation, including our IPO, may result in an ownership change. We have not conducted a study to determine whether an ownership change would result from our IPO. In addition, we may experience ownership changes in the future as a result of
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subsequent shifts in our stock ownership (some of which shifts are outside our control). As a result, our ability to use pre-change federal NOLs and other tax attributes to offset future taxable income and taxes could be subject to limitations. Similar provisions of state tax law may also apply. For these reasons, even if we achieve profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could materially and adversely affect our business, financial condition, results of operations, and prospects.
Our effective tax rate may vary significantly from period to period.
Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations, or rates, both within and outside the U.S., structural changes in our business, new accounting pronouncements or changes to existing accounting pronouncements, non-deductible goodwill impairments, changing interpretations of existing tax laws or regulations, changes in the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate that have different statutory tax rates, the future levels of tax benefits of equity-based compensation, changes in overall levels of pretax earnings or changes in the valuation of our deferred tax assets and liabilities. Additionally, we could be challenged by state and local tax authorities as to the propriety of our sales tax compliance, and our results could be materially impacted by these compliance determinations.
In addition, our effective tax rate may vary significantly depending on the market price of our common stock. The tax effects of the accounting for share-based compensation may significantly impact our effective tax rate from period to period. In periods in which the market price of our common stock is higher than the grant price of the share-based compensation vesting in that period, we will recognize excess tax benefits that will decrease our effective tax rate. In future periods in which our stock price is lower than the grant price of the share-based compensation vesting in that period, our effective tax rate may increase. The amount and value of share-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of share-based compensation on our effective tax rate. These tax effects are dependent on the market price of our common stock, which we do not control, and a decline in our stock price could significantly increase our effective tax rate and adversely affect our financial condition.
Changes in tax laws or tax rulings could adversely affect our effective tax rates, results of operations and financial condition.
The tax regimes we are subject to or operate under are unsettled and may be subject to significant change. This challenge will continue to increase as we expand our operations globally. Changes in tax laws, issuance of new tax rulings or changes in interpretations of existing laws could cause us to be subject to additional income-based taxes and non-income-based taxes, including payroll, sales, use, value-added, digital, net worth, property and goods and services taxes, which in turn could adversely affect our results of operations and financial condition. In particular, the U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate, the imposition of minimum taxes or surtaxes on certain types of income, significant changes to the taxation of income derived from international operations, and it may enact further limitations on the deductibility of business interest. For example, on August 16, 2022, the Inflation Reduction Act (the “IRA”) was signed into law in the U.S. Among other changes, the IRA, along with subsequent regulations, imposes a minimum tax on certain corporations with book income of at least $1 billion, subject to certain adjustments, and a 1% excise tax on certain stock buybacks and similar corporate actions.
In addition, many countries in the European Union, as well as a number of other countries and organizations, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations in the future. We are unable to predict what changes to the tax laws of the U.S. and other jurisdictions may be proposed or enacted in the future or what effect such changes would have on our business. Any of these or similar developments or changes to tax laws or rulings (which changes may have retroactive application) could adversely affect our effective tax rate and our results of operations and financial condition.
Our venture loan and security agreement contains restrictions that limit our flexibility in operating our business.
We have entered into a venture loan and security agreement, dated as of February 6, 2024, by and among us, Horizon Technology Finance Corporation, as a lender and collateral agent, and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (“SVB”), as a lender (the “VLSA”). Concurrent with the VLSA, we also entered into a Loan and Security Agreement with SVB for a senior revolving line of credit of up to $10.0 million (the “Revolving Facility”). As of September 30, 2024, $20.0 million in aggregate principal amount was outstanding under the VLSA, and no amount was outstanding under the Revolving Facility. The VLSA and the
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Revolving Facility contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations”—“Liquidity and Capital Resources” for more information regarding the covenants under the VLSA and the Revolving Facility. The covenants in the VLSA and the Revolving Facility limit our ability to take certain actions and, in the event that we breach one or more covenants, the lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding of the aggregate principal amount, plus accrued interest, and foreclose on the collateral granted to it to secure such indebtedness. Such repayment could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our cash deposits with financial institutions exceed insured limits.
We maintain the majority of our cash and cash equivalents in accounts with one or more U.S. financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of financial institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial condition.
Risks Relating to Our Common Stock
We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of:
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As a result of our “emerging growth company” status, we may take advantage of exemptions from various reporting requirements that would otherwise be applicable to public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We also are a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the aggregate amount of gross proceeds to us as a result of our IPO is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our annual report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Investors may find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be adversely affected and more volatile.
We incur increased costs and are subject to additional regulations and requirements as a result of operating as a public company, which could lower our profits or make it more difficult to run our business.
As a public company, we incur significant legal, accounting, and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We have also incurred and will continue to incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the Securities and Exchange Commission (the “SEC”) and the exchange on which our securities are listed. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory action, and potentially civil litigation.
If we are unable to design, implement, and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to the rules and regulations of the SEC regarding compliance with Section 404 of the Sarbanes-Oxley Act. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly and complicated. We have in the past identified control deficiencies including material weaknesses and may identify control deficiencies, including material weaknesses in our internal control over financial reporting, in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations, or cash flows. Further, if we identify one or more material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we or, if required, our auditors, are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decline, and we could also become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
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We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on appreciation in the market price of our common stock.
We have never declared or paid cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, prospects, financial condition, contractual restrictions and capital requirements. In addition, our ability to pay cash dividends on our capital stock is limited by the terms of the VLSA, and may be limited by the terms of any future debt or preferred securities we issue or any future credit facilities we enter into. Accordingly, investors must for the foreseeable future rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline.
We may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this Quarterly Report on Form 10-Q and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If actual circumstances differ from those in our assumptions, our operating and financial results could fall below our publicly announced guidance or the expectations of investors. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts or investors generally, or if we reduce our guidance for future periods, the market price of our common stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.
We may require additional capital to support business growth, and this capital might not be available on terms favorable to us, or at all, and may dilute existing stockholders’ ownership of our common stock.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges and opportunities, including the need to develop new products, enhance our existing products, enhance our operating infrastructure, potentially expand internationally, and potentially acquire complementary businesses and technologies. In order to achieve these objectives, we may make future commitments of capital resources. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. In addition, the incurrence of indebtedness would increase our fixed obligations and include covenants or other restrictions that would impede our ability to manage our operations. Further, if additional financing is needed, we may not be able to obtain additional financing on terms favorable to us or at all. Our inability to obtain adequate financing or financing on terms satisfactory to us, when we require it, could significantly limit our ability to continue supporting our business growth and responding to business challenges and opportunities.
Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject to stockholder approval.
As of June 30, 2024 and including the shares issued in our IPO, our executive officers, directors, owners of more than 5% of our capital stock and their respective affiliates beneficially owned approximately 52.1% of our outstanding shares. Therefore, these stockholders have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
If 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. Based upon the number of shares outstanding as of September 30, 2024 and after giving effect to the sale of common stock in our IPO, we have outstanding a total of 34,018,654 shares of common stock. Of these shares, all of the shares of our common stock sold in our IPO, are freely tradable, without restriction, in the public market, other than shares purchased by our “affiliates” (as such term is defined in Rule 144 under the Securities Act).
We and each of our directors, our executive officers and certain other record holders that together represent approximately 90% of our outstanding common stock, stock options, warrants, and RSUs, and securities convertible into our common stock entered into lock-up agreements with the underwriters prior to the commencement of our IPO. The lock-up agreements pertaining to our IPO will
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expire April 8, 2025 (the “Lock-Up Period”). After the expiration of the lock-up agreements and the market standoff restrictions described below, up to approximately 23.4 million additional shares of common stock will be eligible for sale in the public market, approximately 72% of which shares are owned by directors, executive officers and other owners of more than 5% of our outstanding common stock, stock options, warrants, RSUs, and securities convertible into our common stock and will be subject to Rule 144 under the Securities Act. The representatives of the underwriters may, however, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.
Furthermore, an additional approximately 10% of our outstanding common stock, stock options, warrants, RSUs, and other securities convertible into or exercisable or exchangeable for our common stock are subject to market standoff restrictions with us that include restrictions on the sale, transfer, or other disposition of shares during the Lock-Up Period. As a result of the foregoing, substantially all of our outstanding common stock, stock options, warrants, RSUs, and other securities convertible into or exercisable or exchangeable for our common stock are subject to a lock-up agreement or market standoff provisions during the Lock-Up Period. We have agreed to enforce all such market standoff restrictions on behalf of the underwriters and not to release, amend, or waive any such market standoff provisions during the Lock-Up Period without the prior consent of BofA Securities, Inc. and J.P. Morgan Securities LLC, on behalf of the underwriters, provided that we may release shares from such restrictions to the extent that it would be permissible to release such shares under the form of lock-up agreement with the underwriters signed by or that will be signed by certain record holders of our securities as described herein.
In addition, 5,189,457 shares of common stock that are subject to outstanding options or subject to outstanding warrants are eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, lock-up agreements, market standoff restrictions, and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.
As of the completion of our IPO, the holders of approximately 17.8 million shares of our common stock, or approximately 59% of our total outstanding common stock, were entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements and market standoff restrictions described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Record holders of our securities are typically the parties to the lock-up agreements with the underwriters and the market standoff restrictions referred to above, while holders of beneficial interests in our shares who are not also record holders in respect of such shares are not typically subject to any such agreements or other similar restrictions. Accordingly, we believe that holders of beneficial interests who are not record holders and are not bound by market standoff restrictions or lock-up agreements could enter into transactions with respect to those beneficial interests that negatively impact our stock price. In addition, a security holder who is neither subject to market standoff restrictions with us nor a lock-up agreement with the underwriters may be able to sell, short sell, transfer, pledge, or otherwise dispose of or attempt to sell, short sell, transfer, hedge, pledge, or otherwise dispose of their equity interests at any time.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions include:
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We are also subject to the anti-takeover provisions contained in Section 203 of the General Corporation Law of the State of Delaware (the “Delaware General Corporation Law”). Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.
Claims for indemnification by our directors, officers, and other employees or agents may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.
In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors, officers and certain other employees provide that:
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, in the event that the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or stockholders to us or to our stockholders, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws (as either may be amended from time to time), or any action asserting a claim against us that is governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in
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the State of Delaware. Our amended and restated certificate of incorporation also provides that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees, or agents and arising under the Securities Act. Nothing in our amended and restated certificate of incorporation or amended and restated bylaws precludes stockholders that assert claims under the Exchange Act from bringing such claims in state or federal court, subject to applicable law.
If any action the subject matter of which is within the scope described above is filed in a court other than a court located within the State of Delaware (a “Foreign Action”), in the name of any stockholder, such stockholder shall be deemed to have consented to the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the applicable provisions of our amended and restated certificate of incorporation and having service of process made upon such stockholder in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder. Although our amended and restated certificate of incorporation contain the choice of forum provision described above, it is possible that a court could find that such a provision is inapplicable for a particular claim or action or that such provision is unenforceable.
We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums, and protection against the burdens of multi-forum litigation. However, this choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees, or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. 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, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, results of operations, and prospects.
The market price of our common stock may be volatile, which could cause the value of your investment to decline.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions, could reduce the market price of our common stock regardless of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, data privacy and security-related events, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors, adverse publicity about the medical device industry, or individual scandals, and, in response, the market price of our common stock could decrease significantly.
Stock markets experience extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
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If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over the analysts, or the content and opinions included in their reports. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our results of operations fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
General Risk Factors
If we engage in acquisitions or strategic partnerships, it may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
From time to time, we may evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary offerings, intellectual property rights, technologies, or businesses. Any acquisition or strategic partnership may entail numerous risks, including:
In addition, if we undertake acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses, and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition or partnership opportunities, and even if we do locate such opportunities, we may not be able to successfully bid for or obtain them due to competitive factors or lack of sufficient resources. This inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.
We or the third parties we depend on may be adversely affected by natural disasters and other catastrophic events, and our business continuity and disaster recovery plans may not adequately protect us from a serious natural disaster or other catastrophic event. Any interruption in our operations or the operations of third parties who supply components or other materials for our products may have a material adverse effect on our business, financial condition, results of operations, and prospects.
Severe weather, natural disasters and other catastrophic events, including pandemics or other public health crises (such as the COVID-19 pandemic), earthquakes, tsunamis, hurricanes, floods, fires, explosions, accidents, power outages, cyberattacks, telecommunications failures, mechanical failures, unscheduled downtimes, civil unrest, strikes, transportation interruptions, unpermitted discharges or releases of toxic or hazardous substances, other environmental risks, wars or other conflicts (including wars in Ukraine and the Middle East), sabotage, terrorist attacks, or other intentional acts of vandalism or misconduct could severely disrupt our operations, or the operations of third parties who manufacture or supply components or other materials for our products, and have a material adverse effect on our business, financial condition, results of operations, and prospects.
If a natural disaster or other catastrophic event occurs that prevents us or third-party suppliers or manufacturers from using all or a significant portion of our or their headquarters or other facilities, that damages critical infrastructure or that otherwise disrupts operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar catastrophic event. The potential impact of any disruption would depend on the nature and extent of the damage caused by a disaster. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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In addition, our corporate headquarters and manufacturing facilities are located in Sunnyvale, California, near major earthquake faults and fire zones. We do not carry earthquake insurance. Furthermore, integral parties in our supply chain are similarly vulnerable to natural disasters or other sudden, unforeseen, and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to risks from legal and arbitration proceedings that may prevent us from pursuing our business activities or require us to incur additional costs in defending against claims or paying damages.
We may become subject to legal disputes and regulatory proceedings in connection with our business activities involving, among other things, product liability, product defects, intellectual property infringement, employment matters, and/or alleged violations of other applicable laws in various jurisdictions. We may not be insured against all potential damages that may arise out of any claims to which we may be party in the ordinary course of our business. A negative outcome of these proceedings may prevent us from pursuing certain activities and/or require us to incur additional costs in order to do so and pay damages. In addition, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, financial condition, results of operations and prospects. Additionally, the significant increase in the cost of directors’ and officers’ liability insurance may cause us to opt for lower overall policy limits or to forgo insurance that we may otherwise rely on to cover significant defense costs, settlements, and damages awarded to plaintiffs.
The outcome of pending or potential future legal and arbitration proceedings is difficult to predict with certainty. In the event of a negative outcome of any material legal or arbitration proceeding, whether based on a judgment or a settlement agreement, we could be obligated to make substantial payments, which could have a material adverse effect on our business, financial condition, results of operations, and prospects. In addition, the costs related to litigation and arbitration proceedings may be significant, and any legal or arbitration proceedings could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We must design our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement, causing us to fail to make a required related party transaction disclosure. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our insurance policies may not cover all potential losses or liabilities that may arise.
We are not insured against all potential losses or liabilities that may arise, and insurance coverage may be unavailable, not cost-effective, or subject to significant limitations. For example, we are not insured against business interruptions suffered by third parties that we depend on, environmental liabilities or patent infringement, among other types of risks. Furthermore, no assurance can be given that an insurance carrier will not seek to cancel or deny coverage after a claim has occurred. If a loss or liability occurs that is not or not fully covered by insurance, we may be required to pay substantial amounts, which could adversely affect its cash position and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sale of Equity Securities
During the quarter ended September 30, 2024, we issued an aggregate of 184,226 shares of our common stock upon the exercise of stock options under our 2014 Plan and 2024 EIP at exercise prices ranging from $0.39 to $9.41 per share, for aggregate proceeds of $0.3 million.
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The issuances of the securities described above were deemed to be exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act, as transactions by an issuer not involving a public offering.
Use of Proceeds
On October 15, 2024, we completed our IPO, in which we issued and sold 12,196,969 shares of our common stock, which includes an additional 1,590,909 shares of common stock purchased by the underwriters pursuant to their option to purchase additional shares, at a price to the public of $17.00 per share. The proceeds to the Company from the IPO were approximately $188.2 million, net of underwriting discounts and commissions and estimated offering costs.
The net proceeds from our IPO have been used and will be used, together with our existing cash and cash equivalents: (i) to fund sales and marketing efforts; (ii) to fund research and product development activities, including to advance our delirium and ischemic stroke indications through completion of clinical studies related to our Clarity algorithm; and (iii) for general corporate purposes, including working capital, operating expenses, and capital expenditures.
There has been no material change in the intended use of proceeds from our IPO as described in our Prospectus.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During the quarter ended September 30, 2024,
Item 6. Exhibits.
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Incorporated by reference |
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Exhibit Number |
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Description |
Form |
Dated |
Number |
Provided |
3.1 |
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8-K |
10/15/2024 |
3.1 |
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3.2 |
|
8-K |
10/15/2024 |
3.2 |
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4.1 |
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S-1/A |
9/19/2024 |
4.01 |
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|
10.1# |
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S-1/A |
10/7/2024 |
10.14 |
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10.2# |
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S-1/A |
10/7/2024 |
10.15 |
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10.3# |
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S-1/A |
10/7/2024 |
10.16 |
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10.4# |
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S-1/A |
9/19/2024 |
10.17 |
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10.5# |
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Form of Indemnification Agreement for Directors and Officers. |
S-1/A |
9/19/2024 |
10.18 |
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10.6# |
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Employment Agreement, by and between CeriBell, Inc. and Raymond Woo, Ph.D., as amended. |
S-1/A |
10/7/2024 |
10.22 |
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10.7# |
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Form of Executive Change in Control and Severance Agreement. |
S-1/A |
9/19/2024 |
10.23 |
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10.8# |
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S-1/A |
10/7/2024 |
10.28 |
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31.1 |
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X |
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31.2 |
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X |
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32.1* |
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X |
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32.2* |
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X |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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X |
101.SCH |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents. |
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X |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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X |
# Indicates management contract or compensatory plan.
* The certification attached as Exhibit 32.1 and Exhibit 32.2 that accompanies this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is not deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CERIBELL, INC. |
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Date: November 12, 2024 |
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By: |
/s/ Xingjuan (Jane) Chao, Ph.D. |
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Xingjuan (Jane) Chao, Ph.D. |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 12, 2024 |
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By: |
/s/ Scott Blumberg |
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Scott Blumberg |
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Chief Financial Officer |
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(Principal Financial Officer) |
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