10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39949
Hyperfine, Inc.
(Exact name of registrant as specified in its charter)
351 New Whitfield Street
Guilford, Connecticut06437
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (866) 796-6767
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class TradingSymbol(s) Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $120.5 million.
As of March 1, 2023, the registrant had 55,991,074 shares of Class A common stock outstanding and 15,055,288 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K:
Certain information required in Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
TABLE OF CONTENTS
PART I 7
Item 1. Business 7
Item 1A. Risk Factors 33
Item 1B. Unresolved Staff Comments 69
Item 2. Properties 69
Item 3. Legal Proceedings 69
Item 4. Mine Safety Disclosures 69
Item 6. [Reserved] 70
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 82
Item 8. Financial Statements and Supplementary Data 83
Item 9A. Controls and Procedures 83
Item 9B. Other Information 84
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 84
PART III 85
Item 10. Directors, Executive Officers and Corporate Governance 85
Item 11. Executive Compensation 85
Item 14. Principal Accountant Fees and Services 85
Item 15 Exhibits and Financial Statement Schedules 86
Signatures 90
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that relate to future events or our future financial performance regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. These statements are based on the beliefs and assumptions of our management team. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
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the success, cost and timing of our product development activities;
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the commercialization and adoption of our existing products and the success of our future product offerings;
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the potential attributes and benefits of our products and services;
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our ability to obtain and maintain regulatory approval for our products, and any related restrictions and limitations of any approved product;
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our ability to identify, in-license or acquire additional technology;
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our ability to maintain our existing licensing, manufacturing and supply agreements;
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our ability to compete with other companies currently marketing or engaged in the development of magnetic resonance imaging technologies, many of which have greater financial and marketing resources than us;
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the size and growth potential of the markets for our products and services, and the ability of our products and services to serve those markets, either alone or in partnership with others;
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the pricing of our products and services and reimbursement for medical procedures conducted using our products and services;
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changes in applicable laws or regulations;
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our estimates regarding expenses, revenue, capital requirements and needs for additional financing;
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our ability to raise financing in the future;
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our financial performance;
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our success in retaining or recruiting, or changes required in, our officers, key employees or directors;
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intense competition and competitive pressures from other companies in the industry in which we operate;
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the anticipated benefits of the Business Combination;
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market conditions and global and economic factors, such as inflation;
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our intellectual property rights;
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the effect of legal, tax and regulatory changes; and
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the impact of the COVID-19 pandemic on our business and operations.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Annual Report on Form 10-K are more fully described in Item 1A under the heading “Risk Factors.” The risks described under the heading “Risk Factors” are not exhaustive. Other sections of this Annual Report on Form 10-K, such as the description of our Business set forth in Item 1 and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time, and it is not possible to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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SUMMARY OF RISK FACTORS
Our business is subject to numerous risks and uncertainties that you should consider before investing in our securities. Some of the principal risk factors are summarized below:
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We are an early-stage life sciences technology company with a history of net losses, which we expect to continue, and we may not be able to generate meaningful revenues or achieve and sustain profitability in the future.
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We have a limited operating history, which may make it difficult to evaluate the prospects for our future viability and predict our future performance. As such, you cannot rely upon our historical operating performance to make an investment or voting decision regarding us.
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We may need to raise additional capital to fund commercialization plans for our products, including manufacturing, sales and marketing activities, expand our investments in research and development, and commercialize new products and applications.
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Our success depends upon market acceptance of our products and services, our ability to develop and commercialize existing and new products and services and generate revenues, and our ability to identify new markets for our technology.
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We are undertaking internal restructuring activities that could result in disruptions to our business or otherwise materially harm our results of operations or financial condition.
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Medical device development is costly and involves continual technological change, which may render our current or future products obsolete.
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We will be dependent upon the success of our sales and customer acquisition and retention strategies.
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If we do not successfully manage the commercialization of our products and services, including continuing to build our sales force, and the development and launch of new products and services, we will not meet the long term forecasts and our business, operating and financial results and condition could be adversely affected.
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If we are unable to attract, recruit, train, retain, motivate and integrate key personnel and expand our organization, our operations may be disrupted, and we may not achieve our goals.
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We have limited experience in marketing and selling our products and related services, and if we are unable to successfully commercialize our products and related services, our business and operating results will be adversely affected.
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We rely on a single contract manufacturer, Benchmark Electronics, Inc. (“Benchmark”), to test, assemble and supply our finished products. If Benchmark fails to fulfill its obligations under its existing contractual arrangements with us or does not perform satisfactorily, our ability to source our devices could be negatively and adversely affected.
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We rely on a limited number of suppliers for our products. A loss of any of these suppliers could negatively affect our business.
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Pricing pressures from contract suppliers or manufacturers on which we rely may impose pricing pressures.
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If we do not successfully optimize and operate our sales and potential future distribution channels or we do not effectively expand and update our infrastructure, our operating results and customer experience may be negatively impacted.
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The market for our products and services is new, rapidly evolving, and increasingly competitive, as the healthcare industry in the United States is undergoing significant structural change, which makes it difficult to forecast demand for our products and services.
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As international expansion of our business occurs, it will expose us to market, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
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The COVID-19 pandemic has and could continue to negatively affect various aspects of our business, make it more difficult for us to meet our obligations to our customers, and result in reduced demand for our products and services, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
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Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
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We are subject to extensive government regulation, which could restrict the development, marketing, sale and distribution of our products and could cause us to incur significant costs.
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There is no guarantee that the FDA will grant 510(k) clearance or premarket approval of our future products, and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.
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If we fail to obtain regulatory authorizations in other countries for existing products or products under development, we will not be able to commercialize these products in those countries.
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We may be subject to enforcement action if we engage in improper or off-label marketing or promotion of our commercial medical device products, including fines, penalties and injunctions.
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Because we do not require extensive training for users of our current products, although they are limited under the FDA’s marketing clearances to use by, and that images generated from the scanner be interpreted by, trained healthcare practitioners, there exists a potential for misuse of these products, misinterpretation of images by untrained professionals or misuse of these products by untrained professionals, which could ultimately harm our reputation and business.
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We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in customer growth or engagement, or otherwise harm our business.
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Cybersecurity risks and cyber incidents could result in the compromise of confidential data or critical data systems and give rise to potential harm to customers, remediation and other expenses, expose us to liability under federal or state law, consumer protection laws, or other common law theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business and operations.
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If we are unable to obtain and maintain and enforce sufficient intellectual property protection for our products and technology, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products may be impaired.
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We currently rely on licenses from third parties, and in the future may rely on additional licenses from other third parties, and if we lose any of these licenses, then we may be subjected to future litigation.
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We face the risk of product liability claims and may be subject to damages, fines, penalties and injunctions, among other things.
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We identified material weaknesses in our internal control over financial reporting. If our remediation measures are ineffective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to report our financial condition or results of operations accurately or in a timely manner and we may be unable to maintain compliance with applicable stock exchange listing requirements, which may adversely affect investor confidence in us and, as a result, materially and adversely affect our business and the value of our Class A common stock.
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Because we are a “controlled company” within the meaning of the Nasdaq listing rules, our stockholders may not have certain corporate governance protections that are available to stockholders of companies that are not controlled companies.
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The dual class structure of our common stock has the effect of concentrating voting power with Jonathan M. Rothberg, Ph.D., Vice Chairperson of our board of directors and the Founder of Legacy Hyperfine and Liminal, which will limit an investor’s ability to influence the outcome of important transactions, including a change in control.
These and other material risks we face are described more fully in Item 1A, Risk Factors, which investors should carefully review prior to making an investment decision with respect to the Company or its securities.
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PART I
All brand names or trademarks appearing in this report are the property of their respective holders. Use or display by us of other parties’ trademarks, trade dress, or products in this report is not intended to, and does not, imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners. Unless the context requires otherwise, references in this report to the “Company,” “we,” “us,” and “our” refer to Hyperfine, Inc. and its wholly-owned subsidiaries, including Hyperfine Operations, Inc., or Legacy Hyperfine, and Liminal Sciences, Inc., or Liminal, as the case may be.
Item 1. BUSINESS
Overview
We are an innovative digital health business with a mission to provide affordable and accessible imaging and monitoring through magnetic resonance imaging (“MRI”) to revolutionize healthcare for people around the world. Our Swoop® Portable Magnetic Resonance (“MR”) Imaging® System (“Swoop® system”) produces high-quality images at a lower magnetic field strength than conventional MRI scanners. Healthcare professionals can use the Swoop® system to make effective clinical diagnoses on a patient in various settings where MRI devices have previously been inaccessible. The easy-to-use interface and portable design of our Swoop® system make it accessible anywhere in a hospital, clinic, or patient care site. We are working to realize our vision of providing affordable and accessible imaging of health conditions worldwide.
MRI is a medical imaging technique used in radiology to image the human body’s anatomy and physiological processes. MRI is typically used in various clinical settings for medical diagnosis, the staging of disease, and follow-up treatment. Unlike X-ray computed tomography (“CT”) or positron emission tomography (“PET”), MRI does not expose patients to harmful ionizing radiation. We believe MRI offers unrivaled clarity in assessing central nervous system (“CNS”), musculoskeletal, and other diseases and injuries, including brain disorders and injuries.
Despite its advantages, many healthcare institutions worldwide lack the facilities, qualified operators, and capital necessary to acquire and maintain expensive MRI devices. For healthcare institutions with conventional MRI scanners, disadvantages of conventional MRI scanners include their high cost and facility requirements for a specialized MRI suite, as well as the scheduling delays, impact on personnel resources, and risk of adverse events that result from the need to transport critically ill patients to the MRI suite. The Swoop® system is intended for use at the patient’s bedside in any professional healthcare facility, such as a physician’s office or a critical care facility. The demand for MRI has been augmented by the aging population and the rising prevalence of cancer and cardiovascular, neurologic, and orthopedic conditions. Healthcare professionals and insurers recognize imaging as a cost-effective and non-invasive diagnostic tool for evaluation and ongoing monitoring. The Swoop® system is the next generation of these devices designed to drive costs down and expand the current $28 billion imaging market.
We believe the adoption of the Swoop® system by healthcare professionals has benefits across healthcare communities both in high- and low-resource settings. Our technology allows us to provide decision support and rapid feedback for diagnostic insight for clinicians of various levels of expertise. Through our collaborations with the healthcare community, we have begun to optimize our software ecosystem to harness artificial intelligence (“AI”) and cloud technology to transform the system into a bedside clinical decision support platform. These efforts seek to improve image quality, help users analyze images, and reduce the time to diagnosis.
Legacy Hyperfine received initial 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) in 2020. The Swoop® system has since been authorized for brain imaging in several countries, including the European Union (CE marking), the United Kingdom (UK Conformity Assessment (“UKCA”)), Canada, Australia, New Zealand and Pakistan.
The Swoop® system is a bedside magnetic resonance imaging device for producing images that display the internal structure of the head where full diagnostic examination is not clinically practical. When interpreted by a trained physician, these images provide information that can be useful in determining a diagnosis. We are building our direct commercial infrastructure in the United States and plan to sell our products in other countries through direct sales or distributors. Furthermore, we possess a portfolio of 142 issued patents worldwide and 108 patents pending as of February 15, 2023.
Our wholly-owned subsidiaries, Legacy Hyperfine and Liminal were founded in 2014 and 2018, respectively, by Dr. Jonathan Rothberg, a serial entrepreneur who received the Presidential Medal of Technology and Innovation in 2016 for inventing a novel next-generation DNA sequencing method and has founded more than ten healthcare and technology companies, including 454 Life Sciences, Ion Torrent, CuraGen, Butterfly Network, and Quantum-Si. Legacy Hyperfine has raised over $160 million in equity investments and partnership milestones from leading institutional investors, including GV (formerly Google Ventures), and grants, including the Bill & Melinda Gates Foundation (the "BMGF").
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Our Competitive Strengths
We believe that our competitive strengths include the following:
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There is a large and growing MRI market, and we have the potential to augment conventional MRI capacity and benefit patients around the world. We believe our solution addresses a vast unmet need across the global market by expanding accessibility to MRI and augmenting the existing capacity of conventional high-field MRI scanners as imaging rates continue to increase across the population and the need for efficient utilization of MRI scanners increases. Our solution is designed to complement conventional MRI scanners currently used in the market, as it seamlessly integrates into relevant hospital systems. Our system is designed to allow users to upload images directly onto hospital systems, such as the picture archiving and communication system (“PACS”), or directly onto our cloud PACS, which then makes images available for diagnostic purposes.
We believe the Swoop® system can expand the existing $28 billion global imaging market (expected to grow at a 4.9% CAGR from 2022 to 2030) by making MRI available to a more extensive set of patients in both developed and emerging markets, as well as improve the utilization of conventional MRI scanners through decreased wait times and facilitation of patient flow. Our primary focus is to expand the availability of MRI globally and across the care continuum, particularly to patients in intensive care units and emergency departments, where timeliness is critical. An MRI scan can be essential for diagnosis and urgent intervention. The Swoop® system can be wheeled directly to a patient’s bedside and offers a prompt solution for those patients who require an MRI scan but are too critically ill to be transported for a conventional MRI scanner and who may otherwise be forced to forego a scan or wait until their condition stabilizes.
We have also initiated a global research program supported by grant funding from the BMGF to assess the clinical feasibility of our Swoop® system in providing immediate point-of-care brain imaging to infants between the ages of 0 to 24 months in low to medium income countries. We were awarded a $1.6 million grant from the BMGF for providing and equipping twenty sites with our Swoop® system to enable the performance of a multi-site study focused on optimizing diagnostic image quality (the “Project”). During the third quarter of 2021, we were awarded an additional $3.3 million grant, of which $2.5 million was received from the BMGF in September 2021, with the remainder received in April 2022. Both of these grants are designed to support the deployment of a total of 25 Swoop® systems and other services to investigators, which commenced in the spring of 2021 and is expected to fund the program for approximately two years. The ongoing investigation is designed to provide data to validate the use of our Swoop® system in measuring the impact of maternal anemia, malnutrition, infection, and birth-related injury. At December 31, 2022, 20 Swoop® system units and 10 baby cradles were provisioned and delivered to BMGF and the majority of the milestones for service deliverables were also met.
The Swoop® system is designed to create value for stakeholders across the care continuum:
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Our innovative technology can potentially improve the quality of care for patients worldwide. We believe our smaller, portable, affordable, effective MRI scanner can broaden access to quality care, leading to improved health outcomes. In many cases, other imaging modalities, such as computerized tomography (“CT”) scanners, are used due to the lack of availability of MRI scanners or their lower cost profile, even though CT provides lower soft tissue contrast for evaluating abnormalities in the brain. Our point-of-care Swoop® system has a significantly lower price point than conventional MRI and CT scanners, making the Swoop® system affordable for hospitals and care centers that are not financially able to acquire a conventional MRI or CT scanner. Compared to CT scans, MRI has a greater range of soft tissue contrast, depicts anatomy in greater detail, and is more sensitive and specific for abnormalities within the brain itself. Our Swoop® system is designed primarily for urgent cases and can also benefit non-urgent cases. Among the neurological conditions for which the Swoop® system can provide a first-line
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diagnostic capability, we expect the Swoop® system’s top clinical use cases will continue to be point-of-care MRI in acute mental change assessment and follow-up in an ICU setting; stroke workflow; and pediatric and adult point-of-care assessment of hydrocephalus, an abnormal buildup of fluid within the brain.
Our solution can potentially improve the diagnosis and lives of the approximately 15 million annual new stroke sufferers worldwide. The Swoop® system does not emit ionizing radiation and therefore does not have the increased risk of cancer that comes with CT imaging. The absence of ionizing radiation is significant for conditions that require regular follow-up with multiple scans per year, such as hydrocephalus. In certain circumstances, such as in the management of patients with delirium or altered mental status, familiarity or keeping the surrounding environment as similar as possible can be critical, which we believe makes bedside devices like our Swoop® system particularly useful since patients do not need to move to distant radiology suites for conventional MRI scans. Studies show that 37% of patients report anxiety-related reactions in an isolated room for imaging. With our Swoop® system, we can offer a quieter, calmer experience with the option of a family member or other caregiver being present by the patient’s bedside during the scanning process.
Our point-of-care Swoop® system also helps avoid the risk of patient injury during transport through the ability to bring the system to the patient. By performing scans for urgent and critically ill patients at the bedside, we can help prevent the adverse incidents that occur with approximately 26–79% of critically ill patient cases during transport. The Swoop® system also obviates the labor-intensive and high-risk process of transporting patients on ventilators or connected to other life-sustaining devices, which can be especially valuable in the staff shortage environment that many healthcare institutions are experiencing.
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Our proprietary, disruptive, and revolutionary product is designed with healthcare professionals in mind. We have commercially launched our Swoop® system, a point-of-care MRI device capable of producing diagnostic quality images at a lower magnetic field strength than conventional MRI scanners. Using an ultra-low-field magnetic force significantly reduces projectile safety concerns and, therefore, should reduce the length of pre-safety checks typically conducted by healthcare professionals. We designed our product with the physician workflow in mind, reducing the average 11.7-hour conventional MRI process to 0.5 to 5.3 hours of workflow time with our Swoop® system. Typically with a 55% or greater reduction in total workflow time, physicians can reduce the time to diagnoses for timely treatment, potentially resulting in improved health outcomes for the patient.
For healthcare professionals already facing demanding time constraints, dealing with lengthy and sometimes confusing MRI protocols adds to their time spent on logistics rather than caring for patients. Additionally, conventional MRI scanners require specially trained technicians fully dedicated to operating those systems and increase the time and cost related to nurses and porters transporting patients to the MRI unit. Our Swoop® system is designed to simplify the image acquisition process. We have designed our system to be user-friendly and require minimal training to be operated. Our platform can be controlled by a tablet, smartphone, or any other Wi-Fi-capable device. The Swoop® system’s portability and accessibility at the bedside can further allow more time for healthcare professionals to focus on other important activities related to patient care, diagnosis, and treatment.
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Our first in its class product provides an attractive return on investment for various care settings. We created the Swoop® system not to replace conventional MRI devices but to supplement their existing capacity. By enabling imaging at the bedside, patients can be treated earlier and discharged sooner, potentially leading to increased hospital savings consistent with the growing shift to value-based care. In addition, by conducting more in-patient MRI scans at the bedside, our Swoop® system can help free up capacity in the MRI suite for additional outpatient procedures, which generate higher revenues for hospitals or other healthcare facilities than in-patient imaging. In studies we have conducted in hospital settings, the use of our Swoop® system has helped to make capacity available that has resulted in 20% increased usage of the existing MRI suite for additional outpatient procedures.
As healthcare costs continue to rise, we believe our Swoop® system will allow for significant potential cost reductions that can benefit the entire imaging ecosystem. Our Swoop® system has dramatically reduced hardware costs through design trade-offs, compensating using modern computational power and deep learning advances. The cost benefits of our Swoop® system are not limited to a customer’s initial purchase of the system. Our customers continue to benefit by not having to spend on additional cooling, power, and maintenance expenses throughout the lifetime of conventional MRI. Unlike conventional MRI scanners, the use of the Swoop® system also does not require a specialized radio frequency (RF) room to safely house the MRI scanner, allowing space for other essential patient care activities. Using the Swoop® system in the ICU can also increase utilization by allowing critically ill patients to receive immediate access to an MRI instead of adding congestion in the schedule of the conventional MRI scanners due to complications in the patient’s condition and unexpected changes in their condition or treatment.
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Our validated platform and business model allows for potential widespread adoption. Over 50 conference presentations and publications have discussed the clinical benefits of point of care, low-field MRI for patients with stroke, hydrocephalus, hematoma, multiple sclerosis and tumor resection. We generate sales revenue by selling the Swoop® system primarily through one business model, which is ownership accompanied by an annual service and support agreement. In this model, the Swoop® system is typically sold with a service and support agreement that begins in year one and is sold initially in either 36- or 60-month terms. In certain cases, the Swoop® system is sold without an accompanying service and support agreement. We believe this makes a convenient and positive experience for our customers. As more healthcare professionals adopt our technology, we anticipate improvements in gross margin due to increased volume and the recurring subscription base of the business.
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We have a strong lean executive leadership team with deep expertise in healthcare. We have a world-class management team, including our executive officers and other senior management, with decades of cumulative experience in healthcare and consumer end-markets. Our team is comprised of experienced leaders with deep leadership experience in medical device development, manufacturing, and commercialization. We believe our leadership team will drive the company to be a disruptive force in revolutionizing MRI.
Our Strategies
Our strategies include the following:
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Focus our development and commercialization efforts on the Swoop® system. In addition to our efforts to develop and commercialize the Swoop® system, we were previously working to develop a non-invasive brain sensing technology that is more affordable, accessible, and safer, to enable healthcare professionals to more easily monitor key brain vital signs such as cerebral blood flow and intracranial pressure throughout patient care. In December 2022, we suspended our program to develop a device to non-invasively measure key vital signs in the brain to focus our resources on the continued development and commercialization of the Swoop® system.
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Focus on our customers through success programs. Our Swoop® system is designed to make the customer experience as easy as possible through our integrated, easy-to-use interface that portrays images on a tablet device. In addition to this design, our team is focused on clinical support programs to help integrate the Swoop® system into any hospital or clinic workflow. We believe that the use of our Swoop® system within hospitals will provide us with opportunities to cross-sell our product and services across departments and reduce customer acquisition costs as customers become more accustomed to the use of our Swoop® system across their facilities and observe the improved health outcomes and decreased costs that the use of our Swoop® system may provide. We expect our clinical support programs to increase our customer referral rates across the medical imaging market as our product continues to be validated and supported by healthcare professionals in the field.
Our clinical support program is designed to ensure that our customers achieve their desired outcomes using our Swoop® system. Our team seeks to foster long term relationships, highlight key product benefits, and manage customer expectations. The program is designed to guide customers to maximize the product's utilization and enhance their experience through ongoing educational tools and opportunities. Our customer success team aims to ensure a smooth path to obtain customer loyalty and continue to grow our install base with subscription renewals, follow-up sales, and new Swoop® system placements.
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Demonstrate our commitment to continuous technical innovation and leadership across the care continuum. Our advanced technology in imaging is supported by an internal team of scientists and engineers dedicated to continuous innovation. Our pace of AI-powered software iterations allows further improvements of image quality, consistency, and image sequences for the clinical uses of our technology. As the Swoop® system becomes integrated into ICUs and sites across medical practices, we are dedicated to gaining more insights into our product’s usability and potentially develop the automated analysis of images that we believe will lead to further efficiencies in patient diagnosis. We plan to continue developing our technology to expand into new imaging applications to enable us to reach the broader care continuum through diagnosis and treatment. In the future, we plan to introduce a further enhanced MRI system designed to conduct neuroimaging and imaging of other parts of the human anatomy.
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Expand clinical validation data and publications. There are over 50 conference presentations and publications discussing the clinical benefits of our Swoop® system. The Journal of American Medical Association (JAMA) published a detailed study conducted at the Yale-New Haven Hospital on how the Swoop® system successfully detected abnormal neuroimaging findings at the bedside of patients in the ICU, demonstrating the capability of ultra-low-field, point-of-care MRI to obtain neuroimaging at the bedside in intensive care settings. We are also partnering with multiple sites, including Massachusetts General Hospital and SUNY Buffalo, for an upcoming study to examine the use of the Swoop system to assess acute ischemic stroke in the emergency department setting.
The Swoop® system has been used for diagnoses across various neurological pathologies, and we believe that the Swoop® system could ultimately enable a new paradigm in the standard of care for these diseases that could be lifesaving. We believe the early diagnosis of these diseases has cost-saving benefits for multiple stakeholders, including patients, providers, and payors, as it can lead to earlier intervention and treatment and fewer patient visits.
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Expand sales in international markets. We intend to continue to increase our sales and distribution capabilities outside of the United States to take advantage of the large international opportunity for our products. The countries in which we have begun commercializing our Swoop® system include the United Kingdom, Canada, Australia, New Zealand and Pakistan. We obtained a Medical Device License issued by Health Canada, UKCA certification in the United Kingdom, CE marking in the EU and regulatory authorization in Australia, New Zealand and Pakistan.
While we will maintain our commercial focus in the U.S. in 2023, our commitment to the vision of providing affordable and accessible imaging that enables earlier detection and remote management of health conditions worldwide is in part made possible by grant funding from the BMGF. Through our engagement with nonprofit organizations, we deployed the Swoop® system to low-middle resource settings without readily-accessible MRI technology. The multiple grants provided by the BMGF, which commenced funding in the spring of 2020, support the deployment of 45 Swoop® systems to investigators. The ongoing investigation is designed to provide data to validate the potential use of the Swoop® system in measuring the impact of maternal anemia, malnutrition, infection, and birth-related injury.
Industry and Market
MRI is a non-ionizing radiation risk imaging modality widely used by healthcare professionals across various clinical settings for the medical diagnosis of a patient, staging of disease, and continued assessment following treatment. MRI is noninvasive, sometimes eliminates the need for surgical intervention or invasive procedures when used correctly, and offers superior soft tissue contrast resolution compared to other imaging modalities like CT. It is a more sensitive and potentially objective measure of brain tissue and injury. MRI is used to examine CNS, musculoskeletal, and other diseases. The prevalence and incidence rates of these diseases have increased across the globe. According to a United Nations report, up to one billion people, nearly one in six of the world’s population, suffer from neurological disorders, including Alzheimer’s and Parkinson’s disease, stroke, multiple sclerosis, epilepsy, migraine, brain injuries, and neuro infections, with some 6.8 million dying of these disorders each year.
The aging population and rising prevalence of cancer, cardiovascular, neurological, and orthopedic conditions have augmented the demand for MRI. Healthcare professionals and insurers recognize imaging as a cost-effective and non-invasive diagnostic for prevention and ongoing monitoring. The Swoop® system is the next generation of these devices that we believe will drive improved access and efficiency and expand the current $28 billion imaging market. Given the significant patient populations needing diagnostic imaging, we have positioned ourselves in an underpenetrated market with substantial room for growth. We estimate that the global imaging market will increase to a more than $20 billion opportunity across our potential use cases. This estimate includes over 100,000 hospitals and outpatient locations that we believe could serve as installation sites for our system. While the current imaging market is mainly limited to high-resource countries, we believe our system can help make MRI technology more accessible globally, leading to an increase in both MRI penetration rates and the size of the overall market opportunity.
Market needs
Despite MRI’s advantages to diagnose and monitor patients through treatment, access to MRI scanners can be problematic. Numerous challenges are associated with the use of conventional MRI devices:
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High cost: The average cost of conventional MRI scanners is $1.2 million and could cost as high as $3 million, significantly more than our Swoop® system. In addition, conventional MRI scanners typically are not offered with our affordable subscription-based pricing model.
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Complex site requirements and upgrades: Due to the use of strong (1.5−3.0T (Tesla)) magnetic fields in conventional MRI scanners, there are various requirements and restrictions on radiation therapy ("RT") facilities size, location, and ongoing maintenance, including the need to build a specialized radio frequency room to house the MRI scanner safely.
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Scheduling delays: A high level of coordination is required between the MRI facility and the ICU to have patients scheduled for a conventional MRI scan. Coordination is further complicated with patients who are unstable in the ICU and require multiple medical procedures in a timely manner.
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Maintaining a connection to life support equipment: Patients in the ICU are often connected to life-sustaining devices that complicate the conventional MRI procedure and transportation to and from the conventional MRI scanner.
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Consumption of valuable personnel resources: One of the most challenging aspects of transporting a patient is coordinating a specialized team to manage the patient as they move from the ICU to the MRI. Such a team typically includes two to six staff members. Further challenging the situation, if the department is already short-staffed, taking staff away from the ICU to assist in imaging a patient could put other patients at risk. Additionally, each patient transport for imaging complicates the ICU workload, creating time-intensive patient care interruptions that require specialized nurses to remove and reattach life-sustaining equipment.
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Risk of adverse events during transportation: According to Glavis et al., the workflow for imaging an ICU patient with conventional high-field MRI can take as long as 11.7 hours at their hospital, but other hospitals have anecdotally reported up to 24
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hours. Additionally, intrahospital transport of patients is associated with numerous cardiovascular and respiratory risks that may limit timely and safe neuroimaging for critically ill patients. And unfortunately, even under the supervision of a well-trained transport team, adverse events may still occur in approximately 26–79% of critically ill patient cases during transport.
Martin et al. reported that ventilator asynchrony was the most frequent adverse event and put patients at a higher risk for pneumothorax, atelectasis, and ventilator-associated pneumonia. Difficulties occur with hardware, challenges with lifts to move the patient, issues with infusion lines, and a lack of battery life for equipment needed to support the patient. In addition to patient impact, there are expenses associated with each adverse event. According to a study by Mello et al., the average hospital-borne cost of an adverse event is $6,255 (adjusted for inflation).
Due to these challenges, the adoption of conventional MRI scanners has been limited across medical settings in the United States and globally, especially in rural locations where many individuals only have access to small clinics. MRI scanners also include additional charges of establishing an MRI suite, patient support areas, machine installation and servicing, software upgrading, and maintenance that burden hospitals and clinics with limited ongoing funding.
There are significant benefits to diagnosing a disease in its early stages, which can reduce the time to treatment and improve the quality of life for those patients. We have taken advantage of technological advances in electronics and computing to develop an MRI device that is not only portable but also uses an ultra-low-field 64mT (0.064T) magnet, which is much lower than the 1.5T or higher field strength of conventional MRI scanners. Our advanced technology allows healthcare professionals to conduct an MRI scan at the patient’s bedside in the hospital or any clinical setting to begin early diagnosis, intervention, and ongoing treatment. Many small- and medium-sized hospitals also consider leasing advanced MRI scanners to provide MRI imaging services without undertaking the potentially more costly long term commitment of purchasing an MRI scanner. Our Swoop® system is available to medical facilities in the United States for purchase with multiple payment options.
According to a 2008 report from the World Health Organization, 90% of the world does not have access to MRI, primarily due to socioeconomic factors. Many low-resource countries recognize the benefit of investing in their healthcare infrastructure, and it is expected to cause a spur in growth for the global MRI market. For example, China is one of the fastest-growing markets building its healthcare infrastructure in rural areas. The ability of these countries to build the facilities needed to house these large systems and train highly specialized personnel to operate conventional MRI scanners presents a challenge.
Products and Services
Our Swoop®Portable MR Imaging® System
We designed our Swoop® system to address an unmet need in point-of-care medical imaging through a unique combination of hardware and AI-powered software services. Our hardware is powered using modern computational power and deep learning advances. Our software addresses the traditional ease-of-use and integration challenges often presented by specialized medical technologies. Our system operates from a Wi-Fi-capable tablet and integrates with picture archiving and communication systems (“PACS”) to enable fast and confident clinical decision-making.
Features
Point-of-Care Neuroimaging—FDA-Cleared for MRI of the Brain and Head in Patients of All Ages
Neuroimaging at the point of care has only been possible using CT. CT can visualize bones or blood vessels well when the patient is injected with a contrast agent but is not as sensitive as MRI at imaging the brain’s anatomy. Additionally, CT delivers a significant
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amount of ionizing radiation. Exposing patients to radiation increases the risk of developing cancer, which limits CT’s use for critically ill patients and makes it particularly hazardous for pediatric patients.
The gold standard for neuroimaging is MRI, which can provide excellent high-resolution images of the soft tissues of the brain without being obscured by the skull. MRI can provide critical insight into brain trauma and disease but historically has not been available at the point of care. Because of their size, weight, and safety issues, conventional MRI scanners were only available in hospitals, major medical centers, and outpatient imaging providers, meaning that patients typically must be transported to the MRI scanner.
We have developed a new category of medical imaging, point-of-care MRI, that is smaller, lighter weight, and lower cost than conventional MRI scanners yet maintains the soft tissue visualization capabilities critical for neuroimaging. Since launching our FDA-cleared portable Swoop® system in 2020, advanced neuroimaging is now available for patients of all ages at the point of care.
Ultra-Low-Field System
To engineer this new category of point-of-care MRI, we made several significant design changes with respect to conventional MRI, particularly the magnetic field strength. Over the past 40 years, the goal for improving conventional MRI scanners has been to attain higher magnetic field strength. In 2017, the FDA cleared the first 7T MRI, after 20 years of development to establish clinical relevance. It was noted that the added field strength allows for better visualization of smaller structures and subtle pathologies that may improve disease diagnosis. We have taken a different approach by developing our Swoop® system to have an ultra-low-field magnet of 0.064T, which enables MRI to become portable because, unlike conventional MRI scanners, the field strength of the magnet in our system does not require a specialized radio frequency room to house the MRI scanner safely. This field strength comes from a unique optimization of the magnet size, weight, field uniformity, and patented design of the permanent magnet structure that provides sufficient image clarity for diagnostic purposes.
There are additional benefits to operating an MRI system with an ultra-low-field magnet. It reduces the risk of iron-containing objects becoming projectile and injuring patients or operators, a typical concern of conventional MRI scanners. Furthermore, the radiofrequency pulses used in conventional MRI are responsible for 55% of the FDA-reported adverse events from MRI, causing skin and internal burns in some patients. Operating at 0.064T means using lower energy radiofrequency pulses and significantly reducing associated safety risks.
Motion Correction
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Portable MRI at the point of care can provide MRI insights to more critically ill patients than previously possible. Conventional MRI scans regularly suffer from quality problems due to patient motion, with approximately 30% of all scans from inpatient or emergency department exams having moderate or severe image quality issues. We have developed motion compensation technology to improve image quality in the most challenging, and often most in need, patients that received FDA clearance for clinical use. We believe that with continued development, our technology can produce diagnostic scans without requiring the operator to make expert adjustments to the scanning procedure due to typical patient movements.
Noise-Cancellation Technology
Designing an ultra-low-field magnet is not sufficient to enable portable MRI. Portable MRI must also address the electromagnetic interference surrounding us. Electromagnetic interference makes conventional MRI outside of a shielded room impossible. Conventional MRI scanners are permanently installed in a special room where the walls, floor, and ceiling are encased in copper or aluminum to provide an environment for conventional MRI machines to operate, in which all man-made and natural electromagnetic interference is prevented from entering. Installation of these shielded rooms typically costs more than $100,000.
We have developed proprietary, patented noise-cancellation technology to enable portable MRI. Our technology measures the external electromagnetic interference and subtracts that from the interference that swamps the MRI signals. The image below shows one slice of an MRI image acquired a) outside a shielded room without noise cancellation, b) outside a shielded room with noise cancellation, and c) inside a shielded room without noise cancellation.
Delivery of Multiple Sequences with Tissue Contrasts
MRI can provide images with different soft tissue contrasts through various sequences that can highlight a range of pathologies. These contrasts are standard in conventional MRI and allow for the differentiation of various tissue types aiding in establishing the diagnosis. Our Swoop® system generates images with contrast weightings with which physicians are most familiar and which are most clinically useful for the target use cases: T1, T2, fluid-attenuated inversion recovery (“FLAIR”), and diffusion-weighted imaging (“DWI”) with apparent diffusion coefficient (“ADC”) maps.
Image Quality
We deliver diagnostic-quality images to healthcare professionals. The images from our Swoop® system are higher in contrast resolution than other portable medical neuroimaging systems, such as portable CT scanners. Our portable Swoop® system also delivers comparable image resolution at 1.5 x 1.5 x 5 mm, 1.6 x 1.6 x 5 mm, or 2.4 x 2.4 x 6mm (depending on the sequence) relative to the typical image resolution of a conventional MRI at 1.0 x 1.0 x 5 mm. Our MRI signal is produced at 0.064T compared to 1.5T or higher produced by conventional, fixed MRI scanners. We believe that the Swoop® system provides the potential to improve the quality of care for patients who have limited or no access to conventional MRI, which includes 90% of the world’s population.
Controlled by an Easy-to-Use Wireless Tablet
As we seek to reach new markets and users with our Swoop® system, we have sought to make the operation of the device as simple and easy to use as possible. We believe it is important to consider usability when significantly changing how a medical device is used, specifically in MRI, where conventionally, the operator is required to have several years of training. We believe this is particularly important when used in emergency situations such as stroke, where time can be critical.
The interfaces to the Swoop® system are simple, intuitive buttons, joystick controls to drive the system, and a familiar tablet controller for image acquisition and viewing. The user interface provided on the touch-screen display offers a playlist of protocols based on the use case that can be started, stopped, and rearranged as needed. In addition to being easy to use and the consequential acceleration of hospital workflows that can result, our system provides standardized images across all placement sites due to our uniform manufacturing specifications and a consistent set of sequences that individual operators do not customize. Conventional MRI scanners are sequenced by highly-trained technologists and can have variations in image resolution and contrast weighting across sites due to institutional policies and radiologist preferences. We believe the standardization of images across scanners and sites will
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significantly benefit the ability of radiologists and other healthcare professionals to read our images efficiently and ultimately build a repository of homogenized image data from which to extract value using data mining and deep learning.
Integration with Picture Archiving and Communication System (PACS) and Secure Image Upload to the Cloud
Similar to other medical devices in hospitals, we designed our Swoop® system to seamlessly integrate with the hospital informational technology (“IT”) infrastructure, such that scans can be ordered easily and sent to PACS to be read by a radiologist. For applications where access to such infrastructure is unavailable, we also offer a secure cloud based PACS where healthcare professionals, including teleradiology service providers, can view images from anywhere in the world. We believe the combination of portable MRI, where scans can be obtained outside the conventional MRI suite, and teleradiology can significantly improve patient care and increase access.
Fully Automated MRI Post-Processing Software
We believe that bringing the AI’s power to MRI has the potential to significantly improve the efficiency of medical imaging in a wide array of use cases, which can benefit the patient by potentially helping to improve outcomes and result in shorter hospital stays. We received FDA clearance for BrainInsightTM, our first AI application, in January 2021. BrainInsightTM offers automatic labeling, spatial measurements, and volumetric quantification that operate on images from our Swoop® system and automatically adds these insights and associates them to the images in the PACS. Using this approach, we intend to grow our portfolio of applications with internal and external development and leverage the uniquely standardized (and fully anonymized) record of image data we plan to create with our portable Swoop® system.
Design
Location Flexibility
Despite the weight of our Swoop® system being 1,400 pounds, its powered drive system means operators can move the system around the hospital with minimal effort. The Swoop® system can be moved from bed-to-bed and easily positioned in tight spaces because it turns on the spot with a zero-turn radius.
Open Layout Designed to Potentially Reduce Patient Anxiety
For an MRI scan in a traditional setting, a patient arrives at the radiology department of a hospital and typically enters through a door covered with radiation warnings and other hazard symbols. The patient then proceeds to a waiting room where they undergo a lengthy safety questionnaire and are asked to remove all jewelry and clothes (to their underwear) and put on a hospital gown. Wait times vary from a half hour to several hours before the patient enters the console room and is led through a large metal door into the RF screen room by themselves. Typical conventional MRI scanners are long tubes where the patient is positioned on a motorized bed, and RF coils are attached around the patient who has been instructed to lay still. The MRI technician uses the motorized bed to push the patient into the long tube of the large superconducting magnet, leaves the room, closes the metal door to the scan room, and tells the patient over an intercom that the scan is about to start. The patient hears the steady mechanical thumping of the cryocooler in the magnet room until the scanning starts, accompanied by extremely loud acoustic noises. The conventional MRI procedure is often a daunting experience for the patient that can cause significant anxiety, especially for pediatric patients who are separated from their families during this time.
Unlike conventional MRI, our Swoop® system is entirely contained in a system that is just 55 inches tall and 34 inches wide and is designed to scan patients in their beds. Parents, family, or caregivers can be close to the patient as they are scanned, with just their head in the transparent head RF coil. The system is quiet enough to allow constant verbal contact with the patient, which can create a considerably less distressing experience for the patient compared to that of a conventional MRI scanner.
Powered Using a Standard Wall Outlet
Operable throughout any hospital environment, our Swoop® system plugs into a standard wall outlet (100-230 VAC, 50/60 Hz, 15A) and uses less than 900W of electricity. This ability is achieved with low-power electronics, including efficient power supplies and power amplifiers, coupled with a zero-power consumption permanent magnet. Our Swoop® system does not require many of the components of conventional MRI, including the liquid helium used in conventional MRI superconducting magnets or the associated safety and supporting infrastructure, the chilled water-cooling systems for the power electronics and gradient coils, and the room air conditioning needed to extract the heat generated in the separate electronics machine room, or the special 480 V, 3-phase, 200A power supply.
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Services
Unlimited Training and Support Resources
Through our subscription model, we offer several services to complement the advanced features of our product. As part of our subscription, we offer user training during the subscription period to make it as easy as possible for healthcare professionals to operate our system. We offer this support primarily as reassurance to our customers, although we are confident our customers will be able to operate our user-friendly device with ease and efficiency; in our experience so far, the user training on the system is generally simple and only requires a few hours.
The Swoop® system subscription includes support and technical assistance with hardware and software issues. A combination of remote and onsite support in collaboration with onsite technical staff solves software issues. In addition to these support services, our subscription includes our Hyperfine Image Viewer, a cloud archive that users can use to upload images for storage purposes. Subscription also grants access to our future software upgrades. Recent upgrades include our FDA-cleared motion correction technology that improves the quality of images in the presence of motion and other potential future upgrades designed to improve the patient workflow and diagnosis.
Our People
Legacy Hyperfine was founded in 2014 by Dr. Jonathan Rothberg. Our mission is to provide affordable and accessible imaging and monitoring through MRI to revolutionize healthcare for people around the world.
As of February 15, 2023, we had 136 employees, all of whom were full-time employees and of whom 17 work in sales, clinical and marketing, 92 work in research, development, manufacturing and operations, and 27 work in general and administrative capacities. As of February 15, 2023, 133 of our employees were located in the United States and 3 were located in the United Kingdom. None of our employees are represented by a labor union or are subject to a collective bargaining agreement.
Dr. Rothberg and our business have been recognized for leadership. Legacy Hyperfine was founded in 2014 by Dr. Jonathan Rothberg, a serial entrepreneur that received the Presidential Medal of Technology and Innovation in 2016 for inventing a novel next generation DNA sequencing method and has founded more than 10 healthcare and technology companies, including 454 Life Sciences, Ion Torrent, CuraGen, Butterfly Network and Quantum-Si.
Information About Our Executive Officers and Directors
The following persons were our executive officers and directors as of March 1, 2023:
Name Position
Executive Officers
Maria Sainz President, Chief Executive Officer and Director
Alok Gupta Chief Financial Officer
Brett Hale Chief Administrative Officer
Khan Siddiqui, M.D. Chief Medical Officer and Chief Strategy Officer
Directors
R. Scott Huennekens Executive Chairperson of the Board of Directors
Jonathan M. Rothberg, Ph.D. Vice Chairperson of the Board of Directors
John Dahldorf Chief Financial Officer, Santa Cruz Nutritionals
Daniel J. Wolterman Chief Executive Officer, Wolterman Consulting LLC
Environmental, Social and Governance Practices
As we work toward our mission, we are increasingly focused on providing transparency around our environmental, social and governance (“ESG”) practices and identifying risks related thereto. We are committed to human capital management, patient advocacy and community outreach efforts, corporate governance, and implementing environmental sustainability initiatives.
Environmental Stewardship: We recognize the importance of taking measures to reduce our environmental footprint. As we grow our business, we have initiated certain projects to begin tracking our environmental impact, and where feasible, have taken measures
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to increase our sustainability efforts. Some of our efforts include our commitment to reduce, reuse or recycle where possible or appropriate and energy efficient projects to lower energy use within our office areas and laboratories.
Human Capital Management: We believe that our people are the reason for our success and we have organized ourselves to maximize productivity and performance. We maintain a high bar for talent and actively work to build diversity within our workforce. Critical to achieving our strategic goals is our ability to build and retain an exceptional team in which each member plays a unique and important role.
We recognize that maintaining an engaged and top-notch workforce and a connection with the communities we serve are critical to our success. Comradery and community are at the core of who we are as a company and are integral facets of our human capital management strategy. We are inspired by each other and the possibilities of what we can achieve together. We understand that in order to drive innovation, we must continuously improve our human capital management strategies and find ways to foster engagement and growth within our organization. To this end, below are some of our initiatives:
Professional Development Programs and Opportunities: Our greatest asset is our employees and we aspire to provide them with opportunities so they can continue to grow and excel in their functions and our company. Professional growth of our employees leads to engagement, development and allows us to leverage opportunities so we can hire and promote key talent from within. Through development planning, we strive for employees at all levels to focus on strengthening the skills required in their current role and potentially their next role. We are focused on building a culture of continuous coaching, feedback and open communication between managers and their direct reports throughout the entire year. We provide managers and employees with training on how to conduct effective forward-looking performance conversations and to set effective goals that are realistic, measurable, attainable, relevant and timebound.
Diversity, Equity and Inclusion: Our commitment to maintaining a top-performing company means investing in and creating ongoing opportunities for employee development in a diverse and inclusive workplace. We believe that a diverse workforce not only positively impacts our performance, fosters innovation, inspires us to achieve greater results, increases our collective capabilities and strengthens our culture, but it also cultivates an essential pipeline of experienced leaders for management. Hiring for diversity of thought, background and experience, and diversity of personal characteristics such as gender, race and ethnicity is intentional and continues to be an area of focus as we build and grow our workforce.
Compensation, Equity and Benefits: We have designed a broad-based compensation program that is designed to attract, retain and motivate our employees to deliver sustainable long term value. We seek to deliver performance-driven, market competitive reward opportunities commensurate with company and individual performance. Many of our employees receive equity grants and cash bonuses in addition to base salaries and our benefits package. We believe that providing employees with an ownership interest in our company further strengthens the level of employee engagement. Furthermore, equity awards help align the interests of our employees with the long term interests of our stockholders. We also offer employees a health insurance package.
Governance, Ethics, and Compliance: Our board of directors is committed to robust corporate governance practices, risk oversight, stockholder rights, diversity, equity and inclusion, corporate sustainability, ethics and compliance in order to protect the long term interests of our company, stockholders and the patients we serve. Our board of directors adopted corporate governance principles applicable to us, including responsible oversight and management of the Company, effective controls and processes, compliance with SEC and Nasdaq Stock Market rules and regulations, maintaining an engaged board of directors and a board structure that recognizes the importance of compliance, diversity, appropriate compensation practices, and succession planning, among other matters.
We will continue to evolve and strengthen our human capital management strategies, increase our environmental efforts, maintain and continue to improve our corporate governance practices, and anticipate reporting on other corporate sustainability measures over time.
Marketing, Sales and Pricing
Marketing
Our marketing efforts are focused on accelerating awareness of our products and capabilities in order to create a strong reputation with clinicians and healthcare administrators. Our go-to-market approach features a targeted sales organization complemented by an array of promotional activities including media coverage, tradeshow exhibition, advertising, and live product demonstration. We principally target ICU, comprehensive and primary stroke accredited facilities. In the future, we plan to leverage this approach for both our Swoop® system and our future products that have similar end markets.
We recognize the role of education in accelerating clinical adoption of our products across the patient care pathway, including healthcare professionals who currently may not themselves be primary users of MRI technology. To support adoption of our product and in addition to our simplified product interface, we are in the process of developing a training curriculum and tutorials and have
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built a team of clinically trained clinical support specialists to guide and coach clinicians on the unique features of our device and on the specific clinical application of our technologies.
Sales and Pricing
The Swoop® system is commercially available in the United States, Canada, Australia, New Zealand, Pakistan, and the United Kingdom, and the system also has received CE marking in the European Union. We are building our direct commercial infrastructure in the United States and also sell our products in other countries either through direct sales or through distributors. Current distributor agreements exist in Canada, Australia, New Zealand, and Pakistan.
We are primarily commercializing our device through one business model, which is ownership accompanied by an annual service and support agreement. In this model, the Swoop® system is typically sold with a service and support agreement that begins in year one and is sold initially in either 36- or 60-month terms. In certain cases, the Swoop® system is sold without an accompanying service and support agreement. We offer our customers payment term options that include, among others, either an upfront payment for the Swoop® system and annual payment for service and support service or an annual payment option for the term of their agreement. The annual payment option contains a portion of interest for the Swoop® system over the term.
This model provides for the sale of the Swoop scanner, along with an off-the-shelf tablet for use with the scanner, to the customer based on agreed payment terms, which is more affordable than the average cost of $1.2 million for conventional MRI scanners.
To a lesser extent, we are also commercializing our device through a subscription bundle model, in which we sellthe use of our device and an off-the-shelf tablet for use with the scanner, plus the same service and support benefits provided in the ownership with service and support model. Both the ownership with service and support model and the subscription bundle model are available for commercial and research use of the device.
To help ensure our customers receive the highest level of customer service, we plan to continue to sell directly to customers and provide ongoing customer support. However, as we expand internationally subject to regulatory authorization in those countries, we may continue to leverage distributors to sell our product depending on the commercial strategy for each country assessed on a country-by-country basis. Through our business model, we aim to provide MRI systems that are more affordable than conventional MRI systems and achieve our vision of increasing accessibility to MRI worldwide.
Suppliers and Manufacturing
Our Swoop® system is built using both custom-made and off-the-shelf components supplied by outside manufacturers and vendors located in the United States, Europe and Asia. One key custom-made component in our Swoop® system is the magnet, which is manufactured by a single source supplier in Europe. The majority of the other components for the Swoop® system are off-the-shelf or made using standard processes.
We purchase some of our components and materials used in manufacturing, including magnets, field programmable gate arrays (“FPGAs”), central processing units (“CPUs”) and molded plastics, from single sources. Although we believe that alternative sources of these components and materials would be available, it would take time to identify and validate replacement components, which could negatively affect our ability to supply the Swoop® system on a timely basis. We cannot give assurances that any alternative supplier would be able to recreate the manufacturing processes currently in use. To mitigate this risk, we typically carry a significant inventory of critical components. We are also working with our Swoop® system device manufacturer, Benchmark Electronics, Inc. ("Benchmark"), to add an additional magnet supplier to the manufacturing process to mitigate the risk to supply of our magnets by the current use of a single supplier.
All of our Swoop® system devices are manufactured, tested, shipped and supported by Benchmark from its facilities in Nashua, NH. We believe that this manufacturing strategy is efficient and conserves capital. However, in the event it becomes necessary to utilize a different contract manufacturer for our Swoop® system products, we would experience additional costs, delays and difficulties in doing so, and our business could be harmed.
Key Agreements
Manufacture and Supply Agreement with Benchmark Electronics, Inc.
In October 2018, Legacy Hyperfine entered into a Manufacture and Supply Agreement with Benchmark (the “MSA”). Under the MSA, Benchmark agreed to manufacture our products pursuant to binding purchase orders. Each month, we have agreed to provide Benchmark with a binding purchase order for a period specified by the MSA, as well as a non-binding forecast for each month within
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such period. If we do not provide the monthly purchase order and forecast update, then the first forecast month of the then-current forecast becomes binding so that a rolling binding commitment to purchase product for the specified period is maintained. The parties have agreed to meet periodically regarding any minimum order quantities of components under the MSA. We also have certain inventory related obligations, including the obligation to purchase excess and obsolete components from Benchmark. Excess components are determined based upon the amount of component inventory that exceeds the build plan for the specified period discussed above. We would be required to purchase such excess inventory and be credited back against future purchases of finished products as the inventory of components is reduced to the amount needed to meet the rolling build plan. Obsolete materials are immediately invoiced once identified.
Under the terms of the MSA, we granted Benchmark a non-exclusive, non-transferable, revocable, fully-paid, royalty-free license, without the right to sublicense, to use our technology solely to manufacture our products. The MSA provides that we will own any right, title and interest in any improvements or modifications to our technology made in the course of performance of Benchmark’s obligations under the MSA. We and Benchmark also agreed to indemnify each other against certain third-party claims.
Following the MSA's initial three-year term, the MSA renews automatically for additional two-year terms unless either party gives 180 days’ prior written notice before the end of the then-current term to the other party electing not to renew the agreement. The MSA or any purchase order under the MSA may be terminated by either party for convenience upon 90 days’ prior written notice to the other party. The MSA may also be terminated by either party by written notice upon the occurrence of (i) a breach by the other party under the agreement which is not cured within 30 days after written notice by the terminating party, (ii) the other party becomes insolvent, dissolves, liquidates or ceases to conduct business or (iii) the occurrence of payment-related breaches. Benchmark may also terminate the agreement upon the filing of any petition against us under bankruptcy or similar laws, where such petition is not vacated within 10 days via court order.
Competition
Several large companies, such as General Electric, Siemens, Philips, Hologic, Varian, Fuji, Toshiba, Canon and Hitachi currently dominate the medical imaging market. We expect that the existing market participants will remain key players in the future.
As a general matter, we view competition on two levels:
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Computed tomography (CT), particularly non-contrast computed tomography, both portable and/or at the point of care setting. CT systems, while providing valuable information about hemorrhage and fractures, provide less soft tissue differentiation to inform clinical decisions when compared to MRI. As such, Swoop is well positioned to augment critical care and emergency departments with existing CT capabilities; and
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Portable ultra-low field MRI systems with the same or better attributes, currently in development. Currently, to our knowledge these systems have no, or limited market penetration and we are not aware of any competing company that has successfully delivered a commercial, scalable portable MRI system. There are several companies currently in the process of developing this technology, including Promaxo, Neuro42, Deepspin and Huami.
We view high-field MRI more as a complementary than a competitive technology. Particularly in the U.S., we are seeing substantial interest among our customers for the implementation of Swoop® system to augment traditional, high-field MRI workflows and increase throughput of high-field scanners.
Intellectual Property
Protection of our intellectual property is a strategic priority for our business. We rely on a combination of patents, trademarks, trade secrets and other intellectual property rights protections and contractual restrictions to protect our proprietary technologies.
The patents owned and in-licensed by us are generally directed to the architecture of Legacy Hyperfine’s MRI systems and related technology, and Liminal’s non-invasive brain sensing and treatment devices and related technology. We have developed a portfolio of issued patents and pending patent applications directed to commercial products and technologies for potential development. We believe that our intellectual property is a core strength of our business, and our strategy includes the continued development of our patent portfolio.
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Our Swoop® System and Related Technology
As of February 15, 2023, Hyperfine owned approximately 142 issued patents and approximately 108 pending patent applications relating to our Swoop® System and related technology. Of Legacy Hyperfine’s approximately 141 issued patents, approximately 103 were issued U.S. patents. Of Legacy Hyperfine’s approximately 108 pending patent applications, approximately 40 were pending U.S. patent applications. In addition, Hyperfine owned approximately 39 issued patents in foreign jurisdictions, including Australia, China, France, Germany, Ireland, Israel, Japan, Korea, the Netherlands, Switzerland/Liechtenstein, and the United Kingdom, and approximately 68 pending patent applications in foreign jurisdictions, including China, Europe and the Patent Cooperation Treaty (PCT) countries, corresponding to the foregoing. In total, Hyperfine owns approximately 69 patent families generally directed to its MRI system, including magnet design and manufacturing, electronics and circuitry, mechanical aspects, safety features, noise compensation technology, image formation and analysis software, and various other aspects of MRI systems. These issued patents and pending patent applications (if they were to issue as patents) have expected expiration dates ranging between 2035 and 2043.
Liminal Non-Invasive Brain Sensor and Related Technology
As of February 15, 2023, Liminal owned approximately 7 pending patent applications. Of Liminal’s approximately 3 pending patent applications, approximately 3 were pending U.S. utility patent applications. These applications are directed to its brain sensing technology, including stimulation and monitoring components, electronics and circuitry, mechanical aspects, and software including AI software algorithms, and various additional features. These pending patent applications (if they were to issue as patents) have expected expiration dates ranging between 2039 and 2041.
In addition to patents, we also rely on trade secrets, technical know-how, and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information and other intellectual property by generally requiring our employees, consultants, contractors, suppliers, outside scientific collaborators and other advisors to execute non-disclosure and assignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from using or incorporating the proprietary rights of third parties during their engagement with us. We also generally require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.
License Agreements
We have entered into licenses in the ordinary course of business relating to our technologies or other intellectual property rights or assets.
Exclusive License Agreements with The General Hospital Corporation (d/b/a Massachusetts General Hospital)
Legacy Hyperfine entered into an exclusive license agreement with The General Hospital Corporation (d/b/a Massachusetts General Hospital) (“MGH”) effective in May 2014 (the “May Agreement”) and an exclusive license agreement with MGH effective in June 2014 (the “June Agreement”), respectively, under each of which Legacy Hyperfine acquired an exclusive and worldwide license to specified patent rights owned by MGH relating to MRI technology. The licenses were granted to us subject to the right of MGH and not-for-profit academic, government and other not-for-profit institutions to make and to use the subject matter described or claimed in the rights granted under the licensed patents for research and educational purposes and, for any licensed patents that are supported by federal funding, subject to certain rights, conditions and limitations imposed by U.S. law, including a royalty-free, non-exclusive license granted to the U.S. government and a requirement that any products used or sold in the United States must be manufactured substantially in the United States.
Under the terms of each of the license agreements, we agreed to pay MGH an annual maintenance fee and agreed to reimburse MGH for certain patent related fees and costs incurred by MGH, including past patent fees and costs. If we were to enter into a sublicense under either license agreement, we would be obligated to pay MGH a percentage in the mid-teens of certain consideration paid to us by the sublicensee. The aggregate amount we paid under these agreements was $98,000.
At the end of the third quarter of 2022, we provided MGH with written notice that we were terminating our license agreements effective in the fourth quarter of 2022. The licensed patents are not used in our current products and we do not expect to use them in future products.
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Government Regulation
Diagnostic and therapeutic medical devices like those we develop and distribute are subject to regulation by numerous regulatory bodies, including the U.S. Food and Drug Administration (“FDA”) and comparable international regulatory agencies. These agencies require developers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, packaging, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation program be conducted before a device can be approved for marketing and commercial distribution. In addition, healthcare regulatory bodies in the United States and around the world impose a range of requirements related to paying for medical devices and the procedures in which they are used, including laws intended to prevent fraud, waste, and abuse of healthcare dollars.
U.S. Laws and Regulations
In the United States, medical devices are subject to extensive regulation at the federal level by the FDA under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and its implementing regulations. The laws and regulations govern, among other things, medical device design and development, nonclinical and clinical testing, pre-market clearance, authorization or approval, establishment registration and product listing, product manufacturing, product packaging and labeling, product storage, advertising and promotion, product distribution, recalls and field actions, servicing and post-market clinical surveillance. A number of U.S. states also impose licensing and compliance regimes on companies that manufacture or distribute prescription devices into or within the state.
Some of our products are also subject to the Radiation Control for Health and Safety Act, administered by the FDA, which imposes performance standards and record keeping, reporting, product testing and product labeling requirements for electronic products that emit radiation, such as magnetic resonance imaging systems.
In addition, the commercialization and use of our devices in the United States is subject to regulation by the U.S. Department of Health and Human Services (“HHS”) and state agencies responsible for reimbursement and regulation of payment for healthcare items and services. Federal laws and regulations apply primarily in connection with government payer programs such as the Medicare and Medicaid programs, but state laws apply more broadly, encompassing healthcare items and services covered by private payers. At the state and federal level, the government’s interest is in regulating the quality and cost of healthcare and protecting the independent clinical judgment of licensed healthcare providers.
The Federal Trade Commission (“FTC”) also oversees the advertising and promotion of our products pursuant to broad authority to police deceptive advertising for goods or services within the United States. Under the Federal Trade Commission Act, the FTC is empowered, among other things, to (a) prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; and (c) gather and compile information and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce. In the context of performance claims for products such as our goods and services, compliance with the FTC Act includes ensuring that there is scientific data to substantiate the claims being made, that the advertising is neither false nor misleading, and that any user or expert testimonials or endorsements we or our agents disseminate related to the goods or services comply with applicable disclosure rules and other regulatory requirements. In addition, with respect to our commercial products and any future products that are marketed as clinical products, FDA’s regulations applicable to medical device products prohibit them from being promoted for uses not within the scope of a given product’s authorized intended use(s), among other promotional and labeling rules applicable to products subject to the FDCA.
Further, medical device systems that include wireless radio frequency transmitters and/or receivers are subject to equipment authorization requirements in the United States. The Federal Communications Commission (“FCC”) requires advance clearance of all radio frequency devices before they can be sold or marketed in the United States. These clearances ensure that the proposed products comply with FCC radio frequency emission and power level standards and will not cause interference.
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FDA Regulation of Medical Devices
Medical devices must undergo pre-market review by and receive clearance, authorization, or approval from the FDA prior to commercialization, unless the device is of a type exempted from such review by statute, regulation, or an FDA exercise of enforcement discretion. The FDA classifies medical devices into three classes based on risk. Regulatory control increases from Class I (lowest risk) to Class III (highest risk). The FDA generally must clear or approve the commercial sale of most new medical devices that fall within product categories designated as Class II and III. Commercial sales of most Class II and III medical devices within the United States must be preceded either by pre-market notification and FDA clearance pursuant to Section 510(k) of the FDCA (Class II) or by the granting of a pre-market approval (“PMA”) (Class III), after a pre-market application is submitted. Both 510(k) notifications and PMA applications must be submitted to FDA with significant user fees, although reduced fees for small businesses are available. Class I devices are generally exempt from pre-market review and notification, as are some moderate-risk Class II devices. Manufacturers of all classes of devices must comply with FDA’s Quality System Regulation (“QSR”), establishment registration, medical device listing, labeling requirements, and medical device reporting (“MDR”) regulations, which are collectively referred to as medical device general controls. Class II devices may also be subject to special controls such as performance standards, post-market surveillance, FDA guidelines, or particularized labeling. Some Class I and Class II devices may be exempted by regulation from the requirement of compliance with substantially all of the QSR.
510(k) Clearance Pathway
A 510(k) pre-market notification must contain information sufficient to demonstrate that the new device is substantially equivalent to a predictive device. A predicate device is a legally marketed device that is not subject to a PMA, meaning, (i) a device that was legally marketed prior to May 28, 1976 (“preamendments device”) and for which a PMA is not required, (ii) a device that has been reclassified from Class III to Class II or I, or (iii) a device that was found substantially equivalent through the 510(k) process. To obtain 510(k) clearance for a non-exempt Class II device, the product developer must submit a pre-market notification to FDA demonstrating that its product is substantially equivalent to such a predicate device. The FDA’s 510(k) clearance process generally takes from three to five months from the date the application is submitted, but it may take significantly longer if FDA has significant questions or needs more information about the new device or its manufacturing or quality controls.
As part of the 510(k) notification process for Class II devices that have an existing classification regulation available for purposes of the regulatory filing, the FDA may require the following:
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Development of comprehensive product description and indications for use.
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Completion of extensive nonclinical tests and/or animal studies, performed in accordance with the FDA’s good laboratory practice (“GLP”) regulations, as well as any performance standards or other testing requirements established by FDA through regulations or device-specific guidance.
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Comprehensive review of one or more predicate devices and development of data supporting the new product’s substantial equivalence to such predicate devices.
Assuming successful completion of all required testing, a detailed 510(k) notification is submitted to the FDA requesting clearance to market the product. This premarket notification includes all relevant data from pertinent nonclinical studies and clinical trials (if applicable), together with detailed information relating to the product’s proposed labeling, and other relevant documentation. The FDA evaluates all 510(k) submissions prior to filing for substantive review based on specific acceptance criteria and may issue a refuse-to-accept notification if the submission is deficient with respect to any of the established criteria. If the FDA determines that the applicant’s device is substantially equivalent to the identified predicate device(s), the agency will issue a 510(k) clearance letter that authorizes commercial marketing of the device for one or more specific indications for use. If the FDA determines that the applicant’s device is not substantially equivalent to the predicate device(s), the agency will issue a not-substantially-equivalent letter stating that the new device may not be commercially distributed.
After a new medical device receives 510(k) clearance from the FDA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require the submission of a PMA application. The FDA requires each manufacturer to make the determination of whether a device modification requires a new 510(k) notification or PMA in the first instance, but the FDA may review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance or PMA for a particular change, the FDA may retroactively require the manufacturer to submit a 510(k) pre-market notification or a PMA application. The FDA may also require the manufacturer to cease U.S. marketing and/or recall any distributed units of the modified device until 510(k) clearance or a PMA for the modification is obtained.
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De Novo Classification
If a previously unclassified new medical device does not qualify for the 510(k) pre-market notification process because no predicate device to which it is substantially equivalent can be identified, the device is automatically classified into Class III. However, if such a device would be considered low or moderate risk (in other words, it does not rise to the level of requiring PMA), it may be eligible for the De Novo classification process. The De Novo classification process allows a device developer to request that the novel medical device be reclassified as either a Class I or Class II device, rather than having it regulated as a high-risk Class III device subject to the PMA requirements. If the manufacturer seeks reclassification into Class II, the classification request must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device.
Under the FDCA, the FDA is required to classify a device within 120 days following receipt of the De Novo classification request from an applicant; however, the most recent FDA performance review goals state that in fiscal year 2023, FDA will attempt to issue a decision within 150 days of receipt on 70% of De Novo requests received during fiscal year 2023. De Novo classification requests are subject to user fees, unless a specific exemption applies.
As with the 510(k) pre-market notification process described above, any modification to a device authorized through the De Novo process that could significantly affect the safety or effectiveness of such device, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require the submission of a PMA application.
As an alternative to the De Novo classification process, a company could also file a reclassification petition seeking to change the automatic Class III designation of a novel post-amendment device under Section 513(f)(3) of the FDCA. FDA can also initiate reclassification of an existing device type on its own initiative. In December 2018, FDA issued a final rule to clarify the administrative process through which the FDA reclassifies a medical device. To reclassify a device under Section 513(e) of the FDCA, the FDA must first publish a proposed reclassification order that includes a summary of the valid scientific evidence that supports the reclassification; convene a device classification panel meeting; and consider comments to the public docket before it then publishes a final reclassification order in the Federal Register.
Pre-market Approval Pathway
Our point-of-care MRI systems have been classified and are regulated as Class II devices, although future products that we develop may be classified as Class III devices. Products classified by FDA as Class III generally require marketing approval via the PMA process. A PMA application must be supported by valid scientific evidence, which typically requires extensive data, including technical, nonclinical, clinical, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use(s). A PMA application also must include a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, it is considered “filed” and the FDA begins an in-depth review of the submitted information. During this substantive review period, the FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA. In addition, the FDA generally will conduct a pre-approval inspection of the manufacturing facility to evaluate compliance with the QSR, which requires manufacturers to implement and follow design, testing, control, documentation and other quality assurance procedures.
FDA review of a PMA application is required to be completed within 180 days of the application’s filing date although the process generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
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the product may not be safe or effective for its intended use(s) to the FDA’s satisfaction;
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the data from the applicant’s nonclinical studies and clinical trials may be insufficient to support approval;
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the manufacturing process or facilities that the applicant uses may not meet applicable requirements; and
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changes in FDA approval policies or adoption of new regulations may require additional data to demonstrate the safety or effectiveness of the device.
If an FDA evaluation of a PMA application or manufacturing facilities is favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions which must be met in order to secure final approval of the PMA application.
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When and if the conditions of the approvable letter have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of a device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted, and data is submitted in an amendment to the PMA. The PMA process can be expensive, uncertain and lengthy. PMA approval may also be granted with post-approval requirements such as the need for additional patient follow-up for an indefinite period of time.
New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA application and may or may not require as extensive clinical data or the convening of an advisory panel.
Clinical Investigations Using Devices in Development
Clinical trials are almost always required to support a PMA application and are sometimes required for a De Novo classification request or 510(k) pre-market notification. In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, an investigator acting on behalf of the company must, among other things, apply for and obtain institutional review board (“IRB”) approval of the proposed investigation. In addition, if the clinical trial involves a “significant risk” (as defined by the FDA) to human health, the company sponsoring the trial (referred to as the “sponsor”) must also submit and obtain FDA approval of an investigational device exemption (“IDE”) application. An IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of trial participants, unless the product is deemed a non-significant risk device and eligible for abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the trial protocol and informed consent are approved by a duly-appointed IRB for each site. FDA’s IDE regulations govern investigational device labeling, prohibit promotion, and specify an array of good clinical practice (“GCP”) requirements, which include, among other things, recordkeeping, reporting and monitoring responsibilities of trial sponsors and study investigators. Clinical trials must further comply with the FDA’s regulations for IRB approval and for informed consent and other human subject protections, all of which are considered part of GCP requirements. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product.
Information about certain clinical trials, including details of the protocol and eventually results, also must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on the ClinicalTrials.gov data registry. Information related to the product, patient population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is made public as part of the registration process. Sponsors are obligated to disclose the results of their clinical trials after completion. Disclosure of results can be delayed in some cases for up to two years after the date of completion of the trial. Failure to timely register a covered clinical trial or to submit results as provided for in the law can give rise to civil monetary penalties and also prevent the non-compliant party from receiving future grant funds from the federal government. The NIH Final Rule on ClinicalTrials.gov registration and reporting requirements became effective in 2017, and both NIH and FDA have brought enforcement actions against non-compliant sponsors.
The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application (or FDA’s grant of a De Novo classification request or clearance of a 510(k) notification, as applicable), for numerous reasons, including, but not limited to, the following:
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the FDA, the IRB(s), or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
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participants do not enroll in clinical trials at the expected rate;
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participants do not comply with trial protocols;
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participant follow-up is not at the expected rate;
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patients experience adverse side effects;
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participants die during a clinical trial, even though their death may not be related to the investigational products;
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IRBs and third-party clinical investigators may delay or reject the sponsor’s trial protocol;
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third-party clinical investigators decline to participate in a trial or do not perform a trial on the sponsor’s anticipated schedule or consistent with the clinical trial protocol, GCPs or other FDA requirements;
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the sponsor or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans;
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third-party clinical investigators have significant financial interests related to the sponsor or the trial that the FDA deems to make the trial results unreliable, or the sponsor or investigators fail to disclose such interests;
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unfavorable regulatory inspections of the sponsor’s clinical trial sites or manufacturing facilities, which may, among other things, require the sponsor to undertake corrective action or suspend or terminate the sponsor’s clinical trials;
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changes in governmental regulations or administrative actions applicable to the sponsor’s trial protocols;
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the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness; and
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the FDA concludes that the results from the sponsor’s trial and/or trial design are inadequate to demonstrate safety and effectiveness of the product.
In the Consolidated Appropriations Act for 2023, Congress amended the FDCA to require the sponsor of any clinical trial for a medical device to develop a diversity action plan for such trial, and if submission of an IDE application is required, to submit such diversity action plan to the FDA. The action plan must include the sponsor’s diversity goals for enrollment, as well as a rationale for the goals and a description of how the sponsor will meet them. The FDA may grant a waiver for some or all of the requirements for a diversity action plan. It is unknown at this time how the diversity action plan may affect device clinical trial planning and timing or what specific information FDA will expect in such plans, but if FDA objects to a sponsor’s diversity action plan and requires the sponsor to amend the plan or take other actions, it may delay trial initiation.
Ongoing Post-Market Regulatory Requirements and FDA Enforcement
In 2020, Legacy Hyperfine received 510(k) clearance from the FDA for its point-of-care MRI system. In addition, our proprietary BrainInsight product is fully automated MRI post-processing medical software that is regulated as a picture archiving and communications system, a classification which may include both hardware and software components, and which is classified by FDA as a Class II medical device. BrainInsight received 510(k) marketing clearance in January 2021 for use in automatic labeling, spatial measurement, and volumetric quantification of brain structures from a set of low-field MR images and to return annotated and segmented images, color overlays, and reports. More recently, in December 2022, Hyperfine received clearance for BrainInsight to include pediatric patients aged two years and older for lateral ventricles and midline shift applications. In December 2022, Hyperfine also received clearance for modifications to the MRI system, including software modifications related to the device pulse sequences and retraining of the advanced reconstruction models.
After a medical device is authorized for marketing and placed in commercial distribution (or, for 510(k)-exempt products, placed into commerce without first obtaining FDA clearance or approval), numerous regulatory requirements apply. These general controls that must be met for all device classes include:
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establishment registration and device listing;
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the QSR, which requires manufacturers, including third-party manufacturers, to follow design, testing, control, storage, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures;
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labeling regulations, which govern the mandatory elements of the device labels and packaging (including Unique Device Identifier markings for certain categories of products);
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FDA’s prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities;
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the MDR regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
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voluntary and mandatory device recalls to address problems when a device is defective and/or could be a risk to health;
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correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; and
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post-market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
FDA’s MDR requirements also extend to healthcare facilities that use medical devices in providing care to patients, or “device user facilities,” which include hospitals, ambulatory surgical facilities, nursing homes, outpatient diagnostic facilities, or outpatient treatment facilities, but not physician offices. A device user facility must report any device-related death to both the FDA and the device manufacturer, or any device-related serious injury to the manufacturer (or, if the manufacturer is unknown, to the FDA) within 10 days of the event. Device user facilities are not required to report device malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur but may voluntarily report such malfunctions through MedWatch, the FDA’s Safety Information and Adverse Event Reporting Program.
To ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic, pre-scheduled and unannounced inspections by the FDA and certain state authorities. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may lead to any of the following sanctions:
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Warning Letters or Untitled Letters that require corrective action;
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fines and civil penalties;
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unanticipated expenditures;
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delays in approving/clearing or refusal to approve/clear any of our future products;
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FDA refusal to issue certificates to foreign governments needed to export our products for sale in other countries;
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suspension or withdrawal of FDA approval or clearance (as may be applicable);
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product recall or seizure;
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partial suspension or total shutdown of production;
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operating restrictions;
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injunctions or consent decrees; and
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civil or criminal prosecution.
We and any of our contract manufacturers, and some suppliers of components or device accessories, are required to manufacture medical device products in compliance with current good manufacturing practice requirements set forth in the QSR, unless explicitly exempted by regulation. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components or services, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA evaluates compliance with the QSR through periodic pre-scheduled or unannounced inspections that may include registered manufacturing facilities of our subcontractors. Following such inspections, FDA may issue reports known as Forms FDA 483 or Notices of Inspectional Observations, which list instances where the FDA inspector believes the manufacturer has failed to comply with applicable regulations and/or procedures. If the observations are sufficiently serious or the manufacturer fails to respond appropriately, the FDA may issue Warning Letters, which are notices of intended enforcement actions against the manufacturer. For less serious violations that may not rise to the level of regulatory significance, FDA may issue Untitled Letters. FDA may take more significant administrative or legal action if a manufacturer continues to be in substantial noncompliance with applicable regulations.
For example, if the FDA believes we or any of our contract manufacturers or regulated suppliers are not in compliance with these requirements and patients are being subjected to serious risks, it can shut down manufacturing operations, require recalls of our medical device products, refuse to approve new marketing applications, initiate legal proceedings to detain or seize products, enjoin future violations, or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our business. We may be unable to comply with all applicable FDA regulations.
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U.S. Fraud and Abuse Laws and Other Compliance Requirements
Successfully commercializing a medical device or technology depends not on only FDA approval, but also on broad health insurance or third-party payor coverage. Government and private payors institute coverage criteria to ensure the appropriate utilization of products and services and to control costs. Limited third-party payor coverage for a technology or procedure may limit adoption and commercial viability, while broader coverage supports optimal market uptake. Favorable coverage decisions by government payors like Medicare or Medicaid is critical because private payors typically follow the government’s lead regarding reimbursement. However, manufacturers whose technology is reimbursed by government payors are subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse. These laws can be implicated by inappropriate sales and marketing arrangements with healthcare providers. Many commonly accepted commercial practices are illegal in the healthcare industry and violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in U.S. federal and state healthcare programs, including Medicare and Medicaid.
Anti-kickback Laws. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a government healthcare program such as Medicare and Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments, and providing anything at less than its fair market value. The Office of the Inspector General for the U.S. Department of Health and Human Services, has issued regulations, commonly known as safe harbors, which set forth certain provisions that, if satisfied in their entirety, will assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor element may result in increased scrutiny by government enforcement authorities or invite litigation by private citizens under federal whistleblower laws. The Anti-Kickback law is broadly interpreted and aggressively enforced with the result that beneficial commercial arrangements can be criminalized in the healthcare industry because of the Anti-Kickback law.
The penalties for violating the federal Anti-Kickback Statute include imprisonment for up to ten years, fines of up to $100,000 per violation and possible exclusion from government healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the government programs such as Medicare and Medicaid.
Federal False Claims Act. The federal False Claims Act prohibits knowingly presenting, or causing to be presented a false claim or the knowing use of false statements or records to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory per-claim civil penalties and attorneys’ fees. Violation of the False Claims Act also can result in exclusion from government healthcare programs.. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals (known as “relators” or, more commonly, as “whistleblowers”) may share in any amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, even before the validity of the claim is established and even if the government decides not to intervene in the lawsuit. Healthcare companies may decide to agree to large settlements with the government and/or whistleblowers to avoid the cost and negative publicity associated with litigation. In addition, the Patient Protection and Affordable Care Act of 2010 amended federal law to provide that a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Criminal prosecution is possible for knowingly making or presenting a false or fictitious or fraudulent claim to the federal government.
Various states have enacted false claims laws analogous to the False Claims Act. Some of these state laws apply where a claim is submitted to any commercial payor, and not merely a government healthcare program, and some authorize private citizens to bring suit on the state’s behalf.
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Federal Physician Self-Referral Law. The Federal Physician Self-Referral Law, also referred to as the Stark Law, prohibits a physician (or an immediate family member of a physician) who has a financial relationship with an entity from referring patients to that entity for certain designated health services, including durable medical equipment and supplies, payable by Medicare, unless an exception applies. The Stark Law also prohibits such an entity from presenting or causing to be presented a claim to the Medicare program for such designated health services provided pursuant to a prohibited referral, and provides that certain collections related to any such claims must be refunded in a timely manner. Exceptions to the Stark Law include, among other things, exceptions for certain financial relationships, including both ownership and compensation arrangements. The Stark Law is a strict liability statute: to the extent that the statute is implicated and an exception does not apply, the statute is violated. In addition to the Stark Law, many states have implemented similar physician self-referral prohibitions that may extend to Medicaid, third-party payors, and self-pay patients. Violations of the Stark Law must be reported and unauthorized claims must be refunded to Medicare in order to avoid potential liability under the federal False Claims Act for avoiding a known obligation to return identified overpayments. Violations of the Stark Law can also form the basis for exclusion from participation in federal and state healthcare programs.
Civil Monetary Penalties Law. The Civil Monetary Penalties Law (“CMPL”) authorizes the imposition of substantial civil money penalties against an entity that engages in certain prohibited activities including but not limited to violations of the Stark Law or Anti-Kickback Statute, knowing submission of a false or fraudulent claim, employment of an excluded individual, and the provision or offer of anything of value to a Medicare or Medicaid beneficiary that the transferring party knows or should know is likely to influence beneficiary selection of a particular provider for which payment may be made in whole or part by a government healthcare program, unless an exception applies. Sanctions for violations of the CMPL include exclusion from participation in government healthcare programs, substantial fines, and payment of up to three times the amount billed, depending upon the nature of the offense.
State Analogs of Federal Fraud and Abuse Laws. Many U.S. states have their own laws intended to protect against fraud and abuse in the healthcare industry and more broadly. In some cases these laws prohibit or regulate additional conduct beyond what federal law affects. Penalties for violating these laws can range from substantial fines to criminal sanctions.
HIPAA. The Health Insurance Portability and Accountability Act of 1996 and implementing regulations (“HIPAA”), created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government healthcare programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
FCPA and Other Anti-Bribery and Anti-Corruption Laws. The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA would include interactions with certain healthcare professionals or organizations in many countries. Our present and future business has been and will continue to be subject to various other U.S. and foreign laws, rules and/or regulations.
Physician Payments Sunshine Act. Manufacturers of U.S. FDA-regulated devices reimbursable by government healthcare programs are subject to the Physician Payments Sunshine Act, which requires manufacturers to track and annually report certain payments and other transfers of value made to U.S.-licensed physicians, certain advanced non-physician healthcare practitioners, or U.S. teaching hospitals. As a manufacturer of U.S. FDA regulated devices reimbursable by government healthcare programs, we are subject to this law. We are also required to report certain ownership interests held by physicians and their immediate family members. The law authorizes significant monetary penalties for violations, depending on the circumstances, and payments reported also have the potential to draw scrutiny on payments to and relationships with physicians, which may have implications under the Anti-Kickback Statute, Stark Law and other healthcare laws.
Similar to the federal law, certain states also have adopted marketing and/or transparency laws relevant to device manufacturers, some of which are broader in scope. Some state laws require medical device companies to comply with the relevant industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring device manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures. The need to build and maintain a robust compliance program with different compliance and/or reporting requirements increases the possibility that a healthcare company may violate one or more of the requirements, resulting in fines and penalties
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U.S. and European Data Security and Data Privacy Laws
HIPAA’s administrative simplification provisions established comprehensive federal standards for the privacy and security of health information. In 2009, Congress enacted Subtitle D of the Health Information Technology for Economic and Clinical Health Act, or HITECH, provisions of the American Recovery and Reinvestment Act of 2009, which expanded and strengthened HIPAA, created new targets for enforcement, imposed new penalties for noncompliance and established new breach notification requirements. HIPAA applies to health plans, healthcare clearing houses, and healthcare providers that conduct certain healthcare transactions electronically, which are referred to collectively as Covered Entities, as well as individuals or entities that perform services for Covered Entities involving the use, or disclosure of, individually identifiable health information or protected health information (“PHI”) under HIPAA. Such service providers are called "Business Associates." Under HIPAA, as amended by the HITECH Act, HHS has issued regulations to protect the privacy and security of PHI used or disclosed by Covered Entities and Business Associates. HIPAA also regulates and standardizes the codes, formats and identifiers used in certain healthcare transactions and standardization of identifiers for health plans and providers, for example insurance billing. We are a Business Associate of our Covered Entity Customers in connection with the use of data and images to train AI algorithms as well as the provision of product maintenance and support services. Accordingly, we execute and must comply with HIPAA Business Associate Agreements and with HIPAA regulations applicable to Business Associates. Any non-compliance with HIPAA and HITECH and related penalties, could adversely impact our business.
The HIPAA security standards require the adoption of administrative, physical, and technical safeguards and the adoption of written security policies and procedures to maintain the security of protected health information.
The HIPAA privacy regulations address the privacy of PHI by limiting the use and release of such information. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, including the right to access or amend certain records containing PHI, request an accounting of disclosures of PHI or to request restrictions on the use or disclosure of PHI. Proposed modifications to the privacy regulations were published in January 2021 with a public comment period that ended in May 2021. The content of the final rules and their potential impact on us is unknown at this time. The HIPAA breach notification regulations impose certain reporting requirements on Covered Entities and their Business Associates in the event of a breach of PHI.
Significant civil and criminal fines and other penalties may be imposed for violating HIPAA directly, and in connection with acts or omissions of any agents, including a downstream Business associate, as determined according to the federal common law of agency. Civil penalties are adjusted for inflation on an annual basis and can exceed one million dollars per year for failure to comply with a HIPAA requirement. A single breach incident can violate multiple requirements. Additionally, a person who knowingly obtains or discloses PHI in violation of HIPAA may face a criminal penalties (including fines and imprisonment), which increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use PHI for commercial advantage, personal gain or malicious harm. Covered Entities are also subject to enforcement by state Attorneys General who were given authority to enforce HIPAA.
Additionally, while HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
Even when HIPAA does not apply, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission 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. Individually identifiable health information is considered sensitive data that merits stronger safeguards. The FTC and states' Attorneys General have also brought enforcement actions and prosecuted some data breach cases as unfair and/or deceptive acts or practices under the FTC Act and comparable state laws.
The HIPAA privacy and security regulations establish a uniform federal "floor" and do not preempt state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. These laws overlap with HIPAA and may differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. The State of California, for example, has implemented comprehensive laws and regulations. The California Confidentiality of Medical Information Act (CMIA), imposes restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. The California Consumer Privacy Act of 2018 (the CCPA) went into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides
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new privacy rights to California residents, including the right to opt out of certain disclosures of their information. It also creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches which has led to an increase data breach litigation. Although the law includes limited exceptions, including for PHI maintained by a covered entity or business associate under HIPAA and medical information maintained by healthcare providers under the CMIA, it may regulate or impact our processing of personal information depending on the context. Further, the California Privacy Rights Act (CPRA) went into effect January 1, 2023, amending the CCPA. The CPRA imposes additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data and expands the application of the CCPA to all human resources personal information of California-based employees. It also created a new California data protection agency authorized to issue substantive regulations and is expected to result in increased privacy and information security enforcement. Similar to California, Virginia, Colorado, Connecticut, and Utah all enacted similar omnibus privacy laws that will also take effect in 2023, increasing the complexity of compliance and the risk of failures to comply.
In dealing with health information for the development of our technology or for commercial purposes, we will be indirectly affected by HIPAA and state-imposed health information privacy and security laws because these laws regulate the ability of our customers and research collaborators to share health information with us. Additionally, we must identify and comply with all applicable state laws for the protection of personal information with respect to employee information or other personal information that we collect.
In the European Union, increasingly stringent data protection and privacy rules that have and will continue to have substantial impact on the use of personal and patient data across the healthcare industry became stronger in May 2018. The EU General Data Protection Regulation, (“GDPR”) applies across the European Union and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances and significant fines for non-compliance. The GDPR fine framework can be up to 20 million euros, or up to 4% of our total global turnover of the preceding fiscal year, whichever is higher. The GDPR sets out a number of requirements that must be complied with when handling the personal data of such European Union-based data subjects including: providing expanded disclosures about how their personal data will be used; higher standards for organizations to demonstrate that they have obtained valid consent or have another legal basis in place to justify their data processing activities; the obligation to appoint data protection officers in certain circumstances; new rights for individuals to be “forgotten” and rights to data portability, as well as enhanced current rights (e.g. access requests); the principal of accountability and demonstrating compliance through policies, procedures, training and audit; and the new mandatory data breach regime. In particular, medical or health data, genetic data and biometric data where the latter is used to uniquely identify an individual are all classified as “special category” data under the GDPR and are afforded greater protection and require additional compliance measures. Noncompliance could result in the imposition of fines, penalties, data lockup or orders to stop noncompliant activities. We may be subject to GDPR if we undertake operations in the EU, offer products or services to individuals in the EU or monitor the behavior of individuals within the EU. Our research activities in the EU currently implicate the GDPR and if we undertake commercial operations in the EU, offer products or services to individuals in the EU or monitor the behavior of individuals within the EU, we will have additional compliance obligations.
We could also be subject to evolving European Union laws on data export, for transfers of data outside the European Union to themselves, group companies or third parties. The GDPR only permits exports of data outside the European Union to jurisdictions that ensure an adequate level of data protection. The United States has not been deemed to offer an adequate level of protection, so in order for us to transfer personal data from the EU to the United States, we must identify a legal basis for data transfer (e.g., the European Union Commission approved Standard Contractual Clauses). On July 16, 2020, the Court of Justice of the European Union or the CJEU, issued a landmark opinion in the case Maximilian Schrems vs. Facebook (Case C-311/18), called Schrems II. This decision (a) calls into question commonly relied upon data transfer mechanisms as between the European Union member states and the United States (such as the Standard Contractual Clauses) and (b) invalidates the EU-U.S. Privacy Shield on which many companies had relied as an acceptable mechanism for transferring such data from the EU to the United States. The CJEU is the highest court in Europe and the Schrems II decision heightens the burden on data importers to assess U.S. national security laws on their business and future actions of European Union data protection authorities are difficult to predict.
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Relatedly, following the United Kingdom’s withdrawal from the EU, the GDPR has been implemented in the United Kingdom (as the UK GDPR). The UK GDPR sits alongside the UK Data Protection Act 2018 which implements certain derogations in the EU GDPR into United Kingdom law. Under the UK GDPR, companies not established in the United Kingdom but who process personal data in relation to the offering of goods or services to individuals in the United Kingdom, or monitor the behavior of individuals in the United Kingdom will be subject to the UK GDPR – the requirements of which are (at this time) largely aligned with those under the EU GDPR and as such, may lead to similar compliance and operational costs with potential fines of up to 17.5 million pounds sterling or 4% of global turnover, whichever is higher. On June 28, 2021, the European Commission issued a decision that the United Kingdom ensures an adequate level of protection for personal data transferred under the EU GDPR from the European Union to the United Kingdom. In 2022, the UK government proposed and debated the Data Protection and Digital Information Bill to harmonize the 2018 Data Protection Act, UK GDPR, and the Privacy and Electronic Communications Regulations under one legislative framework. However, progress on the bill stalled as the government continues to assess the most optimal approach to data protection reform.
International Regulation of Medical Devices
International marketing and distribution of medical devices are subject to regulation by foreign governments, and such regulations may vary substantially from country to country. The time required to obtain marketing authorization in a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. There is a trend towards harmonization of quality system standards among the European Union, United States, Canada and various other industrialized countries.
The primary regulatory environment in Europe is that of the European Economic Area (the “EEA”), which is comprised of the 27 Member States of the European Union (the “EU”), Iceland, Liechtenstein and Norway. In the EEA, medical devices were previously required to comply with the Essential Requirements defined in Annex I to the EU Medical Devices Directive (“MDD”) (applicable in the non-EU EEA Member States via the Agreement on the European Economic Area), a coordinated system for the authorization of medical devices. The directives and standards outlined in the MDD regulate the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive are entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the EEA. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an organization designated by an EU country to assess a product’s conformity with the applicable legal requirements. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by a Notified Body of one country within the EU is required in order for a manufacturer to commercially distribute the product throughout the EU.
In 2017, European Union regulatory bodies finalized a new Medical Device Regulation, which replaced the existing MDD framework and became effective on May 26, 2021. The Medical Device Regulation changes several aspects of the existing regulatory framework for medical device marketing in Europe and is expected to result in increased regulatory oversight of all medical devices marketed in the EU, which may, in turn, increase the costs, time and requirements that need to be met in order to place an innovative or high-risk medical device on the European market. In particular, the new regulations, among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
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establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;
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improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
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set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
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strengthen the rules for the assessment of certain high-risk devices, which may have to undergo an additional check by experts before they are placed on the market.
European medical device manufacturers and distributors are currently benefiting from a grace period for legacy MDD certificates that lasts until May 26, 2024. For a product to qualify for the grace period, there must be no significant changes to such a legacy medical device as described in its existing MDD certificate; the recertification process under the Medical Device Regulation requires a demonstration that the performance and the safety of the currently marketed medical device has been maintained and that the system meets the new regulatory requirements.
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Outside of the EU, regulatory authorization must be sought on a country-by-country basis in order for the company to market their products. Some countries have adopted medical device regulatory regimes, such as the Classification Rules for Medical Devices published by the Hong Kong Department of Health, the Health Sciences Authority of Singapore regulation of medical devices under the Health Products Act, and Health Canada’s risk classification system for invasive devices, among others. Each country may have its own processes and requirements for medical device licensing, approval/clearance, and regulation, therefore requiring the company to seek marketing authorizations on a country-by-country basis.
In addition, as previously noted, the UK left the EU on January 31, 2020, with a transitional period that expired on December 31, 2020. The United Kingdom and the European Union entered into a trade agreement known as the Trade and Cooperation Agreement (“TCA”), which came into effect on January 1, 2021. The TCA does not specifically refer to medical devices. However, as a result of Brexit, the Medical Device Regulation will not be implemented in the UK, and previous legislation that mirrored the Medical Device Regulation in the UK law has been revoked. The regulatory regime for medical devices in the UK will continue to be based on the requirements derived from EU legislation as of January 21, 2020, and the UK may choose to retain regulatory flexibility or align with the Medical Device Regulation going forward. CE markings will continue to be recognized in the UK, and certificates issued by EU recognized Notified Bodies will be valid in the UK, until June 30, 2023. For medical devices placed on the UK market after this period, the UK Conformity Assessment UKCA marking will be mandatory. In contrast, UKCA marking and certificates issued by UK Notified Bodies will not be recognized on the EU market. The TCA does provide for cooperation and exchange of information in the area of product safety and compliance, including market surveillance, enforcement activities and measures, standardization related activities, exchanges of officials, and coordinated product recalls (or other similar actions). Depending on which countries products will ultimately be sold in, manufacturers may start seeking alternative sources for components if this would allow them to benefit from no tariffs. The rules for placing medical devices on the Northern Ireland market will differ from those in the UK.
In addition, outside the United States, a range of anti-bribery and anti-corruption laws, as well as some industry-specific laws and codes of conduct, apply to the medical device industry and interactions with government officials and entities and healthcare professionals. Such laws include, but are not limited to the UK Bribery Act of 2010. Further, the European Union member countries have emphasized a greater focus on healthcare fraud and abuse and have indicated greater attention to the industry by the European Anti-Fraud Office. Countries in Asia have also become more active in their enforcement of anti-bribery laws and with respect to procurement and supply chain fraud.
Corporate Information
HealthCor was incorporated as a Cayman Islands exempted company on November 18, 2020 for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination with one or more businesses. Legacy Hyperfine was incorporated under the laws of the State of Delaware on February 25, 2014 under the name “Hyperfine Research, Inc.” On May 25, 2021, the name of Legacy Hyperfine was changed to “Hyperfine, Inc.” Liminal was incorporated under the laws of the State of Delaware on September 21, 2018 under the name “EpilepsyCo Inc.” On July 20, 2020, the name of Liminal was changed to “Liminal Sciences, Inc.” On December 21, 2021, HealthCor changed its jurisdiction of incorporation from the Cayman Islands to the State of Delaware by deregistering as an exempted company in the Cayman Islands and continuing and domesticating as a corporation, incorporated under the laws of the State of Delaware. On December 22, 2021, HealthCor, Legacy Hyperfine and Liminal completed the Business Combination, pursuant to which each of Legacy Hyperfine and Liminal became a wholly owned subsidiary of HealthCor, HealthCor’s corporate name was changed to Hyperfine, Inc., Legacy Hyperfine’s corporate name was changed to Hyperfine Operations, Inc., Liminal’s corporate name was changed to Liminal Operations, Inc. (which was subsequently changed to Liminal Sciences, Inc.), and the business of Legacy Hyperfine and Liminal became the business of the Company. Our principal executive offices are located at 351 New Whitfield Street, Guilford, Connecticut 06437, and our telephone number is (203) 458-7100.
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