Inspira Technologies Oxy B.H.N. .(IINN) - 2021 Q4 - Annual Report

PART I Key Information The company faces significant financial, business, regulatory, intellectual property, and market-related risks Risks Related to Financial Condition and Capital Requirements The development-stage company faces ongoing operating losses, no product revenue, and requires substantial future funding Financial Performance Summary | Financial Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Loss | $17 million | $7.2 million | | Accumulated Deficit (as of Dec 31, 2021) | $28.8 million | - | - The company has not generated any revenue from product sales to date and its ability to achieve profitability is dependent on successfully developing and obtaining regulatory approval for its products[49] - As of December 31, 2021, the company had approximately $23.7 million in cash and cash equivalents, which is expected to fund operations only through July 2023, necessitating substantial additional capital for commercialization[53] Risks Related to Business and Industry Success hinges on ART system acceptance, intense competition, supply chain, pandemic, and regulatory challenges - The company's business is highly dependent on the successful development, manufacturing, and commercialization of its respiratory support products, which is a complex and uncertain process[58] - The company faces intense competition from major market players in the respiratory care market, including Boston Scientific, ResMed, Medtronic, and Philips Healthcare, who have significantly greater financial and marketing resources[88][89] - The business is exposed to disruptions from the COVID-19 pandemic, which could adversely affect operations, personnel availability, and clinical trial timelines[60] - The company relies on third-party manufacturers and suppliers for components, making it vulnerable to supply shortages, increased costs, and quality control issues[71] Risks Related to Product Development and Regulatory Approval Extensive and uncertain regulatory approval processes, including FDA and EU, pose significant risks to product commercialization - The company's products are subject to extensive and complex regulation by the FDA and foreign regulatory agencies, and failure to comply could result in significant enforcement actions, including fines, recalls, and prohibitions on sales[120][121] - Obtaining FDA clearance (510(k)) or approval (PMA) is an expensive, lengthy, and uncertain process. The company plans a multi-step approach, including a 510(k) submission for its ECLS system, but delays or failure to secure approval would harm the business[122][124][128] - In the European Economic Area (EEA), products must comply with the EU Medical Devices Regulation (MDR) to receive a CE mark, which is required for sales. This process involves a conformity assessment by a Notified Body and evaluation of clinical data[129][131] - Legislative reforms in the U.S. (such as changes to the 510(k) process) and the EU (such as the new MDR) could make it more difficult and costly to obtain and maintain regulatory approvals for the company's products[159][166] Risks Related to Intellectual Property Protecting intellectual property, including patents and trade secrets, is crucial but faces global enforcement and infringement risks - The company's success relies on its ability to protect its patent rights and trade secrets. There is no guarantee that its submitted patent applications will result in registered patents, which could allow competitors to manufacture similar products[179][180] - The company may face infringement claims from third parties, which could block its ability to commercialize products and result in substantial damages or the need to obtain costly licenses[184][186] - Changes in U.S. patent laws, such as the Leahy-Smith America Invents Act, could increase the uncertainties and costs surrounding patent prosecution and enforcement[190] - Protecting intellectual property rights globally is expensive and challenging, as the laws of some foreign countries do not protect these rights to the same extent as in the United States[196][198] Risks Related to Ownership of Ordinary Shares and Warrants Share price volatility, significant insider control, no dividends, and foreign issuer exemptions pose risks to investors - The trading price of the company's Ordinary Shares (IINN) and Warrants (IINNW) has been and is expected to continue to be highly volatile[201] - As of March 13, 2022, principal shareholders, officers, and directors beneficially own approximately 30% of the company's Ordinary Shares, allowing them to potentially exert significant control over shareholder matters[206] - The company qualifies as an "emerging growth company" and a "foreign private issuer," exempting it from certain SEC and Nasdaq governance and reporting requirements, which may offer less protection to investors compared to domestic U.S. issuers[208][212] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in negative tax consequences for U.S. shareholders[216] Risks Related to Israeli Law and Our Operations in Israel Israeli operations face regional instability, IIA grant restrictions, and unique corporate law challenges for M&A and legal enforcement - The company's operations are based in Israel, making it subject to potential political, economic, and military instability in the region, which could adversely affect business operations[220] - The company has received approximately $800,000 in grants from the Israeli Innovation Authority (IIA). These grants require royalty payments of 3% on future product sales and restrict the transfer of technology and manufacturing outside of Israel without IIA approval and potential penalties[225] - Provisions of Israeli corporate and tax law may delay or prevent a merger or acquisition, even if such a transaction would be favorable to shareholders[228][229] - Enforcing U.S. court judgments against the company, its Israeli-based officers, and directors may be difficult in Israel, and asserting U.S. securities law claims in Israeli courts is challenging[230] Information on the Company Inspira Technologies develops the ART system for respiratory support, pursuing global approvals and partnerships in a competitive market History and Development of the Company Incorporated in Israel in 2018, the company listed on Nasdaq in 2021 as an emerging growth and foreign private issuer - The company was incorporated in Israel in 2018 and listed on the Nasdaq Capital Market on July 16, 2021, under the symbols "IINN" and "IINNW"[232] Capital Expenditures Summary | Year | Capital Expenditures (USD) | | :--- | :--- | | 2021 | $182,000 | | 2020 | $23,000 | | 2019 | $31,000 | Business Overview The company develops the ART system, an artificial lung, pursuing global regulatory approvals, distribution, and IP protection for a large market - The company is developing the Augmented Respiration Technology (ART) system, a minimally invasive, extracorporeal respiratory support device designed to function as an external "artificial lung" and serve as an alternative to mechanical ventilation (MV)[238][240] - The company's go-to-market strategy includes pursuing worldwide regulatory approvals, collaborating with leading medical centers, and establishing strategic distribution agreements. Agreements have been signed for distribution in Spain, Portugal, Poland, the Czech Republic, Slovakia, and six U.S. states[264][301][302][303] - The company has completed approximately 40 pre-clinical in-vivo feasibility tests in swine models, which demonstrated the ART system's ability to temporarily increase oxygen gas exchange during induced respiratory failure[305][306][307] Key Patent Applications | Application Title | Filing Date | Status | | :--- | :--- | :--- | | A Cannula Fixation Device (IL 286271) | Sep 10, 2021 | Examination report received | | Dual Lumen Cannula and Methods of Use (PCT/IL2021/051335) | Nov 10, 2021 | International application filed | | Dual Lumen Cannula and Methods of Use (U.S. 17/523,811) | Nov 10, 2021 | Awaiting examination (expedited) | | Extracorporeal Oxygenation System... (PCT/IL2021/051431) | Dec 01, 2021 | International application filed | Organizational Structure Inspira Technologies Oxy B.H.N. Ltd. is an Israeli corporation with no subsidiaries - The company is an Israeli corporation and currently has no subsidiaries[356][357] Property, Plants and Equipment The company leases approximately 670 square meters for its operations in Ra'anana, Israel, until August 2027 - The company leases approximately 670 square meters of office and R&D space in Ra'anana, Israel, with the lease ending in August 2027. The monthly rent is approximately $14,218[359] Operating and Financial Review and Prospects In 2021, operating and net losses significantly increased due to higher G&A and new marketing expenses, offset by strong IPO and warrant exercise proceeds Operating Results Operating and net losses significantly increased in 2021, primarily driven by higher general and administrative and new sales and marketing expenses Operating Performance Summary | Metric (USD in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Operating Loss | 13,432 | 6,269 | | Net Loss | 16,955 | 7,228 | - General and administrative expenses increased by 209% to $7.6 million in 2021, primarily due to higher share-based compensation, directors' fees, and costs associated with being a public company[383] - Sales and marketing expenses were $1.95 million in 2021, compared to none in 2020, as the company began building its go-to-market capabilities. Approximately 60% of these expenses were related to share-based compensation[384] - Research and development expenses remained stable at $3.9 million in 2021, with increases in salaries and subcontractor costs being offset by decreases in materials expenses and IIA grant participation[381] Liquidity and Capital Resources The company's cash position significantly improved to $23.7 million by year-end 2021, primarily from $30.4 million in financing activities Cash Flow Summary | Cash Flow (USD in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | (7,875) | (1,876) | | Net cash used in investing activities | (246) | (26) | | Net cash provided by financing activities | 30,422 | 2,289 | | Net increase in cash | 22,299 | 387 | - Financing activities in 2021 provided $30.4 million, primarily from the IPO ($14.7 million net), exercise of tradable warrants ($8.7 million net), and convertible loans/SAFEs ($7.2 million net)[396] - The company ended 2021 with $23.7 million in cash and cash equivalents, up from $0.5 million at the end of 2020[392] Directors, Senior Management and Employees This section details the company's leadership, compensation, board practices, and employee count, highlighting Israeli governance differences Directors and Senior Management The leadership team includes co-founders Dagi Ben-Noon and Joe Hayon, supported by a six-member Board and Scientific Advisory Board - The senior management team consists of Dagi Ben-Noon (CEO), Joe Hayon (CFO, President), and Avi Shabtai (COO and VP of R&D)[402] - The Board of Directors is chaired by Prof. Benad Goldwasser and includes five other members[402][407] Compensation Aggregate compensation for directors and senior management totaled approximately $6.9 million in 2021, largely from share-based awards Executive Compensation Summary | Compensation Component (USD) | 2021 (8 persons) | | :--- | :--- | | Salary, bonuses, and related benefits | $936,521 | | Pension, retirement, and similar benefits | $105,772 | | Share-Based Compensation | $5,875,552 | | Total | ~$6,917,845 | - A new compensation policy for officers and directors was approved by shareholders on December 17, 2021, for a period of five years[460] Board Practices The six-member board, with four independent directors, follows Israeli corporate governance practices, differing from Nasdaq rules - The Board of Directors consists of six members, with four determined to be independent under Nasdaq rules[437] - The company has established an Audit Committee and a Compensation Committee, with Lior Amit, Limor Rozen, and Tal Parnes serving on both[451][457] - As a foreign private issuer, the company follows Israeli law instead of certain Nasdaq rules regarding quorum requirements, compensation approval processes, and shareholder approval for specific corporate actions[434][436] - Quorum: A quorum is two or more shareholders holding at least 25% of voting rights, lower than the Nasdaq requirement of 33 1/3%[620][624] - Officer Compensation: Compensation is determined by the compensation committee and board, not necessarily by independent directors alone[620][624] - Shareholder Approval: The company follows Israeli law for shareholder approval of corporate actions, which differs from Nasdaq Rule 5635 regarding acquisitions, equity compensation plans, and private placements[620][624] Employees The company's workforce grew to 26 employees by year-end 2021, supplemented by contractors, with no union representation Employee Headcount | Date | Employee Count | | :--- | :--- | | Dec 31, 2021 | 26 (23 full-time, 3 part-time) | | Dec 31, 2020 | 9 (7 full-time, 2 part-time) | | Dec 31, 2019 | 7 (6 full-time, 1 part-time) | Share Ownership The 2019 Equity Incentive Plan, amended in 2021, reserves over 4.1 million shares for equity grants to employees and directors - The company's 2019 Equity Incentive Plan allows for the grant of options and RSUs to directors, employees, and consultants[502] - As of March 13, 2022, 4,180,898 Ordinary Shares were reserved for issuance under the 2019 Plan[502] Major Shareholders and Related Party Transactions Co-founders and insiders hold significant ownership, and related party transactions include employment agreements and past IPO-related settlements Major Shareholders Co-founders Dagi Ben-Noon and Joe Hayon are major shareholders, with executive officers and directors collectively owning 29.4% Major Shareholder Summary | Shareholder | Position | Percentage Owned | | :--- | :--- | :--- | | Dagi Ben-Noon | CEO, Director | 10.52% | | Joe Hayon | CFO, President, Director | 10.52% | | Udi Nussinovitch | Former CSO | 6.61% | | All Exec. Officers & Directors (8 persons) | Group | 29.4% | Related Party Transactions Related party transactions include executive employment and equity agreements, plus a past settlement of a terminated ASX IPO plan - The company has standard employment, indemnification, and equity award agreements with its executive officers and directors[514][515] - A previous plan to conduct an IPO on the Australian Securities Exchange (ASX) via an agreement with InSense Medical Pty Ltd (IML) was terminated in November 2020. A convertible loan from IML was settled through the issuance of 676,061 Ordinary Shares and 169,016 warrants to IML[517][518][520] Financial Information This section covers financial statement references, a legal proceeding regarding IPO services, and the company's no-dividend policy - The company is involved in a legal proceeding with Exchange Listing, LLC, a former consultant, regarding services provided for the IPO. The plaintiff seeks damages of approximately $250,000 and 75,000 Ordinary Shares[524] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future. Dividend payments are also restricted by Israeli Companies Law[525][526] Additional Information This section details material contracts, Israeli tax laws, currency controls, and potential PFIC implications for U.S. shareholders Taxation Israeli corporate tax, dividend withholding, capital gains, and potential adverse PFIC tax consequences for U.S. shareholders are discussed - The general corporate tax rate for Israeli companies is 23% as of 2018[543] - Dividends paid to non-Israeli residents are generally subject to a 25% withholding tax (or 30% for a "substantial shareholder"), though this may be reduced by an applicable tax treaty[562] - For U.S. investors, there is a risk that the company could be considered a Passive Foreign Investment Company (PFIC). If so, U.S. Holders would be subject to adverse tax rules on distributions and gains, and the company does not intend to provide the information necessary for a QEF election[577][578][579] Quantitative and Qualitative Disclosures about Market Risk The company's main market risks are foreign currency exchange fluctuations, particularly NIS/USD, and minimal interest rate risk - The company's primary market risk is foreign currency exchange risk, as approximately 80% of its expenses are denominated in NIS while its reporting currency is the U.S. dollar[594] - Interest rate risk is considered low, as the company's investments primarily consist of cash, cash equivalents, and short-term deposits[596] PART II Use of Proceeds The company raised $14 million net from its July 2021 IPO, with proceeds used as outlined in the prospectus - The company completed its IPO on July 16, 2021, raising net proceeds of $14 million after deducting underwriting discounts and offering costs from the $16 million gross proceeds[604] Controls and Procedures Management deemed disclosure controls effective as of December 2021, with exemptions for internal control reporting as an emerging public company - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[606] - The report does not include a management report or auditor attestation on internal control over financial reporting, due to exemptions for newly public and emerging growth companies[607][608] Principal Accountant Fees and Services Fees to principal accountant Ziv Haft increased to $119,500 in 2021 for audit and fundraising-related services Principal Accountant Fees | Fee Type (USD) | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $119,500 | $107,500 | | Total | $119,500 | $107,500 | Corporate Governance As a foreign private issuer, the company follows Israeli corporate governance, differing from Nasdaq rules on quorum, compensation, and shareholder approvals - The company follows Israeli corporate governance practices in lieu of certain Nasdaq rules, permitted under the foreign private issuer exemption[619][620] - Quorum: A quorum is two or more shareholders holding at least 25% of voting rights, lower than the Nasdaq requirement of 33 1/3%[620][624] - Officer Compensation: Compensation is determined by the compensation committee and board, not necessarily by independent directors alone[620][624] - Shareholder Approval: The company follows Israeli law for shareholder approval of corporate actions, which differs from Nasdaq Rule 5635 regarding acquisitions, equity compensation plans, and private placements[620][624] PART III Financial Statements Audited 2021 financial statements show significant asset and equity growth driven by IPO proceeds, despite increased comprehensive loss from operating expenses Statements of Financial Position Total assets grew to $25.9 million and equity turned positive to $20.4 million by year-end 2021, primarily due to IPO and warrant proceeds Statements of Financial Position Summary | (USD in thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | 25,870 | 987 | | Cash and cash equivalents | 23,749 | 496 | | Total Liabilities | 5,516 | 2,691 | | Total Equity | 20,354 | (1,704) | Statements of Comprehensive Loss The company reported a net loss of $17.0 million and an operating loss of $13.4 million in 2021, driven by increased R&D, G&A, and marketing expenses Statements of Comprehensive Loss Summary | (USD in thousands, except per share data) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Research and development expenses | 3,909 | 3,873 | 887 | | Sales and marketing expenses | 1,951 | - | - | | General and administrative expenses | 7,572 | 2,447 | 384 | | Operating loss | 13,432 | 6,269 | 1,271 | | Total net loss | 16,955 | 7,228 | 4,575 | | Basic and diluted loss per share | (3.20) | (3.67) | (2.40) | Statements of Cash Flows Net cash used in operations increased to $7.9 million in 2021, while financing activities provided $30.4 million, resulting in a $22.3 million cash increase Statements of Cash Flows Summary | (USD in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | (7,877) | (1,876) | | Net cash used in investing activities | (246) | (26) | | Net cash provided by financing activities | 30,422 | 2,289 | | Net increase in cash and cash equivalents | 22,299 | 387 |