ROC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 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: 001-40988
Sonendo, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
20-5041718 |
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
26061 Merit Circle, Suite 102 Laguna Hills, CA |
92653 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (949) 766-3636
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Common stock, par value $0.001 per share |
|
SONX |
|
New York Stock Exchange |
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 4, 2022, the registrant had 26,427,325 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
|
|
Page |
|
1 |
|
|
|
|
PART I. |
3 |
|
|
|
|
Item 1. |
3 |
|
|
3 |
|
|
Condensed Consolidated Statements of Operations and Comprehensive Loss |
4 |
|
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity |
5 |
|
6 |
|
|
7 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3. |
31 |
|
Item 4. |
31 |
|
|
|
|
PART II. |
32 |
|
|
|
|
Item 1. |
32 |
|
Item 1A. |
32 |
|
Item 2. |
33 |
|
Item 3. |
33 |
|
Item 4. |
33 |
|
Item 5. |
34 |
|
Item 6. |
35 |
|
37 |
||
i
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains 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 involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. The forward-looking statements included herein are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control, include, but are not limited to those described in Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, Item 1A. Risk Factors of our Annual Report on Form 10-K for fiscal year 2021 and in the filings we make with Securities and Exchange Commission (the "SEC") from time to time.
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all 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, or implied by, any forward-looking statements.
1
The forward-looking statements included herein are based on current expectations of our management based on available information and are believed to be reasonable. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved. You are cautioned not to place undue reliance on the forward-looking statements included in this Quarterly Report on Form 10-Q, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update or revise these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
SONENDO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
ASSETS |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
66,054 |
|
|
$ |
84,641 |
|
Accounts receivable, net |
|
|
2,702 |
|
|
|
2,516 |
|
Inventory |
|
|
10,134 |
|
|
|
8,150 |
|
Prepaid expenses and other current assets |
|
|
3,968 |
|
|
|
3,552 |
|
Total current assets |
|
|
82,858 |
|
|
|
98,859 |
|
Property and equipment, net |
|
|
2,177 |
|
|
|
2,366 |
|
Operating lease right-of-use assets |
|
|
2,478 |
|
|
|
2,746 |
|
Intangible assets, net |
|
|
2,790 |
|
|
|
2,956 |
|
Goodwill |
|
|
8,454 |
|
|
|
8,454 |
|
Other assets |
|
|
118 |
|
|
|
118 |
|
Total assets |
|
$ |
98,875 |
|
|
$ |
115,499 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
2,235 |
|
|
$ |
3,061 |
|
Accrued expenses |
|
|
4,416 |
|
|
|
4,758 |
|
Accrued compensation |
|
|
2,513 |
|
|
|
3,376 |
|
Operating lease liabilities |
|
|
966 |
|
|
|
975 |
|
Other current liabilities |
|
|
1,957 |
|
|
|
2,482 |
|
Total current liabilities |
|
|
12,087 |
|
|
|
14,652 |
|
Operating lease liabilities, net of current |
|
|
1,474 |
|
|
|
1,730 |
|
Term loan, net of current |
|
|
26,620 |
|
|
|
26,496 |
|
Other liabilities |
|
|
517 |
|
|
|
558 |
|
Total liabilities |
|
|
40,698 |
|
|
|
43,436 |
|
|
|
|
|
|
|
|||
Stockholders’ equity: |
|
|
|
|
|
|
||
Preferred stock, $0.001 par value; authorized —10,000,000 shares; issued and outstanding - none |
|
|
|
|
|
|
||
Common stock, $0.001 par value; authorized — 500,000,000 shares; issued — 26,465,797 shares as of March 31,2022 and 26,383,225 shares as of December 31, 2021; outstanding — 26,419,108 shares as of March 31, 2022 and 26,336,536 shares as of December 31, 2021 |
|
|
26 |
|
|
|
26 |
|
Additional paid-in-capital |
|
|
385,768 |
|
|
|
384,132 |
|
Accumulated deficit |
|
|
(327,566 |
) |
|
|
(312,044 |
) |
|
|
|
58,228 |
|
|
|
72,114 |
|
Less: Treasury stock |
|
|
(51 |
) |
|
|
(51 |
) |
Total stockholders’ equity |
|
|
58,177 |
|
|
|
72,063 |
|
Total liabilities and stockholders’ equity |
|
$ |
98,875 |
|
|
$ |
115,499 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
SONENDO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except share and per share amounts)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Product revenue |
|
$ |
7,203 |
|
|
$ |
5,809 |
|
Software revenue |
|
|
1,830 |
|
|
|
1,618 |
|
Total revenue |
|
|
9,033 |
|
|
|
7,427 |
|
Cost of sales |
|
|
6,754 |
|
|
|
5,685 |
|
Gross profit |
|
|
2,279 |
|
|
|
1,742 |
|
Operating expenses: |
|
|
|
|
|
|
||
Selling, general and administrative |
|
|
11,985 |
|
|
|
6,524 |
|
Research and development |
|
|
4,850 |
|
|
|
5,046 |
|
Change in fair value of contingent earnout |
|
|
— |
|
|
|
14 |
|
Total operating expenses |
|
|
16,835 |
|
|
|
11,584 |
|
Loss from operations |
|
|
(14,556 |
) |
|
|
(9,842 |
) |
Other expense, net: |
|
|
|
|
|
|
||
Interest and financing costs, net |
|
|
(966 |
) |
|
|
(1,064 |
) |
Loss before income tax expense |
|
|
(15,522 |
) |
|
|
(10,906 |
) |
Income tax expense |
|
|
— |
|
|
|
— |
|
Net loss and comprehensive loss |
|
$ |
(15,522 |
) |
|
$ |
(10,906 |
) |
Net loss per share attributable to common stock – basic and diluted |
|
$ |
(0.59 |
) |
|
$ |
(9.05 |
) |
Weighted-average shares outstanding – basic and diluted |
|
|
26,405,252 |
|
|
|
1,205,314 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
SONENDO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in thousands, except shares amount)
|
|
Common Stock |
|
|
|
|
|
Additional |
|
|
|
|
|
Total |
|
|||||||||
|
|
|
|
|
|
|
|
Treasury |
|
|
Paid-In |
|
|
Accumulated |
|
|
Stockholders’ |
|
||||||
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
||||||
Balance at December 31, 2021 |
|
|
26,336,536 |
|
|
$ |
26 |
|
|
$ |
(51 |
) |
|
$ |
384,132 |
|
|
$ |
(312,044 |
) |
|
$ |
72,063 |
|
Employee stock plans |
|
|
82,572 |
|
|
|
— |
|
|
|
— |
|
|
|
242 |
|
|
|
— |
|
|
|
242 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,394 |
|
|
|
— |
|
|
|
1,394 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,522 |
) |
|
|
(15,522 |
) |
Balance at March 31, 2022 |
|
|
26,419,108 |
|
|
|
26 |
|
|
|
(51 |
) |
|
|
385,768 |
|
|
|
(327,566 |
) |
|
|
58,177 |
|
|
|
Convertible Preferred Stock |
|
|
|
Common Stock |
|
|
|
|
|
Additional |
|
|
|
|
|
Total |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Paid-In |
|
|
Accumulated |
|
|
Stockholders’ |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
||||||||
Balance at December 31, 2020 |
|
|
17,031,887 |
|
|
$ |
281,342 |
|
|
|
|
1,200,335 |
|
|
$ |
2 |
|
|
$ |
(51 |
) |
|
$ |
9,703 |
|
|
$ |
(263,545 |
) |
|
$ |
(253,891 |
) |
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
|
12,797 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
494 |
|
|
|
— |
|
|
|
494 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,906 |
) |
|
|
(10,906 |
) |
Balance at March 31, 2021 |
|
|
17,031,887 |
|
|
|
281,342 |
|
|
|
|
1,213,132 |
|
|
|
2 |
|
|
|
(51 |
) |
|
|
10,230 |
|
|
|
(274,451 |
) |
|
|
(264,270 |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
SONENDO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
(15,522 |
) |
|
$ |
(10,906 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation |
|
|
246 |
|
|
|
404 |
|
Amortization of intangible assets |
|
|
166 |
|
|
|
133 |
|
Amortization of right-of-use lease assets |
|
|
269 |
|
|
|
232 |
|
Stock-based compensation |
|
|
1,394 |
|
|
|
494 |
|
Amortization of debt issuance costs |
|
|
124 |
|
|
|
218 |
|
Change in fair value of contingent earnout |
|
|
- |
|
|
|
14 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
(186 |
) |
|
- |
|
|
Inventory |
|
|
(1,984 |
) |
|
|
(872 |
) |
Prepaid expenses and other assets |
|
|
(416 |
) |
|
- |
|
|
Accounts payable |
|
|
(826 |
) |
|
|
(168 |
) |
Accrued expenses and other liabilities |
|
|
(423 |
) |
|
|
(1,529 |
) |
Deferred revenue |
|
|
(24 |
) |
|
|
21 |
|
Accrued compensation |
|
|
(863 |
) |
|
|
(1,108 |
) |
Net cash used in operating activities |
|
|
(18,045 |
) |
|
|
(13,067 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
(56 |
) |
|
|
(74 |
) |
Net cash used in investing activities |
|
|
(56 |
) |
|
|
(74 |
) |
Financing activities: |
|
|
|
|
|
|
||
Payment of common stock issuance costs |
|
|
(598 |
) |
|
|
— |
|
Proceeds from exercise of common stock options |
|
|
242 |
|
|
|
33 |
|
Payment of contingent earnout |
|
|
(117 |
) |
|
|
(667 |
) |
Principal repayments on finance lease |
|
|
(13 |
) |
|
|
(11 |
) |
Net cash used in financing activities |
|
|
(486 |
) |
|
|
(645 |
) |
Net decrease in cash and cash equivalents |
|
|
(18,587 |
) |
|
|
(13,786 |
) |
Cash and cash equivalents at beginning of period |
|
|
84,641 |
|
|
|
51,722 |
|
Cash and cash equivalents at end of period |
|
$ |
66,054 |
|
|
$ |
37,936 |
|
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Cash paid for: |
|
|
|
|
|
|
||
Interest |
|
$ |
848 |
|
|
$ |
850 |
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Operating lease right-of-use assets obtained in exchange for lease liabilities |
|
$ |
— |
|
|
$ |
168 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
SONENDO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Description of Business
Sonendo, Inc. (“Sonendo” or the “Company”) was incorporated in June 2006 pursuant to the laws of the State of Delaware under the name Dentatek Corporation. In March 2011, the Company changed its name to Sonendo, Inc. The Company is a medical technology company that has developed and is commercializing the GentleWave System to treat tooth decay. The Company’s principal market is the United States. The Company’s products include the GentleWave System, which is cleared by the United States (“U.S.”) Food and Drug Administration (“FDA”) for sale in the U.S., along with the system’s sterilized, single-use procedure instruments ("PIs"). In addition, the Company offers practice management software to enable an integrated digital office for dental practitioners.
Basis of Presentation
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”) on a consistent basis with the Company’s annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. The results of operations included in these condensed consolidated financial statements are not necessarily indicative of the results of operations to be expected for the year, any other interim period, or for any other future annual or interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed, consolidated, or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 23, 2022.
Initial Public Offering and Reverse Stock Split
On October 20, 2021, the Company’s Board of Directors (the "Board") approved an amendment to the Company’s certificate of incorporation to effect a reverse split of shares of the Company’s common stock and convertible preferred stock on a 1-for- basis (the “Reverse Stock Split”). The par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, convertible preferred stock, warrants and forward obligation issued for preferred stock, share data, per share data and related information contained in the unaudited condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased. The Reverse Stock Split was effected on October 22, 2021.
On November 2, 2021, the Company completed its initial public offering (“IPO”) of 7.8 million shares of its common stock at a public offering price of $12.00 per share. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses, were $83.8 million. On November 2, 2021, the Company amended and restated its certificate of incorporation to provide for, among other things, the Company’s authorized capital stock to consist of 500,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. In addition, upon the closing of the IPO, all 17,031,887 outstanding shares of the Company’s convertible preferred stock were converted into an equal number of shares of common stock, 224,842 shares of common stock were issued in connection with the settlement of the outstanding forward obligation, and warrants to purchase 331,503 shares of convertible preferred stock were converted into equal number of warrants to purchase shares of common stock. The amended and restated certificate of incorporation defines the voting rights, dividends, liquidation, rights and preferences of each class of stock.
Liquidity and Management’s Plans
As of March 31, 2022, the Company had cash and cash equivalents of $66.1 million.
The Company has a limited operating history, and the revenue and income potential of the Company’s business and market are unproven. The Company has experienced net losses and negative cash flows from operations since its inception and as of March 31,
7
2022 had an accumulated deficit of $327.6 million. During the three months ended March 31, 2022, the Company incurred net losses of $15.5 million and used $18.0 million of cash and cash equivalents in operations. The Company will continue to incur significant costs and expenses related to its ongoing operations until it gains market acceptance of products and achieves a level of revenues adequate to support the Company’s operations.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Based on its current operating plan, the Company expects that its existing cash and cash equivalents, together with anticipated revenue and available debt financing arrangements will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the date of issuance of the accompanying unaudited condensed consolidated financial statements. If the Company's actual operating expenses significantly exceed its operating plan or its debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9), the Company may have to significantly delay or scale back its operations to reduce working capital requirements, and substantial uncertainty would exist with respect to the Company’s ability to continue as a going concern. In addition, the Company would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of its assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing the Company’s commercial efforts, development activities and other discretionary expenditures that are within the Company’s control. These reductions in expenditures, if required, may have an adverse impact on the Company’s ability to achieve certain of the Company’s planned objectives in fiscal year 2022.
COVID-19
The COVID-19 pandemic has negatively impacted our operations, revenue and overall financial condition, and may negatively impact our operations, revenue, and overall financial condition in the future if new and more transmissible vaccine-resistant variants emerge. We continued to experience disruptions to our business during the three months ended March 31, 2022, as a result of customers' continuing reluctance to start root canal procedures in light of the ongoing risk posed by the virus. Our customers, including endodontists, have experienced significant financial hardship and some of them may never fully recover. We also experienced disruptions, and may experience future disruptions, including: delays in capital and clinical sales representatives becoming fully trained and productive; difficulties and delays in dental practitioner outreach and training dental practitioners to use our GentleWave System; travel restrictions; delays in initiation, enrollment and follow-ups of our clinical studies; challenges with maintaining adequate supply from third-party manufacturers of components and finished goods and distribution providers; and access to dental practitioners for training and case support. The COVID-19 pandemic also resulted in, and may in the future result in, significant disruption to the global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. As of March 31, 2022, the COVID-19 pandemic did not trigger any asset impairments for the Company.
The duration and ultimate economic impact of the COVID-19 pandemic on our business remains uncertain at this time. We expect that any future restrictions on dental procedures, as a result of COVID-19 or the emergence of any vaccine resistant variant, would have a negative impact on our operations, revenue and overall financial condition.
Operating Segments
The Company operates two operating and reportable segments: Product and Software. Operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated regularly by the chief operating decision maker, who is the Company’s chief executive officer (“CEO”), for the purpose of allocating resources and assessing performance. Description of the activities within these segments is included in Note 12.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to avail itself of this exemption and, therefore, for new or revised accounting standards applicable to public companies, the Company will be subject to an extended transition period until those standards would otherwise apply to private companies.
8
2. Summary Accounting Policies and Recent Accounting Pronouncements
The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Summary of Accounting Policies, of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make informed estimates, judgements and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and disclosures in the accompanying notes, including estimates of probable losses and expenses, as of the date of the accompanying unaudited condensed consolidated financial statements. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of these unaudited condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including the expected business and operational changes, the sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Actual results could differ materially from the estimates and assumptions used in the preparation of the accompanying unaudited condensed consolidated financial statements under different assumptions or conditions.
Revenue Recognition
Contracts with Customers
The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. Specifically, the Company applies the following five core principles to recognize revenue: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.
Product revenue is generated from sales of the GentleWave console and related PIs and accessories. Software revenue is generated from sales of TDO’s The Digital Office endodontist practice management software licenses. The Company’s products are sold primarily in the United States and Canada directly to customers through its field sales force.
Performance Obligations
The Company’s performance obligations primarily arise from the manufacture and delivery of the GentleWave System, related PIs and accessories, and the delivery or license of TDO software and related ancillary services. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Consideration may be variable based on volume.
The Company considers the individual deliverables in its product offering as separate performance obligations and assesses whether each promised good or service is distinct. The total contract transaction price is determined based on the consideration expected to be received, based on the stated value in contractual arrangements or the estimated cash to be collected in no-contracted arrangements, and is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The stand-alone selling price is based on an observable price offered to other comparable customers. The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer and market conditions. The Company regularly reviews and updates standalone selling prices as necessary. The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company estimates related variable consideration at the point of sale, including discounts, product returns, refunds, and other similar obligations.
Revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by the Company’s performance. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met, and the Company has transferred control of the goods to the customer. Product revenue is recognized at a point in time when the Company has transferred control to the customer, which is generally when title of the goods transfers to the customer. Software is licensed via delivery to the customer or via a service arrangement under which cloud-based access is provided on a subscription basis
9
(software-as-a-service). When a fixed up-front license fee is received in exchange for the delivery of software, revenue is recognized at the point in time when the delivery of the software has occurred. When software is licensed on a subscription basis, revenue is recognized over the respective license period.
The Company also sells extended service contracts on its GentleWave Systems. Sales of extended service contracts are recorded as deferred revenue until such time as the standard warranty expires, which is generally up to two years from the date of sale. Service contract revenue is recognized on a straight-line basis over time consistent with the life of the related service contract in proportion to the costs incurred in fulfilling performance obligations under the service contract.
Revenue for technical support and other services is recognized ratably over the performance obligation period.
The Company generally does not experience returns. If necessary, a provision is recorded for estimated sales returns and allowances and is deducted from gross product revenue to arrive at net product revenue in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from these estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves established, a reduction or increase to revenue will be recorded in the period in which such a determination is made.
All non-income government-assessed taxes (sales and use taxes) collected from the Company’s customers and remitted to governmental agencies are recorded in accrued expenses and other current liabilities until they are remitted to the government agency.
The Company has adopted the practical expedient permitting the direct expensing of costs incurred to obtain contracts where the amortization of such costs would occur over one year or less, and it applied to substantially all the Company’s contracts.
Contract liabilities
The Company recognizes a contract liability when a customer pays for good or services for which the Company has not yet transferred control. The balances of the Company’s contract liabilities are as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Extended service contracts |
|
$ |
187 |
|
|
$ |
251 |
|
Subscription software licenses |
|
|
560 |
|
|
|
520 |
|
Total contract liabilities |
|
|
747 |
|
|
|
771 |
|
Less: long-term portion |
|
|
— |
|
|
|
— |
|
Contract liabilities – current |
|
$ |
747 |
|
|
$ |
771 |
|
Contract liabilities are included within other current liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Revenue recognized during the three months ended March 31, 2022 and 2021 that was included in the contract liability balance as of December 31, 2021 and 2020 was $0.6 million and $0.5 million, respectively.
Disaggregation of revenue
The Company disaggregates revenue from contracts with customers by segment and by the timing of when goods and services are transferred which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected.
The following table provides information regarding revenues disaggregated by segment and the timing of when goods and services are transferred:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Product revenue recognized at a point in time |
|
$ |
7,027 |
|
|
$ |
5,614 |
|
Product revenue recognized over time |
|
|
176 |
|
|
|
195 |
|
Software revenue recognized at a point in time |
|
|
219 |
|
|
|
174 |
|
Software revenue recognized over time |
|
|
1,611 |
|
|
|
1,444 |
|
Total |
|
$ |
9,033 |
|
|
$ |
7,427 |
|
10
No individual customer accounted for more than 10% of sales for the three months ended March 31, 2022 and 2021.
Warranty Reserve
The Company provides a standard warranty on its GentleWave Systems for a specified period of time. For the three months ended March 31, 2022 and 2021, GentleWave Systems sold were covered by the warranty for a period of up to two years from the date of sale. Estimated warranty costs are recorded as a liability at the time of delivery with a corresponding provision to cost of sales. Warranty expenses expected to be incurred within 12 months from the date of sale are classified as other current liabilities while those expected to be incurred after 12 months from the date of sale are classified as other liabilities in the accompanying unaudited condensed consolidated balance sheets. Warranty accruals are estimated based on the current product costs, the Company’s historical experience, management’s expectations of future conditions and standard maintenance schedules. The Company evaluates this reserve on a regular basis and makes adjustments as necessary.
The following table provides a reconciliation of the change in estimated warranty liabilities for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Balance at beginning of period |
|
$ |
1,620 |
|
|
$ |
1,584 |
|
Provision for warranties issued |
|
|
310 |
|
|
|
330 |
|
Warranty costs incurred |
|
|
(315 |
) |
|
|
(461 |
) |
Balance at end of period |
|
$ |
1,615 |
|
|
$ |
1,453 |
|
Current portion |
|
$ |
1,153 |
|
|
$ |
1,043 |
|
Non-current portion |
|
|
462 |
|
|
|
410 |
|
Total |
|
$ |
1,615 |
|
|
$ |
1,453 |
|
The warranty liability, current and non-current, are included in other current liabilities and other liabilities, respectively, on the unaudited condensed consolidated balance sheets.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”). ASU’s not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s unaudited condensed consolidated financial statements.
Accounting Pronouncement Recently Adopted
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. The Company adopted ASU 2019-12 in the first quarter of 2022 as an emerging growth company. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. This will be effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, which for the Company is the first quarter of 2024, with early adoption permitted beginning first quarter of 2021. The Company early adopted the ASU on January 1, 2022 as a smaller reporting company. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.
11
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)”, which clarifies and reduces diversity in an issuer’s accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The Company early adopted the ASU on January 1, 2022. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.
Recent Accounting Updates Not Yet Effective
In October 2021, the FASB, issued Accounting Standards Update No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity (acquirer) to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact the standard will have on its condensed consolidated financial statements.
3. Balance Sheet Components
Inventory
Inventory consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Raw materials |
|
$ |
6,141 |
|
|
$ |
4,911 |
|
Work in process |
|
|
310 |
|
|
|
270 |
|
Finished goods |
|
|
3,683 |
|
|
|
2,969 |
|
Total inventory |
|
$ |
10,134 |
|
|
$ |
8,150 |
|
The Company recorded a reserve for excess and obsolete inventory of $0.6 million and $0.7 million at March 31, 2022 and December 31, 2021, respectively.
Intangible assets, net
Intangible assets as of March 31, 2022 and December 31, 2021 consisted of the following:
|
|
March 31, 2022 |
|
|||||||||||
|
|
Weighted Average Amortization Period |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
|
|
(in years) |
|
(in thousands) |
|
|||||||||
Developed Technology (5 - 10 years) |
|
4.0 |
|
$ |
2,445 |
|
|
$ |
857 |
|
|
$ |
1,588 |
|
Customer relationships (7 years) |
|
2.8 |
|
|
1,910 |
|
|
|
944 |
|
|
|
966 |
|
Tradenames (10 years) |
|
0.8 |
|
|
360 |
|
|
|
124 |
|
|
|
236 |
|
Total intangible assets |
|
7.6 |
|
$ |
4,715 |
|
|
$ |
1,925 |
|
|
$ |
2,790 |
|
12
|
|
December 31, 2021 |
|
|||||||||||
|
|
Weighted Average Amortization Period |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
|
|
(in years) |
|
(in thousands) |
|
|||||||||
Developed Technology (5 - 10 years) |
|
4.0 |
|
$ |
2,445 |
|
|
$ |
768 |
|
|
$ |
1,677 |
|
Customer relationships (7 years) |
|
2.8 |
|
|
1,910 |
|
|
|
875 |
|
|
|
1,035 |
|
Tradenames (10 years) |
|
0.8 |
|
|
360 |
|
|
|
116 |
|
|
|
244 |
|
Total intangible assets |
|
7.6 |
|
$ |
4,715 |
|
|
$ |
1,759 |
|
|
$ |
2,956 |
|
Amortization expense was $0.2 million for the three months ended March 31, 2022, with approximately $0.1 million amortization expense recorded in cost of sales and $0.1 million recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Amortization expense was $0.1 million for the three months ended March 31, 2021, which was mostly recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
The following table presents estimated future annual amortization expense related to intangible assets, net as of March 31, 2022:
|
|
Future Intangible Asset Amortization Expenses |
|
|
|
|
(in thousands) |
|
|
2022 (remaining nine months) |
|
$ |
498 |
|
2023 |
|
|
618 |
|
2024 |
|
|
442 |
|
2025 |
|
|
386 |
|
2026 and thereafter |
|
|
846 |
|
Total future amortization expense |
|
$ |
2,790 |
|
4. Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash, cash equivalents, accounts receivable, accounts payable, operating lease liabilities, warrant liabilities, forward obligation, contingent earnout, and a term loan. Fair value is measured as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 – Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities the Company has the ability to access.
Level 2 – Inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 – Unobservable inputs that are significant to the fair value measurement and reflect the reporting entity’s use of significant management judgment and assumptions when there is little or no market data. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. These include the Black-Scholes option-pricing model which uses inputs such as expected volatility, risk-free interest rate and expected term to determine fair market valuation.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification at each reporting date. Changes in the ability to observe valuation inputs may result in a
13
reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.
The following table provides the assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such value at March 31, 2022 and December 31, 2021:
|
|
March 31, 2022 |
|
|||||||||||||
|
|
Fair Value |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
65,206 |
|
|
$ |
65,206 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Fair Value |
|
|
Quoted Prices in Active Markets for Identical Assets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
84,102 |
|
|
$ |
84,102 |
|
|
$ |
— |
|
|
$ |
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent earnout |
|
$ |
524 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
524 |
|
Recurring liabilities included in Level 3 for the periods presented consisted of a contingent earnout.
The following tables present the rollforward of the estimated fair values for instruments classified by the Company within Level 3 of the fair value hierarchy defined above, measured using significant unobservable inputs:
|
|
Warrant |
|
|
Forward |
|
|
Contingent |
|
|
Total |
|
||||
|
|
(in thousands) |
|
|||||||||||||
December 31, 2021 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
524 |
|
|
$ |
524 |
|
Payment of contingent earnout |
|
|
— |
|
|
|
— |
|
|
|
(524 |
) |
|
|
(524 |
) |
March 31, 2022 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
Warrant |
|
|
Forward |
|
|
Contingent |
|
|
Total |
|
||||
|
|
(in thousands) |
|
|||||||||||||
December 31, 2020 |
|
$ |
1,914 |
|
|
$ |
2,750 |
|
|
$ |
930 |
|
|
$ |
5,594 |
|
Payment of contingent earnout |
|
|
— |
|
|
|
— |
|
|
|
(667 |
) |
|
|
(667 |
) |
Change in fair value |
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
14 |
|
March 31, 2021 |
|
$ |
1,914 |
|
|
$ |
2,750 |
|
|
$ |
277 |
|
|
$ |
4,941 |
|
There were no transfers in or out of Level 3 during the three months ended March 31, 2022 and 2021.
Warrants
In December 2013, the Company entered into a $10.0 million term loan facility with Oxford Finance LLC. The term loan was repaid in full in June 2017. In connection with the term loan, the Company issued immediately exercisable warrants to the lender for the purchase of 27,397 shares of the Company’s Series C-1 preferred stock equal to three percent of the aggregate amount funded.
In June 2017, the Company entered into a term loan facility with Perceptive Credit Holdings, LP, which was subsequently amended (see Note 9). Upon funding of the initial loan, and each initial tranche of the amended loans, the Company issued immediately exercisable warrants to the lender for the purchase of 54,793 shares of the Company’s Series D preferred stock, and 249,313 shares of the Company’s Series E preferred stock.
14
In August 2021, the Company amended its term loan with Perceptive Credit Holdings, LP and Perceptive Credit Holdings III, LP and issued immediately exercisable warrants to the lender for the purchase of 150,684 shares of the Company’s Series E preferred stock. The fair value at issuance of the Series E preferred stock warrants related to the August 2021 amendment was $2.1 million.
Prior to the Company's IPO in November 2021, the Company recognized warrants to purchase shares of convertible preferred stock as liabilities, reflecting deemed liquidation provisions of the convertible preferred stock considered contingent redemption provisions that were not solely within the Company's control. Upon the closing of the IPO, the contingent redemption provisions were removed with the automatic conversion of the underlying preferred stock to common stock, and the Company revalued the convertible preferred stock warrants and reclassified the liability to stockholders equity. The common stock warrants are no longer subject to remeasurement subsequent to the IPO.
Warrants issued and outstanding at March 31, 2022 and December 31, 2021 included the following:
Number of warrants |
|
|
Exercise price per share |
|
||
|
27,397 |
|
|
$ |
10.95 |
|
|
54,793 |
|
|
$ |
17.80 |
|
|
249,313 |
|
|
$ |
20.08 |
|
|
331,503 |
|
|
|
|
|
In April 2022, the Company amended its term loan and the warrants previously issued to Perceptive Credit Holdings III, LP and certain of its affiliates to purchase an aggregate of 304,105 shares of its common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share. There was no impact to the Company's unaudited condensed financial statements as of March 31, 2022.
As of March 31, 2021, warrants fully vested and outstanding had estimated fair values ranging between $7.88 to $12.28. Fair values were determined using the Black-Scholes option-pricing model with the following input assumptions for the three months ended March 31, 2021:
|
|
Three Months Ended |
|
|
March 31, 2021 |
Expected volatility range (weighted average) |
|
79.33 to 86.41% (80.39%) |
Dividend yield |
|
0.00% |
Risk-free interest rates range (weighted average) |
|
0.30% to 1.57% (1.31%) |
Expected term range (average) |
|
2.75 years to 8.52 years (7.01 years) |
Assumptions were weighted by the relative fair value of the instruments. An increase in the expected volatility, risk-free interest rates, and expected term would result in an increase to the estimated value of the warrants while an increase in the dividend yield would result in a decrease to the estimated value of the warrants.
These warrants expire between December 2023 and August 2031.
5. Convertible Preferred Stock and Common Stock
Authorized Shares
On November 2, 2021, the Company amended and restated its certificate of incorporation and bylaws to provide for, among other things, the Company’s authorized capital stock to consist of 500,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.
6. Stock-based Compensation Expense
15
Stock-based Compensation Expenses
The following tables present the Company's stock-based compensation for equity-settled awards by type and financial statement lines included in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss for the three months ended March 31:
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2022 |
|
|
2021 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Options |
|
$ |
883 |
|
|
$ |
494 |
|
|
RSUs |
|
511 |
|
|
|
- |
|
|
|
Total stock-based compensation expense |
|
$ |
1,394 |
|
|
$ |
494 |
|
|
|
|
|
|
|
|
|
|
||
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
2022 |
|
|
2021 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Cost of sales |
|
$ |
101 |
|
|
$ |
61 |
|
|
Selling, general and administrative |
|
|
978 |
|
|
|
292 |
|
|
Research and development |
|
|
315 |
|
|
|
141 |
|
|
Total stock-based compensation expense |
|
$ |
1,394 |
|
|
$ |
494 |
|
|
Compensation cost related to unvested stock options and RSUs will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of March 31, 2022.
|
|
Unamortized Compensation Costs |
|
|
Weighted Average Service Period |
|
|
|
(in thousands) |
|
|
(years) |
|
Options |
|
$ |
8,674 |
|
|
2.3 |
RSUs |
|
|
13,394 |
|
|
1.2 |
Total unamortized compensation cost |
|
$ |
22,068 |
|
|
|
Plan Activities
The following table summarizes stock option activity under the Company's incentive plans:
|
|
Number |
|
|
Weighted |
|
|
Weighted- Average Remaining Contractual Life |
|
Aggregate Intrinsic Value |
|
|||
|
|
|
|
|
|
|
|
(in years) |
|
(in thousands) |
|
|||
Options outstanding, December 31, 2021 |
|
|
3,119,993 |
|
|
$ |
7.59 |
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
||
Forfeited |
|
|
(33,599 |
) |
|
$ |
7.92 |
|
|
|
|
|
|
|
Exercised |
|
|
(61,438 |
) |
|
$ |
3.94 |
|
|
|
|
$ |
123 |
|
Options outstanding, March 31, 2022 |
|
|
3,024,956 |
|
|
$ |
7.66 |
|
|
7.4 |
|
$ |
427 |
|
Options vested and exercisable, March 31, 2022 |
|
|
1,527,230 |
|
|
$ |
4.96 |
|
|
5.8 |
|
$ |
427 |
|
Vested and expected to vest after March 31, 2022 |
|
|
2,840,872 |
|
|
$ |
7.48 |
|
|
7.3 |
|
$ |
427 |
|
The weighted-average grant-date fair value of options granted during the three months ended March 31, 2022 and 2021 was $5.72 per share and $11.26 per share, respectively.
The following table summarizes the non-vested stock options as of March 31, 2022 and December 31, 2021:
|
|
Number of Shares |
|
|
Weighted |
|
||
Non-vested Options, December 31, 2021 |
|
|
1,632,852 |
|
|
$ |
7.09 |
|
Non-vested Options, March 31, 2022 |
|
|
1,497,827 |
|
|
$ |
7.19 |
|
16
The total fair value of shares vested during the three months ended March 31, 2022 and 2021 was $0.7 million and $0.7 million, respectively.
Certain stock option grants under the 2017 Plan allow the recipient to exercise the options prior to the options becoming fully vested. Under the 2017 Plan, the Company retains the right to repurchase common shares that have been issued upon early exercise of options at the original issue price. During the three months ended March 31, 2022, the Company did not repurchase shares. There was no material amount of shares of common stock subject to repurchase as of March 31, 2022. Cash received for the early exercise of unvested stock options is initially recorded as a liability and are released to equity over the vesting period. During three months ended March 31, 2022 and 2021, early exercised stock options vested were immaterial.
7. Leases
The Company leases office space under operating leases with expirations ranging from April 2022 to March 2025, some of which include rent escalations or an option to extend the lease for up to three years per renewal. The exercise of lease renewal options is at the sole discretion of the Company. Where real estate leases contain an option to renew, any period beyond the option date is only included as part of the lease term if the Company is reasonably certain to exercise the option.
As of March 31, 2022, the Company has not entered into any leases that have not yet commenced that would entitle the Company to significant rights or create additional obligations.
The Company determines whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from the use of the property, plant, and equipment.
The Company has elected the practical expedient to not separate its lease component from non-lease component for its real estate leases. The Company has elected the practical expedient not to apply the lease recognition requirements to short-term leases with an initial term of 12 months or less.
The Company uses either its incremental borrowing rate or the implicit rate in the lease agreement as the basis to calculate the present value of future lease payments at lease commencement. The incremental borrowing rate represents the rate the Company would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment.
Future minimum lease payments under these leases are as follows:
17
|
|
Lease Amounts |
|
|
|
|
(in thousands) |
|
|
2022 (remaining nine months) |
|
$ |
911 |
|
2023 |
|
|
1,038 |
|
2024 |
|
|
618 |
|
2025 |
|
|
104 |
|
2026 and thereafter |
|
|
— |
|
Total future minimum lease payments |
|
|
2,671 |
|
Less: Imputed Interest |
|
|
(231 |
) |
Present value of operating lease liabilities |
|
$ |
2,440 |
|
Less: Current portion |
|
|
966 |
|
Long-term operating lease liabilities |
|
$ |
1,474 |
|
|
|
|
|
|
Weighted average remaining lease term in years |
|
|
2.51 |
|
Weighted average discount rate |
|
|
7.58 |
% |
|
|
|
|
|
Variable operating lease expenses consist primarily of real estate taxes and insurance. The components of lease expense and related cash flows were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Rent expense |
|
$ |
317 |
|
|
$ |
293 |
|
Short-term lease costs |
|
|
— |
|
|
|
36 |
|
Variable lease costs |
|
|
26 |
|
|
|
42 |
|
Total |
|
$ |
343 |
|
|
$ |
371 |
|
|
|
|
|
|
|
|
||
Cash paid for operating leases |
|
$ |
313 |
|
|
$ |
298 |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Cost of sales |
|
$ |
58 |
|
|
$ |
60 |
|
Selling, general and administrative |
|
|
285 |
|
|
|
311 |
|
Total |
|
$ |
343 |
|
|
$ |
371 |
|
8. Commitments and Contingencies
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business, including without limitation, actions with respect to intellectual property, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible issues based on the developments in these proceedings or matters. A liability is recorded in the accompanying unaudited condensed consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
9. Term Loan
Perceptive loan
On August 23, 2021, the Company entered into a fifth amendment to the Credit Agreement and Guaranty with Perceptive Credit Holdings, LP (the "Perceptive Loan"), which transferred the loan to Perceptive Credit Holdings III, LP. In connection with this transfer and assignment, the Company entered into an amended and restated credit agreement and guaranty with Perceptive Credit
18
Holdings III, LP (the "Amended Perceptive Loan Agreement"), which provides two additional tranches of delayed-draw term loans of $10.0 million each, for an aggregate amount of $20.0 million (the "Amended Perceptive Loan"). The Amended Perceptive Loan Agreement provided for the issuance by the Company of warrants to purchase 150,684 shares of Series E Preferred shares at $11.00 per share, which was converted to the common stock upon the Company's IPO. The Amended Perceptive Loan Agreement modified the repayment of all outstanding principal to be due at maturity on August 23, 2026. In conjunction with the Amended Perceptive Loan, the Company paid a closing fee equal to $0.5 million as well as the lender’s legal fees and expenses. The Company accounted for the amendment as a modification.
On December 31, 2021, the first $10.0 million loan expired. The obligation of Perceptive Credit Holdings III, LP to make the second $10.0 million loan was subject to the making of the first loan. Because the Company did not draw the first loan, the second loan, which was required to be initiated on or before March 31, 2022 was forfeited.
For the three months ended March 31, 2022, the effective interest rate of the Amended Perceptive Loan was 14.59%. As of March 31, 2022 and 2021, the fair value of the Perceptive Loan approximates its carrying amount.
Future principal repayments on the Amended Perceptive Loan, as amended, as of March 31, 2022, are as follows:
|
|
Principal |
|
|
|
|
(in thousands) |
|
|
2026 |
|
$ |
30,000 |
|
Total |
|
$ |
30,000 |
|
The Amended Perceptive Loan Agreement also includes financial covenants that require the Company to (i) maintain, at all times, a minimum aggregate balance of $3.0 million in cash in one or more controlled accounts, and (ii) satisfy certain minimum revenue thresholds, measured for the twelve consecutive month period on each calendar quarter-end until June 30, 2026. These thresholds increase over time and range from $26.4 million for the twelve month period ended September 30, 2021 to $95.3 million for the twelve month period ended June 30, 2026. Failure to satisfy these financial covenants would constitute an event of default under the agreement. During the three months ended March 31, 2022, the Company was in compliance with all financial covenants and conditions required by the outstanding Amended Perceptive Loan Agreement.
On April 6, 2022, the Company entered into Amendment No. 1 (the “Amendment”) to the Amended Perceptive Loan Agreement. The Amendment extends the borrowing deadline for the first tranche of $10.0 million of delayed-draw term loans from December 31, 2021 to September 30, 2022, subject to the Company having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date. The Amendment also extends the borrowing deadline for the second tranche of $10.0 million delayed-draw term loans from March 31, 2022 to June 30, 2023, subject to (i) the Company having generated at least $46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) the closing market capitalization of the Company being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to the lender.
As a condition to entering into the Amendment, on April 6, 2022, the Company also amended the warrants previously issued to Perceptive Credit Holdings III, LP and certain of its affiliates to purchase an aggregate of 304,105 shares of its common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share.
10. Income Taxes
The Company maintains a full valuation allowance against its net deferred tax assets as of March 31, 2022 based on the current assessment that it is not more likely than not these future benefits will be realized before expiration. No material income tax expense or benefit has been recorded given the valuation allowance position and projected taxable losses in the jurisdictions where the Company files income tax returns. The Company has not experienced any significant increases or decreases to its unrecognized tax benefits since December 31, 2021 and does not expect any within the next 12 months.
The Company monitors changes to the tax laws in the states it conducts business and files corporate income tax returns.
Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by
19
Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. The Company has not completed an analysis regarding the limitation of net operating loss and R&D credit carryforwards as of March 31, 2022.
The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years remain open to examination and the state returns remain subject to examination for tax years . Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authorities. All other state jurisdictions remain open to examination.
12. Segment Information
The Company operates and reports its results in two business segments, Product and Software. The Company reports segment information based on the management approach. The management approach designates the internal reporting used by the Company's Chief Operating Decision Maker ("CODM") for decision making and performance assessment as the basis for determining the Company’s reportable segments. The performance measures of the Company’s reportable segments is primarily income (loss) from operations. Income (loss) from operations for each segment includes all revenues, related cost of net revenues, gross margin and operating expenses directly attributable to the segment.
The Company’s Product segment includes GentleWave System console and related accessories and instruments. The GentleWave System offers a novel approach to root canal therapy, using advanced fluid dynamics, broad-spectrum acoustic energy and accelerated chemistry to deliver optimal cleaning and disinfection of the root canal system.
The Company’s Software segment includes selling traditional software licenses for practice management software to enable an integrated digital office for endodontists as well as Software-as-a-Service subscriptions for the software.
The following tables present the Company’s segment information for the three months ended March 31:
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
(in thousands, except percentage data) |
|
|||||||||||||||||||||
|
|
Product |
|
|
Software |
|
|
Total |
|
|
Product |
|
|
Software |
|
|
Total |
|
||||||
Revenue |
|
$ |
7,203 |
|
|
$ |
1,830 |
|
|
$ |
9,033 |
|
|
$ |
5,809 |
|
|
$ |
1,618 |
|
|
$ |
7,427 |
|
Cost of sales |
|
|
6,078 |
|
|
|
676 |
|
|
|
6,754 |
|
|
|
5,075 |
|
|
|
610 |
|
|
|
5,685 |
|
Gross profit |
|
|
1,125 |
|
|
|
1,154 |
|
|
|
2,279 |
|
|
|
734 |
|
|
|
1,008 |
|
|
|
1,742 |
|
Gross margin |
|
|
16 |
% |
|
|
63 |
% |
|
|
25 |
% |
|
|
13 |
% |
|
|
62 |
% |
|
|
23 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Selling, general and administrative |
|
|
11,526 |
|
|
|
459 |
|
|
|
11,985 |
|
|
|
6,066 |
|
|
|
458 |
|
|
|
6,524 |
|
Research and development |
|
|
4,431 |
|
|
|
419 |
|
|
|
4,850 |
|
|
|
4,639 |
|
|
|
407 |
|
|
|
5,046 |
|
Change in fair value of contingent earnout |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
14 |
|
Total operating expenses |
|
|
15,957 |
|
|
|
878 |
|
|
|
16,835 |
|
|
|
10,719 |
|
|
|
865 |
|
|
|
11,584 |
|
Income (loss) from operations |
|
$ |
(14,832 |
) |
|
$ |
276 |
|
|
$ |
(14,556 |
) |
|
$ |
(9,985 |
) |
|
$ |
143 |
|
|
$ |
(9,842 |
) |
Segment Assets:
|
|
As of March 31, 2022 |
|
|
As of December 31, 2021 |
|
||
|
|
(in thousands) |
|
|||||
Product |
|
$ |
87,992 |
|
|
$ |
104,588 |
|
Software |
|
|
10,883 |
|
|
|
10,911 |
|
Total |
|
$ |
98,875 |
|
|
$ |
115,499 |
|
13. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the periods presented:
20
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands, except shares and per share data) |
|
|||||
Numerator: |
|
|
|
|
|
|
||
Net loss attributable to common stock holders |
|
$ |
(15,522 |
) |
|
$ |
(10,906 |
) |
Denominator: |
|
|
|
|
|
|
||
Weighted-average shares outstanding – basic and diluted |
|
|
26,405,252 |
|
|
|
1,205,314 |
|
Net loss per share – basic and diluted |
|
$ |
(0.59 |
) |
|
$ |
(9.05 |
) |
The following potentially dilutive securities were excluded from the computation of diluted net loss per share calculations for the periods presented because the impact of including them would be anti-dilutive:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Convertible preferred stock |
|
|
— |
|
|
|
17,031,887 |
|
Stock options |
|
|
3,024,956 |
|
|
|
2,957,860 |
|
RSUs |
|
|
2,702,762 |
|
|
|
— |
|
Warrants |
|
|
331,503 |
|
|
|
180,819 |
|
Forward obligation |
|
|
— |
|
|
|
224,842 |
|
Total |
|
|
6,059,221 |
|
|
|
20,395,408 |
|
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in the filings we make with Securities and Exchange Commission (the “SEC”) from time to time. See “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a commercial-stage medical technology company focused on saving teeth from tooth decay, the most prevalent chronic disease globally. We have developed the GentleWave System, an innovative technology platform designed to treat tooth decay by cleaning and disinfecting the microscopic spaces within teeth without the need to remove tooth structure. Our initial focus is on leveraging the GentleWave System, the first and only FDA-cleared system for root canal therapy that employs a sterilized, single-use procedure instrument ("PI"), to transform root canal therapy ("RCT"), by addressing the limitations of conventional methods. The system utilizes our proprietary mechanism of action, which combines procedure fluid optimization, broad-spectrum acoustic energy and advanced fluid dynamics, to debride and disinfect deep regions of the complex root canal system in a less invasive procedure that preserves tooth structure. The clinical benefits of our GentleWave System when compared to conventional methods of RCT include improved clinical outcomes, such as superior cleaning that is independent of root canal complexity and tooth anatomy, high and rapid rates of healing and minimal to no post- operative pain. In addition to the clinical benefits, the GentleWave System can improve the workflow and economics of dental practices. We began scaling commercialization of our current technology in 2017 and are focused on establishing the GentleWave Procedure as the standard of care for RCT. As of March 31, 2022, we had an installed base of approximately 850 GentleWave Systems that had performed more than 800,000 GentleWave patient procedures since commercialization.
RCT is a treatment for late-stage tooth decay that aims to save the patient’s tooth instead of removing it. Conventional methods of RCT depend primarily on instruments to manually scrape and remove tooth structure and open canals inside the tooth in order to remove and irrigate infected tissue. We believe that conventional methods of RCT do not adequately clean and disinfect the entire root canal system, primarily due to the complexity and uniqueness of each root canal and the inability of current endodontic technologies to effectively reach the microscopic spaces within the tooth. Conventional methods of RCT also generally require extensive use of instrumentation within the root canal system, which can result in the removal of substantial tooth structure, weaken the tooth and impact its long-term survival. This lack of sufficient cleaning and removal of substantial tooth structure can result in poor clinical outcomes, such as high treatment failure rates and significant post- operative pain. In addition, other limitations of conventional methods of performing RCT include: a frequent need for multiple visits to complete the procedure, a lack of standardized procedure protocols and a complex procedure that can be difficult to perform.
Our GentleWave System represents an innovative technology platform and approach to RCT. The GentleWave System is a Class II device and has received 510(k) clearance from the FDA. The key components of our GentleWave System are a sophisticated and mobile console and a pre-packaged, sterilized, single-use PI. The GentleWave System utilizes a proprietary mechanism of action that is designed to combine procedure fluid optimization, broad-spectrum acoustic energy and advanced fluid dynamics to efficiently and effectively reach microscopic spaces within teeth and dissolve and remove tissue and bacteria with minimal or no removal of tooth structure. We have invested significant resources in establishing a broad intellectual property portfolio that protects the GentleWave Procedure and its unique mechanism of action, as well as future capabilities under development. We believe our GentleWave System transforms the patient and dental practitioner experience and addresses many of the limitations of conventional RCT.
We are committed to continuing to generate evidence to support the clinical benefits of the GentleWave System. These benefits have been demonstrated in-vivo and in-vitro across two prospective, multi-center clinical studies, in real-world, clinical practice and in over 30 peer-reviewed journal publications, including seven independent publications and more than 23 publications by our consultants or sponsored or funded by us. For example, results from our PURE study demonstrated a treatment success rate of 97% at the six- and 12-month follow-ups for patients treated using the GentleWave System.
In the United States and Canada, our direct sales force markets and sells the GentleWave System to dental practitioners performing a high volume of root canals as part of their practice. Our commercial strategy and sales model involves a focus on driving adoption of our GentleWave System by increasing our installed base of consoles and maximizing recurring PI revenue through increased utilization. We intend to expand the size of our sales and clinician support teams to support our efforts of driving adoption and
22
utilization of the GentleWave System. We also plan to pursue marketing authorizations and similar certifications to enable marketing and engage in other market access initiatives over time in attractive international regions in which we see significant potential opportunity.
On November 2, 2021, we completed our initial public offering (“IPO”) of 7.8 million shares of our common stock at a public offering price of $12.00 per share. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $83.8 million. As of March 31, 2022, we had cash and cash equivalents of $66.1 million, an accumulated deficit of $327.6 million, and $30.0 million in principal outstanding under our term loan facility. We generated revenue of $9.0 million and incurred a net loss of $15.5 million for the three months ended March 31, 2022, compared to revenue of $7.4 million and a net loss of $10.9 million for the three months ended March 31, 2021.
We expect to continue to incur net losses for the next several years. We expect to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. and Canadian sales representatives, expanding our international marketing programs and expanding direct to clinician digital marketing efforts to help facilitate further adoption among existing accounts and to broaden awareness and adoption of our products to new clinicians. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our GentleWave products, support regulatory submissions and demonstrate the clinical efficacy of our new products. Moreover, we are incurring additional expenses as a result of operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses. As a result of these expenses, we will require additional financing to fund our operations and planned growth.
We believe that our cash and cash equivalents will be sufficient to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Report on Form 10-Q. We may also seek additional financing opportunistically. We may seek to raise any additional capital by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our stockholders may experience dilution.
Factors Affecting Our Performance and Key Business Metrics
We believe there are several important factors that impact our operating performance and results of operations. We also regularly review several operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. We believe the following factors and key business metrics are important indicators of our performance:
23
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted our operations, revenue and overall financial condition, and may negatively impact our operations, revenue, and overall financial condition in the future if new and more transmissible vaccine-resistant variants emerge. We continued to experience disruptions to our business during the three months ended March 31, 2022, as a result of customers' continuing reluctance to start root canal procedures in light of the ongoing risk posed by the virus. Our customers, including endodontists, have experienced significant financial hardship and some of them may never fully recover. We also experienced disruptions, and may experience future disruptions, including: delays in capital and clinical sales representatives becoming fully trained and productive; difficulties and delays in dental practitioner outreach and training dental practitioners to use our GentleWave System; travel restrictions; delays in initiation, enrollment and follow-ups of our clinical studies; challenges with maintaining adequate supply from third-party manufacturers of components and finished goods and distribution providers; and access to dental practitioners for training and case support. The COVID-19 pandemic also resulted in, and may in the future result in, significant disruption to the global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.
We have recently encountered disruptions in our supply of certain materials used in the final assembly and packaging of our PIs. We are engaged in activities to mitigate supply disruptions, but we have experienced a reduction in our safety stock levels and, if the supply disruptions persist, we may not be able to fully satisfy customer orders resulting in lower utilization. We are currently implementing alternative secondary source suppliers and packaging methods in order to ensure that we are able to source sufficient components and materials to manufacture our products. In the event that we are unable to implement new packaging methods or source sufficient components and materials from our current or future suppliers to manufacture enough of our products to satisfy demand, we may need to cease or slow down production and our business operations and financial condition may be materially harmed. Additionally, costs of certain materials and services have increased due to the increased demand and supply shortage. If such inflationary pressures in costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows.
The duration and ultimate economic impact of the COVID-19 pandemic on our business remains uncertain at this time. We expect that any future restrictions on dental procedures, as a result of COVID-19 or the emergence of any vaccine resistant variant, and other related issues, including supply chain disruptions, would have a negative impact on our operations, revenue and overall financial condition.
Components of Our Results of Operations
Revenue
Our revenue consists primarily of product revenue and software revenue. We generate product revenue on the capital sale of our GentleWave console and recurring sales of our single-use PIs and accessories. To a lesser extent, we also derive product revenue from service and repair and extended warranty contracts with our existing customers. Software revenue relates to fees we receive for licensing our TDO practice management tool to dental practitioners. We expect our product revenue to increase in absolute dollars as we increase adoption and utilization of the GentleWave System, though revenues may fluctuate from quarter to quarter.
Cost of Sales and Gross Margin
Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor to produce our products, warranty, provisions for slow-moving and obsolete inventory, and other direct costs such as shipping and software support. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include compensation for personnel, including stock-based compensation expenses, facilities, the cost of production equipment and operations supervision, quality control, material procurement and intangible assets amortization. We provide a two-year warranty on capital equipment upon initial sale, and we establish a reserve for warranty repairs based on historical warranty repair costs incurred. Provisions for warranty obligations, which are included in cost of sales, are provided for at the time of shipment. We expect our cost of sales to increase in absolute dollars for the foreseeable future primarily as, and to the extent, our revenue grows, partially offset by lower unit product costs, though it may fluctuate from period to period.
24
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily, product mix and the resulting average selling prices, production volumes, manufacturing costs and product yields, and the implementation of cost reduction strategies. Our software gross margin is generally higher than our product gross margin. As a result of these factors, we expect gross margin may fluctuate from period to period. We are engaged in various efforts to improve our gross margin by reducing unit product costs to the extent our production volumes increase, as well as through product design improvements, reducing material costs through negotiations with suppliers and optimizing the manufacturing process and reducing the costs to service our installed base.
Operating Expenses
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling, marketing, professional education, administration, finance, information technology, legal, and human resource functions. SG&A expenses also include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit fees, legal fees, insurance costs and general corporate expenses including allocated facilities-related expenses. We expect our SG&A expenses to increase in absolute dollars for the foreseeable future as we expand our commercial infrastructure and incur additional fees associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses, though it may fluctuate from period to period. However, over time, we expect our SG&A expenses to decrease as a percentage of revenue.
Research and Development
Research and development ("R&D") expenses consist primarily of costs incurred for proprietary R&D programs, and include costs of product engineering, product development, regulatory affairs, consulting services, materials, and depreciation, as well as other costs associated with products and technologies being developed. These expenses include employee and non-employee compensation, including stock-based compensation, supplies, materials, consulting, related travel expenses and facilities expenses. We expect our R&D expenses to moderate in absolute dollars for the foreseeable future as we continue to develop, enhance, and commercialize new products and technologies. However, we expect our R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts.
Changes in Fair Value of Contingent Earnout
Changes in fair value of contingent earnout consists of fair value adjustments from our contingent earnout liabilities recorded in connection with the 2018 acquisition of TDO. We record a liability related to the contingent earnout provisions, which are based on actual and estimated annual sales of licenses and units, as defined in the stock purchase agreement, for each of the years ended December 31, 2021 and 2020. The contingent earnout period ended December 31, 2021 and final payment was made in February 2022.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest expense under our outstanding term loan, and the remeasurement to fair value each reporting period, of our preferred stock warrant liabilities and our forward obligation recorded in connection with an asset acquisition. On completion of our IPO, all of the outstanding warrants to purchase shares of convertible preferred stock were revalued and converted into warrants to purchase shares of common stock and the warrants liability was reclassified into stockholders’ equity. As a result, we are no longer required to remeasure the fair value of the common stock warrants at each reporting period. On completion of our IPO, the forward obligation was settled by the issuance of shares of common stock and will no longer require remeasurement at each reporting period.
Results of Operations
Comparison of Three Months Ended March 31, 2022 and 2021
The following table shows our results of operations for the three months ended March 31, 2022 and 2021, together with the dollar and percentage change in those items:
25
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Revenue |
|
$ |
9,033 |
|
|
$ |
7,427 |
|
|
|
1,606 |
|
|
|
22 |
% |
Cost of sales |
|
|
6,754 |
|
|
|
5,685 |
|
|
|
1,069 |
|
|
|
19 |
% |
Gross profit |
|
|
2,279 |
|
|
|
1,742 |
|
|
|
537 |
|
|
|
31 |
% |
Gross margin |
|
|
25 |
% |
|
|
23 |
% |
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
11,985 |
|
|
|
6,524 |
|
|
|
5,461 |
|
|
|
84 |
% |
Research and development |
|
|
4,850 |
|
|
|
5,046 |
|
|
|
(196 |
) |
|
|
(4 |
)% |
Change in fair value of contingent earnout |
|
|
— |
|
|
|
14 |
|
|
|
(14 |
) |
|
|
(100 |
)% |
Total operating expenses |
|
|
16,835 |
|
|
|
11,584 |
|
|
|
5,251 |
|
|
|
45 |
% |
Loss from operations |
|
|
(14,556 |
) |
|
|
(9,842 |
) |
|
|
(4,714 |
) |
|
|
48 |
% |
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest and financing costs, net |
|
|
(966 |
) |
|
|
(1,064 |
) |
|
|
98 |
|
|
|
(9 |
)% |
Loss before income tax expense |
|
|
(15,522 |
) |
|
|
(10,906 |
) |
|
|
(4,616 |
) |
|
|
42 |
% |
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net loss |
|
$ |
(15,522 |
) |
|
$ |
(10,906 |
) |
|
|
(4,616 |
) |
|
|
42 |
% |
Revenue
Our breakdown of revenue for the three months ended March 31, 2022 and 2021, respectively, is summarized below:
|
|
Three Months Ended March 31, |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
|
(in thousands, except percentages) |
|
|||||||||||||
Product revenue |
|
$ |
7,203 |
|
|
$ |
5,809 |
|
|
|
1,394 |
|
|
|
24 |
% |
Software revenue |
|
|
1,830 |
|
|
|
1,618 |
|
|
|
212 |
|
|
|
13 |
% |
Total revenue |
|
$ |
9,033 |
|
|
$ |
7,427 |
|
|
|
1,606 |
|
|
|
22 |
% |
Revenue increased $1.6 million, or 22%, for the three months ended March 31, 2022 from the comparable period in the prior year, with approximately $0.9 million of the increase attributable to higher sales volume and the rest to a higher average selling price. For the three months ended March 31, 2022, we generated $2.1 million and $4.3 million from the sale of GentleWave consoles and PIs, respectively, compared to $1.8 million and $3.3 million for the three months ended March 31, 2021, respectively. There were no significant changes in the Software segment revenue.
Cost of sales and Gross margin
Cost of sales increased $1.1 million, or 19%, for the three months ended March 31, 2022 from the comparable period in the prior year. The increase was primarily attributable to higher sales volume and costs relating to supply chain disruptions that were partially offset by higher absorption of manufacturing overhead expenses due to increased production volume. There were no significant changes in the Software segment cost of sales.
Gross margin increased 2% for the three months ended March 31, 2022 from the comparable period in the prior year, primarily due to higher average selling price and improved overhead absorption.
Selling, general and administrative expenses
SG&A expenses increased $5.5 million, or 84%, for the three months ended March 31, 2022 from the comparable period in the prior year, primarily driven by changes in our Product segment due to higher employee-related compensation and benefit expenses, including stock-based compensation, as a result of the expansion of our commercial infrastructure and increase in sales, as well as additional expenses and fees associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses. There were no significant changes in the Software segment selling, general and administrative expenses.
Research and development expenses
R&D expenses were relatively flat for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. There were no significant changes in any major components of the R&D expenses.
26
Change in fair value of contingent earnout
There was no change in fair value of contingent earnout recorded for the three months ended March 31, 2022 as the contingent earnout period ended December 31, 2021 and final payment was made in February 2022.
Loss from operations
Loss from operations increased $4.7 million for the three months ended March 31, 2022 from the comparable period in the prior year, primarily due to increases in operating expenses in the Product segment as partially offset by higher sales and gross profit in the Product segment. The Software segment recorded income from operations of $0.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
Interest and financing costs, net
There were no significant changes in interest and financing costs, net, for the three months ended March 31, 2022 and 2021.
Liquidity and Capital Resources
Sources of liquidity
We have incurred significant operating losses and negative cash flows from operations since our inception, and we anticipate that we will continue to incur net losses for the next several years. As of March 31, 2022, we had cash and cash equivalents of $66.1 million, an accumulated deficit of $327.6 million, and $30.0 million in principal outstanding under our term loan facility. For the three months ended March 31, 2022 and 2021, our net losses from operations were $15.5 million and $10.9 million, respectively, and our net cash used in operating activities was $18.0 million and $13.1 million, respectively.
Prior to our IPO, we raised a total of $281.3 million in net proceeds from private placements of convertible preferred stock, and approximately $4.2 million from the issuance of common stock and stock option exercises. On November 2, 2021, we completed our IPO of 7.8 million shares of our common stock at a public offering price of $12.00 per share. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $83.8 million.
Funding requirements
We expect our operating expenses to increase for the foreseeable future as we continue to invest in expanding our sales and marketing infrastructure programs to both drive and support anticipated sales growth and product development. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to drive and support the anticipated growth in our organization. We will also incur additional expenses as we increase the size of our administrative function to support the growth of our business and operations as a public company. The timing and amount of our operating expenditures will depend on many factors, including:
27
Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Based upon our current operating plan, we believe that our cash and cash equivalents, together with anticipated revenue and available debt financing arrangements will be sufficient to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Report. If our actual operating expenses significantly exceed our operating plan or our debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9), we may have to significantly delay or scale back our operations to reduce working capital requirements, and substantial uncertainty would exist with respect to our ability to continue as a going concern. In addition, we would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of our assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing certain of the our commercial efforts, development activities and other discretionary expenditures that are within our control. These reductions in expenditures, if required, may have an adverse impact on the our ability to achieve certain of our planned objectives in fiscal year 2022.
We have based this estimate on estimates and assumptions that may prove to be wrong, and we may need to utilize additional available capital resources or seek additional financing opportunistically. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. If our existing capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional public or private equity or debt securities or obtain an additional credit facility. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional capital through collaboration agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.
Indebtedness
On June 23, 2017, we entered into a credit agreement and guaranty (the "Credit Agreement") with Perceptive Credit Holdings, LP, which provided for a delayed-draw term loan in an aggregate principal amount of $20.0 million. The initial loan of $10.0 million was made in a single borrowing on June 23, 2017. The interest rate for the loan is the greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. In connection with the loan, we granted a security interest in substantially all of our assets to the lender.
The Credit Agreement was amended in October 2018 to provide an additional tranche consisting of two borrowings, which were exercised on October 16, 2018 and October 7, 2019 in an aggregate principal amount of $10.0 million each. The Credit Agreement was further amended in October 2019 to provide two additional tranches of delayed-draw term loans of $10.0 million each, and to modify the repayment provisions of the loan to require all principal to be due at maturity. The additional tranches were not exercised prior to their expiration on December 31, 2020. Both amendments were evaluated and accounted for as modifications.
On August 23, 2021, we further amended the Credit Agreement to transfer and assign the loans thereunder to Perceptive Credit Holdings III, LP. In connection with this transfer and assignment, we entered into an amended and restated credit agreement and guaranty (the "New Credit Agreement") with Perceptive Credit Holdings III, LP, which provides for two additional tranches of delayed-draw term loans of $10.0 million each and extended the maturity date for repayment, including with respect to amounts owed in connection the existing delayed-draw term loan, to August 2026.
The interest rate for amounts borrowed under the New Credit Agreement is the greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. In connection with the New Credit Agreement, we also entered into an amended and restated security agreement and granted a security interest in substantially all of our assets. We are permitted to make voluntary prepayments, subject to a scaled prepayment premium that ranges from 7.0% to 1.0% of the aggregate principal amount outstanding on such prepayment date for prepayments made after August 23, 2022 and before August 23, 2025. No prepayment premium is required for payments made after August 23, 2025.
The New Credit Agreement contains events of default, including, without limitation, events of default upon: (i) failure to make a payment pursuant to the terms of the agreement; (ii) violation of certain covenants; (iii) payment or other defaults on other indebtedness; (iv) material adverse change in the business or change in control; (v) insolvency; (vi) significant judgments; (vii) incorrectness of representations and warranties; (viii) regulatory matters; and (ix) failure by us to maintain a valid and perfected lien on the collateral securing the borrowing. In the event of an event of default, the lender may terminate its commitments and declare all
28
amounts outstanding under the New Credit Agreement immediately due and payable, together with accrued interest and all fees and other obligations. The amount of such repayment will include payment of any prepayment premium applicable due to the time of such payment. In addition, upon the occurrence and during the continuance of any event of default, the applicable margin will increase by 3.00% per annum to 12.25%.
The New Credit Agreement includes financial covenants that requires us to (i) maintain, at all times, a minimum aggregate balance of $3.0 million in cash in one or more controlled accounts, and (ii)satisfy certain minimum revenue thresholds, measured for the twelve consecutive month period on each calendar quarter-end until June 30, 2026. These thresholds increase over time and range from $26.4 million for the 12-month period ended September 30, 2021 to $95.3 million for the 12-month period ended June 30, 2026. Failure to satisfy these financial covenants would constitute an event of default under the New Credit Agreement.
In connection with the New Credit Agreement, we issued a warrant to purchase 150,685 shares of our Series E convertible preferred stock at a purchase price of $20.08 per share. Upon the closing of our IPO, this convertible preferred stock warrant was converted to a warrant to purchase 150,685 shares of our common stock at a purchase price of $20.08 per share.
On December 31, 2021, the first tranche of $10.0 million loan expired. The obligation of Perceptive Credit Holdings III, LP to make the second tranche loan is subject to the making of the first tranche. Since the Company did not draw the first tranche, the second tranche available by March 31, 2022 has been forfeited.
As of March 31, 2022, we had an aggregate principal balance of $30.0 million outstanding under the New Credit Agreement and we were in compliance with all covenants and conditions under the New Credit Agreement.
On April 6, 2022, we entered into Amendment No. 1 to the New Credit Agreement (the "Amended New Credit Agreement") with Perceptive Credit Holdings III, LP. The Amended New Credit Agreement extends the first tranche of $10.0 million of the delayed borrowing date deadline from December 31, 2021 to September 30, 2022, subject to we having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date. The Amended New Credit Agreement also extends the second tranche of $10.0 million borrowing Date deadline from March 31, 2022 to June 30, 2023, subject to (i) we having generated at least $46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) our closing market capitalization being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to the lender.
As a condition to entering into the Amended New Credit Agreement, on April 6, 2022, we amended the warrants previously issued to Perceptive Credit Holdings III, LP and certain of its affiliates under the Credit Agreement and New Credit Agreement to purchase an aggregate of 304,105 shares of our common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share.
Summary statement of cash flows
The following table summarizes the primary sources and uses of our cash flows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
|||||
Net cash provided by (used in) : |
|
|
|
|
|
|
||
Operating activities |
|
$ |
(18,045 |
) |
|
$ |
(13,067 |
) |
Investing activities |
|
|
(56 |
) |
|
|
(74 |
) |
Financing activities |
|
|
(486 |
) |
|
|
(645 |
) |
Net decrease in cash and cash equivalents |
|
$ |
(18,587 |
) |
|
$ |
(13,786 |
) |
Net Cash Used in Operating Activities
Net cash used in operating activities was $18.0 million for the three months ended March 31, 2022, primarily consisting of net loss of $15.5 million, non-cash items of $2.3 million and a net change in our net operating assets and liabilities of $4.8 million. Non-cash items primarily consisted of $0.7 million in depreciation and amortization and $1.4 million in stock-based compensation. The change in our net operating assets and liabilities was primarily due to a $2.0 million increase in inventory held due to higher production and changes in prepaid expenses and other assets, accounts payable, accrued expenses and accrued compensation attributable to timing of payment.
29
Net cash used in operating activities was $13.1 million for the three months ended March 31, 2021, primarily consisting of net loss of $10.9 million, non-cash items of $1.5 million and a net change in our net operating assets and liabilities of $3.7 million. Non-cash items primarily consisted of $0.8 million in depreciation and amortization and $0.5 million in stock-based compensation. The change in our net operating assets and liabilities was primarily due to decrease in accounts payable, accrued expenses and accrued compensation attributable to timing of payment.
Net Cash Used in Investing Activities
Net cash used in investing activities was $0.1 million for each of the three months ended March 31, 2022 and 2021, as a result of purchases of property and equipment.
Net Cash Provided by Financing Activities
Net cash used by financing activities was $0.5 million for the three months ended March 31, 2022, primarily resulting from the payment of the remainder of the IPO fees and contingent earnout. Net cash used in financing activities was $0.6 million for the three months ended March 31, 2021, primarily due to payment of contingent earnout to the former owners of TDO.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, the revenue generated, and expenses incurred, and related disclosures, during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
There were no material changes to our critical accounting policies or in the methodology used for estimates from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on March 23, 2022.
JOBS Act Accounting Election and Smaller Reporting Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, presenting only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this Quarterly Report on Form 10-Q, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements. We have elected to take advantage of certain of the reduced disclosure obligations in this Quarterly Report on Form 10-Q and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to avail ourselves of this exemption and, therefore, for new or revised accounting standards applicable to public companies, we may delay adopting new or revised accounting standards until those standards would otherwise apply to private companies.
We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year in which we have total annual gross revenues of at least $1.07 billion, (b) the date that we are deemed to be a large accelerated filer, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act’), which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the second quarter of that fiscal year, (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period and (d) the last day of the 2026 fiscal year.
30
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
31
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various claims and legal proceedings. Regardless of outcome, litigation and other legal and administrative proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are currently not a party to any legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition, and results of operations.
Item 1A. Risk Factors.
We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 risks and uncertainties that could cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. These risks and uncertainties are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, results of operations or the market price of our common stock. Except as set forth below, there have been no material changes to the risk factors previously described in our 2021 Annual Report on Form 10-K.
We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply shortages, price fluctuations and quality issues that could negatively affect our business, financial condition and results of operations.
We rely on third-party suppliers, including in some instances single or sole source suppliers, to provide us with certain components, sub-assemblies and finished products for our products. These components, sub-assemblies and finished products are critical and, for a small number of items, there are relatively few alternative sources of supply. For example, our GentleWave console includes a number of components, including high pressure lines, high pressure pumps, fluid temperature control systems, degassing systems and user interface control systems, most of which we source externally from third party suppliers. We rely on Teledyne SSI to supply our high pressure pump, Marlow Industries, Inc. for our fluid temperature control systems and Idex Health & Science LLC for our degassing components. We do not currently have long-term supply contracts with certain of the sole and single source suppliers of these key components, and there are no minimum purchase or payment requirements. Additionally, we believe we are not a major customer to many of our suppliers. Our suppliers may therefore give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms. These single or sole source suppliers may be unwilling or unable to supply the necessary materials and components or manufacture and assemble our products in a reliable manner and at the levels we anticipate or at levels adequate to satisfy demand for our products.
In addition, we have not been qualified or obtained necessary regulatory clearances for additional suppliers for most of the components, sub-assemblies and materials we require for our products. While we currently believe that alternative sources of supply or sterilization may be available, we cannot be certain whether they will be available if and when we need them, or that any alternative suppliers or providers would be able to provide the quantity and quality of components, materials and sterilization that we would need to manufacture and ship our products if our existing suppliers and providers were unable to satisfy our requirements. To utilize other sources, we would need to identify and qualify new providers to our quality standards and obtain any additional regulatory clearances or approvals required to change providers, which could result in manufacturing delays and increase our expenses.
Although we believe that we have stable relationships with our existing suppliers, we cannot assure you that we will be able to secure a stable supply of components or materials going forward. In the event that any adverse developments occur with our suppliers, in particular for those components that are single or sole sourced, or if any of our suppliers modifies any of the components they supply to us, our ability to supply our products may be temporarily or permanently interrupted. Obtaining substitute components could be difficult, time and resource- consuming and costly. Also, there can be no assurance that we will be able to secure a supply of alternative components at reasonable prices without experiencing interruptions in our business operations.
Quarantines, shelter-in-place and similar government orders related to the COVID-19 pandemic or other infectious disease outbreaks, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, could also impact the suppliers upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our products. We have recently encountered disruptions in our supply of certain materials used in the final assembly and packaging of our Procedure Instruments. We are engaged in activities to mitigate supply disruptions, but we have experienced a reduction in our safety stock levels and, if the supply disruptions persist, we may not be able to fully satisfy customer orders resulting in lower utilization. We are currently implementing alternative secondary source suppliers and packaging methods in order to ensure that we are able to source
32
sufficient components and materials to manufacture our products. In the event that we are unable to implement new packaging methods or source sufficient components and materials from our current or future suppliers to manufacture enough of our products to satisfy demand, we may have to cease or slow down production and our business operations and financial condition may be materially harmed. Additionally, costs of certain materials and services have increased due to the increased demand and supply shortage. If such inflationary pressures in costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows.
Our dependence on third-parties subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:
Although we require our third-party suppliers and providers to supply us with components and services that meet our specifications and other applicable legal and regulatory requirements in our agreements and contracts, and we perform incoming inspection, testing or other acceptance activities to ensure the components meet our requirements, there is a risk that these third parties will not always act consistent with our best interests, and may not always supply components or provide services that meet our requirements or in a timely manner. In addition, we cannot assure you that our suppliers have obtained and will be able to obtain or maintain all licenses, permits, clearances and approvals necessary for their operations or comply with all applicable laws and regulations, and failure to do so by them may lead to interruption in their business operations, which in turn may result in shortages of components supplied to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Proceeds
On October 28, 2021, our Registration Statement on Form S-1 (File No. 333-260136) relating to our IPO was declared effective by the SEC. We received aggregate net proceeds of $83.8 million, after deducting underwriters' discounts and commissions and offering expenses of $9.8 million. There has been no material change in the planned use of the IPO proceeds as described in our prospectus dated November 1, 2021, as filed with the SEC pursuant to Rule 424(b) under the Securities Act (File No. 333-260136) on November 1, 2021.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
33
None.
Item 5. Other Information.
None.
34
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q unless otherwise stated.
|
|
Incorporated by Reference |
|
|||
Exhibit Number |
Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed / Furnished Herewith |
3.1 |
8-K |
001-40988 |
3.1 |
11/2/2021 |
|
|
3.2 |
8-K |
001-40988 |
3.2 |
11/2/2021 |
|
|
4.1 |
S-1/A |
333-260136 |
4.1 |
10/25/2021 |
|
|
4.2 |
S-1/A |
333-260136 |
4.2 |
10/25/2021 |
|
|
4.3 |
S-1 |
333-260136 |
4.3 |
10/8/2021 |
|
|
4.4 |
Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2013 |
S-1 |
333-260136 |
4.4 |
10/8/2021 |
|
4.5 |
Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on June 30, 2014 |
S-1 |
333-260136 |
4.5 |
10/8/2021 |
|
4.6 |
Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2014 |
S-1 |
333-260136 |
4.6 |
10/8/2021 |
|
4.7 |
S-1 |
333-260136 |
4.7 |
10/8/2021 |
|
|
4.8 |
S-1 |
333-260136 |
4.8 |
10/8/2021 |
|
|
4.9 |
S-1 |
333-260136 |
4.9 |
10/8/2021 |
|
|
4.10 |
S-1 |
333-260136 |
4.10 |
10/8/2021 |
|
|
4.11 |
8-K |
001-40988 |
4.1 |
4/7/2022 |
|
|
4.12 |
Schedule to Exhibit 4.11 - Form of Credit Agreement Warrant to Purchase Stock |
8-K |
001-40988 |
4.2 |
4/7/2022 |
|
4.13 |
10-K |
001-40988 |
4.11 |
3/23/2022 |
|
|
10.1 |
Amendment No. 1 to Amended and Restated Credit Agreement and Guaranty |
8-K |
001-40988 |
10.1 |
4/7/2022 |
|
31.1 |
|
|
|
|
* |
|
31.2 |
|
|
|
|
* |
|
32.1 |
|
|
|
|
* |
|
32.2 |
|
|
|
|
* |
|
35
101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
* |
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
* |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
* |
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
* |
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
* |
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
* |
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
* |
* Filed or furnished herewith.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Sonendo, Inc. |
|
|
|
|
|
|
|
|
|
Date: May 10, 2022 |
|
By: |
/s/ Bjarne Bergheim |
|
|
|
Bjarne Bergheim |
|
|
|
President, Chief Executive Officer and Director |
|
|
|
(principal executive officer) |
|
|
|
|
|
|
|
|
Date: May 10, 2022 |
|
By: |
/s/ Michael P. Watts |
|
|
|
Michael P. Watts |
|
|
|
Chief Financial Officer |
|
|
|
(principal financial and accounting officer) |
37
Exhibit 31.1
CERTIFICATION
I, Bjarne Bergheim, certify that:
Date: May 10, 2022 |
|
By: |
/s/ Bjarne Bergheim |
|
|
|
Bjarne Bergheim |
|
|
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Michael Watts, certify that:
Date: May 10, 2022 |
|
By: |
/s/ Michael Watts |
|
|
|
Michael Watts |
|
|
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sonendo, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
Date: May 10, 2022 |
|
By: |
/s/ Bjarne Bergheim |
|
|
|
Bjarne Bergheim |
|
|
|
President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sonendo, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
Date: May 10, 2022 |
|
By: |
/s/ Michael Watts |
|
|
|
Michael Watts |
|
|
|
Chief Financial Officer |