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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 June 30,March 31, 20232024

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
Identification No.)

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 ExchangeOTC Markets

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 August 1, 2023,May 2, 2024, the registrant had 52,691,60770,455,399 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

Cautionary Note Regarding Forward-Looking Statements

1

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

Signatures

34

 

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"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“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 20222023 and in the filings we make with Securities and Exchange Commission (the "SEC"“SEC”) from time to time.

We are an early-stage company with a history of significant net losses, we expect to continue to incur operating losses for the foreseeable future and we may not be able to achieve or sustain profitability.
Our common stock has been delisted from the New York Stock Exchange (“NYSE”), which may negatively impact our stockholders and the trading price and liquidity of our common stock.
Our revenue is primarily generated from sales of our GentleWave Console and the accompanying single-use procedure instruments (“PIs”), as well as The Digital Office (“TDO”) software, and we are therefore highly dependent on the success of thosethese offerings.
Our future operating results may be difficult to predict and could fall below expectations or any guidance we may provide.
The terms of our credit agreement contain operating and financial covenants and place restrictions on our operating and financial flexibility.
We need additional funding to finance our planned operations, and may not be able to raise capital when needed.
The commercial success of our GentleWave System and the GentleWave Procedure will depend upon the degree of market acceptance of our products by dental practitioners, our ability to maintain strong working relationships with our existing clinicians and dental customers and our ability to increase penetration in existing markets and expand into adjacent markets.
We may provide inadequate training, fail to increase our sales and marketing capabilities or fail to develop and maintain broad brand awareness in a cost-effective manner.
We may not be able to obtain or maintain adequate levels of third party coverage and reimbursement.
We may not be able to achieve or maintain satisfactory pricing and margins for our products.
We may not be able to compete successfully.
We may be unable to develop or commercialize new products on a timely basis and our products may become obsolete.
We have limited experience manufacturing our products in large-scale commercial quantities and we face a number of manufacturing risks that may adversely affect our manufacturing abilities, which could delay, prevent or impair our growth.
We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply shortages and price fluctuations that could negatively affect our business, financial condition and results of operations.
OurAny changes in our shipping arrangements or damages or losses sustained from shipping could adversely affect our business, financial condition, results of operations and growth have been adversely impacted by the effects of the COVID-19 pandemic and may be adversely impacted by COVID-19 or another pandemic, epidemic or infectious disease outbreak in the future.
We have a history of recurring losses and accumulated deficit, and anticipate that we will continue to incur net losses for the next several years. We may need additional funding to finance our planned operations, and may not be able to raise capital when needed.prospects.
Our TDO softwareoperating expenses may substantially increase and our business and financial results will be adversely affected if we receive a significant number of warranty claims or our GentleWave Systems require significant amounts of service after sale.
We may encounter difficulties in managing our growth, forecasting demand and managing inventory.

1


Our internal computer systems or those used by our contractors or consultants, may fail or suffer security breaches, and such failure could negatively affect our business, financial condition and results of operations.
Natural or man-made disasters and other similar events may significantly disrupt our business, including by causing delays in production or an increase in costs, and negatively impact our business, financial condition and results of operations.
The sizes of the addressable markets for our GentleWave System have not been established with precision and our potential market opportunity may be smaller than we estimate and may decline.
We may incur substantial liabilities and other negative impacts on our business as a result of product liability lawsuits and we may not be able to obtain or maintain insurance to cover these and other risks.
Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.
Our products and operations are subject to extensive government regulation and oversight in the United States.
Our ability to utilize our net operating loss carryforwards and research and development credit carryforwards may be limited.
We are highly dependent on our senior management team.
Our success depends on our ability to obtain and maintain our intellectual property.
The market price of our common stock may be volatile and an active trading market may not develop.
Anti-takeover provisions in our Certificate of Incorporation and Bylaws, as well as those under Delaware law could prevent or delay a change in control.
We are subject to additional risks and costs as a result of being a public company.
We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.

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.

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

1


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)

 

 

June 30,

 

December 31,

 

 

March 31,

 

December 31,

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(Unaudited)

 

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,567

 

 

$

17,665

 

 

$

18,580

 

 

$

14,009

 

Short-term investments

 

 

53,320

 

 

 

73,784

 

 

 

15,009

 

 

 

32,773

 

Accounts receivable, net

 

 

6,308

 

 

 

5,798

 

 

 

4,176

 

 

 

4,790

 

Inventory

 

 

13,161

 

 

 

15,462

 

 

 

12,116

 

 

 

11,074

 

Prepaid expenses and other current assets

 

 

1,854

 

 

 

8,397

 

 

 

1,611

 

 

 

1,969

 

Current assets of discontinued operations

 

 

1,162

 

 

 

656

 

Total current assets

 

 

87,210

 

 

 

121,106

 

 

 

52,654

 

 

 

65,271

 

Property and equipment, net

 

 

2,777

 

 

 

2,860

 

 

 

767

 

 

 

461

 

Operating lease right-of-use assets

 

 

3,619

 

 

 

2,455

 

 

 

3,227

 

 

 

2,703

 

Intangible assets, net

 

 

1,960

 

 

 

2,292

 

Goodwill

 

 

8,454

 

 

 

8,454

 

Other assets

 

 

118

 

 

 

118

 

 

 

127

 

 

 

128

 

Non-current assets of discontinued operations

 

 

 

 

 

9,597

 

Total assets

 

$

104,138

 

 

$

137,285

 

 

$

56,775

 

 

$

78,160

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,092

 

 

$

4,438

 

 

$

916

 

 

$

1,142

 

Accrued expenses

 

 

4,235

 

 

 

5,357

 

 

 

2,737

 

 

 

3,072

 

Accrued compensation

 

 

2,690

 

 

 

3,616

 

 

 

1,470

 

 

 

2,413

 

Operating lease liabilities

 

 

1,290

 

 

 

1,114

 

 

 

1,172

 

 

 

1,250

 

Current portion of term loan

 

 

10,800

 

 

 

24,900

 

Other current liabilities

 

 

2,038

 

 

 

2,191

 

 

 

1,786

 

 

 

1,844

 

Current liabilities of discontinued operations

 

 

73

 

 

 

700

 

Total current liabilities

 

 

11,345

 

 

 

16,716

 

 

 

18,954

 

 

 

35,321

 

Operating lease liabilities, net of current

 

 

2,132

 

 

 

1,095

 

 

 

1,888

 

 

 

1,423

 

Term loan, net of current

 

 

37,043

 

 

 

36,746

 

 

 

10,911

 

 

 

12,467

 

Other liabilities

 

 

574

 

 

 

773

 

 

 

491

 

 

 

530

 

Total liabilities

 

 

51,094

 

 

 

55,330

 

 

 

32,244

 

 

 

49,741

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

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 and outstanding— 52,659,684 shares as of June 30, 2023 and 49,974,281 shares as of December 31, 2022

 

 

53

 

 

 

50

 

Common stock, $0.001 par value; authorized — 500,000,000 shares; issued and outstanding— 70,449,873 shares as of March 31, 2024 and 63,547,467 shares as of December 31, 2023

 

 

70

 

 

 

64

 

Additional paid-in-capital

 

 

455,176

 

 

 

451,060

 

 

 

461,237

 

 

 

458,357

 

Accumulated other comprehensive loss

 

 

(30

)

 

 

(61

)

 

 

(1

)

 

 

11

 

Accumulated deficit

 

 

(402,155

)

 

 

(369,094

)

 

 

(436,775

)

 

 

(430,013

)

Total stockholders’ equity

 

 

53,044

 

 

 

81,955

 

 

 

24,531

 

 

 

28,419

 

Total liabilities and stockholders’ equity

 

$

104,138

 

 

$

137,285

 

 

$

56,775

 

 

$

78,160

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

Product revenue

 

$

8,763

 

 

$

8,442

 

 

$

17,441

 

 

$

15,645

 

Software revenue

 

 

2,280

 

 

 

2,105

 

 

 

4,326

 

 

 

3,935

 

Total revenue

 

 

11,043

 

 

 

10,547

 

 

 

21,767

 

 

 

19,580

 

Revenue, net

 

$

7,047

 

 

$

8,678

 

Cost of sales

 

 

9,945

 

 

 

7,994

 

 

 

17,323

 

 

 

14,748

 

 

 

 

 

 

 

Product and service

 

 

4,900

 

 

 

6,700

 

Impairment of long-lived assets

 

 

146

 

 

 

 

Total cost of sales

 

 

5,046

 

 

 

6,700

 

Gross profit

 

 

1,098

 

 

 

2,553

 

 

 

4,444

 

 

 

4,832

 

 

 

2,001

 

 

 

1,978

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

14,751

 

 

 

12,822

 

 

 

29,417

 

 

 

24,807

 

 

 

10,061

 

 

 

14,114

 

Research and development

 

 

3,298

 

 

 

4,018

 

 

 

6,792

 

 

 

8,868

 

 

 

2,189

 

 

 

2,927

 

Total operating expenses

 

 

18,049

 

 

 

16,840

 

 

 

36,209

 

 

 

33,675

 

 

 

12,250

 

 

 

17,041

 

Loss from operations

 

 

(16,951

)

 

 

(14,287

)

 

 

(31,765

)

 

 

(28,843

)

Operating loss

 

 

(10,249

)

 

 

(15,063

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and financing costs, net

 

 

(739

)

 

 

(850

)

 

 

(1,296

)

 

 

(1,816

)

 

 

(1,940

)

 

 

(579

)

Loss before income tax expense

 

 

(17,690

)

 

 

(15,137

)

 

 

(33,061

)

 

 

(30,659

)

 

 

(12,189

)

 

 

(15,642

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

 

(12,189

)

 

 

(15,642

)

Income from discontinued operations, net of tax (Note 3)

 

 

5,427

 

 

 

271

 

Net loss

 

$

(17,690

)

 

$

(15,137

)

 

$

(33,061

)

 

$

(30,659

)

 

$

(6,762

)

 

$

(15,371

)

Other comprehensive income (loss) (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (net of tax):

 

 

 

 

 

 

Unrealized (loss) gain on short-term investments

 

 

(25

)

 

 

(42

)

 

 

31

 

 

 

(42

)

 

 

(12

)

 

 

56

 

Comprehensive loss

 

$

(17,715

)

 

$

(15,179

)

 

$

(33,030

)

 

$

(30,701

)

 

$

(6,774

)

 

$

(15,315

)

Net loss per share from continuing operations – basic and diluted

 

$

(0.13

)

 

$

(0.16

)

Net income per share from discontinued operations – basic and diluted

 

$

0.06

 

 

$

0.00

 

Net loss per share – basic and diluted

 

$

(0.19

)

 

$

(0.57

)

 

$

(0.35

)

 

$

(1.16

)

 

$

(0.07

)

 

$

(0.16

)

Weighted-average shares outstanding – basic and diluted

 

 

93,684,289

 

 

 

26,468,515

 

 

 

93,538,676

 

 

 

26,437,058

 

 

 

94,822,835

 

 

 

93,391,444

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except shares amount)

 

 

Common Stock

 

 

Additional

 

Accumulated

 

 

 

Total

 

 

Common Stock

 

 

Additional

 

Accumulated

 

 

 

Total

 

 

 

 

 

 

Paid-In

 

Other

 

Accumulated

 

Stockholders’

 

 

 

 

 

 

Paid-In

 

Other

 

Accumulated

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2022

 

 

49,974,281

 

 

$

50

 

 

$

451,060

 

 

$

(61

)

 

$

(369,094

)

 

$

81,955

 

Balance at December 31, 2023

 

 

63,547,467

 

 

$

64

 

 

$

458,357

 

 

$

11

 

 

$

(430,013

)

 

$

28,419

 

Employee stock plans

 

 

216,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

790,524

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,942

 

 

 

 

 

 

 

 

 

1,942

 

 

 

 

 

 

 

 

 

2,890

 

 

 

 

 

 

 

 

 

2,890

 

Exercise of pre-funded warrants

 

 

1,062,080

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

6,111,882

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

56

 

 

 

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,371

)

 

 

(15,371

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,762

)

 

 

(6,762

)

Balance at March 31, 2023

 

 

51,252,466

 

 

$

51

 

 

$

453,002

 

 

$

(5

)

 

$

(384,465

)

 

$

68,583

 

Employee stock plans

 

 

698,016

 

 

 

1

 

 

 

116

 

 

 

 

 

 

 

 

 

117

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,059

 

 

 

 

 

 

 

 

 

2,059

 

Exercise of pre-funded warrants

 

 

709,202

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,690

)

 

 

(17,690

)

Balance at June 30, 2023

 

 

52,659,684

 

 

$

53

 

 

$

455,176

 

 

$

(30

)

 

$

(402,155

)

 

$

53,044

 

Balance at March 31, 2024

 

 

70,449,873

 

 

$

70

 

 

$

461,237

 

 

$

(1

)

 

$

(436,775

)

 

$

24,531

 

 

 

Common Stock

 

 

 

 

Additional

 

Accumulated

 

 

 

Total

 

 

Common Stock

 

 

Additional

 

Accumulated

 

 

 

Total

 

 

 

 

 

 

Treasury

 

Paid-In

 

Other

 

Accumulated

 

Stockholders’

 

 

 

 

 

 

Paid-In

 

Other

 

Accumulated

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

26,336,536

 

 

$

26

 

 

$

(51

)

 

$

384,132

 

 

$

 

 

$

(312,044

)

 

$

72,063

 

Balance at December 31, 2022

 

 

49,974,281

 

 

$

50

 

 

$

451,060

 

 

$

(61

)

 

$

(369,094

)

 

$

81,955

 

Employee stock plans

 

 

82,572

 

 

 

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

242

 

 

 

216,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

1,394

 

 

 

 

 

 

 

 

 

1,394

 

 

 

 

 

 

 

 

 

1,942

 

 

 

 

 

 

 

 

 

1,942

 

Exercise of pre-funded warrants

 

 

1,062,080

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

56

 

 

 

 

 

 

56

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,522

)

 

 

(15,522

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,371

)

 

 

(15,371

)

Balance at March 31, 2022

 

 

26,419,108

 

 

$

26

 

 

$

(51

)

 

$

385,768

 

 

$

 

 

$

(327,566

)

 

$

58,177

 

Employee stock plans

 

 

150,112

 

 

 

1

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

9

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

1,954

 

 

 

 

 

 

 

 

 

1,954

 

Revaluation of warrants

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

 

 

 

(42

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,137

)

 

 

(15,137

)

Balance at June 30, 2022

 

 

26,569,220

 

 

$

27

 

 

$

(51

)

 

$

387,803

 

 

$

(42

)

 

$

(342,703

)

 

$

45,034

 

Balance at March 31, 2023

 

 

51,252,466

 

 

 

51

 

 

 

453,002

 

 

 

(5

)

 

 

(384,465

)

 

 

68,583

 

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)

 

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(33,061

)

 

$

(30,659

)

 

$

(6,762

)

 

$

(15,371

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

710

 

 

 

477

 

 

 

64

 

 

 

339

 

Amortization of intangible assets

 

 

331

 

 

 

332

 

 

 

51

 

 

 

166

 

Amortization of right-of-use lease assets

 

 

628

 

 

 

552

 

 

 

322

 

 

 

325

 

Impairment of long-lived assets

 

 

146

 

 

 

 

Stock-based compensation

 

 

4,001

 

 

 

3,348

 

 

 

2,890

 

 

 

1,942

 

Amortization of debt issuance costs

 

 

297

 

 

 

226

 

 

 

1,144

 

 

 

146

 

Accretion of available for sale securities, net

 

 

(1,272

)

 

 

 

 

 

(264

)

 

 

(634

)

Gain on sale of discontinued operations

 

 

(5,703

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(510

)

 

 

(732

)

 

 

906

 

 

 

(634

)

Inventory

 

 

2,301

 

 

 

(4,503

)

 

 

(1,403

)

 

 

(561

)

Prepaid expenses and other assets

 

 

6,543

 

 

 

(458

)

 

 

812

 

 

 

(694

)

Accounts payable

 

 

(3,346

)

 

 

(623

)

 

 

(260

)

 

 

896

 

Accrued expenses and other liabilities

 

 

(2,056

)

 

 

642

 

 

 

(1,492

)

 

 

(1,614

)

Deferred revenue

 

 

19

 

 

 

(149

)

 

 

128

 

 

 

(95

)

Accrued compensation

 

 

(926

)

 

 

44

 

 

 

(1,268

)

 

 

(1,187

)

Net cash used in operating activities

 

 

(26,341

)

 

 

(31,503

)

 

 

(10,689

)

 

 

(16,976

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(30,733

)

 

 

(34,255

)

 

 

 

 

 

(15,125

)

Proceeds from maturities of available-for-sale securities

 

 

52,500

 

 

 

 

 

 

18,015

 

 

 

27,300

 

Purchases of property and equipment

 

 

(627

)

 

 

(794

)

 

 

(146

)

 

 

(210

)

Net cash provided by (used in) investing activities

 

 

21,140

 

 

 

(35,049

)

Proceeds from sale of discontinued operations, net

 

 

14,204

 

 

 

 

Net cash provided by investing activities

 

 

32,073

 

 

 

11,965

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Payment of common stock issuance costs

 

 

 

 

 

(598

)

Issuance of stock under employee stock plans

 

 

117

 

 

 

250

 

Principal repayments on term loan

 

 

(16,800

)

 

 

 

Tax paid on vested stock awards under employee stock plan

 

 

(4

)

 

 

 

Principal repayments on finance lease

 

 

(9

)

 

 

(7

)

Proceeds from exercise of pre-funded warrants

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Payment of contingent earnout

 

 

 

 

 

(117

)

Principal repayments on finance lease

 

 

(15

)

 

 

(26

)

Net cash provided by (used in) financing activities

 

 

103

 

 

 

(491

)

Net decrease in cash and cash equivalents

 

 

(5,098

)

 

 

(67,043

)

Net cash used in financing activities

 

 

(16,813

)

 

 

(6

)

Net increase (decrease) in cash and cash equivalents

 

 

4,571

 

 

 

(5,017

)

Cash and cash equivalents at beginning of period

 

 

17,665

 

 

 

84,641

 

 

 

14,009

 

 

 

17,665

 

Cash and cash equivalents at end of period

 

$

12,567

 

 

$

17,598

 

 

$

18,580

 

 

$

12,648

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

2,828

 

 

$

1,706

 

 

$

1,300

 

 

$

1,387

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets obtained in exchange for lease liabilities

 

$

1,792

 

 

$

223

 

 

$

826

 

 

$

1,802

 

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”(the “Company” or the “Company”“we” and “our”) 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.States (“U.S.”). The Company’s products include the GentleWave System, which is cleared by the United States (“U.S.”) Food and Drug Administration (“FDA”(the “FDA”) for sale in the U.S. and approved by Health Canada in Canada, along with the system’s sterilized, single-use procedure instruments ("PIs"(“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 SEC 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, 20222023 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, 20222023 filed with the SEC on March 8,11, 2024.

As discussed in Note 3, “Discontinued Operations”, on March 1, 2024, the Company divested its software segment by selling substantially all assets and liabilities of TDO Software, Inc, its wholly owned subsidiary. The sale met the criteria to be accounted for as a discontinued operation as required by Accounting Standards Codification (“ASC”) 205-20. Accordingly, the financial results of the software business are reported as discontinued operations in the accompanying unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for all periods presented. The Company's Condensed Consolidated Statements of Cash Flows include the financial results of the software business for the three months ended March 31, 2024 and 2023. All amounts and disclosure included in the Notes to condensed consolidated financial statements reflect only the Company's continuing operations unless otherwise noted.

Liquidity and Going Concern

On September 27, 2022, the Company completed a private placement (the "Private Placement"“Private Placement”), issuing an aggregate of approximately 23.0 million shares of its common stock at a purchase price of $0.95 per share and pre-funded warrants to purchase an aggregate of 43.3 million shares of common stock at a purchase price of $0.949 per pre-funded warrant. The pre-funded warrants have an exercise price of $0.001 per share of common stock, are immediately exercisable and will remain exercisable until exercised in full. The aggregate net proceeds from the Private Placement, after deducting placement agent fees and other offering expenses, were $59.0 million. See Note 5, Stockholders'6, Stockholders’ Equity, for additional information.

As of June 30, 2023,March 31, 2024, the Company had cash and cash equivalents and short-term investments of $65.933.6 million.million and $23.2 million in principal outstanding under its term loan facility.

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 June 30, 2023March 31, 2024 had an accumulated deficit of $402.2436.8 million. During the sixthree months ended June 30, 2023,March 31, 2024, the Company incurred net losses of $33.112.2 million, and used $26.310.7 million of cash and cash equivalents in operations. In the three months ended June 30, 2023, we received allits continuing operations, and recognized a gain of the $4.45.7 million paymentfrom sale of Employee Retention Credit ("ERC") recognized in other income in 2022.discontinued operations. The Company will continue to incur significant costs and expenses related to its ongoing operations until it gains market acceptance of its products and achieves a level of revenues adequate to support its operations.

7


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 and short-term investments 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.

7The Company’s ability to continue as a going concern depends on its ability to continue to commercialize its products, achieve and maintain profitable operations, as well as the adherence to conditions of the outstanding term loan as amended in March 2024 (see Note 10). Without additional financing, the Company will have insufficient liquidity to achieve further commercialization of our products and maintain compliance with our loan covenants. Due to these conditions, there is substantial doubt about the Company’s ability to continue as a going concern and, therefore, it may be unable to realize its assets and discharge its liabilities in the normal course of business.


The Company planswill require additional financing in order to fund its operations, capital fundingfuture expected negative cash flows. Due to its failure to comply with the continued listing standards set forth in the NYSE’s Listed Company Manual, our common stock was suspended from trading on the NYSE effective at the opening of business Eastern Standard Time on November 22, 2023. The Company commenced trading on the OTCQX on the same day. In April 2024, the Company withdrew its request to appeal and otherthe NYSE and our common stock has been delisted from the NYSE, which may negatively impact the Company’s stockholders and the trading price and liquidity needs, using existingof its common stock. Over-the-counter markets are more limited than the NYSE, and it is likely that there will be significantly less liquidity in the trading of the Company’s common stock. The delisting of the Company’s common stock from the NYSE could have material adverse effects on its business, financial condition and results of operations.

The Company has active plans to mitigate these conditions. Specifically, the Company has been taking steps and plans to further reduce negative cash cash equivalents and short-term investments and, to the extent available, cash generated from commercial operations. If the Company's actualflow through operating expenses significantly exceed its operating planexpense reductions. The Company is evaluating multiple opportunities, which may include soliciting external investment or its debt financing arrangements become unavailable because certain borrowing requirements are not met (see seeking strategic partnerships. Additionally, as detailed in Note 9)3 and Note 10, the Company may have to significantly delay or scale backclosed on the sale of TDO Software, Inc. (“TDO”) and renegotiated its operations to reduce working capital requirements. In addition,covenant requirements with its lender, among other terms, which resulted in 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 its planned objectives.

On March 10, 2023, the California Department of Financial Protection and Innovation shut down Silicon Valley Bank (SVB) due to liquidity concerns and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. On March, 27, 2023, SVB began operating as a division of First Citizens Bank. As of June 30, 2023, the Company held approximatelyremitting $0.915 million in operating accounts at SVB. The Company’s remaining cashof principal payments on its outstanding borrowings. Its plans are subject to inherent risks and cash equivalentsuncertainties and short-term investments, consisting of money market funds, high-grade corporate securities,there can be no assurance that its plans can be effectively implemented and, U.S. government backed securities, reside in custodial accounts held by U.S. Bank. There has been no disruption totherefore, that the Company's operations.conditions can be effectively mitigated.

Effects of the Macroeconomic Environment

The Company’s unaudited condensed consolidated financial statements as of and for the sixthree months ended June 30, 2023March 31, 2024 reflect the Company’s estimates of the impact of the macroeconomic environment, including the impact of inflation and higher interest rates. The duration and the scope of these conditions cannot be predicted; therefore, the extent to which these conditions will directly or indirectly impact the Company’s business, results of operations and financial condition, is uncertain. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the date of this filing.

Operating Segments

The Company has business activity and operatespreviously had two operating and reportable segments: Product and Software. Operating segments are definedFollowing the divestiture of the software business on March 1, 2024, there were no substantial assets or operations of the software segment. The software segment was reported as componentsDiscontinued Operations as of an enterpriseMarch 31, 2024, and is presented as such 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 evaluating performance.all periods in this report.

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"“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'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.2023.

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.

8


Inventory

Inventory consists of finished products, work-in-process and raw materials and is valued at the lower of cost or net realizable value. Cost may include materials, labor and manufacturing overhead. Cost is determined by the first in, first out inventory method. The carrying value of inventory is reviewed for potential impairment whenever indicators suggest that the cost of inventory exceeds the carrying value and management adjusts the inventory to its net realizable value. The Company also periodically evaluates inventory for estimated losses from excess quantities and obsolescence and writes down the cost of inventory to net realizable value at the time such determinations are made. Net realizable value is determined using the estimated selling price, in the ordinary course of business, less estimated costs to completeof completion and dispose.disposal.

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 revenueRevenue recorded from continuing operations is generated from sales of the GentleWave Console and related PIs and accessories. Software revenue is generated from sales of TDO's endodontist practice management software licenses.accessories and services on its GentleWave Console. 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 from continuing operations primarily arise from the manufacture and delivery of the GentleWave System, related PIs and accessories, and the delivery or licenseto a lesser extent, performance of TDO software and related ancillary services.service contracts on its GentleWave Consoles. 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.

9


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 (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 significant 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

9


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 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 goods or services for which the Company has not yet transferred control. The balances of the Company’s contract liabilities are as follows:

 

 

June 30,

 

 

December 31,

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Extended service contracts

 

$

391

 

 

$

336

 

Subscription software licenses

 

 

445

 

 

 

481

 

Total contract liabilities

 

 

836

 

 

 

817

 

Less: long-term portion

 

 

133

 

 

 

 

Contract liabilities – current

 

$

703

 

 

$

817

 

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Total contract liabilities - extended service contracts

 

$

1,048

 

 

$

920

 

Less: long-term portion

 

 

281

 

 

 

302

 

Contract liabilities – current

 

$

767

 

 

$

618

 

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 sixthree months ended June 30,March 31, 2024 and 2023 and 2022 that was included in the contract liability balance as of December 31, 20222023 and 20212022 was $0.80.2 million and $0.60.1 million, respectively .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 segmentrevenues and the timing of when goods and services are transferred:

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Product revenue recognized at a point in time

 

$

8,617

 

 

$

8,266

 

 

$

17,141

 

 

$

15,293

 

Product revenue recognized over time

 

 

146

 

 

 

176

 

 

 

300

 

 

 

352

 

Software revenue recognized at a point in time

 

 

617

 

 

 

545

 

 

 

1,066

 

 

 

764

 

Software revenue recognized over time

 

 

1,663

 

 

 

1,560

 

 

 

3,260

 

 

 

3,171

 

Total

 

$

11,043

 

 

$

10,547

 

 

$

21,767

 

 

$

19,580

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Product revenue recognized at a point in time

 

$

6,730

 

 

$

8,524

 

Service revenue recognized over time

 

 

317

 

 

 

154

 

Total revenue

 

$

7,047

 

 

$

8,678

 

No individual customer accounted for more than 10% of sales for the sixthree months ended June 30, 2023March 31, 2024 and 2022.2023.

Warranty Reserve

The Company provides a standard warranty on its GentleWave Systems for a specified period of time. For the sixthree months ended June 30,March 31, 2024 and 2023, and 2022, 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 accruals are estimated based on the current product costs, the Company’s historical experience, management’s expectations

10


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 and six months ended June 30, 2023March 31, 2024 and 2022:2023:

10


Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

(in thousands)

 

 

(in thousands)

 

Balance at beginning of period

$

1,757

 

 

$

1,615

 

 

$

1,930

 

 

$

1,620

 

 

$

1,269

 

 

$

1,930

 

Provision for warranties issued

 

205

 

 

 

470

 

 

 

400

 

 

 

780

 

 

 

200

 

 

 

195

 

Warranty costs incurred

 

(383

)

 

 

(355

)

 

 

(751

)

 

 

(670

)

 

 

(427

)

 

 

(368

)

Balance at end of period

$

1,579

 

 

$

1,730

 

 

$

1,579

 

 

$

1,730

 

 

$

1,042

 

 

$

1,757

 

Current portion

 

 

 

 

 

 

$

1,302

 

 

$

1,219

 

 

$

980

 

 

$

1,335

 

Non-current portion

 

 

 

 

 

 

 

277

 

 

 

511

 

 

 

62

 

 

 

422

 

Total

 

 

 

 

 

 

$

1,579

 

 

$

1,730

 

 

$

1,042

 

 

$

1,757

 

The warranty liability,liabilities, 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”). ASUs 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 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 early None.adopted the ASU on January 1, 2023. The adoption did not have an impact on the Company's unaudited condensed consolidated financial statements. The Company will evaluate the impact for each business combination transaction completed hereafter.

3. Discontinued Operations

On March 1, 2024, the Company entered into an Asset Purchase Agreement by and among TDO, Valsoft Corporation Inc., a Quebec corporation, and Aspire USA LLC, a Delaware limited liability company and affiliate of Valsoft (collectively “Valsoft”), pursuant to which TDO agreed to sell to Valsoft substantially all the assets and liabilities relating to the Company’s software segment. As consideration for the transaction, Valsoft agreed to pay TDO approximately $16.0 million, with $15.0 million paid on March 1, 2024 and $1.0 million due in approximately 12 months. In connection with the transaction, Valsoft agreed to make offers of employment to certain employees of the Business on terms that are comparable to those currently in effect for such employees. The Asset Purchase Agreement contains certain representations, warranties and covenants of each of TDO and Valsoft. Each of TDO and the Valsoft has agreed to indemnify the other for certain losses arising out of breaches of representations and covenants and for certain losses arising out of retained liabilities or assumed liabilities relating to the TDO business, as applicable, subject to customary limitations.

The divestiture met the criteria to be accounted for as a discontinued operation as of March 31, 2024. Accordingly, the operating results of the continued and discontinued operations for the three months ended March 31, 2024 are presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss within income from discontinued operations as follows:

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Revenue

 

$

1,389

 

 

$

2,046

 

Cost of sales

 

 

510

 

 

 

678

 

Gross profit

 

 

879

 

 

 

1,368

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

 

679

 

 

 

552

 

Research and development

 

 

476

 

 

 

567

 

(Loss) income from discontinued operations, net of tax

 

 

(276

)

 

 

249

 

Other income

 

 

 

 

 

22

 

Gain on sale of discontinued operations, net of tax

 

 

5,703

 

 

 

 

Net income from discontinued operations

 

$

5,427

 

 

$

271

 

Software is licensed via delivery to the customer or via a service arrangement under which cloud-based access is provided on a subscription basis (software-as-a-service). When a fixed up-front license fee is received in exchange for the delivery of software,

11


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 following table presented assets and liabilities of discontinued operations as of March 31, 2024 and December 31, 2023:

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Current assets:

 

$

1,162

 

 

$

656

 

Non-current assets:

 

 

 

 

 

 

Intangible assets, net

 

 

 

 

 

661

 

Goodwill

 

 

 

 

 

8,454

 

Other

 

 

 

 

 

482

 

Total assets of discontinued operations

 

$

1,162

 

 

$

10,253

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

34

 

Accrued expenses

 

 

53

 

 

 

194

 

Accrued compensation

 

 

20

 

 

 

345

 

Operating lease liabilities

 

 

 

 

 

127

 

Total liabilities of discontinued operations

 

$

73

 

 

$

700

 

Depreciation and amortization of long-lived assets, stock-based compensation expense and capital expenditures of discontinued operations were not material for each of the three-months ended March 31, 2024 and 2023.

4. Balance Sheet Components

Inventory

Inventory consisted of the following:

 

June 30,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(in thousands)

 

 

(in thousands)

 

Raw materials

 

$

7,589

 

 

$

9,269

 

 

$

6,534

 

 

$

6,450

 

Work in process

 

 

143

 

 

 

427

 

 

 

338

 

 

 

278

 

Finished goods

 

 

5,429

 

 

 

5,766

 

 

 

5,244

 

 

 

4,346

 

Total inventory

 

$

13,161

 

 

$

15,462

 

 

$

12,116

 

 

$

11,074

 

As of June 30, 2023 and December 31, 2022, theThe balance of the reserve of excess and obsolete inventory was $2.8 million and $0.5 million, respectively. During the three months ended June 30, 2023, the Company recorded a reserve for excess and obsolete inventory of $1.7 million related to reduced sales volumes of legacy GentleWave Console ("Gen3"). During the same period, the Company also recorded a charge of $1.2 million related to phasing out legacy procedure instruments, the molar and anterior pre-molar as the Company moves to the CleanFlow procedure instruments, of which $0.6 million was due to excess and obsolete inventory.

Intangible assets, net

Intangible assets as of June 30, 2023 and December 31, 2022 consisted of the following:

11


 

June 30, 2023

 

 

 

Weighted Average Amortization Period

 

Gross

 

 

Accumulated
Amortization

 

 

Net

 

 

 

(in years)

 

(in thousands)

 

Developed Technology (5 - 10 years)

 

4.0

 

$

2,445

 

 

$

1,301

 

 

$

1,144

 

Customer relationships (7 years)

 

2.8

 

 

1,910

 

 

 

1,285

 

 

 

625

 

Tradenames (10 years)

 

0.8

 

 

360

 

 

 

169

 

 

 

191

 

Total intangible assets

 

7.6

 

$

4,715

 

 

$

2,755

 

 

$

1,960

 

 

December 31, 2022

 

 

 

Weighted Average Amortization Period

 

Gross

 

 

Accumulated
Amortization

 

 

Net

 

 

 

(in years)

 

(in thousands)

 

Developed Technology (5 - 10 years)

 

4.0

 

$

2,445

 

 

$

1,123

 

 

$

1,322

 

Customer relationships (7 years)

 

2.8

 

 

1,910

 

 

 

1,148

 

 

 

762

 

Tradenames (10 years)

 

0.8

 

 

360

 

 

 

152

 

 

 

208

 

Total intangible assets

 

7.6

 

$

4,715

 

 

$

2,423

 

 

$

2,292

 

Amortization expense was $0.1 million, which was mostly recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for each of the three months ended June 30, 2023 and 2022.

Amortization expense was $0.30.8 million for each of the six months ended June 30, 2023periods ending March 31, 2024 and 2022, with approximately $0.1 million amortization expense recorded in cost of sales and $0.2 million recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.December 31, 2023.

The following table presents estimated future annual amortization expense related to intangible assets, net as of June 30, 2023:

 

 

Future Intangible Asset Amortization Expenses

 

 

 

(in thousands)

 

2023 (remaining six months)

 

$

286

 

2024

 

��

442

 

2025

 

 

386

 

2026

 

 

169

 

2027 and thereafter

 

 

677

 

Total future amortization expense

 

$

1,960

 

5

4.. Fair Value of Financial Instruments

The Company applies fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s financial instruments consist principally of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, operating lease liabilities, warrant liabilities 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

12


those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar

12


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 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 carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and certain accrued expenses approximate fair value due to the short-term nature of these items. Accordingly, the Company estimates that the recorded amounts approximate fair market value.

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 June 30, 2023March 31, 2024 and December 31, 2022:2023:

 

June 30, 2023

 

 

March 31, 2024

 

 

Fair Value

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

Fair Value

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

(in thousands)

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,676

 

 

$

11,676

 

 

$

 

 

$

 

 

$

17,671

 

 

$

17,671

 

 

$

 

 

$

 

Total cash equivalents at fair value

 

 

11,676

 

 

 

11,676

 

 

 

 

 

 

 

 

 

17,671

 

 

 

17,671

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

24,811

 

 

 

24,811

 

 

 

 

 

 

 

 

 

5,697

 

 

 

5,697

 

 

 

 

 

 

 

Commercial paper and corporate bonds

 

 

21,083

 

 

 

 

 

 

21,083

 

 

 

 

 

 

9,312

 

 

 

 

 

 

9,312

 

 

 

 

U.S. government agency bonds

 

 

7,426

 

 

 

 

 

 

7,426

 

 

 

 

Total short-term investments at fair value

 

 

53,320

 

 

 

24,811

 

 

 

28,509

 

 

 

 

 

 

15,009

 

 

 

5,697

 

 

 

9,312

 

 

 

 

Total assets at fair value

 

$

64,996

 

 

$

36,487

 

 

$

28,509

 

 

$

 

 

$

32,680

 

 

$

23,368

 

 

$

9,312

 

 

$

 

 

 

June 30, 2023

 

 

March 31, 2024

 

 

Fair
Value

 

 

Cost
Basis

 

 

Amounts Recognized in Accumulated Other Comprehensive Loss

 

 

Fair
Value

 

 

Cost
Basis

 

 

Amounts Recognized in Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

(in thousands)

 

 

(in thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

24,811

 

 

$

24,828

 

 

$

 

 

$

(17

)

 

$

5,697

 

 

$

5,697

 

 

$

 

 

$

 

Commercial paper and corporate bonds

 

 

21,083

 

 

 

21,092

 

 

 

 

 

 

(9

)

 

$

9,312

 

 

 

9,313

 

 

 

1

 

 

 

(2

)

U.S. government agency bonds

 

 

7,426

 

 

 

7,430

 

 

 

2

 

 

 

(6

)

Total available-for-sale securities at fair value

 

$

53,320

 

 

$

53,350

 

 

$

2

 

 

$

(32

)

 

$

15,009

 

 

$

15,010

 

 

$

1

 

 

$

(2

)

 

 

December 31, 2022

 

 

December 31, 2023

 

 

Fair Value

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

Fair Value

 

 

Quoted Prices in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

(in thousands)

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,253

 

 

$

12,253

 

 

$

 

 

$

 

 

$

10,761

 

 

$

10,761

 

 

$

 

 

$

 

Commercial paper

 

 

1,998

 

 

 

 

 

 

1,998

 

 

 

 

U.S. government agency bonds

 

 

1,991

 

 

 

 

 

 

1,991

 

 

 

 

Corporate Bonds

 

 

1,827

 

 

 

 

 

 

1,827

 

 

 

 

Total cash equivalents at fair value

 

 

16,242

 

 

 

12,253

 

 

 

3,989

 

 

 

 

 

 

12,588

 

 

 

10,761

 

 

 

1,827

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

33,622

 

 

 

33,622

 

 

 

 

 

 

 

 

 

14,826

 

 

 

14,826

 

 

 

 

 

 

 

Commercial paper and corporate bonds

 

 

40,162

 

 

 

 

 

 

40,162

 

 

 

 

 

 

13,204

 

 

 

 

 

 

13,204

 

 

 

 

U.S. government agency bonds

 

 

4,743

 

 

 

 

 

 

4,743

 

 

 

 

Total short-term investments at fair value

 

 

73,784

 

 

 

33,622

 

 

 

40,162

 

 

 

 

 

 

32,773

 

 

 

14,826

 

 

 

17,947

 

 

 

 

Total assets at fair value

 

$

90,026

 

 

$

45,875

 

 

$

44,151

 

 

$

 

 

$

45,361

 

 

$

25,587

 

 

$

19,774

 

 

$

 

 

13


 

 

December 31, 2022

 

 

December 31, 2023

 

 

Fair
Value

 

 

Cost
Basis

 

 

Amounts Recognized in Accumulated Other Comprehensive Loss

 

 

Fair
Value

 

 

Cost
Basis

 

 

Amounts Recognized in Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

(in thousands)

 

 

(in thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

33,622

 

 

$

33,676

 

 

$

 

 

$

(54

)

U.S. Treasury securities

 

$

14,826

 

 

$

14,820

 

 

$

6

 

 

$

 

Commercial paper and corporate bonds

 

 

40,162

 

 

 

40,169

 

 

 

 

 

 

(7

)

 

$

13,204

 

 

$

13,197

 

 

$

9

 

 

$

(2

)

U.S. government agency bonds

 

 

4,743

 

 

 

4,745

 

 

 

 

 

 

(2

)

Total available-for-sale securities at fair value

 

$

73,784

 

 

$

73,845

 

 

$

 

 

$

(61

)

 

$

32,773

 

 

$

32,762

 

 

$

15

 

 

$

(4

)

 

Money market funds and U.S. Treasury securities are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

Commercial paper, U.S. government agency bonds and corporate bonds are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

5.6. Stockholders’ Equity

Warrants

In April 2022, the Company amended its term loan and the warrants previously issued to Perceptive Credit Holdings III, LP (“Perceptive”) 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.

Warrants issued and outstanding at June 30, 2023March 31, 2024 and December 31, 20222023 included 27,39719,179 warrants with an exercise price of $10.95 per share and 304,106304,105 warrants with an exercise price of $12.00 per share in each period. These warrants expire between December 2023June 2024 and August 2031.

On September 27, 2022, the Company completed the Private Placement, issuing an aggregate of approximately 23.0 million shares of its common stock at a purchase price of $0.95 per share and pre-funded warrants to purchase an aggregate of 43.3 million shares of common stock at a purchase price of $0.949 per pre-funded warrant to certain institutional investors and accredited investors (the "Purchasers"“Purchasers”). The pre-funded warrants have an exercise price of $0.001 per share of common stock, are immediately exercisable and will remain exercisable until exercised in full. The aggregate net proceeds from the Private Placement, after deducting placement agent fees and other offering expenses, were $59.0 million.

The pre-funded warrants include a provision whereby the exercisability of the warrants may be limited if, upon exercise, the warrant holder or any of its affiliates would beneficially own more than 9.99% of the Company'sCompany’s common stock. The threshold is subject to the Purchaser'sPurchasers’ rights under the pre-funded warrant to increase or decrease such percentage to any other percentage not in excess of 19.99% upon at least 61 days'days’ prior notice from the PurchaserPurchasers to the Company. As of June 30, 2023,March 31, 2024, approximately 1.86.1 million shares have been issued pursuant to the exercise of pre-funded warrants and 41.524.9 million shares underlying the pre-funded warrants remain outstanding.

The pre-funded warrants are classified as equity and are accounted for as a component of additional paid-in capital at the time of issuance. The pre-funded warrants are included in the calculation of basic and diluted loss per share. Pursuant to the terms and conditions of the purchase agreements entered into by the Purchasers, the Company was obligated to file a registration statement with the SEC registering the resale by the Purchasers of the shares of common stock issued to them in the Private Placement and the shares of common stock to be issued to them upon exercise of the pre-funded warrants issued to them in the Private Placement within 45 days of the closing of the Private Placement. On November 4, 2022, the Company filed a registration statement on Form S-3 (File No. 333-268174), as required under the purchase agreements, and the registration statement was declared effective by the SEC on November 16, 2022.

 

6.14


7. Stock Based Compensation

14


Stock-based Compensation Expenses

The following tables present the Company'sCompany’s stock-based compensation for stock-settled awards by type (i.e., stock options and restricted stock units (“RSUs”)) granted under the Company'sCompany’s incentive plans, and rights to purchase shares of common stock issued under the Company'sCompany’s Employee Stock Purchase Plan (“ESPP”) and financial statement lines included in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss for the sixthree months ended June 30:March 31:

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

Three months ended March 31,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(in thousands)

 

 

(in thousands)

 

 

 

Options

 

$

757

 

 

$

917

 

 

$

1,588

 

 

$

1,800

 

 

$

390

 

 

$

831

 

RSUs

 

 

1,229

 

 

 

1,024

 

 

 

2,295

 

 

 

1,535

 

 

 

2,500

 

 

 

1,066

 

ESPP

 

73

 

 

 

13

 

 

118

 

 

 

13

 

 

 

 

 

45

 

Total stock-based compensation expense

 

$

2,059

 

 

$

1,954

 

 

$

4,001

 

 

$

3,348

 

 

$

2,890

 

 

$

1,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Cost of sales

 

$

91

 

 

$

140

 

 

$

239

 

 

$

241

 

Selling, general and administrative

 

 

1,781

 

 

 

1,407

 

 

 

3,343

 

 

 

2,385

 

Research and development

 

187

 

 

407

 

 

 

419

 

 

 

722

 

Total stock-based compensation expense

 

$

2,059

 

 

$

1,954

 

 

$

4,001

 

 

$

3,348

 

 

 

Three months ended March 31,

 

 

 

2024

 

 

2023

 

 

 

Continuing operations

 

 

Discontinued operations

 

 

Total

 

 

Continuing perations

 

 

Discontinued operations

 

 

Total

 

 

 

(in thousands)

 

 

 

 

Cost of sales

 

$

302

 

 

$

79

 

 

$

381

 

 

$

139

 

 

$

9

 

 

$

148

 

Selling, general and administrative

 

 

1,724

 

 

 

199

 

 

 

1,923

 

 

 

1,540

 

 

 

22

 

 

 

1,562

 

Research and development

 

 

495

 

 

 

91

 

 

 

586

 

 

 

224

 

 

 

8

 

 

 

232

 

Total stock-based compensation expense

 

$

2,521

 

 

$

369

 

 

$

2,890

 

 

$

1,903

 

 

$

39

 

 

$

1,942

 

During the three months ended March 31, 2024, the Company immediately vested 457,093 outstanding RSUs granted to certain non-executive employees in the continuing operations and recognized $1.6 million unamortized compensation expenses associated with these RSUs, with approximately $0.3 million expenses recorded in cost of sales, $0.8 million in selling, general and administrative and $0.4 million in research and development.

During the three months ended March 31, 2024, the Company immediately vested 132,394 outstanding RSUs granted to certain non-executive employees in the discontinued operations and recognized $0.3 million unamortized compensation expenses associated with these RSUs, as presented in the table above.

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 June 30, 2023.March 31, 2024.

 

Unamortized Compensation Costs

 

 

Weighted Average Service Period

 

Unamortized Compensation Costs

 

 

Weighted Average Service Period

 

(in thousands)

 

(years)

 

(in thousands)

 

(years)

Options

 

$

4,022

 

 

1.93

 

$

1,672

 

 

1.4

RSUs

 

 

11,821

 

 

3.04

 

 

5,427

 

 

2.4

Total unamortized compensation cost

 

$

15,843

 

 

 

 

$

7,099

 

 

 

Plan Activities

The following table summarizes stock option activity under the Company'sCompany’s incentive plans:

 

Number
of Shares

 

 

Weighted
Average
Exercise Price Per
Share

 

 

Weighted- Average Remaining Contractual Life

 

 

Aggregate Intrinsic Value

 

 

 

 

 

 

 

 

 

(in years)

 

 

(in thousands)

 

Options outstanding, December 31, 2022

 

 

2,756,368

 

 

$

2.83

 

 

 

 

 

$

1,510

 

Granted

 

 

195,120

 

 

$

1.08

 

 

 

 

 

 

 

Forfeited

 

 

(85,338

)

 

$

2.35

 

 

 

 

 

 

 

Expired

 

 

(98,883

)

 

$

1.14

 

 

 

 

 

$

9

 

Options outstanding, June 30, 2023

 

 

2,767,267

 

 

$

2.79

 

 

 

6.9

 

 

$

62

 

Options vested and exercisable, June 30, 2023

 

 

2,003,220

 

 

$

2.66

 

 

 

6.2

 

 

$

7

 

Vested and expected to vest after June 30, 2023

 

 

2,701,112

 

 

$

2.76

 

 

 

6.8

 

 

$

62

 

 

Number
of Shares

 

 

Weighted
Average
Exercise Price Per
Share

 

 

Weighted- Average Remaining Contractual Life

 

Aggregate Intrinsic Value

 

 

 

 

 

 

 

 

 

(in years)

 

(in thousands)

 

Options outstanding, December 31, 2023

 

 

2,383,641

 

 

$

2.86

 

 

 

 

 

 

Forfeited

 

 

(205,041

)

 

$

2.41

 

 

 

 

 

 

Expired

 

 

(28,081

)

 

$

1.10

 

 

 

 

 

 

Options outstanding, March 31, 2024

 

 

2,150,519

 

 

$

2.92

 

 

6.1

 

$

-

 

Options vested and exercisable, March 31, 2024

 

 

1,743,488

 

 

$

2.95

 

 

5.5

 

$

-

 

The weighted-average grant-date fair value ofThere were no options granted during the sixthree months ended June 30, 2023March 31, 2024 and 2022 was $0.83 and $1.16 per share, respectively.2023.

15


The following table summarizes the non-vested stock options that were outstanding as of June 30, 2023March 31, 2024 and December 31, 2022:2023:

 

Number of Shares

 

 

Weighted
Average
Grant Date Fair Value

 

Non-vested Options, December 31, 2022

 

 

1,118,088

 

 

$

6.23

 

Non-vested Options, June 30, 2023

 

 

764,047

 

 

$

6.46

 

 

Number of Shares

 

 

Weighted
Average
Grant Date Fair Value

 

Non-vested Options, December 31, 2023

 

 

461,287

 

 

$

5.33

 

Non-vested Options, March 31, 2024

 

 

407,031

 

 

$

1.36

 

The total fair value of shares vested during the sixthree months ended June 30,March 31, 2024 and 2023 and 2022 was $$$1.60.3 million and $1.80.7 million, respectively, in each period.

15


respectively.

Certain stock option grants under the 2017 Stock Incentive Plan (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 shares of its common shares that have been issued upon early exercise of options at the original issue price. During the three and six months ended June 30, 2023,March 31, 2024, the Company did not repurchase any shares. There was no material number of shares of common stock subject to repurchase as of June 30, 2023.March 31, 2024. Cash received for the early exercise of unvested stock options is initially recorded as a liability and released to equity over the vesting period. There were no early exercised stock options during the three and six months ended June 30,March 31, 2024 and 2023. During the three and six months ended June 30, 2022, early exercised stock options vested were immaterial.

The following table summarizes RSU activity under the Company'sCompany’s incentive plans:

 

Number
of Shares

 

 

Weighted
Average
Grant Date Fair Value

 

RSUs outstanding, December 31, 2022

 

 

2,858,649

 

 

$

4.49

 

Granted

 

 

3,516,198

 

 

$

1.58

 

Vested

 

 

(793,389

)

 

$

3.55

 

Forfeited

 

 

(322,650

)

 

$

4.61

 

RSUs outstanding, June 30, 2023

 

 

5,258,808

 

 

$

2.68

 

 

Number
of Shares

 

 

Weighted
Average
Grant Date Fair Value

 

RSUs outstanding, December 31, 2023

 

 

3,342,621

 

 

$

2.60

 

Granted

 

 

 

 

 

 

Vested

 

 

(813,349

)

 

$

3.26

 

Forfeited

 

 

(145,499

)

 

$

1.81

 

RSUs outstanding, March 31, 2024

 

 

2,383,773

 

 

$

2.42

 

During the three months ended March 31, 2024, vested RSUs included a total of 589,487 aforementioned immediately vested outstanding RSUs.

7.8. Leases

The Company leases office space under operating leases with expirations ranging from March 2025 to December 2026,March 2028, 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.

As of June 30, 2023,March 31, 2024, the Company has not entered into any new 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:

 

 

Lease Amounts

 

 

 

(in thousands)

 

2023 (remaining six months)

 

$

628

 

2024

 

 

1,555

 

2025

 

 

1,010

 

2026

 

 

645

 

Total future minimum lease payments

 

 

3,838

 

Less: Imputed Interest

 

 

(416

)

Present value of operating lease liabilities

 

$

3,422

 

Less: Current portion

 

 

1,290

 

Long-term operating lease liabilities

 

$

2,132

 

 

 

 

 

Weighted average remaining lease term in years

 

 

2.77

 

Weighted average discount rate

 

 

8.80

%

 

 

 

 

16


 

 

Lease Amounts

 

 

 

(in thousands)

 

2024 (remaining nine months)

 

$

937

 

2025

 

 

1,008

 

2026

 

 

892

 

2027

 

 

480

 

2028

 

 

122

 

Total future minimum lease payments

 

 

3,439

 

Less: Imputed Interest

 

 

(379

)

Present value of operating lease liabilities

 

$

3,060

 

Less: Current portion

 

 

1,172

 

Long-term operating lease liabilities

 

$

1,888

 

 

 

 

 

Weighted average remaining lease term in years

 

 

3.08

 

Weighted average discount rate

 

 

8.24

%

 

 

 

 

Variable operating lease expenses consist primarily of real estate taxes and insurance. The components of lease expense and related cash flows were as follows:

16


 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Rent expense

 

$

356

 

 

$

386

 

Variable lease costs

 

 

 

 

 

32

 

Total

 

$

356

 

 

$

418

 

 

 

 

 

 

 

 

Cash paid for operating leases

 

$

370

 

 

$

376

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(in thousands)

 

Rent expense

 

$

381

 

 

$

320

 

 

$

767

 

 

$

637

 

Variable lease costs

 

 

32

 

 

 

27

 

 

 

64

 

 

 

53

 

Total

 

$

413

 

 

$

347

 

 

$

831

 

 

$

690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for operating leases

 

$

382

 

 

$

317

 

 

$

758

 

 

$

630

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(in thousands)

 

 

(in thousands)

 

 

(in thousands)

 

Cost of sales

 

$

68

 

 

$

58

 

 

$

138

 

 

$

116

 

 

$

80

 

 

$

70

 

Selling, general and administrative

 

 

345

 

 

 

289

 

 

 

693

 

 

 

574

 

 

 

276

 

 

 

348

 

Total

 

$

413

 

 

$

347

 

 

$

831

 

 

$

690

 

 

$

356

 

 

$

418

 

 

8.9. 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.

9.10. Term Loan

Perceptive loan

On April 6, 2022, the Company entered into Amendment No. 1 (the “First Amendment”) to the Amended and Restated Credit Agreement and Guaranty with Perceptive (the “Perceptive Loan Agreement”). The First Amendment extended the borrowing deadline for the first tranche of $10.0 million of delayed-draw term loans from December 31, 2021 to September 30, 2022 and the borrowing deadline for the second tranche of $10.0 million delayed-draw term loans from March 31, 2022 to June 30, 2023. The Company borrowed the extended first tranche of $10.0 million in July 2022, receiving net proceeds of $9.9 million, and forfeited the extended second tranche on June 30, 2023.

As a condition to entering into the First Amendment, on April 6, 2022, the Company also amended the warrants previously issued to Perceptive 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. In August 2022, a portion of these warrants representing 153,421 shares were transferred to a third party and its affiliates.

For the six months ended June 30, 2023 and 2022, the interest rate for amounts borrowed under the Perceptive Loan Agreement, as amended, was the greater of the one-month LIBOR and 2.00% plus the applicable margin of 9.25%. On January 13, 2023, the Company entered into Amendment No. 2 (the "Second Amendment"“Second Amendment”) to the Amended and Restated Credit Agreement and Guaranty by and among the Company, the Subsidiary Guarantors party thereto, the Lenders party thereto and Perceptive (the “Amended Perceptive Loan AgreementAgreement”) to replace the existing benchmark rate from the one-month LIBOR with a one-month Secured Overnight Financing Rate ("SOFR"(“SOFR”). All other terms remain unchanged on the original agreement.For the three months ended March 31, 2024 and 2023, the interest rate for amounts borrowed under the Amended Perceptive Loan Agreement was the greater of the one-month SOFR and 2.00% plus the applicable margin of 9.25%.

17


On March 1, 2024, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Amended Perceptive Loan Agreement. Pursuant to the Third Amendment, the Company made a one-time $15.0 million principal repayment on March 1, 2024, and agreed to make an amortization payment of $1.8 million on the outstanding principal on March 31, 2024 and make monthly amortization payments on the outstanding principal each in the amount of $0.9 million on each payment date commencing on April 30, 2024. Accordingly, $1.0 million of the unamortized debt issuance costs were expensed.

For the sixthree months ended June 30,March 31, 2024 and 2023, and 2022, the effective interest rate of the Amended Perceptive loanLoan, was 17.2321.22% and 14.7016.71%, respectively. As of June 30,March 31, 2024 and 2023,and 2022, the fair value of the Amended Perceptive loanLoan approximates its carrying amount.

FuturePursuant to the Third Amendment, future principal repayments onand the net carrying value of the Perceptive loanLoan as of June 30, 2023,March 31, 2024, are as follows:

 

Principal

 

 

Principal

 

 

(in thousands)

 

 

(in thousands)

 

Remaining 9 months of 2024

 

$

8,100

 

2025

 

 

10,800

 

2026

 

$

40,000

 

 

 

4,300

 

Total

 

$

40,000

 

Total principal payment

 

 

23,200

 

Debt discounts

 

 

(1,489

)

Net carrying value

 

$

21,711

 

The Company is 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.

17


The Amended Perceptive Loan Agreement as amended,contains events of default, including, without limitation, 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. Based on the Amended Perceptive Loan Agreement, the Company has granted a security interest in substantially all of its assets.

The Amended Perceptive Loan Agreement 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) pursuant to the Third Amendment, satisfy certain minimum revenue thresholds, measured for the consecutive 12-month periods ending on each calendar quarter-end until June 30, 2026. These thresholds progressively increase over time, ranging from $2026 as follows:26.4

For 12-month Period Ending

 

Revenue

 

 

 

(in thousands)

 

March 31, 2024

 

$

39,000

 

June 30, 2024

 

$

35,500

 

September 30, 2024

 

$

33,000

 

December 31, 2024

 

$

31,500

 

March 31, 2025

 

$

31,000

 

June 30, 2025

 

$

33,000

 

September 30, 2025

 

$

35,935

 

December 31, 2025

 

$

40,160

 

March 31, 2026

 

$

44,950

 

June 30, 2026

 

$

51,500

 

 million for

Pursuant to the consecutive 12-month periods ending September 30, 2021Third Amendment, the lender also waived the covenant requiring the absence of any “going concern” or like qualification or exception or any qualification or exception as to $95.3 million for the consecutive 12-month periods ending June 30, 2026. Specifically,scope of the minimum revenue thresholds foraudit, solely with respect to the consecutive 12-months periodfiscal year ending on June 30, 2024 and September 30, 2024, are $December 31, 2023.

47.2 million and $52.0 million, respectively. Failure to satisfy these financialany covenants would constitute an event of default under the agreement. ForAmended Perceptive Loan Agreement. In the six monthsevent of an event of default, the lender may terminate its commitments and declare all amounts outstanding under the Amended Perceptive Loan 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%.

18


Total revenue generated from continuing and discontinued operations for the 12-months period ended June 30, 2023,March 31, 2024 was $41.6 million, and cash and cash equivalents and short term investment balance was $33.6 million as of March 31, 2024. As such, the Company was in compliance with all financial covenants and conditions required byunder the outstandingAmended Perceptive Loan Agreement as amended.of March 31, 2024.

10.11. Income Taxes

The Company maintains a full valuation allowance against its net deferred tax assets as of June 30, 2023March 31, 2024 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, 20222023 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 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 June 30, 2023.March 31, 2024.

The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years 20202021 through 20222023 remain open to examination and the state returns remain subject to examination for tax years 20192020 through 20222023. 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.

11.12. Segment Information

The Company operatespreviously operated and reportsreported its results in two business segments, Product and Software. The Company reportsSoftware segment information based onassets included goodwill and intangible assets, which were derecognized in connection with 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 measuresdivestiture of the Company’s reportable segments are primarily income (loss) from operations. Income (loss) fromsoftware business on March 1, 2024. Following the divestiture, there were no substantial assets or operations for each segment includes all revenues, related cost of net revenues, gross margin and operating expenses directly attributable to the software segment.

The Company’s Productsoftware segment includes saleswas reported as Discontinued Operations as of the Company's GentleWave System consoleMarch 31, 2024, and related accessories and instruments.

The Company’s Software segment includes sales of the Company's traditional software licensesis presented as such for practice management software to enable an integrated digital office for endodontists.

The following tables present the Company’s segmentall periods in this report. For more information, for the three and six months ended June 30, 2023 and 2022. Cost of sales in the Product segment included a $1.7 million charge due to reduced sales volumes of the Company's legacy Gen3 console andsee Note 3 “Discontinued Operations.”

18


a $1.2 million charge due to phasing out the Company's legacy procedure instruments, the molar and anterior pre-molar as the Company moves to the CleanFlow procedure instruments.

 

2023

 

 

2022

 

 

(in thousands, except percentage data)

 

 

Product

 

 

Software

 

 

Total

 

 

Product

 

 

Software

 

 

Total

 

Revenue

 

$

8,763

 

 

$

2,280

 

 

$

11,043

 

 

$

8,442

 

 

$

2,105

 

 

$

10,547

 

Cost of sales

 

 

9,248

 

 

 

697

 

 

 

9,945

 

 

 

7,385

 

 

 

609

 

 

 

7,994

 

Gross profit

 

 

(485

)

 

 

1,583

 

 

 

1,098

 

 

 

1,057

 

 

 

1,496

 

 

 

2,553

 

Gross margin

 

 

-6

%

 

 

69

%

 

 

10

%

 

 

13

%

 

 

71

%

 

 

24

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

14,109

 

 

 

642

 

 

 

14,751

 

 

 

12,243

 

 

 

579

 

 

 

12,822

 

Research and development

 

 

2,764

 

 

 

534

 

 

 

3,298

 

 

 

3,552

 

 

 

466

 

 

 

4,018

 

Total operating expenses

 

 

16,873

 

 

 

1,176

 

 

 

18,049

 

 

 

15,795

 

 

 

1,045

 

 

 

16,840

 

Income (loss) from operations

 

$

(17,358

)

 

$

407

 

 

$

(16,951

)

 

$

(14,738

)

 

$

451

 

 

$

(14,287

)

 

2023

 

 

2022

 

 

 

(in thousands, except percentage data)

 

 

Product

 

 

Software

 

 

Total

 

 

Product

 

 

Software

 

 

Total

 

Revenue

 

$

17,441

 

 

$

4,326

 

 

$

21,767

 

 

$

15,645

 

 

$

3,935

 

 

$

19,580

 

Cost of sales

 

 

15,948

 

 

 

1,375

 

 

 

17,323

 

 

 

13,463

 

 

 

1,285

 

 

 

14,748

 

Gross profit

 

 

1,493

 

 

 

2,951

 

 

 

4,444

 

 

 

2,182

 

 

 

2,650

 

 

 

4,832

 

Gross margin

 

 

9

%

 

 

68

%

 

 

20

%

 

 

14

%

 

 

67

%

 

 

25

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

28,223

 

 

 

1,194

 

 

 

29,417

 

 

 

23,770

 

 

 

1,037

 

 

 

24,807

 

Research and development

 

 

5,691

 

 

 

1,101

 

 

 

6,792

 

 

 

7,983

 

 

 

885

 

 

 

8,868

 

Total operating expenses

 

 

33,914

 

 

 

2,295

 

 

 

36,209

 

 

 

31,753

 

 

 

1,922

 

 

 

33,675

 

Income (loss) from operations

 

$

(32,421

)

 

$

656

 

 

$

(31,765

)

 

$

(29,571

)

 

$

728

 

 

$

(28,843

)

Segment Assets:

 

 

As of June 30, 2023

 

 

As of December 31, 2022

 

 

 

(in thousands)

 

Product

 

$

93,209

 

 

$

125,713

 

Software

 

 

10,929

 

 

 

11,572

 

Total

 

$

104,138

 

 

$

137,285

 

 

12.13. 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:

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(in thousands, except shares and per share data)

 

 

(in thousands, except shares and per share data)

 

 

(in thousands, except shares and per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

$

(12,189

)

 

$

(15,642

)

Income from discontinued operations, net of tax

 

 

5,427

 

 

271

 

Net loss

 

$

(17,690

)

 

$

(15,137

)

 

$

(33,061

)

 

$

(30,659

)

 

$

(6,762

)

 

$

(15,371

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – basic and diluted

 

 

93,684,289

 

 

 

26,468,515

 

 

 

93,538,676

 

 

 

26,437,058

 

 

 

94,822,835

 

 

 

93,391,444

 

Net loss per share – basic and diluted

 

$

(0.19

)

 

$

(0.57

)

 

$

(0.35

)

 

$

(1.16

)

 

$

(0.07

)

 

$

(0.16

)

The pre-funded warrants to purchase an aggregate of 43.3 million shares of common stock are considered outstanding for the purposes of computing loss per share and are included in the calculation of basic and diluted shares outstanding above.

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:

19


 

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

Stock options

 

 

2,767,267

 

 

 

3,024,956

 

RSUs

 

 

5,258,808

 

 

 

2,702,762

 

Warrants

 

 

331,503

 

 

 

331,503

 

Total

 

 

8,357,578

 

 

 

6,059,221

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Stock options

 

 

2,150,519

 

 

 

2,748,494

 

RSUs

 

 

2,383,773

 

 

 

5,598,529

 

Warrants

 

 

323,284

 

 

 

331,503

 

Total

 

 

4,857,576

 

 

 

8,678,526

 

 

20


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, 2022.2023. 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, 20222023 and in the filings we make with the 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 and manufacture 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. The GentleWave System employs a sterilized, single-use procedure instrument ("PI"), to transform root canal therapy ("RCT"(“RCT”), by addressing the limitations of conventional methods.

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.

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 for preparing, cleaning, and irrigating teeth indicated for RCT. 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. In 2022, we launched the GentleWave G4 System bringing expanded capabilities and capacity to our technology. We believe our GentleWave System transforms the patient and dental practitioner experience and addresses many of the limitations of conventional RCT.

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 have been and will continue to expand the size of our sales and clinician support teams to support our efforts of driving adoption and utilization of the GentleWave System. We 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.

As of June 30, 2023,March 31, 2024, we had an installed base of approximately 1,0401,142 GentleWave Systems. We generated revenue of $21.8$7.0 million and incurred a net loss of $33.1$12.2 million from continuing operations for the sixthree months ended June 30, 2023,March 31, 2024, compared to revenue of $19.6$8.7 million and a net loss of $30.7$15.6 million for the sixthree months ended June 30, 2022.March 31, 2023. As of June 30, 2023,March 31, 2024, we had cash and cash equivalents and short-term investments of $65.9$33.6 million, an accumulated deficit of $402.2$436.8 million, and $40.0$23.2 million in principal outstanding under our term loan facility.In the three months ended June 30, 2023, we received all of the $4.4 million payment of Employee Retention Credit ("ERC") recognized in other income in 2022.

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,including 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 will continue to incur 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 may require additional financing to fund our operations and planned growth.

21


We believe that our cash and cash equivalents and short-term investments will be sufficientOur ability to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Reportcontinue as a going concern depends 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. 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 incurcontinue to commercialize our products, achieve and maintain profitable operations, as well as the adherence to conditions of outstanding term loans (see Note 10 to the Condensed Consolidated Financial Statements). We will require additional debt. Any debt financing or additional equityin order to fund our future expected negative cash flows. There is a

21


material uncertainty that raises substantial doubt about our ability to continue as a going concern and, therefore, that we raise may contain terms that are not favorablebe unable to us orrealize our stockholders. Ifassets and discharge our liabilities in the normal course of business (see Liquidity and Capital Resources section).

On March 1, 2024, we raise additional capital through collaboration agreements, licensing or divestiture arrangements, or marketingdivested our TDO software segment by selling substantially all the assets and distribution arrangements, we may have to relinquish valuable rights toliabilities of TDO, 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, orwholly owned subsidiary, for approximately $16.0 million, with $15.0 million received upon closing and the balance due in amounts orapproximately 12 months. A gain of $5.7 million on terms unacceptable to us.sale of the software business was recorded in income from discontinued operations.

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:

Installed base of GentleWave Systems: We have initially focused on driving adoption of the GentleWave Procedure among endodontists in the United States and Canada. To drive further adoption of our system, we will continue to increaserestructure our team of capital sales representatives, who are focused on system placement by directly engaging with dental practitioners and educating them about the compelling value proposition of the GentleWave Procedure. Our sales force leverages third-party data of root canal procedure volumes by practitioner, in order to enable us to efficiently and effectively identify target accounts. We believe that our current targeting strategy identifies a well-defined customer base that is accessible by our direct sales organization.
System utilization: Our revenue is significantly impacted by the utilization of our GentleWave System. Our objective is to establish the GentleWave Procedure as the standard of care for RCT. We intend to increase awareness of the GentleWave Procedure among dental practitioners and, in select markets where we establish a large installed base, directly with patients through various targeted direct-to-patient marketing initiatives, showcasing the benefits and points of difference of the GentleWave Procedure. We believe that once patients become aware of the GentleWave Procedure, they will seek the GentleWave Procedure over conventional RCT. We believe these initiatives will drive a greater volume of root canal procedures to dental practitioners who offer the GentleWave Procedure, thereby increasing utilization of our system.
Gross margins: Our results of operations depend, in part, on our ability to increase our gross margins by more effectively managing our costs to produce our GentleWave Console and single-use PIs,PI, and to scale our manufacturing operations efficiently. We expect to realize operating leverage through increased scale efficiencies as our commercial operations grow. We are undertaking continuous margin improvement programs, including simplifying our product offering to one PI that can be used across various platforms, implementing lean manufacturing methods and working with our suppliers to reduce material costs. We have also executed several product design improvements to reduce product cost. For example, we expect the CleanFlow PI launchedis now our leading PI and we have phased out the legacy PI designed for molar teeth (a “Molar PI”), anteriors and premolars (an “APM PI”) substantially in 2022 to have a positive impact on the gross margin profile of our single-use PIs.early 2024. We anticipate that the combination of these strategies will drivecontinue driving margin improvement.
Commercial organization: As of June 30, 2023,March 31, 2024, our sales and customer support team consisted of approximately 87 54employees. We intend to continue to make investments inre-prioritize our commercial organization by increasingto increase the number of employees in our commercial organization, as well as by expanding our marketing and training programs, to help facilitate further adoption of our products among existing and new customer accounts. Successfully recruiting and training a sufficient number of sales and customer support employees is required to achieve growth at the rate we expect. The rate at which we groweffectiveness of our commercial organization and the speed at which newly hired personnel become effectivere-prioritization can impact our revenue growth and our costs incurred in anticipation of such growth.

Effects of the Macroeconomic Environment

Our unaudited condensed consolidated financial statements as of and for the sixthree months ended June 30, 2023March 31, 2024 reflect our estimate of the impact of the macroeconomic environment, including the impact of inflation and higher interest rates. The duration and scope of these conditions cannot be predicted; therefore, the extent to which these conditions will directly or indirectly impact our business, results of operations and financial condition, is uncertain. We are not aware of any specific event or circumstance that would require an update to our estimates, judgments and assumptions or a revision of the carrying value of our assets or liabilities as of the date of this filing.

22Stock Listing


Due to our failure to comply with the continued listing standards set forth in the NYSE’s Listed Company Manual, our common stock was suspended from trading on the NYSE effective at the opening of business Eastern Standard Time on November 22, 2023. We commenced trading on the OTCQX on the same day. We withdrew our request for an appeal and our common stock was delisted from the NYSE, which may negatively impact our stockholders and the trading price and liquidity of our common stock.

Components of Our Results of Operations

As discussed in Note 3, “Discontinued Operations” to the accompanying unaudited Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q, on March 1, 2024, we divested our software segment by selling substantially all assets

22


and liabilities of TDO Software, Inc, our wholly owned subsidiary. The sale met the criteria to be accounted for as a discontinued operation as required by Accounting Standards Codification (“ASC”) 205-20. Accordingly, the financial results of the software business are reported as discontinued operations in the accompanying unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for all periods presented. Our Condensed Consolidated Statements of Cash Flows include the financial results of the software business for the three months ended March 31, 2024 and 2023.

Revenue

Our revenue from continuing operations consists primarily of product revenue and softwareservice 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 and service revenue to increase in absolute dollars as we increase adoption and utilization of our GentleWave System, though revenues may fluctuate from quarter to quarter. We also expect the growth of recurring sales of our single-use PI and accessories to outpace the growth of capital sales of our GentleWave Console. Prior period financial statements have been recast so that software revenue is included in the discontinued operations.

Cost of Sales and Gross Margin

Cost of sales from continuing operations 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 personnel compensation, including stock-based compensation expenses, facilities, the cost of production equipment anddepreciation, operations supervision, quality control, material procurement, and intangible assets amortization.amortization and impairment of long-lived assets. We provide up to a two-yearone-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. Prior period financial statements have been recast so that software cost of sales is included in the discontinued operations.

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 previous software segment gross margin is generally higher than our product gross margin. As a result of these factors, wePrior period financial statements have been recast to exclude the software segment from continuing operations. We expect gross margin mayto fluctuate from periodin the short term, however, to period.increase year over year. 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"&A”) expenses consist primarily of personnel compensation, 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 increasedecrease in absolute dollars for the foreseeable future as we expandimplement our cost saving measures, re-prioritize our commercial infrastructure, become more efficient in the general and incur additional fees associated with operating as a public company, including legal, accounting, insurance, exchange listingadministrative functions, and SEC compliance, investor relations, and other administrative and professional services expenses,have divested our software segment, 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"&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 moderatedecrease in absolute dollars for the foreseeable future as we continuebecome more efficient in our effort to develop, enhance, and commercialize new products and technologies.technologies, and have divested our software segment. 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.

23


Impairment of Long-lived Assets

Long-lived assets include definite-lived intangibles, long-lived fixed assets and lease right-of-use assets. An impairment charge of long-lived assets is recognized when an assessment of potential impairment indicates that an asset’s carrying amount is not recoverable. The carrying amount of the asset is reduced to its estimated fair value based on discounted cash flow analysis. An impairment analysis is subjective and assumptions regarding future growth rates and operating expense levels can have a significant impact on the expected future cash flows and impairment analysis.

Other Income (Expense), Net

Other (expense) income, net, consists primarily of interest expense under our outstanding term loan and investment income.income in our continuing operations.

Income from Discontinued Operations

Income from discontinued operations consists primarily of (loss) income from TDO software business and gain from sale of TDO assets and liabilities.

Results of Operations

Comparison of Three and Six Months Ended June 30,March 31, 2024 and 2023 and 2022

The following tables present our results of operations for the three months ended June 30, 2023 and 2022, together with the dollar and percentage change in those items:

23


 

Three Months Ended June 30,

 

 

Change

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

(in thousands, except percentages)

 

Revenue

 

$

11,043

 

 

$

10,547

 

 

 

496

 

 

 

5

%

Cost of sales

 

 

9,945

 

 

 

7,994

 

 

 

1,951

 

 

 

24

%

Gross profit

 

 

1,098

 

 

 

2,553

 

 

 

(1,455

)

 

 

(57

)%

Gross margin

 

 

10

%

 

 

24

%

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

14,751

 

 

 

12,822

 

 

 

1,929

 

 

 

15

%

Research and development

 

 

3,298

 

 

 

4,018

 

 

 

(720

)

 

 

(18

)%

Total operating expenses

 

 

18,049

 

 

 

16,840

 

 

 

1,209

 

 

 

7

%

Loss from operations

 

 

(16,951

)

 

 

(14,287

)

 

 

(2,664

)

 

 

19

%

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and financing costs, net

 

 

(739

)

 

 

(850

)

 

 

111

 

 

 

(13

)%

Loss before income tax benefit

 

 

(17,690

)

 

 

(15,137

)

 

 

(2,553

)

 

 

17

%

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,690

)

 

$

(15,137

)

 

 

(2,553

)

 

 

17

%

The following table shows our results of operations for the sixthree months ended June 30,March 31, 2024 and 2023, and 2022, together with the dollar and percentage change in those items:

 

Six Months Ended June 30,

 

 

Change

 

 

Three Months Ended March 31,

 

 

Change

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

2024

 

 

2023

 

 

$

 

 

%

 

 

(in thousands, except percentages)

 

 

(in thousands, except percentages)

 

Revenue

 

$

21,767

 

 

$

19,580

 

 

 

2,187

 

 

 

11

%

Revenue, net

 

 

7,047

 

 

 

8,678

 

 

 

(1,631

)

 

 

(19

)%

Cost of sales

 

 

17,323

 

 

 

14,748

 

 

 

2,575

 

 

 

17

%

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

4,900

 

 

 

6,700

 

 

 

(1,800

)

 

 

(27

)%

Impairment of long-lived assets

 

 

146

 

 

 

 

 

 

146

 

 

 

100

%

Total cost of sales

 

 

5,046

 

 

 

6,700

 

 

 

(1,654

)

 

 

(25

)%

Gross profit

 

 

4,444

 

 

 

4,832

 

 

 

(388

)

 

 

(8

)%

 

 

2,001

 

 

 

1,978

 

 

 

23

 

 

 

1

%

Gross margin

 

 

20

%

 

 

25

%

 

 

 

 

 

 

 

 

28

%

 

 

23

%

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

29,417

 

 

 

24,807

 

 

 

4,610

 

 

 

19

%

 

 

10,061

 

 

 

14,114

 

 

 

(4,053

)

 

 

(29

)%

Research and development

 

 

6,792

 

 

 

8,868

 

 

 

(2,076

)

 

 

(23

)%

 

 

2,189

 

 

 

2,927

 

 

 

(738

)

 

 

(25

)%

Total operating expenses

 

 

36,209

 

 

 

33,675

 

 

 

2,534

 

 

 

8

%

 

 

12,250

 

 

 

17,041

 

 

 

(4,791

)

 

 

(28

)%

Loss from operations

 

 

(31,765

)

 

 

(28,843

)

 

 

(2,922

)

 

 

10

%

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(10,249

)

 

 

(15,063

)

 

 

4,814

 

 

 

(32

)%

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and financing costs, net

 

 

(1,296

)

 

 

(1,816

)

 

 

520

 

 

 

(29

)%

 

 

(1,940

)

 

 

(579

)

 

 

(1,361

)

 

 

235

%

Loss before income tax expense

 

 

(33,061

)

 

 

(30,659

)

 

 

(2,402

)

 

 

8

%

 

 

(12,189

)

 

 

(15,642

)

 

 

3,453

 

 

 

(22

)%

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continued operations, net of tax

 

 

(12,189

)

 

 

(15,642

)

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

5,427

 

 

 

271

 

 

 

5,156

 

 

 

1903

%

Net loss

 

$

(33,061

)

 

$

(30,659

)

 

 

(2,402

)

 

 

8

%

 

$

(6,762

)

 

$

(15,371

)

 

 

8,609

 

 

 

(56

)%

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

The following table shows our breakdown of revenue for the three and six months ended June 30, 2023 and 2022, together with the dollar and percentage change in those items:

 

Three Months Ended June 30,

 

 

Change

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

(in thousands, except percentages)

 

Product revenue

 

$

8,763

 

 

$

8,442

 

 

 

321

 

 

 

4

%

Software revenue

 

 

2,280

 

 

 

2,105

 

 

 

175

 

 

 

8

%

Total revenue

 

$

11,043

 

 

$

10,547

 

 

 

496

 

 

 

5

%

 

Six Months Ended June 30,

 

 

Change

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

(in thousands, except percentages)

 

Product revenue

 

$

17,441

 

 

$

15,645

 

 

 

1,796

 

 

 

11

%

Software revenue

 

 

4,326

 

 

 

3,935

 

 

 

391

 

 

 

10

%

Total revenue

 

$

21,767

 

 

$

19,580

 

 

 

2,187

 

 

 

11

%

Total revenue increased $0.5Revenue from continuing operations decreased $1.6 million, or 5%, and $2.2 million, or 11%19%, for the three months and six months ended June 30, 2023, respectively,March 31, 2024 from the comparable periodsperiod in the prior year.

24


Product revenueyear, increased $0.3 million, or 4%, for the three months ended June 30, 2023 compared to the prior year period, which was primarily driven by lower sales volumes in PIs, partially offset by an increase in the average selling price of PIs ofby approximately 17%, partially offset by a decrease in Consoles sales volumes. 6%.For the three months ended June 30, 2023,March 31, 2024, we generated $2.2 $1.8 million $5.6 million and $1.0 $4.2 million from the sale of GentleWave Consoles,consoles and PIs, and other products, respectively, compared to$2.7 million, $4.8to $2.0 million and $0.9$5.7 million, respectively, for the three months ended June 30, 2022.March 31, 2023.

Software revenue increased $0.2 million, or 8%, for the three months ended June 30, 2023 compared to the prior year period, which was primarily due to a higher number of customer subscriptions.

Product revenue increased $1.8 million, or 11%, for the six months ended June 30, 2023 compared to the prior year period, which was primarily driven by an increase in the average selling price of PIs of approximately 13%, as well as an increase in PI sales volumes of approximately 10%, partially offset by a decrease in Consoles sales volume. For the six months ended June 30, 2023, we generated $4.2 million and $11.3 million from the sale of GentleWave Consoles and PIs, respectively, compared to $4.8 million and $9.1 million, respectively, for the six months ended June 30, 2022.

Software revenue increased $0.4 million, or 10%, for the six months ended June 30, 2023 compared to the prior year period, which was primarily due to a higher number of customer subscriptions.

Cost of sales and Gross margin

Cost of sales increased $2.0from continuing operations decreased $1.8 million, or 24%, and $2.6 million, or 17%27%, for the three and six months ended June 30, 2023, respectively,March 31, 2024 from the comparable periodsperiod in the prior year. The increaseyear, which was primarily driven by a $1.7 million charge dueattributable to reduced sales volumes of our legacy GentleWave Console ("Gen3"), and a $1.2 million charge due to phasing out our legacy procedure instruments, the molar and pre-molar as we move to the CleanFlow procedure instruments. These charges werelower PI volume sold. The decrease is partially offset by lower costexpenses of CleanFlow PIs on per unit basis as compared$0.3 million recognized relating to our legacy PI products. There were no significant changesthe immediate vesting of RSUs granted to certain non-executive employees in the Software segment cost of sales.three months ended March 31, 2024.

24


Gross margin decreased 14% and 4%increased 6% for the three months and six months ended June 30, 2023, respectively,March 31, 2024 from the comparable periodsperiod in the prior year, primarily due to the aforementioned charges to cost of sales and higher console cost on per unit basis, partially offset by higher PI average selling price and lower PI cost on per unit basis.

Selling, general and administrative expenses

SG&A expenses increased $1.9decreased $4.1 million, or 15%, and $4.6 million, or 19%29%, for the three and six months ended June 30, 2023, respectively,March 31, 2024 from the comparable period in the prior year. The increase wasyear, primarily driven by changesan approximately $2.5 million decrease in our Product segment due to higher employee-related compensation and benefit expenses, of approximately $0.7 million for the three months period and approximately $2.5 million in the six month period, including stock-based compensation, and recruiting expenses, as a result of the expansionreduction in headcount. The decrease was also attributed lower marketing spending as we re-prioritize our commercial organization to increase the adoption of our commercial infrastructureproducts among existing and our general and administrative functions. There were no significant changesnew customer accounts. The decrease is partially offset by expenses of $0.8 million recognized relating to the immediate vesting of RSUs granted to certain non-executive employees in the Software segment selling, general and administrative expenses.three months ended March 31, 2024.

Research and development expenses

R&D expenses decreased $0.7 million, or 18% and $2.1 million, or 23%25%, for the three and six months ended June 30, 2023, respectively,March 31, 2024 from the comparable period in the prior year, which was primarily driven by decrease in employee related compensation and benefit expenses due to lower spending on product development and outside servicesheadcount. The decrease is partially offset by expenses of $0.4 million recognized relating to the immediate vesting of RSUs granted to certain non-executive employees in the Product segment, as well as lower headcount. There were no significant changes in any major components of the R&D expenses in the Software segment as described in the Components of Our Results of Operations above.three months ended March 31, 2024.

Other expense, net

Total other expense, net for the three and six months ended June 30, 2023March 31, 2024 decreasedincreased compared to the prior year periods, mainly due to interest incomea $1.0 million expense of the unamortized debt issuance costs of our term loan resulting from our short-term investmentsthe principal prepayment.

.Income from Discontinued Operations

Income from discontinued operations for the three months ended March 31, 2024 consists primarily of gain of $5.7 million from sale of TDO assets and liabilities and loss from TDO software business for the period from January 1, 2024 to March 1, 2024, which includes expenses of $0.3 million recognized relating to the immediate vesting of RSUs granted to certain non-executive employees.

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.

On September 27, 2022, we completed a private placement (the "Private Placement"“Private Placement”), issuing an aggregate of approximately 23.0 million shares of our common stock at a purchase price of $0.95 per share and pre-funded warrants to purchase an aggregate of 43.3 million shares of our common stock at a purchase price of $0.949 per pre-funded warrant. The pre-funded warrants have an exercise price of $0.001 per share of common stock, are immediately exercisable and will remain exercisable until exercised in full. The aggregate net proceeds from the Private Placement, after deducting placement agent fees and other offering expenses, were $59.0 million.

25


As of June 30, 2023,March 31, 2024, we had cash and cash equivalents and short-term investments of $65.9$33.6 million, an accumulated deficit of $402.2$436.8 million, and $40.0$23.2 million in principal outstanding under our term loan facility. For the three and six months ended June 30,March 31, 2024 and 2023, and 2022, our net losses from continuing operations were $33.1$12.2 million and $30.7$15.6 million, respectively, and our net cash used in operating activities was $26.3$10.7 million and $31.5$17.0 million, respectively.

On March 10, 2023, the California Department of Financial Protection and Innovation shut down Silicon Valley Bank (SVB) due to liquidity concerns and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. On March, 27, 2023, SVB began operating as a division of First Citizens Bank. As of June 30, 2023, we held approximately $0.9 million in operating accounts at SVB. Our remaining cash and cash equivalents and short-term investments, consisting of money market funds, high-grade corporate securities, and U.S. government backed securities, reside in custodial accounts held by U.S. Bank. There has been no disruption to the Company's operations.

Funding requirements

We expect our operating expenses to increasedecrease for the foreseeable future as we continue to investimplement our cost saving measures, re-prioritize our commercial infrastructure, become more efficient in expanding our salesthe R&D and marketing infrastructure programs to both drive and support anticipated sales growth and product development. In addition, we expect our general and administrative expensesfunctions, and have divested our software segment, though it may fluctuate from period to increase for the foreseeable future as we hire personnel and expand our infrastructure to both 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.period. The timing and amount of our operating expenditures will depend on many factors, including:

the degree and rate of market acceptance of our current and future products and the GentleWave Procedure;
the scope and timing of investment in our sales force and expansion of our commercial organization;force;
the impact of the macroeconomic environment, including as a result of inflation and rising interest rates, the war in Ukraine and the Gaza strip, or any other pandemic, epidemic or infectious disease outbreak, on our business;
the cost of our research and development activities;
the cost and timing of additional regulatory clearances or approvals;
the costs associated with any product recall that may occur;
the costs associated with the manufacturing of our products at increased production levels;

25


the costs of attaining, defending and enforcing our intellectual property rights;
whether we acquire third-party companies, products or technologies;
the terms and timing of any other collaborative, licensing and other arrangements that we may establish;
the scope, rate of progress and cost of our current or future clinical trials and registries;
the emergence of competing new products, technologies or alternative treatments or other adverse market developments;
the rate at which we expand internationally;
our ability to raise additional funds to finance our operations;
debt service requirements; and
the cost associated with being a public company.

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 and short-term investments 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 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), 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 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 our ability to achieve certain of our planned objectives in fiscal year 2023.

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 upondepends on our ability to successfully secure sourcescontinue to commercialize our products, achieve and maintain profitable operations, as well as the adherence to conditions of the outstanding term loan (see Note 10 to the Condensed Consolidated Financial Statements). Without additional financing, we will have insufficient liquidity to achieve further commercialization of our products and ultimately achieve profitable operations. Ifmaintain compliance with our existing capital resources are insufficientloan covenants. Due to satisfythese conditions, there is substantial doubt about our liquidity requirements,ability to continue as a going concern and, therefore, we may seekbe unable to sellrealize our assets and discharge our liabilities in the normal course of business.

We will require additional public or private equity or debt securities or obtain an additional credit facility. The salefinancing in order to fund future expected negative cash flows. Due to our failure to comply with the continued listing standards set forth in the NYSE’s Listed Company Manual, our common stock was suspended from trading on the NYSE effective at the opening of equity or convertible debt securitiesbusiness Eastern Standard Time on November 22, 2023. We commenced trading on the OTCQX on the same day. In April 2024, we withdrew the request to appeal the NYSE’s delisting determination and our common stock was delisted from the NYSE, which may result in dilution tonegatively impact our stockholders and in the casetrading price and liquidity of our common stock.

26


preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to thoseOver-the-counter markets are more limited than the NYSE, and it is likely that there will be significantly less liquidity in the trading of our common stock. Debt financing, ifThe delisting of our common stock from the NYSE could have material adverse effects on our business, financial condition and results of operations due to, among other things:

reduced trading liquidity and market prices for our common and preferred stock ;
decreased number of institutional and other investors willing to hold or acquire our stock, coverage by securities analysts, market making activity and information available may involve covenantsconcerning trading prices and volume, as well as fewer broker-dealers willing to execute trades in our stock, thereby further restricting our operations or our ability to incurobtain equity financing;
resulting event of default or noncompliance under certain of our debt facilities and other agreements; and
reduced ability to retain, attract and motivate our directors, officers and employees by means of equity compensation.

Delisting our common stock from the NYSE may adversely impact our liquidity, impair our stockholders’ ability to buy and sell our common stock, impair our ability to raise capital, and the market price of our common stock could decrease. Delisting our common stock could also adversely impact the perception of our financial condition and have additional debt. Any debt financingnegative ramifications, including further loss of confidence by our employees, the loss of institutional investor interest and fewer business opportunities.

We have active plans to mitigate these conditions. Specifically, we plan to reduce negative cash flow through operating expense reductions. We are evaluating multiple opportunities, which may include soliciting external investment or additional equityseeking strategic partnerships. Additionally, as detailed in Note 3 to the Consolidated Financial Statements, we closed on the sale of TDO and renegotiated our covenant requirements with our lender, among other terms, which resulted in us remitting $15 million of principal payments on our outstanding borrowings. Our plans are subject to inherent risks and uncertainties and there can be no assurance that we raise may contain termsour plans can be effectively implemented and, therefore, that are not favorable to us or our stockholders. If we raise additional capital through collaboration agreements, licensing or divestiture 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 notthe conditions can be favorable to us. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.effectively mitigated.

Indebtedness

On April 6, 2022, we entered into Amendment No. 1 (the “First Amendment”) to the Amended and Restated Credit Agreement and Guaranty (the “Perceptive Loan Agreement”) with Perceptive Credit Holdings III, LP (“Perceptive”). The First Amendment extended the borrowing deadline for the first tranche of $10.0 million of delayed-draw term loans from December 31, 2021 to September 30, 2022, and also extended the borrowing deadline for the second tranche of $10.0 million delayed-draw term loans from March 31, 2022 to June 30, 2023. We borrowed the extended first tranche of $10.0 million in July 2022, receiving net proceeds of $9.9 million, and forfeited the extended tranche on June 30, 2023.

As a condition to entering into the First Amendment, on April 6, 2022, we also amended the warrants previously issued to Perceptive and certain of its affiliates 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. In August 2022, a portion of these warrants representing 153,421 shares were transferred to a third party and its affiliates.

For the six months ended June 30, 2023 and 2022, the interest rate for amounts borrowed under the Perceptive Loan Agreement, as amended, was the greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. On January 13, 2023, we entered into the Second Amendment No. 2 (the "Second Amendment") to the Amended Perceptive Loan Agreement as amended, to replace the existing benchmark rate from the one-month LIBOR with a one-month Secured Overnight Financing Rate ("SOFR").SOFR. All other terms remain unchanged on the original agreement.For the three months ended March 31, 2024 and 2023, the interest rate for amounts borrowed under the Amended Perceptive Loan Agreement was the greater of the one-month SOFR and 2.00% plus the applicable margin of 9.25%.

In connection with entering intoOn March 1, 2024, we entered to the Third Amendment to the Amended Perceptive Loan Agreement. Pursuant to the Third Amendment, the Company made a one-time $15.0 million principal repayment on March 1, 2024, and agreed to make an amortization

26


payment of $1.8 million on the outstanding principal on March 31, 2024 and make monthly amortization payments on the outstanding principal amount each in the amount of $0.9 million on each payment date commencing on April 30, 2024. Accordingly, $1.0 million of the unamortized debt issuance costs were expensed.

For the three months ended March 31, 2024 and 2023, the effective interest rate of the Amended Perceptive Loan, was 21.22% and 16.71%, respectively. As of March 31, 2024 and 2023, the fair value of the Amended Perceptive Loan approximates its carrying amount.

The Third Amendment also modified certain covenants included in the Amended Perceptive Loan Agreement and released all liens granted to the TDO software assets. Future principal repayments and the net carrying value of the Perceptive Loan, Agreement, we also entered into an amended and restated security agreement and granted a security interest in substantially allas of our assets. December 31, 2023, are as follows:

 

Principal

 

 

 

(in thousands)

 

Remaining 9 months of 2024

 

$

8,100

 

2025

 

 

10,800

 

2026

 

 

4,300

 

Total principal payment

 

 

23,200

 

Debt discounts

 

 

(1,489

)

Net carrying value

 

$

21,711

 

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 Amended Perceptive Loan Agreement as amended, 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 consecutive 12-month periods ending on each calendar quarter-end until June 30, 2026. These thresholds progressively increase over time, ranging from $26.4 million for the consecutive 12-month periods ending September 30, 2021 to $95.3 million for the consecutive 12-month periods ending June 30, 2026. Specifically, the minimum revenue thresholds for the consecutive 12-months period ending on June 30, 2024 and September 30, 2024, are $47.2 million and $52.0 million, respectively. Failure to satisfy these financial covenants would constitute an event of default under the agreement, as amended.

The Perceptive Loan Agreement, as amended, 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. Based on the Amended Perceptive Loan Agreement, we have granted a security interest in substantially all of our assets.

The Amended Perceptive Loan Agreement includes financial covenants that require 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) pursuant to the Third Amendment, satisfy certain minimum revenue thresholds, measured for the consecutive 12-month periods ending on each calendar quarter-end until June 30, 2026 as follows:

For 12-month Period Ending

 

Revenue

 

 

 

(in thousands)

 

March 31, 2024

 

$

39,000

 

June 30, 2024

 

$

35,500

 

September 30, 2024

 

$

33,000

 

December 31, 2024

 

$

31,500

 

March 31, 2025

 

$

31,000

 

June 30, 2025

 

$

33,000

 

September 30, 2025

 

$

35,935

 

December 31, 2025

 

$

40,160

 

March 31, 2026

 

$

44,950

 

June 30, 2026

 

$

51,500

 

Pursuant to the Third Amendment, the lender also waived the covenant requiring the absence of any “going concern” or like qualification or exception or any qualification or exception as to the scope of the audit, solely with respect to the fiscal year ending on December 31, 2023.

Failure to satisfy any covenants would constitute an event of default under the Amended Perceptive Loan Agreement. In the event of an event of default, the lender may terminate its commitments and declare all amounts outstanding under the Amended Perceptive Loan Agreement as amended, 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%.

27


Revenue generated from continuing and discontinued operations for the 12-months period ended March 31, 2024 was $41.6 million, and cash and cash equivalents and short term investment balance was $33.6 million as of March 31, 2024. As of June 30, 2023, we had an aggregate principal balance of $40.0 million outstanding under the Perceptive Loan Agreement, as amended, andsuch, we were in compliance with all financial covenants and conditions under such agreement.

27


the agreement as of March 31, 2024.

Summary statement of cash flows

The following table summarizes our statement of cash flows:

 

Six Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

 

2024

 

 

2023

 

 

(in thousands)

 

 

(in thousands)

 

Net cash provided by (used in) :

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(26,341

)

 

$

(31,503

)

 

$

(10,689

)

 

$

(16,976

)

Investing activities

 

 

21,140

 

 

 

(35,049

)

 

 

32,073

 

 

 

11,965

 

Financing activities

 

 

103

 

 

 

(491

)

 

 

(16,813

)

 

 

(6

)

Net decrease in cash and cash equivalents

 

$

(5,098

)

 

$

(67,043

)

Net increase (decrease) in cash and cash equivalents

 

$

4,571

 

 

$

(5,017

)

Operating Activities

Net cash used in operating activities was $26.3$10.7 million for the sixthree months ended June 30, 2023,March 31, 2024, primarily consisting of net loss of $33.1$6.8 million and gain on sales of discontinued operations of $5.7 million, as adjusted for non-cash items of $4.7$4.4 million, as well aspartially offset by a net change in our net operating assets and liabilities of $2.0$2.6 million. Non-cash items primarily consisted of $2.0$2.9 million in stock-based compensation and $1.1 million of amortization of debt issuance costs. Changes in our net operating assets and liabilities year-over-year, was primarily due to a $1.4 million increase inventory due to managing production level, $1.0 million increase in accrued expenses and other liabilities on payments to vendors and a $1.0 million increase in accrued compensation due to year-end bonus payout, partially offset by changes in accounts receivable, prepaid expenses and other assets and accounts payable attributable to timing of payment.

Net cash used in operating activities was $17.0 million for the three months ended March 31, 2023, primarily consisting of net loss of $15.2 million as adjusted for non-cash items of $2.3 million and a net change in our net operating assets and liabilities of $3.9 million. Non-cash items primarily consisted of $0.7 million in depreciation and amortization and $4.0$1.9 million in stock-based compensation. Changes in our net operating assets and liabilities year-over-year, was primarily due to a $4.4$1.7 million cash receipts of ERC refundincrease in accrued expenses and $2.3other liabilities on payments to vendors and a $1.2 million decreaseincrease in inventoryaccrued compensation due to increase in inventory reserves for legacy products, partially offset by increase in accounts receivable, prepaid expenses, accrued compensation and accounts payable attributable to timing of payment.

Net cash used in operating activities was $31.5 million for the six months ended June 30, 2022, primarily consisting of net loss of $30.7 million as adjusted for non-cash items of $4.5 million, partially offset by a net changeyear-end bonus payout. Changes in our net operating assets and liabilities of $5.8 million. Non-cash items primarily consisted of $1.6 millionalso resulted from changes in depreciation and amortization and $3.3 million in stock-based compensation. The change in our net operating assets and liabilities was primarily due to a $4.5 million increase inaccounts receivable, inventory, held due to higher production and changes in prepaid expenses and other assets and accounts payable accrued expenses and accrued compensation attributable to timing of payment.

Investing Activities

Net cash provided by investing activities was $21.1$32.1 million for the sixthree months ended June 30,March 31, 2024, as a result of $18.0 million proceeds from maturities of available-for-sale securities and $14.2 million net proceeds from sale of discontinued operations, partially offset by the purchases of property and equipment. Net cash provided by investing activities was $12.0 million for the three months ended March 31, 2023, as a result of proceeds from maturities of available-for-sale securities partially offset by the purchases of available-for-sale securities and property and equipment.Net cash used in investing activities was $35.0 million for the six months ended June 30, 2022, as a result of purchases of available-for-sale securities and property and equipment.

Financing Activities

Net cash used in financing activities was $16.8 million for the sixthree months ended June 30, 2023 was immaterial.March 31, 2024, primarily due to principal repayment on our term loan. Net cash used byin financing activities was $0.5 million for the sixthree months ended June 30, 2022, primarily resulting from the payment of the remainder of the IPO fees and contingent earnout.March 31, 2024 was immaterial.

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"(“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

28


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“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” included in our Annual Report on Form 10-K filed with the SEC on March 8, 2023.11, 2024.

JOBS Act Accounting Election and Smaller Reporting Company Status

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We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act").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.

In addition, 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 (a) following the fifth anniversary of our IPO, which closed on November 2, 2021, (b) in which we have total annual gross revenues of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, as defined in Rule 12b-2 under the Exchange Act of 1934, as amended, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second quarter of the prior fiscal year, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

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 no longer qualify as 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 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700 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

Our management, under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), conducted an evaluation 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 of 1934, as amended, 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 June 30,March 31, 2023.

Changes in Internal Control over Financial Reporting

29


There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30,March 31, 2023 that have materially affected, or are 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

29


been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

30


 

PART II—OTHER INFORMATION

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, 20222023 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 20222023 Annual Report on Form 10-K.

We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.

We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks, which exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to widespread demands for customer withdrawals and liquidity constraints that may result in market-wide liquidity problems. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. government in the future or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a future failure or liquidity crisis.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.During the quarter ended March 31, 2024, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement," each as defined in Regulation S-K Item 408.

Item 6. Exhibits.

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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

Incorporated by Reference

Exhibit

Number

Description

Form

File No.

Exhibit

Filing Date

Filed / Furnished Herewith

Description

Form

File No.

Exhibit

Filing Date

Filed / Furnished Herewith

3.1

Amended and Restated Certificate of Incorporation

8-K

001-40988

3.1

11/2/2021

Amended and Restated Certificate of Incorporation

8-K

001-40988

3.1

11/2/2021

3.2

Amended and Restated Bylaws

8-K

001-40988

3.2

11/2/2021

Amended and Restated Bylaws

8-K

001-40988

3.2

11/2/2021

4.1

Form of Certificate of Common Stock

S-1/A

333-260136

4.1

10/25/2021

Form of Certificate of Common Stock

S-1/A

333-260136

4.1

10/25/2021

4.2

Fifth Amended and Restated Voting Agreement by and among Sonendo, Inc. and the investors listed therein

S-1/A

333-260136

4.2

10/25/2021

 

Fifth Amended and Restated Voting Agreement by and among Sonendo, Inc. and the investors listed therein

S-1/A

333-260136

4.2

10/25/2021

 

4.3

Third Amended and Restated Investors’ Rights Agreement by and among Sonendo, Inc. and the investors listed therein

S-1

333-260136

4.3

10/8/2021

Third Amended and Restated Investors’ Rights Agreement by and among Sonendo, Inc. and the investors listed therein

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

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

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

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

Warrant to purchase Series D preferred stock

S-1

333-260136

4.7

10/8/2021

Warrant to purchase Series D preferred stock

S-1

333-260136

4.7

10/8/2021

4.8

Warrant to purchase Series E preferred stock (2018)

S-1

333-260136

4.8

10/8/2021

Warrant to purchase Series E preferred stock (2018)

S-1

333-260136

4.8

10/8/2021

4.9

Warrant to purchase Series E preferred stock (2019)

S-1

333-260136

4.9

10/8/2021

Warrant to purchase Series E preferred stock (2019)

S-1

333-260136

4.9

10/8/2021

4.10

Warrant to purchase Series E preferred stock (2021)

S-1

333-260136

4.10

10/8/2021

Warrant to purchase Series E preferred stock (2021)

S-1

333-260136

4.10

10/8/2021

4.11

Credit Agreement Warrant to Purchase Stock

8-K

001-40988

4.1

4/7/2022

 

Description of Common Stock

10-K

001-40988

4.11

3/23/2022

 

4.12

Schedule to Exhibit 4.11 - Form of Credit Agreement Warrant to Purchase Stock

8-K

001-40988

4.2

4/7/2022

 

Credit Agreement Warrant to Purchase Stock

8-K

001-40988

4.1

4/7/2022

 

4.13

Description of Common Stock

10-K

001-40988

4.11

3/23/2022

 

Schedule to Exhibit 4.11 - Form of Credit Agreement Warrant to Purchase Stock

8-K

001-40988

4.2

4/7/2022

 

4.14

Form of Credit Agreement Warrant to Purchase Stock (Warberg entities)

10-Q

001-40988

4.11

8/10/2022

 

4.15

Schedule to Exhibit 4.14 - Holders of Credit Agreement Warrants to Purchase Common Stock (Warberg entities)

10-Q

001-40988

4.12

8/10/2022

 

4.16

Form of Indenture for Senior Debt Securities

S-3

333-270366

4.6

3/8/2023

 

4.17

Form of Indenture for Subordinated Debt Securities

S-3

333-270366

4.7

3/8/2023

 

10.1

Offer Letter, dated March 18, 2024, between Sonendo, Inc. and Chris Guo

 

10.2

Asset Purchase Agreement, between TDO Software, Inc., Valsoft Corporation Inc. and Aspire USA LLC, effective as of March 1, 2024

8-K

001-40988

10.2

3/5/2024

 

10.3

Amendment No. 3 to Amended and Restated Credit Agreement and Guaranty, dated as of March 1, 2024, by and between Sonendo, Inc. and Perceptive Credit

8-K

001-40988

10.2

3/5/2024

 

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

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

*

32


 

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

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.

33


 

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: August 9, 2023May 8, 2024

By:

/s/ Bjarne Bergheim

Bjarne Bergheim

President, Chief Executive Officer and Director

(principal executive officer)

 

 

 

 

 

 

 

 

Date: August 9, 2023May 8, 2024

By:

/s/ Michael P. WattsChris Guo

Michael P. WattsChris Guo

Interim Chief Financial Officer

(principal financial and accounting officer)

 

34