Lucira Health, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

OR

For the transition period from to

Commission File Number: 001-39976

Lucira Health, Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (510) 350-8071

Securities registered pursuant to Section 12(b) of the Act:

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.

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 November 8, 2021, the number of shares of registrant’s common stock, par value $0.001 per share, outstanding was 39,224,551.

Table of Contents

Where You Can Find More Information

Investors and others should note that we announce material financial and other information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also post supplemental materials on the Press Release section of our investor relations website at www.https://ir.lucirahealth.com/. Except as specifically noted herein, information on or accessible through our website is not, and will not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated by reference into any other filings we may make with the U.S. Securities and Exchange Commission (the “SEC”).

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SPECIAL 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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition; business strategy and plans; and objectives of management for future operations, including our statements regarding the benefits and timing of the roll out of new technology, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

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You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the Securities and Exchange Commission as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

“Lucira Health,” “Lucira,” the Lucira Health logo and our other registered or common law trade names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are our property. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, the trademarks and tradenames referred to in this Quarterly Report on Form 10-Q appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LUCIRA HEALTH, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

(1) The balance sheet as of December 31, 2020 is derived from the audited financial statements as of that date

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

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LUCIRA HEALTH, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)

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

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LUCIRA HEALTH, INC.

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands, except share data)

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

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LUCIRA HEALTH, INC.

CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands, except share data)

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

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LUCIRA HEALTH, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

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

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LUCIRA HEALTH, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(In thousands, except share and per share data)  

Note 1. Organization

Description of Business

Lucira Health, Inc. (the “Company”) was incorporated under the laws of the state of Delaware on February 20, 2013 under the name DiAssess Inc. The Company changed its name to Lucira Health, Inc. in January 2020. The Company is located in Emeryville, California.

The Company is a medical technology company focused on the development and commercialization of transformative and innovative infectious disease test kits. The Company has developed a testing platform that produces high-complexity-laboratory-accurate molecular testing in a single-use and user-friendly test kit that is powered by two AA batteries and fit in the palm of a hand. The Company’s initial focus is within respiratory diseases, and initially for COVID-19 and influenza Types A and B indications.

On November 17, 2020, the Company received an Emergency Use Authorization (“EUA”) from the Food and Drug Administration (“FDA”) for (1) prescription at-home use with self-collected nasal swab specimens in individuals aged 14 and older who are suspected of COVID-19 by their healthcare provider and (2) use at the point-of-care (“POC”), with self-collected nasal swab specimens in individuals aged 14 and older, and in individuals aged 13 and under when the specimen is collected by a healthcare provider at the POC. People who are suspected of COVID-19 are those who are either symptomatic or are thought to have been exposed to COVID-19.  On April 9, 2021, the Company received its first FDA EUA authorization for over-the-counter (“OTC”) non-prescription use among symptomatic and asymptomatic individuals aged 14 and older (with self-collection) and children aged two to 13 (with parent collection).  

Reverse Stock Split

On January 28, 2021, the Company’s board of directors (the “Board”) approved a 1-for-4.3103 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock and each series of its redeemable convertible preferred stock to be consummated prior to the effectiveness of the Company’s initial public offering (“IPO”) on February 4, 2021. The par value and authorized shares of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock, preferred stock, options to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented. The Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware on January 28, 2021 that automatically effectuated the Reverse Stock Split without any further action required.

Initial Public Offering

On February 9, 2021, the Company closed its IPO of 10,350,000 shares of its common stock, including 1,350,000 shares of common stock issued pursuant to the full exercise of the underwriters’ option to purchase additional shares in the IPO, at a price to the public of $17.00 per share. The net proceeds to the Company from the IPO were $159.9 million, after deducting underwriting discounts and commissions of $12.3 million and offering expenses of $3.7 million. In connection with the IPO, all shares of redeemable convertible preferred stock and outstanding convertible notes converted into 25,449,694 shares of common stock.

Liquidity and Going Concern

The Company has incurred recurring losses and negative cash flows from operating activities since inception. The Company anticipates that it will continue to incur net losses into the foreseeable future. As of September 30, 2021, the Company had cash of $117.3 million and had an accumulated deficit of $120.7 million. The Company believes that cash as of September 30, 2021 will be sufficient to fund its planned operations for a period of at least 12 months from the date of the issuance of the accompanying financial statements.

Management expects to incur additional losses in the future and in order to continue to fund its operations the Company may need to raise additional capital to fully implement its business plan. The Company may raise additional capital through the issuance of equity securities, debt financings or other sources in order to further implement its business plan. However, if such financing is not available when needed and at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of new test kits.

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Other Risk and Uncertainties

While the Company generated $31.9 million of revenues from the sale of its test kits during the nine months ended September 30, 2021, there still remains uncertainty of future revenues from sales of its test kits. The Company is devoting most of its efforts to the sales and marketing and research and development of its test kits. The Company is subject to a number of product risks, including the receipt of regulatory approvals for additional indications of the COVID-19 test kit and timing thereof, size of the market opportunity, demand from the public and members of the medical community for the COVID-19 test kit and rate of adoption of the COVID-19 test kit. The commercial success of the COVID-19 test kit was initially dependent upon physicians, and healthcare providers accepting and adopting the Company’s test kit. Since receiving the EUA authorization for OTC use, the Company’s commercial business has evolved to include partnerships with testing providers, distributors and businesses. The Company is also subject to risks related to compliance with government regulations, protection of proprietary technology, dependence on third-parties, product liability, and dependence on key individuals.

In connection with the COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel restrictions and other social distancing directives, intended to control the spread of the virus. Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses. The Company believes some of the precautionary measures and challenges resulting from the COVID-19 pandemic may continue as COVID-19 becomes endemic, but there is uncertainty and volatility in these and other trends despite the continued progress of vaccination efforts. To the extent that restrictions remain in place, additional prevention and mitigation measures are implemented in the future, or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there is likely to be an adverse impact on global economic conditions and consumer confidence and spending, which could materially and adversely affect the Company’s research and development, as well as operational activities. At this time, the Company is working to manage and mitigate potential disruptions to its research and future manufacturing and supply chain considerations. The Company has not experienced hindrance to its operations or material negative financial impacts as compared to prior periods. At this time, the extent to which the COVID-19 pandemic impacts the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and pursuant to the instructions of the SEC on Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the management’s opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flows for the periods presented have been included.

The accompanying balance sheet as of September 30, 2021, the statements of operations for the three and nine months ended September 30, 2021 and 2020, the statements of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2021 and 2020, and the statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2021 and the results of its operations and cash flows for the nine months ended September 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2021 and 2020 are unaudited. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period. These financial statements and accompanying notes should be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 31, 2021.

Use of Estimates

Significant estimates and assumptions made in the accompanying financial statements include, but are not limited to recognition of grant income, the fair value of the Company’s pre IPO common stock and redeemable convertible preferred stock, the fair value of derivative liabilities and convertible notes payable, stock-based compensation, incremental borrowing rate, revenue recognition, inventory valuation, sales returns, warranty reserves, allowance for doubtful accounts, accrued research and development costs, uncertain tax positions, the recoverability of its long-lived assets and the valuation of deferred tax assets. The Company

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evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk and Significant Suppliers

Financial instruments that potentially subject the Company to credit risk consist principally of cash held by financial institutions, grant income receivables and account receivables. Substantially all of the Company’s cash is held at one financial institution that management believes is of high credit quality. Such deposits may, at times, exceed federally insured limits.

The Company’s grant income receivable balance at each respective balance sheet dates results from grant agreements with the U.S. government.

As of September 30, 2021, accounts receivable balance was $11.9 million. Three customers accounted for 18%, 15%, and 12% of accounts receivable balance. As of December 31, 2020, accounts receivable balance was $0.3 million and was comprised by the Company’s only customer. The Company evaluates the collectability of its accounts receivable based on historical collection trends and provides for an allowance for doubtful accounts. Allowance for doubtful accounts was $0.3 million and $0.0 million as of September 30, 2021 and December 31, 2020, respectively. Three customers accounted for 15%, 14% and 11% and one customer accounted for 10% of the Company’s revenue during the three and nine months ended September 30, 2021, respectively.

The Company is dependent on key suppliers, who are single source, for certain laboratory materials and inventory items. An interruption in the supply of these materials could temporarily impact the Company’s ability to manufacture its commercial inventory and perform development, testing and clinical trials related to its products. The Company is also dependent on its manufacturing and distribution partners that are critical to its ability to supply product to its end customers.

Fair Value Measurements

The carrying value of the Company’s cash, accounts receivable, grant income receivable, prepaid expenses, other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s derivative liabilities and convertible notes are measured at fair value on a recurring basis and are classified as Level 3 liabilities until conversion of the notes. The Company records subsequent adjustments to reflect the increase or decrease in estimated fair value at each reporting date on the statement of operations.

Cash, and Restricted Cash Equivalents

The Company considers highly liquid investments purchased with a remaining maturity date upon acquisition of three months or less to be cash equivalents and are stated at cost, which approximates fair value. As of September 30, 2021 and September 30, 2020, there were no cash equivalents.

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As of September 30, 2021, the Company held a restricted cash balance of $2.3 million which was used to secure a letter of credit in relation to the Company’s contract manufacturer to secure certain purchases made on the Company’s behalf. The cash was deposited in a money market account with maturities of three months or less and thus considered a restricted cash equivalent.

Inventories Produced in Preparation for Product Launches

The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when positive results have been obtained for the clinical trials that the Company determines are necessary to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and the Company has determined it is probable that these capitalized costs will provide future economic benefit in excess of capitalized costs. The factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive clinical test results for the underlying product, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the submission of the regulatory application. The Company closely monitors the status of each respective product within the regulatory approval process, including all relevant communication with regulatory authorities. If the Company is aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized.

For inventories that are capitalized in preparation of product launch, anticipated future sales, expected approval date and shelf lives are evaluated in assessing realizability. The shelf life of a product is determined as part of the regulatory approval process; however, in evaluating whether to capitalize pre-launch inventory production costs, the Company considers the product stability data of all of the pre-approval production to date to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs. Prior to obtaining the EUA authorization for its COVID-19 test kit on November 17, 2020, the Company charged $2.3 million of preapproval inventory to research and development expense. After receipt of the EUA in November 2020, the Company accounted for all production item purchases as inventory in accordance with its inventories policy below. Preapproval inventories previously recorded as research and development expense that are subsequently sold will have a zero cost of product. Subsequent to receipt of the EUA in November 2020, the Company utilized a portion of the preapproval inventory resulting in a remaining unused amount of $1.3 million as of December 31, 2020. As of the six months ended June 30, 2021, the Company utilized all of the preapproval inventory write-offs for cost of sales of $1.0 million and for selling, general and administrative and research and development activities of $0.3 million.

Inventories

The Company values its inventory at the lower of cost or net realizable value and determines the cost of inventory using standard costs which closely resembles the first-in, first-out method. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors.

In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. The Company periodically reviews its inventories for shelf life, excess or obsolescence and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by the Company, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Amounts written-down due to unmarketable inventory are recorded in cost of revenue and a new lower-cost basis for the inventory is established. The Company recorded $1.3 million of inventory obsolescence charges during the three and nine months ended September 30, 2021 related to an issue during transit for one of the key raw material components of its product.

Warranty

The Company offers a standard product warranty that our products will perform as intended upon the date of original delivery for a reasonable period of time, which is the shorter of date usage or product shelf life. The Company has the obligation, at its option, to either refund, repair or replace a defective product. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of products sold. The estimate of future warranty costs is based on historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies. The Company will regularly review these estimates to assess the appropriateness of our recorded warranty liabilities and adjust the amounts as necessary. As of September 30, 2021 and December 31, 2020, the accrued liability for warranty returns was not significant.

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Grant Income Receivable

Grant income receivable consists of billed and unbilled amounts earned from various government grants for costs incurred prior to the period end under reimbursement contracts. The amounts are billed to the respective government agencies. As collection is deemed probable, no allowance for doubtful accounts has been established. If amounts become uncollectible, they are recorded as operating expense in the Company’s statements of operations. Of the amounts presented on the balance sheets as grant income receivable, $0.1 million and $0.2 million were unbilled as of September 30, 2021 and December 31, 2020, respectively.

Property and Equipment, Net

Property and equipment are stated at cost, net of depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining term of the related lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in other income or expense in the statements of operations in the period realized.

Leases

The Company determines if an arrangement is a lease at inception and if so, determines whether the lease qualifies as operating or finance. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the balance sheets. The Company did not have any finance leases as of September 30, 2021 and December 31, 2020.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. When the Company’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at commencement dates in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and exclude lease incentives when paid by the Company or on the Company’s behalf. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components. The Company elected to not separate lease and non-lease components for all of its building leases. The Company also made an accounting policy election to recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and not recognize ROU assets or lease liabilities for such leases.

Long-Lived Assets

The Company’s long-lived assets are comprised principally of its property and equipment, including leasehold improvements and ROU assets.

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable. The Company identifies impairments related to property and equipment when management determines that the remaining carrying value will not be realized through future use. The Company evaluates events or circumstances, including competition in the markets where it operates, that would indicate the carrying value of assets may not be fully recoverable. If an event or circumstance is identified indicating carrying value may not be recoverable, the sum of future undiscounted cash flows is compared to the carrying value. If the carrying value exceeds the future undiscounted cash flows, the carrying value of the asset is reduced to fair value, with the difference recorded as an impairment charge. Assets are evaluated for impairment on an individual basis, which management believes is the lowest level for which there are identifiable cash flows. The Company evaluates assets by assessing if long-lived assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful life as its primary indicator of potential impairment. The fair value of assets is determined as the present value of the estimated future cash flows, adjusted as necessary for market participant factors. Any required impairment loss would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense. For the three and nine months ended September 30, 2021, a $1.6 million impairment of long-lived assets was recorded, there was no impairment recorded during the same periods in 2020. See additional discussion in Note 4, Other Financial Information.

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Accrued Research and Development Costs

The Company records accrued expenses for estimated costs of its research and development activities conducted by third-party service providers, which include clinical trial activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services or supplies provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expense in the statements of operations. The Company records accrued expenses for these costs based on factors such as estimates of the work completed or supplies received and in accordance with agreements established with these vendors. Any payments made in advance of services or supplies provided are recorded as prepaid assets, which are expensed as the services or supplies are received.

The Company estimates the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. The Company makes significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, the Company adjusts its accrued estimates.

Redeemable Convertible Preferred Stock

The Company’s shares of preferred stock are assessed at issuance for classification and redemption features requiring bifurcation. The Company’s preferred stock is not mandatorily redeemable. The Company presents as temporary equity any stock which (i) the Company undertakes to redeem at a fixed or determinable price on the fixed or determinable date or dates; (ii) is redeemable at the option of the holders, or (iii) has conditions for redemption which are not solely within the control of the Company. The Company’s preferred stock is redeemable if the Company has not been dissolved within 90 days following the occurrence of certain deemed liquidation events, which the Company determined is not solely within its control and thus has classified shares of redeemable convertible preferred stock as temporary equity until such time as the conditions are removed or lapse. The Company initially records redeemable convertible preferred stock at fair value, net of issuance costs. Because the occurrence of a deemed liquidation event is not currently probable, the carrying values of the shares of redeemable convertible preferred stock are not being accreted to their redemption values. Subsequent adjustments to the carrying values of the shares of redeemable convertible preferred stock would be made only when a deemed liquidation event becomes probable.

In connection with the IPO on February 9, 2021, all outstanding shares of redeemable convertible preferred stock converted into 23,978,747 shares of common stock.

Deferred Offering Costs

The Company capitalized certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings, including the IPO, as deferred offering costs until such financings are consummated. After consummation of the financing, these costs are recorded as a reduction of the proceeds received from the equity financing. If a planned equity financing is abandoned, the deferred offering costs are expensed immediately as a charge to operating expenses in the condensed statements of operations. There was $2.2 million of deferred offering costs related to the Company’s IPO recorded as other assets on the Company’s balance sheet as of December 31, 2020. The Company recorded additional offering costs between December 31, 2020 and February 9, 2021 and recorded $3.7 million as an offset to the IPO proceeds as additional paid in capital on the closing date.

Revenue Recognition

The Company recognizes revenue under Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), “Revenue from Contracts with Customers” when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:

Under ASC 606, assuming all other revenue recognition criteria have been met, the Company will recognize revenue for arrangements upon the transfer of control of the Company’s products to its customers, which is currently upon the shipment of the

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product to the customer under the Company’s standard terms and conditions. There are no further performance obligations by the Company to the customer after shipment of the product. Control of the Company’s products is transferred at a point in time.

Revenue is measured based on the amount of consideration that the Company expects to receive as reduced by estimated discounts and allowances.

All of the Company’s revenue has been derived from sales of its test kits. Since receiving the initial EUA in the fourth quarter 2020, the Company marketed its test products to physicians and licensed healthcare providers in the United States. On April 9, 2021, the Company received its first FDA EUA authorization for OTC non-prescription use and expanded its marketing to include domestic testing providers, distributors, businesses and international distributors.

Collection of the Company’s net receivables generally occur within 30 days of billing. Contracts do not contain significant financing components based on the typical period of time between delivery of products and collection of consideration. Customers in certain countries outside of the United States pay in advance of product delivery. In those instances, payment and delivery typically occur in the same month.

Costs to obtain or fulfill a contract are currently expensed when incurred because our performance obligation is satisfied at a point in time.

The Company invoices its customers upon shipment of product, and records its sales upon shipment in accordance with its standard terms and conditions, unless underlying customer contracts specify otherwise.

When necessary, the Company invoices and collects sales tax from its customers for sales of products. The Company has elected to exclude sales tax from the measurement of the transaction price.

The following table sets forth the Company’s revenue by geographic area based on the customers’ locations:

Grant Income

The Company earns grant income for performing tasks under research and development agreements with governmental agencies.

In July 2018, the Company entered into an agreement with the Biomedical Advanced Research and Development Authority (“BARDA”), a division within the U.S. Department of Health and Human Services (“HHS”), for an award of up to $10 million to demonstrate the feasibility of a novel in-home, disposable, point-of-care rapid diagnostic assay for the detection of Influenza A and B for work performed through July 2020. In September 2019, the Company amended its agreement with BARDA to increase the award to $21.5 million and extend the reporting period through July 2022. The Company recognized grant income from BARDA of $0.0 for the three and nine months ended September 30, 2021, compared to $0.0 million and $1.8 million for the three and nine months ended September 30, 2020, respectively. In July 2021, BARDA terminated the influenza contract for convenience.

The Company recognized grant income from other governmental agencies of $0.1 million and $0.4 million during the three and nine months ended September 30, 2021, respectively, compared to less than $0.1 million and $0.2 million during the three and nine months ended September 30, 2020, respectively.

Grant income derived from reimbursement of direct out-of-pocket expenses, overhead allocations and fringe benefits for research costs associated with government contracts and grants are recorded at the gross amount within grant income. The costs associated with these reimbursements are reflected as a component of research and development expense in the Company’s statements of operations.

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Research and Development

Costs associated with research and development activities are expensed as incurred and include, but are not limited to, personnel-related expenses including stock-based compensation expense, materials, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead including rent and utilities.

Advertising and Marketing Costs

Costs associated with advertising and marketing activities are expensed as incurred. Total advertising and marketing costs were less than $0.1 million and $1.3 million for the three and nine months ended September 30, 2021, respectively, compared to $0.0 million in 2020, and are included in selling, general and administrative expenses in the accompanying statements of operations.

Stock-Based Compensation

The Company’s stock-based awards consist of stock options, restricted stock awards, and employee stock purchase plan issued to grantees. The Company measures the estimated fair value of the stock-based awards on the date of grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective awards. The Company records expense for awards with service-based vesting using the straight-line method. The Company accounts for forfeitures as they occur.

In January 2021, the Company’s Board adopted the 2021 Equity Incentive Plan (the “2021 Plan”). The stockholders approved the 2021 Plan in January 2021, and it became effective upon the execution of the underwriting agreement for the IPO on February 4, 2021. Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or cash-based awards to individuals who are then employees, officers, directors or consultants of the Company. No further grants will be made under the 2014 Equity Incentive Plan.

In February 2021, the Board adopted the 2021 Employee Stock Purchase Plan (the "ESPP"). The Company recognizes stock-based compensation expense related to shares issued pursuant to its ESPP on a straight-line basis over the offering period, which is generally six months. The ESPP allows employees to purchase shares of the Company's common stock at a 15 percent discount. The ESPP also includes a six-month look-back provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering.

The Company classifies stock-based compensation expense in its statements of operations in the same manner in which the award recipient’s cash compensation costs are classified.

The fair value of each restricted stock award is determined based on the number of shares granted and the value of the Company’s common stock on the date of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model requires the use of a number of complex assumptions including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends, and expected term of the option. Prior to the Company’s initial public offering, the Company was a private company and lacked company-specific historical and implied fair value information. Therefore, the Board considered numerous objective and subjective factors to determine the fair value of the Company’s common stock options at each meeting in which awards were approved. The factors considered include, but are not limited to (i) the results of contemporaneous independent third-party valuations of the Company’s common stock and the prices, rights, preferences and privileges of the Company’s redeemable convertible preferred stock relative to those of its common stock; (ii) the lack of marketability of the Company’s common stock; (iii) actual operating and financial results;(iv) current business conditions and projections; (v) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions, and (vi) precedent transactions involving the Company’s shares.

The Company determined the expected stock volatility using a weighted-average of the historical volatility of a group of guideline companies that issued options with substantially similar terms, and expects to continue to do so until such time as the Company has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the simplified method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

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Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common stock outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents of potentially diluted securities outstanding for the period determined using the treasury-stock and if-converted methods. Potentially dilutive common stock equivalents are comprised of redeemable convertible preferred stock, and options and restricted stock units outstanding under the Company’s stock option plan. For the nine months ended September 30, 2021 and 2020, there was no difference in the number of shares used to calculate basic and diluted shares outstanding as the inclusion of the potentially dilutive securities would be anti-dilutive.

The following table summarizes the Company’s net loss per share:

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

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Segment Reporting

The Company has determined that the Chief Executive Officer is its Chief Operating Decision Maker. The Company’s Chief Executive Officer reviews financial information presented on an aggregate basis for the purposes of assessing the performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single operating and reportable segment, which is the business of designing, manufacturing and selling of disposable test kits.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements, or Accounting Standard Updates (“ASU”) are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

The Company is an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. This means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company has the option to adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and can do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company has elected to use the extended transition period for complying with new or revised accounting standards unless the Company otherwise early adopts select standards.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes specific exceptions to the general principles in Topic 740, improves application of income tax-related guidance and reduces complexity related to the accounting for income taxes. The standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within that year. Early adoption is permitted. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes the interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Entities will apply the guidance prospectively, except for certain amendments. The Company early adopted ASU 2019-12 effective January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements and related disclosures.  

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt this ASU beginning January 1, 2023. The Company is evaluating the potential impact of this standard on its financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is evaluating the potential impact of this standard on its financial statements.

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Note 3. Fair Value Measurements

The Company’s restricted cash equivalent is measured at fair value on recurring basis and is classified as Level 1 input. The restricted cash equivalent is a money market account that the Company opened in August 2020. The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.

The Company did not have any financial instruments measured at fair value on a recurring basis as of September 30, 2021.

The change in the fair value of the derivative liabilities and convertible notes accounted for at fair value is summarized below.

In order to determine the fair value of the convertible notes issued in December 2020, (the “2020B Notes”), the Company utilized the probability-weighted expected return method (“PWERM”). See additional information on the 2020B Notes in Note 7. The PWERM relies on a forward-looking analysis to determine the fair value. Under this method, discrete future outcomes, including an IPO and non-IPO scenarios, are weighted based on the estimated probability of each scenario. The PWERM is used when discrete future outcomes can be predicted with reasonable certainty based on a probability distribution. The fair value estimate relied upon in the PWERM scenario was based on likelihood of achieving four liquidity events, i) an initial public offering ii) merger or acquisition of the Company given prevailing market conditions iii) change of control iv) maturity of the convertible notes. Estimates and assumptions impacting the fair value measurement include future value under the various conversion scenarios, discount rate, discount period, discount factor and probability of occurrence of each scenario, as best estimated by management.  The estimated future value of the notes for each scenario is then discounted to present value using a discount rate. The future value was determined based on the estimated term to the event from valuation date as determined by management. The exit value in an IPO scenario is based on banker indications as well as an analysis of guideline companies that went public within the past few years that are broadly comparable to the Company. The exit value of an M&A scenario is determined by management with an estimated premium applied to the IPO value estimate. The discount rate, discount period, and probability of the occurrence of liquidity scenarios are estimates made by the management.

The convertible notes were measured at fair value one last time upon extinguishment on February 9, 2021 in connection with the Company’s IPO.

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Note 4. Other Financial Information

Inventory

Inventory consist of the following:

Other Current Assets

Other current assets consist of the following:

Property and Equipment, Net

Depreciation and amortization expense was $1.3 million and $2.2 million for the three and nine months ended September 30, 2021, respectively, compared to less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2020, respectively. During the three months ended September 30, 2021, the Company deployed $10.5 million of assets into production from construction-in-progress, with the major portion of the remaining balance expected to be placed in service in the fourth quarter of 2021. Construction-in-progress is related to the setup of manufacturing infrastructure and the purchase of long lead time manufacturing equipment as the Company grows its manufacturing capacity and invests in semi-automation. Construction-in-progress amounts recorded are not subject to depreciation as such assets are not yet available for their intended use.

During the quarter ended September 30, 2021, the Company identified a trigger for impairment assessment related to certain long-lived assets in the Auburn Hills, Michigan manufacturing facility. This facility is operated by Jabil, the commercial manufacturing provider of its COVID-19 test kit. While the Company has not yet committed a plan to exit the Auburn Hills facility or restructure its manufacturing operations, facts and circumstances indicate that the costs of certain assets, primarily those associated with a dry room affixed to the Auburn Hills facility, will not be recovered before the end of their previously estimated useful life. As a result, the Company has recorded an impairment charge of $1.6 million during the three months ended September 30, 2021, related to these assets.

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Accrued Liabilities

Accrued liabilities consist of the following:

Note 5. Commitments and Contingencies

Commitments

License Agreement with Eiken Chemical Co., Ltd.

In July 2020, the Company entered into a patent license agreement (“Eiken Agreement”), with Eiken Chemical Co., Ltd. (“Eiken”). Pursuant to the terms of the Eiken Agreement, Eiken granted the Company a royalty bearing non-transferable, non-assignable, sublicensable (to the Company’s affiliates), non-exclusive license under certain patents, which the Company refers to collectively as the Eiken Licensed Patents, relating, in part, to loop-mediated isothermal amplification, to develop, make, use, sell, offer for sale and dispose of any reagent, product, kit, device, equipment and/or system for nucleic acid-based in-vitro diagnostic tests for detection of SARS-CoV-2, which causes COVID-19, which the Company collectively refers to as the Initial Licensed Products, in the United States. The Company also has limited have-made rights with respect to the Eiken Licensed Patents.

Under the terms of the Eiken Agreement, the Company also has an option to expand the license to the Eiken Licensed Patents for the Initial Licensed Products outside of the United States for a payment of additional fees. In addition, the Company also has an option to expand the license to the Eiken Licensed Patents for new targets beyond the purpose of testing COVID-19 in the United States, which the Company collectively refer to as the Additional Licensed Products, and together with the Initial Licensed Products, the Licensed Products, for a payment of a one-time fee for each Additional Licensed Product and an additional fee for the expansion of the licensed territory outside of the United States for each Additional Licensed Product.

As partial consideration of the rights granted to the Company under the Eiken Agreement, the Company made an upfront payment to Eiken of $24. The Company also made an additional payment in July 2021 for $24 (based on the December 31, 2020 conversion ratio of 103.56 yen to one U.S. dollar). The Company recorded the upfront payment and second payment as research and development expense on the statement of operations for the year ended December 31, 2020 and September 30, 2021, respectively. In April 2021, the Company paid the first installment of the world-wide license in the amount of $9. The second installment for the world-wide license of $9 was paid in July 2021. In addition, the Company is obligated to pay a royalty in the low single-digit percentage on total net sales of all Licensed Products, that will be recorded as a cost of goods sold. Royalty expense for the three and nine months ended September 30, 2021 were $0.5 million and $1.0 million, respectively, compared to $0.0 million for the three and nine months ended September 30, 2020.

The Eiken Agreement will terminate on the expiration date of the last to expire valid claim of the Eiken Licensed Patents in all countries, the latest of which is June 2031. The Company may also terminate the Eiken Agreement at any time upon a certain number of days’ prior written notice to Eiken after Eiken has received the payment due July 2021 mentioned above and all royalties accrued up to the termination date. Eiken may terminate the Eiken Agreement upon (1) not receiving any royalties on Licensed Products for a certain period of time after the Company commences sale of such Licensed Product, (2) a breach by the Company or its affiliates that is not cured within a certain number of days after receiving written notice of the breach, (3) our bankruptcy or insolvency or certain other bankruptcy or insolvency events, (4) the assignment or attempt to assign the Eiken Agreement by the

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Company in violation of the Eiken Agreement or (5) a challenge by the Company or its affiliates of the validity of any of the Eiken Licensed Patents.

Technology Services Agreement with Jabil

On September 10, 2020, the Company entered into a technical services agreement (“Jabil TSA”), with Jabil, Inc. (“Jabil”), pursuant to which Jabil will use commercially reasonable efforts to perform certain technical services related to the development of components, assemblies and systems in relation to each project under the agreement as set forth in one or more statement of work, which may include the Company’s COVID-19 test kit and any of its future product candidates.

The Company is obligated to pay Jabil all amounts as set forth in each statement of work, which will specify the timeline and schedule for the performance of each service, the compensation to be paid by the Company to Jabil and other relevant terms and conditions.

After the initial term of three years, the Jabil TSA will automatically be renewed for successive periods of one year unless a party provides the other party with notice of its intention not to renew the agreement at least 180 days prior to the expiration of the then current term. Either party may terminate the Jabil TSA at any time upon the mutual written consent of both parties. In addition, the agreement may be terminated by either party (a) at will upon at least 180 days’ written notice to the other party, (b) for cause based on a material breach by the other party, subject to a 60-day cure period and (c) for certain bankruptcy or insolvency events enumerated under the agreement.

Manufacturing Services Agreement with Jabil

On September 10, 2020, the Company entered into a manufacturing services agreement (“Jabil MSA”) with Jabil, pursuant to which Jabil will manufacture, test, pack and ship certain electronic assemblies and systems in accordance with the Company’s specifications. Jabil may not subcontract any of its manufacturing services under the Jabil MSA without the Company’s prior written consent. The Company is obligated to provide, on a monthly basis, a rolling 12-month forecast to Jabil as well as 12-months of historical aggregate end customer demand at the finished product level, when available, which will be used to constitute written purchase orders from the Company, and the Company is obligated to purchase the quantity of products that is required by the first four months of each forecast. Jabil is entitled to reject any purchase orders that are not placed in accordance with the forecast. As of September 30, 2021, the Company has an outstanding non-cancellable purchase commitment of $26.3 million related to the Jabil MSA.

The Company is obligated to pay Jabil upon the completion of test kit purchase orders based on a volume pricing matrix, pursuant to which Jabil will review the actual purchases during the then-ending quarter and compare against the forecasted orders in the upcoming quarter. If Jabil determines that the actual purchases correspond to a different pricing band in the volume pricing matrix, Jabil will either issue (a) a credit for any excess price paid by us if the actual price is lower than the invoiced price or (b) an invoice for any shortfall if the actual price is higher than the invoiced price. Jabil may adjust the volume pricing matrix to reflect changes in costs on the first anniversary of its notice to the Company that production qualification can commence, or after the addition of new equipment or labor. The parties will review the prices on a quarterly basis and may revise them based on applicable costs and expenses.

The agreement is for an initial term of three years and automatically renewed for successive periods of one year, subject to either party’s notice of intent not to renew, delivered at least 180 days prior to the expiration of the then-current term. The Jabil MSA may be terminated at any time upon the mutual written consent of the parties. In addition, the agreement may be terminated by either party (a) at will upon at least 180 days’ written notice to the other party, (b) for cause based on a material breach by the other party, subject to a 30-day cure period and (c) for certain bankruptcy or insolvency events enumerated under the agreement.

Other Commitments

As of September 30, 2021, the Company has additional outstanding non-cancellable purchase commitments for $48.2 million for raw material purchases and fixed assets related to expanding the Company’s manufacturing capacity.

Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not been subject to any claims or required to defend any action related to its indemnification obligations.

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The Company’s amended and restated certificate of incorporation contains provisions limiting the liability of directors, and its amended and restated bylaws provide that the Company will indemnify each of its directors to the fullest extent permitted under Delaware law. The Company’s amended and restated certificate of incorporation and amended and restated bylaws also provide the Board with discretion to indemnify its officers and employees when determined appropriate by the Board. In addition, the Company has entered and expects to continue to enter into agreements to indemnify its directors and executive officers.

Legal Proceedings

From time to time, the Company may become involved in legal proceedings arising out of the ordinary course of its business. Management is currently not aware of any matters that will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Note 6. Leases

The Company has operating leases for corporate offices, operations and research and development facilities. These leases have remaining lease terms of 1 to 3 years. The lease of operations and research and development facilities includes costs for utilities and common area maintenance which are not included in the calculation of lease payments.

In July 2021, the Company entered into an operating lease agreement for space within a building in Emeryville. The lease commenced on July 6, 2021 and has a lease term expiring on June 30, 2024 with two options to extend the lease term for a period of 3 years each.

In August 2021, the Company entered into an operating lease agreement for space within a building in San Jose. The lease commenced on August 30, 2021 and has a 2-year term with an auto renewal for another 2-year period upon expiration of every such bi-annual term. On September 14, 2021, the Company amended the original operating lease for San Jose, to increase the amount of leased space. The expansion lease was effective as of September 1, 2021.

Leases with an initial term of 12 months or less are not recorded on the balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease terms. Operating leases with terms greater than 12 months are included in operating lease ROU assets and operating lease liabilities in the Company’s balance sheets as of September 30, 2021 and December 31, 2020. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Maturities of lease liabilities as of September 30, 2021, are as follows:

Additional information related to the Company’s leases was as follows for the three and nine months ended September 30, 2021:

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As of September 30, 2021 and December 31, 2020, the weighted-average remaining lease term for operating leases was 2.1 years and 2.4 years, respectively. As of September 30, 2021 and December 31, 2020, the weighted-average discount rate for operating leases was 7.4% and 13.1%, respectively.

Note 7. Convertible Notes Payable

2020A Notes

The Company entered into convertible promissory notes (the “2020A Notes”) in June and July 2020, with several lenders, including current investors. The lenders provided in aggregate $11.1 million in cash consideration to the Company. The 2020A Notes accrued simple interest at 4% per annum that was due and payable upon the request of the holders of a majority of the then outstanding principal amount of the 2020A Notes on or after June 12, 2021.

Pursuant to the 2020A Notes, the outstanding principal balance and unpaid accrued interest was automatically convertible into equity shares in the next equity financing round of at least $10 million (“2020A Qualified Financing”) at a price per share equal to the lower of (i) 80% of the price paid per share for equity securities by the investors in the 2020A Qualified Financing or (ii) the quotient resulting from dividing $95 million by the number of shares of outstanding common stock on a diluted basis immediately prior to the closing of the 2020A Qualified Financing. If the next financing was not a 2020A Qualified Financing (“2020A Non-Qualified Financing”), the holders of a majority of the outstanding principal of the 2020A Notes also had the option to convert the outstanding principal balance and unpaid accrued interest into equity shares issued in the 2020A Non-Qualified Financing on the same terms set forth for a 2020A Qualified Financing. In addition, if the Company consummated a change of control, it would be required to convert the outstanding principal balance of the 2020A Notes and any unpaid accrued interest into shares of a newly created series of preferred stock having the identical rights, privileges, preferences and restrictions as the Series B. Additionally, in the event that the 2020A Notes had not converted into equity securities by June 12, 2021, the outstanding principal and unpaid accrued interest of each of the 2020A Notes would have automatically converted into shares of Series B at a conversion price equal to the original issuance price.

In August 2020, the Company issued Series C for proceeds of approximately $58.7 million (see Note 8), which met the definition of a 2020A Qualified Financing. Additionally, the 2020A Notes and accrued and unpaid interest of $11.2 million were extinguished and converted into 2,593,110 shares of Series C at $4.3124 per share, which is 80% of the Series C issuance price of $5.3905. The Series C had a fair value of $5.3905 per share on the date of conversion. The Company extinguished the 2020A Notes at fair value along with the accrued interest of $44.

2020B Notes

The Company issued and sold convertible promissory notes (the “2020B Notes” and together with the “2020A Notes”, the “2020 Notes”) in December 2020, with several lenders, including current investors. The lenders provided an aggregate amount of $20.0 million in cash consideration to the Company. The 2020B Notes accrue simple interest at 0.15% per annum and this interest is due and payable upon the request of the holders of a majority of the then outstanding principal amount of the 2020B Notes on or after December 11, 2022.

The outstanding principal and unpaid accrued interest of each Note is convertible upon occurrence of one of the following events: Maturity or Change in Control. In the event of an equity financing including an IPO with proceeds of not less than $10.0 million (“2020B Qualified Financing”), 2020B notes automatically convert into equity securities sold in the 2020B Qualified Financing at 80% of the price paid for securities sold in the 2020B Qualified Financing. In the event of an equity financing or IPO of less than $10.0 million, the majority holders of the 2020B Notes have the option to treat the offering as a 2020B Qualified Financing at 80% of the price paid for securities sold in the round (“2020B Non-Qualified Financing”). In the case of maturity, all unpaid interest and principal shall be due and payable on the maturity date. If the notes remain outstanding on the maturity date, then the outstanding principal balance and any unpaid accrued interest is automatically converted in Series C Preferred stock based on the Series C original issue price of $5.3905. In addition, if the Company consummates a change of control as defined in Note 8, the holders of the 2020B Notes will receive shares of the Company’s common stock at 70% of the price paid for shares of common stock.

The 2020 Notes are considered freestanding instruments that qualify as liabilities under ASC Topic 480, Distinguishing Liabilities from Equity as the Company is committed to issue an instrument that ultimately may require a transfer of assets. The 2020 Notes were accounted for at fair value and re-measured at each reporting date. Accordingly, the Company classified the 2020 Notes as a liability at their fair value and adjusts the instruments to fair value at each balance sheet date until the 2020 Notes are converted. The Company recorded a change in the fair value of the 2020A Notes of $2.8 million recognized as remeasurement of derivative liabilities

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and convertible notes in other income (expense), net in the statements of operations prior to their extinguishment in August 2020.  The Company recorded a change in the fair value of the 2020B Notes of $4.7 million recognized as remeasurement of derivative liabilities and convertible notes in other income (expense), net in the statements of operations during the year ended December 31, 2020.

The Company recorded a change in the fair value of the 2020B Notes of $0.3 million recognized as remeasurement of derivative liabilities and convertible notes in other income (expense), net in the statement of operations during the first quarter of 2021.

Conversion of Convertible Notes Payable

On February 9, 2021, upon the closing of the IPO, the 2020B Notes and accrued interest automatically converted into shares of common stock at a conversion price equal to 80% of the IPO price per share, which resulted in the issuance of 1,470,947 shares of common stock.

Note 8. Capital Stock

Redeemable Convertible Preferred Stock

Under the Company’s amended and restatement certificate of incorporation, the Company is authorized to issue 14,382,437 shares of preferred stock designated as Series A, of which 3,274,913 were issued in October 2015.

On March 6, 2019, the Company amended and restated its certificate of incorporation to, among other things, increase its authorized shares of redeemable convertible preferred stock from 14,382,437 to 27,858,121 shares, of which 13,742,223 shares are designated as Series B and set forth the rights, preferences and privileges of the Series B. On July 24, 2019, the Company amended and restated its certificate of incorporation to increase its authorized shares of redeemable convertible preferred stock from 27,858,121 to 28,931,242, including increasing the shares designated as Series B to 14,815,344. On November 4, 2019, the Company amended and restated its certificate of incorporation to increase its authorized shares of redeemable convertible preferred stock from 28,931,242 to 29,208,635, including increasing the shares designated as Series B to 15,092,737.

In March 2019, the Company entered into an agreement with new and existing preferred stockholders, to issue 1,608,300 shares of Series B for $7.5 million in gross proceeds. In addition, as discussed in Note 7, the Company converted all outstanding 2018 Notes and related accrued interest in the amount of $4.1 million into 1,097,048 shares of Series B. From June to August 2019, the Company entered into agreements with new and existing preferred stockholders, to issue an additional 731,824 shares of Series B for $3.4 million in gross proceeds. The Company incurred approximately $83 of issuance costs related to Series B during the year ended December 31, 2019, which has been netted against the gross proceeds.

On January 9, 2020, the Company amended and restated its certificate of incorporation to increase its authorized shares of redeemable convertible preferred stock to 45,389,864 including increasing the shares designated as Series B to 31,273,966. On August 6, 2020, the Company amended and restated its certificate of incorporation to increase its authorized shares of redeemable convertible preferred stock to 103,355,827, of which 30,996,574 shares are designated as Series B and 58,243,355 of shares are designated as Series C and set forth the rights, preferences and privileges of Series C.

In August 2020, the Company entered into an agreement with new and existing preferred stockholders, to issue 13,512,578 shares of Series C for $69.8 million in proceeds from the sale of Series C and the conversion of convertible notes and related accrued interest in the amount into 2,593,110 shares of Series C.

On February 9, 2021, in connection with the closing of the IPO, all shares of redeemable convertible preferred stock converted into 23,978,747 shares of common stock.

On February 9, 2021, the Company amended and restated its certificate of incorporation to authorize two classes of stock, respectively, common stock and preferred stock. The total number of shares which the Company is authorized to issue is 210,000,000 shares. 200,000,000 shares of which shall be common stock, having a par value per share of $0.001. 10,000,000 shares of which shall be preferred stock, having a par value per share of $0.001.

The Company has not issued any preferred stock since the closing of the IPO.

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As of December 31, 2020, the Company’s redeemable convertible preferred stock consisted of the following:

Dividends

The Company may not declare, pay or set aside any dividends on shares of the Company unless the holders of the outstanding Series C first receive a dividend on each outstanding share of Series C in an amount equal to the dividend payable per share if all participating shares had been converted into common stock multiplied by the number of shares of common stock issuable upon the conversion of Series C. After payment or setting aside dividends to Series C, Series B are entitled to receive, prior and in preference to holders of common stock, a dividend on each outstanding share of Series B in an amount equal to the dividend payable per share if all participating shares had been converted into common stock multiplied by the number of shares of common stock issuable upon the conversion of Series B. After payment or setting aside dividends to Series B, Series A are entitled to receive, prior and in preference to holders of common stock, a dividend on each outstanding share of Series A in an amount equal to the dividend payable per share if all participating shares had been converted into common stock multiplied by the number of shares of common stock issuable upon the conversion of Series A.

As of September 30, 2021, the Board had not declared any dividends.

Liquidation Preference and Redemption

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, the holders of shares of Series C then outstanding were entitled to be paid before any payment is made to the holders of the Series B, Series A or common stock, the Series C liquidation preference, which is equal to the greater of (i) one times the Series C original issue price, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series C been converted into common stock. Upon satisfaction of Series C liquidation preference, the Series B liquidation preference, which is equal to the greater of (i) the per share liquidation preference plus all declared but unpaid dividends or (ii) the amount per share as would be payable had all shares of Series B been converted into common stock, is paid prior to any other preferences. Upon the satisfaction of the Series B liquidation preference, the Series A liquidation preference, which is equal to the greater of (i) the per share liquidation preference plus all declared but unpaid dividends or (ii) the amount per share as would be payable had all shares of Series A been converted into common stock, is paid prior to any additional preferences. Following the satisfaction of the liquidation preferences, all holders of shares of common stock participate in any remaining distribution on a pro rata basis based on the number of shares of common stock then held. As of December 31, 2020, the liquidation preference per share for Series A, Series B, and Series C was $5.1185, $4.6616 and $5.3905 respectively.

Each of the following events was considered a “Deemed Liquidation Event” unless the holders of at least a majority of the outstanding shares of redeemable convertible preferred stock on an as-converted basis elect otherwise by written notice sent to the Company at least five (5) days prior to the effective date of any such event:

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Conversion

Each share of redeemable convertible preferred stock would be automatically convertible into common stock at its then-effective conversion price (discussed below) (i) upon the vote or written consent of the holders of at least a majority of the then outstanding shares of redeemable convertible preferred stock on an as-converted basis, or (ii) upon the completion of a firm underwritten public offering of the Company’s common stock with gross proceeds of at least $50.0 million.

In addition, each share of the Company’s redeemable convertible preferred stock would be convertible, at the option of the holder, into shares of common stock by dividing the initial conversion prices by the conversion price in effect at the time of conversion.

The following table summarizes the number of shares of common stock into which each share of redeemable convertible preferred stock could have been converted as of December 31, 2020: