Sonendo, Inc. - Quarter Report: 2023 March (Form 10-Q)

10-Q

za ROC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐	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 Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 2, 2023, the registrant had 51,289,278 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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		32

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. The forward-looking statements included herein are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control, include, but are not limited to those described in Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, Item 1A. Risk Factors of our Annual Report on Form 10-K for fiscal year 2022 and in the filings we make with Securities and Exchange Commission (the "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 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 those offerings.

•

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 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.

•

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 may need additional funding to finance our planned operations, and may not be able to raise capital when needed.

•

Our history of recurring losses and accumulated deficit raise substantial doubts about our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

•

Our TDO software and 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.

•

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.

•

Our products and operations are subject to extensive government regulation and oversight in the United States.

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

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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SONENDO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)


	March 31,			December 31,
	2023			2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,648		$	17,665
Short-term investments		62,299			73,784
Accounts receivable, net		6,432			5,798
Inventory		15,969			15,462
Prepaid expenses and other current assets		9,091			8,397
Total current assets		106,439			121,106
Property and equipment, net		2,843			2,860
Operating lease right-of-use assets		3,932			2,455
Intangible assets, net		2,126			2,292
Goodwill		8,454			8,454
Other assets		118			118
Total assets	$	123,912		$	137,285
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,392		$	4,438
Accrued expenses		4,217			5,357
Accrued compensation		2,429			3,616
Operating lease liabilities		1,246			1,114
Other current liabilities		1,949			2,191
Total current liabilities		15,233			16,716
Operating lease liabilities, net of current		2,470			1,095
Term loan, net of current		36,891			36,746
Other liabilities		735			773
Total liabilities		55,329			55,330
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— 51,252,466 shares as of March 31, 2023 and 49,974,281 shares as of December 31, 2022		51			50
Additional paid-in-capital		453,002			451,060
Accumulated other comprehensive loss		(5	)		(61	)
Accumulated deficit		(384,465	)		(369,094	)
Total stockholders’ equity		68,583			81,955
Total liabilities and stockholders’ equity	$	123,912		$	137,285

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2023			2022
Product revenue	$	8,678		$	7,203
Software revenue		2,046			1,830
Total revenue		10,724			9,033
Cost of sales		7,378			6,754
Gross profit		3,346			2,279
Operating expenses:
Selling, general and administrative		14,666			11,985
Research and development		3,494			4,850
Total operating expenses		18,160			16,835
Loss from operations		(14,814	)		(14,556	)
Other expense, net:
Interest and financing costs, net		(557	)		(966	)
Loss before income tax expense		(15,371	)		(15,522	)
Income tax expense		—			—
Net loss	$	(15,371	)	$	(15,522	)
Other comprehensive income (net of tax):
Unrealized gain on short-term investments		56			—
Comprehensive loss	$	(15,315	)	$	(15,522	)
Net loss per share – basic and diluted	$	(0.16	)	$	(0.59	)
Weighted-average shares outstanding – basic and diluted		93,391,444			26,405,252

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except shares amount)


	Common Stock				Additional		Accumulated						Total
					Paid-In		Other			Accumulated			Stockholders’
	Shares		Amount		Capital		Comprehensive Loss			Deficit			Equity
Balance at December 31, 2022		49,974,281	$	50	$	451,060	$	(61	)	$	(369,094	)	$	81,955
Employee stock plans		216,105		—		—		—			—			—
Stock-based compensation		—		—		1,942		—			—			1,942
Exercise of pre-funded warrants		1,062,080		1		—		—			—			1
Unrealized gain on short-term investments		—		—		—		56			—			56
Net loss		—		—		—		—			(15,371	)		(15,371	)
Balance at March 31, 2023		51,252,466	$	51	$	453,002	$	(5	)	$	(384,465	)	$	68,583


	Common Stock							Additional					Total
					Treasury			Paid-In		Accumulated			Stockholders’
	Shares		Amount		Stock			Capital		Deficit			Equity
Balance at December 31, 2021		26,336,536	$	26	$	(51	)	$	384,132	$	(312,044	)	$	72,063
Employee stock plans		82,572		—		—			242		—			242
Stock-based compensation		—		—		—			1,394		—			1,394
Net loss		—		—		—			—		(15,522	)		(15,522	)
Balance at March 31, 2022		26,419,108	$	26	$	(51	)	$	385,768	$	(327,566	)	$	58,177

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2023			2022
Cash flows from operating activities:
Net loss	$	(15,371	)	$	(15,522	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		339			246
Amortization of intangible assets		166			166
Amortization of right-of-use lease assets		325			269
Stock-based compensation		1,942			1,394
Amortization of debt issuance costs		146			124
Accretion of available for sale securities, net		(634	)		—
Changes in operating assets and liabilities:
Accounts receivable, net		(634	)		(186	)
Inventory		(561	)		(1,984	)
Prepaid expenses and other assets		(694	)		(416	)
Accounts payable		896			(826	)
Accrued expenses and other liabilities		(1,614	)		(423	)
Deferred revenue		(95	)		(24	)
Accrued compensation		(1,187	)		(863	)
Net cash used in operating activities		(16,976	)		(18,045	)
Cash flows from investing activities:
Purchases of available-for-sale securities		(15,125	)		—
Proceeds from maturities of available-for-sale securities		27,300			—
Purchases of property and equipment		(210	)		(56	)
Net cash provided by (used in) investing activities		11,965			(56	)
Financing activities:
Payment of common stock issuance costs		—			(598	)
Proceeds from exercise of common stock options		—			242
Proceeds from exercise of pre-funded warrants		1			—
Payment of contingent earnout		—			(117	)
Principal repayments on finance lease		(7	)		(13	)
Net cash used in financing activities		(6	)		(486	)
Net decrease in cash and cash equivalents		(5,017	)		(18,587	)
Cash and cash equivalents at beginning of period		17,665			84,641
Cash and cash equivalents at end of period	$	12,648		$	66,054

Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	1,387		$	848
Supplemental schedule of non-cash investing and financing activities:
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	1,802		$	168
Lease liabilities recorded for operating lease right-of-use assets	$	(1,802	)	$	(168	)

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

SONENDO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Description of Business

Sonendo, Inc. (“Sonendo” or the “Company”) was incorporated in June 2006 pursuant to the laws of the State of Delaware under the name Dentatek Corporation. In March 2011, the Company changed its name to Sonendo, Inc. The Company is a medical technology company that has developed and is commercializing the GentleWave System to treat tooth decay. The Company’s principal market is the United States. The Company’s products include the GentleWave System, which is cleared by the United States (“U.S.”) Food and Drug Administration (“FDA”) for sale in the U.S. and approved by Health Canada in Canada, along with the system’s sterilized, single-use procedure instruments ("PIs"). In addition, the Company offers practice management software to enable an integrated digital office for dental practitioners.

Basis of Presentation

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”) on a consistent basis with the Company’s annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2022 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, 2022 filed with the SEC on March 8, 2023.

Liquidity

On September 27, 2022, the Company completed a private placement (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. 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' Equity, for additional information.

As of March 31, 2023, the Company had cash and cash equivalents and short-term investments of $74.9 million.

The Company has a limited operating history, and the revenue and income potential of the Company’s business and market are unproven. The Company has experienced net losses and negative cash flows from operations since its inception and as of March 31, 2023 had an accumulated deficit of $384.5 million. During the three months ended March 31, 2023, the Company incurred net losses of $15.4 million and used $17.0 million of cash and cash equivalents in operations. In April 2023, the Company has received approximately $3.2 million payment of the total $4.4 million related to Employee Retention Credit ("ERC") recognized in other income in 2022. 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.

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.

The Company plans to fund its operations, capital funding and other liquidity needs, using existing cash, cash equivalents and short-term investments and, to the extent available, cash generated from commercial operations. If the Company's actual operating expenses significantly exceed its operating plan or its debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9), the Company may have to significantly delay or scale back its operations to reduce working capital requirements. In addition, the Company would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of its assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing the Company’s commercial efforts, development activities and other discretionary expenditures that are within the Company’s control. These reductions in expenditures, if required, may have an adverse impact on the Company’s ability to achieve certain of 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 Sunday, March 12, 2023, the U.S. Treasury Department, Federal Reserve and FDIC announced that all bank depositors would have access to their money starting Monday, March 13, 2023. On March, 27, 2023, SVB began operating as a division of First Citizens Bank. As of March 31, 2023, the Company held approximately $0.6 million in operating accounts at SVB. The Company’s 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.

Effects of the Macroeconomic Environment and COVID-19

The Company’s unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2023 reflect the Company’s estimates of the impact of the macroeconomic environment, including the impact of inflation, higher interest rates, and the COVID-19 pandemic. 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.

The COVID-19 pandemic negatively impacted the Company's operations, revenue and overall financial condition, and may negatively impact its operations, revenue, and overall financial condition in the future if new and more transmissible vaccine-resistant variants emerge. The Company's customers, including endodontists, have experienced significant financial hardship and some of them may never fully recover. The Company has also experienced disruptions, and may experience future disruptions, including: delays in capital and clinical sales representatives becoming fully trained and productive; difficulties and delays in dental practitioner outreach and training dental practitioners to use its GentleWave System; travel restrictions; delays in initiation, enrollment and follow-ups of its clinical studies; challenges with maintaining adequate supply from third-party manufacturers of components and finished goods and distribution providers; and access to dental practitioners for training and case support.

The Company expects that any future restrictions on dental procedures, as a result of COVID-19 or the emergence of any vaccine resistant variant or other pandemic, epidemic or infectious disease outbreak, and other related issues including supply chain disruptions, would have a negative impact on its operations, revenue and overall financial condition.

Operating Segments

The Company has business activity and operates two operating and reportable segments: Product and Software. Operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated regularly by the chief operating decision maker, who is the Company’s chief executive officer (“CEO”), for the purpose of allocating resources and evaluating performance.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to avail itself of this exemption and, therefore, for new or revised accounting standards applicable to public companies, the Company will be subject to an extended transition period until those standards would otherwise apply to private companies.

2. Summary Accounting Policies and Recent Accounting Pronouncements

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Summary of Accounting Policies, of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make informed estimates, judgements and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and disclosures in the accompanying notes, including estimates of probable losses and expenses, as of the date of the accompanying unaudited condensed consolidated financial statements. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of these unaudited condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including the expected business and operational changes, the sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Actual results could differ materially from the estimates and assumptions used in the preparation of the accompanying unaudited condensed consolidated financial statements under different assumptions or conditions.

Revenue Recognition

Contracts with Customers

The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. Specifically, the Company applies the following five core principles to recognize revenue: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

Product revenue is generated from sales of the GentleWave Console and related PIs and accessories. Software revenue is generated from sales of TDO's endodontist practice management software licenses. The Company’s products are sold primarily in the United States and Canada directly to customers through its field sales force.

Performance Obligations

The Company’s performance obligations primarily arise from the manufacture and delivery of the GentleWave System, related PIs and accessories, and the delivery or license of TDO software and related ancillary services. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Consideration may be variable based on volume.

The Company considers the individual deliverables in its product offering as separate performance obligations and assesses whether each promised good or service is distinct. The total contract transaction price is determined based on the consideration expected to be received, based on the stated value in contractual arrangements or the estimated cash to be collected in no-contracted arrangements, and is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The stand-alone selling price is based on an observable price offered to other comparable customers. The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer and market conditions. The Company regularly reviews and updates standalone selling prices as necessary. The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company estimates related variable consideration at the point of sale, including discounts, product returns, refunds, and other similar obligations.

Revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by the Company’s performance. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met, and the Company has transferred control of the goods to the customer. Product revenue is recognized at a point in time when the Company has transferred control to the customer, which is generally when title of the goods transfers to the customer. Software is licensed via delivery to the customer or via a service arrangement under which cloud-based access is provided on a subscription basis (software-as-a-service). When a fixed up-front license fee is received in exchange for the delivery of software, revenue is recognized at the point in time when the delivery of the software has occurred. When software is licensed on a subscription basis, revenue is recognized over the respective license period.

The Company also sells extended service contracts on its GentleWave Systems. Sales of extended service contracts are recorded as deferred revenue until such time as the standard warranty expires, which is generally up to two years from the date of sale. Service contract revenue is recognized on a straight-line basis over time consistent with the life of the related service contract in proportion to the costs incurred in fulfilling performance obligations under the service contract.

Revenue for technical support and other services is recognized ratably over the performance obligation period.

The Company generally does not experience returns. If necessary, a provision is recorded for estimated sales returns and allowances and is deducted from gross product revenue to arrive at net product revenue in the period the related revenue is recorded. These estimates are based on historical sales returns and allowances and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from these estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves established, a reduction or increase to revenue will be recorded in the period in which such a determination is made.

All non-income government-assessed taxes (sales and use taxes) collected from the Company’s customers and remitted to governmental agencies are recorded in accrued expenses 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:


	March 31,		December 31,
	2023		2022
	(in thousands)
Extended service contracts	$	319	$	336
Subscription software licenses		403		481
Total contract liabilities		722		817
Less: long-term portion		140		—
Contract liabilities – current	$	582	$	817

Contract liabilities are included within other current liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Revenue recognized during the three months ended March 31, 2023 and 2022 that was included in the contract liability balance as of December 31, 2022 and 2021 was $0.4 million in each year.

Disaggregation of revenue

The Company disaggregates revenue from contracts with customers by segment and by the timing of when goods and services are transferred, which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected.

The following table provides information regarding revenues disaggregated by segment and the timing of when goods and services are transferred:


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Product revenue recognized at a point in time	$	8,524	$	7,027
Product revenue recognized over time		154		176
Software revenue recognized at a point in time		449		219
Software revenue recognized over time		1,597		1,611
Total	$	10,724	$	9,033

No individual customer accounted for more than 10% of sales for the three months ended March 31, 2023 and 2022.

Warranty Reserve

The Company provides a standard warranty on its GentleWave Systems for a specified period of time. For the three months ended March 31, 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 of future conditions and standard maintenance schedules. The Company evaluates this reserve on a regular basis and makes adjustments as necessary.

The following table provides a reconciliation of the change in estimated warranty liabilities for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023			2022
	(in thousands)
Balance at beginning of period	$	1,930		$	1,620
Provision for warranties issued		195			310
Warranty costs incurred		(368	)		(315	)
Balance at end of period	$	1,757		$	1,615
Current portion	$	1,335		$	1,153
Non-current portion		422			462
Total	$	1,757		$	1,615

The warranty liability, current and non-current, are included in other current liabilities and other liabilities, respectively, on the unaudited condensed consolidated balance sheets.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”). 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 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. Balance Sheet Components

Inventory

Inventory consisted of the following:


	March 31,		December 31,
	2023		2022
	(in thousands)
Raw materials	$	9,331	$	9,269
Work in process		183		427
Finished goods		6,455		5,766
Total inventory	$	15,969	$	15,462

The Company recorded a reserve for excess and obsolete inventory of $0.6 million and $0.5 million at March 31, 2023 and December 31, 2022, respectively.

Intangible assets, net

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


	March 31, 2023
	Weighted Average Amortization Period	Gross		Accumulated Amortization		Net
	(in years)	(in thousands)
Developed Technology (5 - 10 years)	4.0	$	2,445	$	1,212	$	1,233
Customer relationships (7 years)	2.8		1,910		1,216		694
Tradenames (10 years)	0.8		360		161		199
Total intangible assets	7.6	$	4,715	$	2,589	$	2,126


	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 $0.2 million for the three months ended March 31, 2023 and 2022, with approximately $0.1 million amortization expense recorded in cost of sales and $0.1 million recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

The following table presents estimated future annual amortization expense related to intangible assets, net as of March 31, 2023:


	Future Intangible Asset Amortization Expenses
	(in thousands)
2023 (remaining nine months)	$	452
2024		442
2025		386
2026		169
2027 and thereafter		677
Total future amortization expense	$	2,126

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 those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. These include the Black-Scholes option-pricing model which uses inputs such as expected volatility, risk-free interest rate and expected term to determine fair market valuation.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification at each reporting date. Changes in the ability to observe valuation inputs may result in a 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 March 31, 2023 and December 31, 2022:


	March 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)
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	12,098	$	12,098	$	—	$	—
Total cash equivalents at fair value		12,098		12,098		—		—
Short-term investments:
U.S. treasury securities		28,257		28,257		—		—
Commercial paper and corporate bonds		29,602		—		29,602		—
U.S. government agency bonds		4,440		—		4,440		—
Total short-term investments at fair value		62,299		28,257		34,042		—
Total assets at fair value	$	74,397	$	40,355	$	34,042	$	—


	March 31, 2023
	Fair Value		Cost Basis		Amounts Recognized in Accumulated Other Comprehensive Loss
					Unrealized Gains		Unrealized Losses
	(in thousands)
Available-for-sale securities:
U.S. treasury securities	$	28,257	$	28,265	$	10	$	(18	)
Commercial paper and corporate bonds		29,602		29,610		—		(8	)
U.S. government agency bonds		4,440		4,430		11		—
Total available-for-sale securities at fair value	$	62,299	$	62,305	$	21	$	(26	)


	December 31, 2022
	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)
Assets:
Cash equivalents:
Money market funds	$	12,253	$	12,253	$	—	$	—
Commercial paper		1,998		—		1,998		—
U.S. government agency bonds		1,991		—		1,991		—
Total cash equivalents at fair value		16,242		12,253		3,989		—
Short-term investments:
U.S. treasury securities		33,622		33,622		—		—
Commercial paper and corporate bonds		40,162		—		40,162		—
Total short-term investments at fair value		73,784		33,622		40,162		—
Total assets at fair value	$	90,026	$	45,875	$	44,151	$	—


	December 31, 2022
	Fair Value		Cost Basis		Amounts Recognized in Accumulated Other Comprehensive Loss
					Unrealized Gains		Unrealized Losses
	(in thousands)
Available-for-sale securities:
U.S. treasury securities	$	33,622	$	33,676	$	—	$	(54	)
Commercial paper and corporate bonds		40,162		40,169		—		(7	)
Total available-for-sale securities at fair value	$	73,784	$	73,845	$	—	$	(61	)

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. 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 March 31, 2023 and December 31, 2022 included 27,397 warrants with exercise price of $10.95 per share and 304,106 warrants with exercise price of $12.00 per share in each period. These warrants expire between December 2023 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"). 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's common stock. The threshold is subject to the Purchaser's 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' prior notice from the Purchaser to the Company. As of March 31, 2023, approximately 1.1 million shares have been issued pursuant to the exercise of pre-funded warrants and 42.2 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. Stock Based Compensation

Stock-based Compensation Expenses

The following tables present the Company's stock-based compensation for stock-settled awards by type (i.e., stock options and restricted stock units (“RSUs”)) granted under the Company's incentive plans, and rights to purchase shares of common stock issued under the Company'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 three months ended March 31:


	Three months ended March 31,
	2023		2022
	(in thousands)
Options	$	831	$	883
RSUs		1,066		511
ESPP	45			—
Total stock-based compensation expense	$	1,942	$	1,394

	Three months ended March 31,
	2023		2022
	(in thousands)
Cost of sales	$	148	$	101
Selling, general and administrative		1,562		978
Research and development		232		315
Total stock-based compensation expense	$	1,942	$	1,394

Compensation cost related to unvested stock options and RSUs will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of March 31, 2023.


	Unamortized Compensation Costs		Weighted Average Service Period
	(in thousands)		(years)
Options	$	4,978	2.1
RSUs		13,456	3.2
Total unamortized compensation cost	$	18,434

Plan Activities

The following table summarizes stock option activity under the Company'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
Forfeited		(4,333	)	$	2.34
Expired		(3,541	)	$	2.34
Options outstanding, March 31, 2023		2,748,494		$	2.84	6.7	$	192
Options vested and exercisable, March 31, 2023		1,724,176		$	2.74	5.6	$	111
Vested and expected to vest after March 31, 2023		2,631,002		$	2.83	6.6	$	183

There were no options granted during the three months ended March 31, 2023. The weighted-average grant-date fair value of options granted during the three months ended March 31, 2022 was $5.72 per share.

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


	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested Options, December 31, 2022		1,118,088	$	6.23
Non-vested Options, March 31, 2023		1,024,318	$	6.13

The total fair value of shares vested during the three months ended March 31, 2023 and 2022 was $0.7 million in each period.

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 months ended March 31, 2023, the

Company did not repurchase any shares. There was no material number of shares of common stock subject to repurchase as of March 31, 2023. 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 months ended March, 2023. During the three months ended March 31, 2022, early exercised stock options vested were immaterial.

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


	Number of Shares			Weighted Average Grant Date Fair Value
RSUs outstanding, December 31, 2022		2,858,649		$	4.49
Granted		2,988,302		$	1.65
Vested		(216,253	)	$	5.67
Forfeited		(32,169	)	$	5.28
RSUs outstanding, March 31, 2023		5,598,529		$	2.93

7. Leases

The Company leases office space under operating leases with expirations ranging from March 2025 to December 2026, 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 March 31, 2023, the Company has not entered into any leases that have not yet commenced that would entitle the Company to significant rights or create additional obligations.

The Company determines whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from the use of the property, plant, and equipment.

The Company has elected the practical expedient to not separate its lease component from non-lease component for its real estate leases. The Company has elected the practical expedient not to apply the lease recognition requirements to short-term leases with an initial term of 12 months or less.

The Company uses either its incremental borrowing rate or the implicit rate in the lease agreement as the basis to calculate the present value of future lease payments at lease commencement. The incremental borrowing rate represents the rate the Company would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment.

Future minimum lease payments under these leases are as follows:


	Lease Amounts
	(in thousands)
2023 (remaining nine months)	$	999
2024		1,555
2025		1,010
2026		645
Total future minimum lease payments		4,209
Less: Imputed Interest		(493	)
Present value of operating lease liabilities	$	3,716
Less: Current portion		1,246
Long-term operating lease liabilities	$	2,470

Weighted average remaining lease term in years		2.99
Weighted average discount rate		8.79	%

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


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Rent expense	$	386	$	317
Variable lease costs		32		26
Total	$	418	$	343

Cash paid for operating leases	$	376	$	313


	Three Months Ended March 31,
	2023		2022
	(in thousands)
Cost of sales	$	70	$	58
Selling, general and administrative		348		285
Total	$	418	$	343

8. Commitments and Contingencies

Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business, including without limitation, actions with respect to intellectual property, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible issues based on the developments in these proceedings or matters. A liability is recorded in the accompanying unaudited condensed consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

9. Term Loan

Perceptive loan

On 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, subject to the Company having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date. The First Amendment 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, subject to (i) the Company having generated at least $46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) the closing market capitalization of the Company being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to Perceptive. The Company borrowed the first tranche of $10.0 million on July 29, 2022 and received net proceeds of $9.9 million.

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 three months ended March 31, 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") to the Perceptive Loan Agreement to replace the existing benchmark rate from the one-month LIBOR with a one-month Secured Overnight Financing Rate ("SOFR"). All other terms remain unchanged on the original agreement.

For the three months ended March 31, 2023 and 2022, the effective interest rate of the Perceptive loan was 16.71% and 14.59%, respectively. As of March 31, 2023 and 2022, the fair value of the Perceptive loan approximates its carrying amount.

Future principal repayments on the Perceptive loan as of March 31, 2023, are as follows:


	Principal
	(in thousands)
2026	$	40,000
Total	$	40,000

The 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 12 consecutive month period on each calendar quarter-end until June 30, 2026. These thresholds increase over time and range from $26.4 million for the twelve-month period ended September 30, 2021 to $95.3 million for the twelve month period ended June 30, 2026. Failure to satisfy these financial covenants would constitute an event of default under the agreement. For the three months ended March 31, 2023, the Company was in compliance with all financial covenants and conditions required by the outstanding Perceptive Loan Agreement, as amended.

10. Income Taxes

The Company maintains a full valuation allowance against its net deferred tax assets as of March 31, 2023 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, 2022 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 March 31, 2023.

The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years 2020 through 2022 remain open to examination and the state returns remain subject to examination for tax years 2019 through 2022. 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. Segment Information

The Company operates and reports its results in two business segments, Product and Software. The Company reports segment information based on the management approach. The management approach designates the internal reporting used by the Company's chief operating decision maker ("CODM") for decision making and performance assessment as the basis for determining the Company’s reportable segments. The performance measures of the Company’s reportable segments are primarily income (loss) from operations. Income (loss) from operations for each segment includes all revenues, related cost of net revenues, gross margin and operating expenses directly attributable to the segment.

The Company’s Product segment includes sales of the Company's GentleWave System console and related accessories and instruments.

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

The following tables present the Company’s segment information for the three months ended March 31:


	2023									2022
	(in thousands, except percentage data)
	Product			Software			Total			Product			Software			Total
Revenue	$	8,678		$	2,046		$	10,724		$	7,203		$	1,830		$	9,033
Cost of sales		6,700			678			7,378			6,078			676			6,754
Gross profit		1,978			1,368			3,346			1,125			1,154			2,279
Gross margin		23	%		67	%		31	%		16	%		63	%		25	%
Operating expenses:
Selling, general and administrative		14,114			552			14,666			11,526			459			11,985
Research and development		2,927			567			3,494			4,431			419			4,850
Total operating expenses		17,041			1,119			18,160			15,957			878			16,835
Income (loss) from operations	$	(15,063	)	$	249		$	(14,814	)	$	(14,832	)	$	276		$	(14,556	)

Segment Assets:


	As of March 31, 2023		As of December 31, 2022
	(in thousands)
Product	$	112,473	$	125,713
Software		11,439		11,572
Total	$	123,912	$	137,285

12. 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 March 31,
	2023			2022
	(in thousands, except shares and per share data)
Numerator:
Net loss	$	(15,371	)	$	(15,522	)
Denominator:
Weighted-average shares outstanding – basic and diluted		93,391,444			26,405,252
Net loss per share – basic and diluted	$	(0.16	)	$	(0.59	)

The following potentially dilutive securities were excluded from the computation of diluted net loss per share calculations for the periods presented because the impact of including them would be anti-dilutive:


	Three Months Ended March 31,
	2023		2022
Stock options		2,748,494		3,024,956
RSUs		5,598,529		2,702,762
Warrants		331,503		331,503
Total		8,678,526		6,059,221

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. 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, 2022 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"), 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 March 31, 2023, we had an installed base of approximately 1,005 GentleWave Systems. We generated revenue of $10.7 million and incurred a net loss of $15.3 million for the three months ended March 31, 2023, compared to revenue of $9.0 million and a net loss of $15.5 million for the three months ended March 31, 2022. As of March 31, 2023, we had cash and cash equivalents and short-term investments of $74.9 million, an accumulated deficit of $384.5 million, and $40.0 million in principal outstanding under our term loan facility. In April 2023, the Company has received approximately $3.2 million payment of the total $4.4 million related to 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, 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 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.

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 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 incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional capital through collaboration agreements, licensing 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 not be favorable to us. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.

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:

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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 increase 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.

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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.

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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, 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 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 launched in 2022 to have a positive impact on the gross margin profile of our single-use PIs. We anticipate that the combination of these strategies will drive margin improvement.

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Commercial organization: As of March 31, 2023, our sales and customer support team consisted of approximately 87 employees. We intend to continue to make investments in our commercial organization by increasing 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 grow our commercial organization and the speed at which newly hired personnel become effective can impact our revenue growth and our costs incurred in anticipation of such growth.

Effects of the Macroeconomic Environment and the COVID-19 Pandemic

Our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2023 reflect our estimate of the impact of the macroeconomic environment, including the impact of inflation, higher interest rates and the COVID-19 pandemic. 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.

The COVID-19 pandemic negatively impacted our operations, revenue and overall financial condition, and may negatively impact our operations, revenue, and overall financial condition in the future if new and more transmissible vaccine-resistant variants emerge. Our

customers, including endodontists, have experienced significant financial hardship as a result of the COVID-19 pandemic and some of them may never fully recover. We also experienced disruptions, and may experience future disruptions, including: delays in capital and clinical sales representatives becoming fully trained and productive; difficulties and delays in dental practitioner outreach and training dental practitioners to use our GentleWave System; travel restrictions; delays in initiation, enrollment and follow-ups of our clinical studies; challenges with maintaining adequate supply from third-party manufacturers of components and finished goods and distribution providers; and access to dental practitioners for training and case support. The COVID-19 pandemic resulted in, and may in the future result in, significant disruption to the global financial markets, reducing our ability to access capital when needed, which could negatively affect our liquidity.

We have mitigated the disruptions to our supply of certain materials used in the final assembly and packaging of our PIs encountered in early 2022 as a result of the COVID-19 pandemic. We regularly explore different opportunities to implement alternative secondary source suppliers and packaging methods in order to ensure cost effectiveness and that we are able to source sufficient components and materials to manufacture our products. In the event that we are unable to implement new packaging methods or source sufficient components and materials from our current or future suppliers to manufacture enough of our products to satisfy demand, we may need to cease or slow down production and our business operations and financial condition may be materially harmed. Additionally, the costs of certain materials and services have increased in recent years due to the increased demand and supply shortages caused, in large part, by the pandemic. If such inflationary pressures in costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows.

We expect that any future restrictions on dental procedures, as a result of COVID-19 or the emergence of any vaccine resistant variant, and other related issues including supply chain disruptions, would have a negative impact on our operations, revenue and overall financial condition.

Components of Our Results of Operations

Revenue

Our revenue consists primarily of product revenue and software revenue. We generate product revenue on the capital sale of our GentleWave Console and recurring sales of our single-use PIs and accessories. To a lesser extent, we also derive product revenue from service and repair and extended warranty contracts with our existing customers. Software revenue relates to fees we receive for licensing our TDO practice management tool to dental practitioners. We expect our product revenue to increase in absolute dollars as we increase adoption and utilization of our GentleWave System, though revenues may fluctuate from quarter to quarter.

Cost of Sales and Gross Margin

Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor to produce our products, warranty, provisions for slow-moving and obsolete inventory, and other direct costs such as shipping and software support. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include personnel compensation, including stock-based compensation expenses, facilities, the cost of production equipment and operations supervision, quality control, material procurement and intangible assets amortization. We provide up to a two-year warranty on capital equipment upon initial sale, and we establish a reserve for warranty repairs based on historical warranty repair costs incurred. Provisions for warranty obligations, which are included in cost of sales, are provided for at the time of shipment. We expect our cost of sales to increase in absolute dollars for the foreseeable future primarily as, and to the extent, our revenue grows, partially offset by lower unit product costs, though it may fluctuate from period to period.

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily, product mix and the resulting average selling prices, production volumes, manufacturing costs and product yields, and the implementation of cost reduction strategies. Our software gross margin is generally higher than our product gross margin. As a result of these factors, we expect gross margin may fluctuate from period to period. We are engaged in various efforts to improve our gross margin by reducing unit product costs to the extent our production volumes increase, as well as through product design improvements, reducing material costs through negotiations with suppliers and optimizing the manufacturing process and reducing the costs to service our installed base.

Operating Expenses

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses consist primarily of 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 increase in absolute dollars for the foreseeable future as we expand our

commercial infrastructure and incur additional fees associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses, though it may fluctuate from period to period. However, over time, we expect our SG&A expenses to decrease as a percentage of revenue.

Research and Development

Research and development ("R&D") expenses consist primarily of costs incurred for proprietary R&D programs, and include costs of product engineering, product development, regulatory affairs, consulting services, materials, and depreciation, as well as other costs associated with products and technologies being developed. These expenses include employee and non-employee compensation, including stock-based compensation, supplies, materials, consulting, related travel expenses and facilities expenses. We expect our R&D expenses to moderate in absolute dollars for the foreseeable future as we continue to develop, enhance, and commercialize new products and technologies. However, we expect our R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts.

Other Income (Expense), Net

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

Results of Operations

Comparison of Three Months Ended March 31, 2023 and 2022

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


	Three Months Ended March 31,						Change
	2023			2022			$			%
	(in thousands, except percentages)
Revenue	$	10,724		$	9,033			1,691			19	%
Cost of sales		7,378			6,754			624			9	%
Gross profit		3,346			2,279			1,067			47	%
Gross margin		31	%		25	%
Operating expenses:
Selling, general and administrative		14,666			11,985			2,681			22	%
Research and development		3,494			4,850			(1,356	)		(28	)%
Total operating expenses		18,160			16,835			1,325			8	%
Loss from operations		(14,814	)		(14,556	)		(258	)		2	%
Other expense, net:
Interest and financing costs, net		(557	)		(966	)		409			(42	)%
Loss before income tax expense		(15,371	)		(15,522	)		151			(1	)%
Income tax expense		—			—			—			—
Net loss	$	(15,371	)	$	(15,522	)		151			(1	)%

Revenue

The following table shows our breakdown of revenue for the three months ended March 31, 2023 and 2022, together with the dollar and percentage change in those items:


	Three Months Ended March 31,				Change
	2023		2022		$		%
	(in thousands, except percentages)
Product revenue	$	8,678	$	7,203		1,475		20	%
Software revenue		2,046		1,830		216		12	%
Total revenue	$	10,724	$	9,033		1,691		19	%

Total revenue increased $1.7 million, or 19%, for the three months ended March 31, 2023 from the comparable period in the prior year, reflecting the growth in further discussed below.

Product revenue increased $1.5 million, or 20%, for the three months ended March 31, 2023 compared to the prior year period, which was primarily driven by growth in sales volumes in PIs, as well as an increase in the average selling price of PIs by approximately 9%. For the three months ended March 31, 2023, we generated $2.0 million and $5.7 million from the sale of GentleWave consoles and PIs, respectively, compared to $2.1 million and $4.3 million, respectively, for the three months ended March 31, 2022.

Software revenue increased $0.2 million, or 12%, for the three months ended March 31, 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 $0.6 million, or 9%, for the three months ended March 31, 2023 from the comparable period in the prior year. The increase was primarily attributable to higher console cost on per unit basis, which was partially offset by a favorable manufacturing absorption of approximately $0.3 million attributable to improved operating leverage. There were no significant changes in the Software segment cost of sales.

Gross margin increased 6% for the three months ended March 31, 2023 from the comparable period in the prior year, primarily due to higher PI average selling price and improved operating leverage, which was partially offset by higher console cost on per unit basis.

Selling, general and administrative expenses

SG&A expenses increased $2.7 million, or 22%, for the three months ended March 31, 2023 from the comparable period in the prior year, primarily driven by changes in our Product segment due to approximately $1.5 million higher employee-related compensation and benefit expenses, including stock-based compensation, and recruiting expenses, as a result of the expansion of our commercial infrastructure and our general and administrative functions. There were no significant changes in the Software segment selling, general and administrative expenses.

Research and development expenses

R&D expenses decreased $1.4 million, or 28%, for the three months ended March 31, 2023 from the comparable period in the prior year, which was primarily driven by lower headcount and lower spending on product development and outside services in the Product segment. 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.

Other expense, net

Total other expense net for the three months ended March 31, 2023 decreased compared to the prior year periods, mainly due to interest income from our short-term investments.

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"), 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.

As of March 31, 2023, we had cash and cash equivalents and short-term investments of $74.9 million, an accumulated deficit of $384.5 million, and $40.0 million in principal outstanding under our term loan facility. For the three months ended March 31, 2023 and 2022, our net losses from operations were $15.3 million and $15.5 million, respectively, and our net cash used in operating activities was $17.0 million and $18.0 million, respectively.

Funding requirements

We expect our operating expenses to increase for the foreseeable future as we continue to invest in expanding our sales and marketing infrastructure programs to both drive and support anticipated sales growth and product development. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to 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. The timing and amount of our operating expenditures will depend on many factors, including:

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the degree and rate of market acceptance of our current and future products and the GentleWave Procedure;

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the scope and timing of investment in our sales force and expansion of our commercial organization;

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the impact of the macroeconomic environment, including as a result of inflation and rising interest rates, the war in Ukraine, and the ongoing global COVID-19 pandemic, or any other pandemic, epidemic or infectious disease outbreak, on our business;

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the cost of our research and development activities;

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the cost and timing of additional regulatory clearances or approvals;

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the costs associated with any product recall that may occur;

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the costs associated with the manufacturing of our products at increased production levels;

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the costs of attaining, defending and enforcing our intellectual property rights;

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whether we acquire third-party companies, products or technologies;

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the terms and timing of any other collaborative, licensing and other arrangements that we may establish;

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the scope, rate of progress and cost of our current or future clinical trials and registries;

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the emergence of competing new products, technologies or alternative treatments or other adverse market developments;

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the rate at which we expand internationally;

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our ability to raise additional funds to finance our operations;

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debt service requirements; and

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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 upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. If our existing capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional public or private equity or debt securities or obtain an additional credit facility. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional capital through collaboration agreements, licensing 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 not be favorable to us. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.

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, subject to our having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date. The First Amendment 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, subject to (i) our having generated at least $46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) our closing market capitalization being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to Perceptive. We borrowed the first tranche of $10.0 million on July 29, 2022 and received net proceeds of $9.9 million.

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 three months ended March 31, 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 Amendment No. 2 (the "Second Amendment") to the 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"). All other terms remain unchanged on the original agreement.

In connection with entering into the Perceptive Loan Agreement, we also entered into an amended and restated security agreement and granted a security interest in substantially all of our assets. We are permitted to make voluntary prepayments, subject to a scaled prepayment premium that ranges from 7.0% to 1.0% of the aggregate principal amount outstanding on such prepayment date for prepayments made after August 23, 2022 and before August 23, 2025. No prepayment premium is required for payments made after August 23, 2025.

The Perceptive Loan Agreement, as amended, 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) satisfy certain minimum revenue thresholds, measured for the 12 consecutive month period on each calendar quarter-end until June 30, 2026. These thresholds increase over time and range from $26.4 million for the 12-month period ended September 30, 2021 to $95.3 million for the 12-month period ended June 30, 2026. Failure to satisfy these financial covenants would constitute an event of default under the Perceptive Loan 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. In the event of an event of default, the lender may terminate its commitments and declare all amounts outstanding under the 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%.

As of March 31, 2023, we had an aggregate principal balance of $40.0 million outstanding under the Perceptive Loan Agreement, as amended, and we were in compliance with all covenants and conditions under such agreement.

Summary statement of cash flows

The following table summarizes our statement of cash flows:


	Three Months Ended March 31,
	2023			2022
	(in thousands)
Net cash provided by (used in) :
Operating activities	$	(16,976	)	$	(18,045	)
Investing activities		11,965			(56	)
Financing activities		(6	)		(486	)
Net decrease in cash and cash equivalents	$	(5,017	)	$	(18,587	)

Operating Activities

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, partially offset by a net change in our net operating assets and liabilities of $3.9 million. Non-cash items primarily consisted of $0.8 million in depreciation and amortization and $1.9 million in stock-based compensation. Changes in our net operating assets and liabilities year-over-year, was primarily due to a $1.7 million increase in accrued expenses and other liabilities on payments to vendors and a $1.2 million increase in accrued compensation due to year-end bonus payout. Changes in our net operating assets and liabilities also resulted from changes in accounts receivable, inventory, prepaid expenses and other assets and accounts payable attributable to timing of payment.

Net cash used in operating activities was $18.0 million for the three months ended March 31, 2022, primarily consisting of net loss of $15.5 million, non-cash items of $2.0 million and a net change in our net operating assets and liabilities of $4.7 million. Non-cash items primarily consisted of $0.7 million in depreciation and amortization and $1.4 million in stock-based compensation. The change

in our net operating assets and liabilities was primarily due to a $2.0 million increase in inventory held due to higher production and changes in prepaid expenses and other assets, accounts payable, accrued expenses and accrued compensation attributable to timing of payment.

Investing Activities

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 $0.1 million for each of the three months ended March 31, 2022, as a result of purchases of property and equipment.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 was immaterial. Net cash used by financing activities was $0.5 million for the three months ended March 31, 2022, primarily resulting from the payment of the remainder of the IPO fees and contingent earnout.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, the revenue generated, and expenses incurred, and related disclosures, during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

There were no material changes to our critical accounting policies or in the methodology used for estimates from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on March 8, 2023.

JOBS Act Accounting Election and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, presenting only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this Quarterly Report on Form 10-Q, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements. We have elected to take advantage of certain of the reduced disclosure obligations in this Quarterly Report on Form 10-Q and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

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 March 31, 2023.

Changes in Internal Control over Financial Reporting

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in various claims and legal proceedings. Regardless of outcome, litigation and other legal and administrative proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are currently not a party to any legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition, and results of operations.

Item 1A. Risk Factors.

We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 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 2022 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.

Item 6. Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q unless otherwise stated.


		Incorporated by Reference
Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed / Furnished Herewith
3.1	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
4.1	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
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
4.4	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2013	S-1	333-260136	4.4	10/8/2021
4.5	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on June 30, 2014	S-1	333-260136	4.5	10/8/2021
4.6	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2014	S-1	333-260136	4.6	10/8/2021
4.7	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
4.9	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
4.11	Credit Agreement Warrant to Purchase Stock	8-K	001-40988	4.1	4/7/2022
4.12	Schedule to Exhibit 4.11 - Form of Credit Agreement Warrant to Purchase Stock	8-K	001-40988	4.2	4/7/2022
4.13	Description of Common Stock	10-K	001-40988	4.11	3/23/2022
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.					*
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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Sonendo, Inc.


Date: May 9, 2023	By:	/s/ Bjarne Bergheim
		Bjarne Bergheim
		President, Chief Executive Officer and Director
		(principal executive officer)


Date: May 9, 2023	By:	/s/ Michael P. Watts
		Michael P. Watts
		Chief Financial Officer
		(principal financial and accounting officer)