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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2024

OR

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

For the transition period from to

Commission File Number: 001-40988

 

Sonendo, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-5041718

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

26061 Merit Circle, Suite 102

Laguna Hills, CA

92653

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 766-3636

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

SONX

 

OTC Markets

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

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

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

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

As of May 2, 2024, the registrant had 70,455,399 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

Cautionary Note Regarding Forward-Looking Statements

1

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

Signatures

34

 

i


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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 2023 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 common stock has been delisted from the New York Stock Exchange (“NYSE”), which may negatively impact our stockholders and the trading price and liquidity of our common stock.
Our revenue is primarily generated from sales of our GentleWave Console and the accompanying single-use procedure instruments (“PIs”) and we are therefore highly dependent on the success of these offerings.
Our future operating results may be difficult to predict and could fall below expectations or any guidance we may provide.
The terms of our credit agreement contain operating and financial covenants and place restrictions on our operating and financial flexibility.
We need additional funding to finance our planned operations, and may not be able to raise capital when needed.
The commercial success of our GentleWave System and the GentleWave Procedure will depend upon the degree of market acceptance of our products by dental practitioners, our ability to maintain strong working relationships with our existing clinicians and dental customers and our ability to increase penetration in existing markets and expand into adjacent markets.
We may provide inadequate training, fail to increase our sales and marketing capabilities or fail to develop and maintain broad brand awareness in a cost-effective manner.
We may not be able to obtain or maintain adequate levels of third party coverage and reimbursement.
We may not be able to achieve or maintain satisfactory pricing and margins for our products.
We may not be able to compete successfully.
We may be unable to develop or commercialize new products on a timely basis and our products may become obsolete.
We have limited experience manufacturing our products in large-scale commercial quantities and we face a number of manufacturing risks that may adversely affect our manufacturing abilities, which could delay, prevent or impair our growth.
We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply shortages and price fluctuations that could negatively affect our business, financial condition and results of operations.
Any changes in our shipping arrangements or damages or losses sustained from shipping could adversely affect our business, financial condition, results of operations and prospects.
Our operating expenses may substantially increase and our business and financial results will be adversely affected if we receive a significant number of warranty claims or our GentleWave Systems require significant amounts of service after sale.
We may encounter difficulties in managing our growth, forecasting demand and managing inventory.

1


 

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

We operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and are believed to be reasonable. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved. You are cautioned not to place undue reliance on the forward-looking statements included in this Quarterly Report on Form 10-Q, which speak only as of the date of this document. We do not intend, and undertake no obligation, to update or revise these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SONENDO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,580

 

 

$

14,009

 

Short-term investments

 

 

15,009

 

 

 

32,773

 

Accounts receivable, net

 

 

4,176

 

 

 

4,790

 

Inventory

 

 

12,116

 

 

 

11,074

 

Prepaid expenses and other current assets

 

 

1,611

 

 

 

1,969

 

Current assets of discontinued operations

 

 

1,162

 

 

 

656

 

Total current assets

 

 

52,654

 

 

 

65,271

 

Property and equipment, net

 

 

767

 

 

 

461

 

Operating lease right-of-use assets

 

 

3,227

 

 

 

2,703

 

Other assets

 

 

127

 

 

 

128

 

Non-current assets of discontinued operations

 

 

 

 

 

9,597

 

Total assets

 

$

56,775

 

 

$

78,160

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

916

 

 

$

1,142

 

Accrued expenses

 

 

2,737

 

 

 

3,072

 

Accrued compensation

 

 

1,470

 

 

 

2,413

 

Operating lease liabilities

 

 

1,172

 

 

 

1,250

 

Current portion of term loan

 

 

10,800

 

 

 

24,900

 

Other current liabilities

 

 

1,786

 

 

 

1,844

 

Current liabilities of discontinued operations

 

 

73

 

 

 

700

 

Total current liabilities

 

 

18,954

 

 

 

35,321

 

Operating lease liabilities, net of current

 

 

1,888

 

 

 

1,423

 

Term loan, net of current

 

 

10,911

 

 

 

12,467

 

Other liabilities

 

 

491

 

 

 

530

 

Total liabilities

 

 

32,244

 

 

 

49,741

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized —10,000,000 shares; issued and outstanding - none

 

 

 

 

 

 

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

 

 

70

 

 

 

64

 

Additional paid-in-capital

 

 

461,237

 

 

 

458,357

 

Accumulated other comprehensive loss

 

 

(1

)

 

 

11

 

Accumulated deficit

 

 

(436,775

)

 

 

(430,013

)

Total stockholders’ equity

 

 

24,531

 

 

 

28,419

 

Total liabilities and stockholders’ equity

 

$

56,775

 

 

$

78,160

 

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

3


 

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Revenue, net

 

$

7,047

 

 

$

8,678

 

Cost of sales

 

 

 

 

 

 

Product and service

 

 

4,900

 

 

 

6,700

 

Impairment of long-lived assets

 

 

146

 

 

 

 

Total cost of sales

 

 

5,046

 

 

 

6,700

 

Gross profit

 

 

2,001

 

 

 

1,978

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

 

10,061

 

 

 

14,114

 

Research and development

 

 

2,189

 

 

 

2,927

 

Total operating expenses

 

 

12,250

 

 

 

17,041

 

Operating loss

 

 

(10,249

)

 

 

(15,063

)

Other expense, net:

 

 

 

 

 

 

Interest and financing costs, net

 

 

(1,940

)

 

 

(579

)

Loss before income tax expense

 

 

(12,189

)

 

 

(15,642

)

Income tax expense

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

 

(12,189

)

 

 

(15,642

)

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

 

 

5,427

 

 

 

271

 

Net loss

 

$

(6,762

)

 

$

(15,371

)

 

 

 

 

 

 

 

Other comprehensive income (net of tax):

 

 

 

 

 

 

Unrealized (loss) gain on short-term investments

 

 

(12

)

 

 

56

 

Comprehensive loss

 

$

(6,774

)

 

$

(15,315

)

Net loss per share from continuing operations – basic and diluted

 

$

(0.13

)

 

$

(0.16

)

Net income per share from discontinued operations – basic and diluted

 

$

0.06

 

 

$

0.00

 

Net loss per share – basic and diluted

 

$

(0.07

)

 

$

(0.16

)

Weighted-average shares outstanding – basic and diluted

 

 

94,822,835

 

 

 

93,391,444

 

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

4


 

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except shares amount)

 

 

Common Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Paid-In

 

 

Other

 

 

Accumulated

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2023

 

 

63,547,467

 

 

$

64

 

 

$

458,357

 

 

$

11

 

 

$

(430,013

)

 

$

28,419

 

Employee stock plans

 

 

790,524

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,890

 

 

 

 

 

 

 

 

 

2,890

 

Exercise of pre-funded warrants

 

 

6,111,882

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,762

)

 

 

(6,762

)

Balance at March 31, 2024

 

 

70,449,873

 

 

$

70

 

 

$

461,237

 

 

$

(1

)

 

$

(436,775

)

 

$

24,531

 

 

 

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

 

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

 

5


 

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(6,762

)

 

$

(15,371

)

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

 

 

 

 

 

 

Depreciation

 

 

64

 

 

 

339

 

Amortization of intangible assets

 

 

51

 

 

 

166

 

Amortization of right-of-use lease assets

 

 

322

 

 

 

325

 

Impairment of long-lived assets

 

 

146

 

 

 

 

Stock-based compensation

 

 

2,890

 

 

 

1,942

 

Amortization of debt issuance costs

 

 

1,144

 

 

 

146

 

Accretion of available for sale securities, net

 

 

(264

)

 

 

(634

)

Gain on sale of discontinued operations

 

 

(5,703

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

906

 

 

 

(634

)

Inventory

 

 

(1,403

)

 

 

(561

)

Prepaid expenses and other assets

 

 

812

 

 

 

(694

)

Accounts payable

 

 

(260

)

 

 

896

 

Accrued expenses and other liabilities

 

 

(1,492

)

 

 

(1,614

)

Deferred revenue

 

 

128

 

 

 

(95

)

Accrued compensation

 

 

(1,268

)

 

 

(1,187

)

Net cash used in operating activities

 

 

(10,689

)

 

 

(16,976

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

 

 

 

(15,125

)

Proceeds from maturities of available-for-sale securities

 

 

18,015

 

 

 

27,300

 

Purchases of property and equipment

 

 

(146

)

 

 

(210

)

Proceeds from sale of discontinued operations, net

 

 

14,204

 

 

 

 

Net cash provided by investing activities

 

 

32,073

 

 

 

11,965

 

Financing activities:

 

 

 

 

 

 

Principal repayments on term loan

 

 

(16,800

)

 

 

 

Tax paid on vested stock awards under employee stock plan

 

 

(4

)

 

 

 

Principal repayments on finance lease

 

 

(9

)

 

 

(7

)

Proceeds from exercise of pre-funded warrants

 

 

 

 

 

1

 

Net cash used in financing activities

 

 

(16,813

)

 

 

(6

)

Net increase (decrease) in cash and cash equivalents

 

 

4,571

 

 

 

(5,017

)

Cash and cash equivalents at beginning of period

 

 

14,009

 

 

 

17,665

 

Cash and cash equivalents at end of period

 

$

18,580

 

 

$

12,648

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

1,300

 

 

$

1,387

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

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

 

$

826

 

 

$

1,802

 

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

6


 

SONENDO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Description of Business

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

Basis of Presentation

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Form 10-Q and Article 10 of SEC Regulation S-X 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, 2023 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 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, 2023 filed with the SEC on March 11, 2024.

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

Liquidity and Going Concern

On September 27, 2022, the Company completed a private placement (the “Private Placement”), 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 6, Stockholders’ Equity, for additional information.

As of March 31, 2024, the Company had cash and cash equivalents and short-term investments of $33.6 million and $23.2 million in principal outstanding under its term loan facility.

The Company has a limited operating history, and the revenue and income potential of the Company’s business and market are unproven. The Company has experienced net losses and negative cash flows from operations since its inception and as of March 31, 2024 had an accumulated deficit of $436.8 million. During the three months ended March 31, 2024, the Company incurred net losses of $12.2 million, used $10.7 million of cash and cash equivalents in its continuing operations, and recognized a gain of $5.7 million from sale of discontinued operations. The Company will continue to incur significant costs and expenses related to its ongoing operations until it gains market acceptance of its products and achieves a level of revenues adequate to support its operations.

7


 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

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

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

The Company has active plans to mitigate these conditions. Specifically, the Company has been taking steps and plans to further reduce negative cash flow through operating expense reductions. The Company is evaluating multiple opportunities, which may include soliciting external investment or seeking strategic partnerships. Additionally, as detailed in Note 3 and Note 10, the Company closed on the sale of TDO Software, Inc. (“TDO”) and renegotiated its covenant requirements with its lender, among other terms, which resulted in the Company remitting $15 million of principal payments on its outstanding borrowings. Its plans are subject to inherent risks and uncertainties and there can be no assurance that its plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.

Effects of the Macroeconomic Environment

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

Operating Segments

The Company previously had two operating and reportable segments: Product and Software. Following the divestiture of the software business on March 1, 2024, there were no substantial assets or operations of the software segment. The software segment was reported as Discontinued Operations as of March 31, 2024, and is presented as such for all periods in this report.

Emerging Growth Company Status

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

8


 

2. Summary Accounting Policies and Recent Accounting Pronouncements

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Summary of Accounting Policies, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Use of Estimates

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

Inventory

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

Revenue Recognition

Contracts with Customers

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

Revenue recorded from continuing operations is generated from sales of the GentleWave Console and related PIs and accessories and services on its GentleWave Console. The Company’s products are sold primarily in the United States and Canada directly to customers through its field sales force.

Performance Obligations

The Company’s performance obligations from continuing operations primarily arise from the manufacture and delivery of the GentleWave System, related PIs and accessories, and to a lesser extent, performance of service contracts on its GentleWave Consoles. Payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components. Consideration may be variable based on volume.

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

9


 

The Company estimates related variable consideration at the point of sale, including discounts, product returns, refunds, and other similar obligations.

Revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by the Company’s performance. Revenue is recognized at a point in time if the criteria for recognizing revenue over time are not met, and the Company has transferred control of the goods to the customer.

Product revenue is recognized at a point in time when the Company has transferred control to the customer, which is generally when title of the goods transfers to the customer. 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.

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

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Total contract liabilities - extended service contracts

 

$

1,048

 

 

$

920

 

Less: long-term portion

 

 

281

 

 

 

302

 

Contract liabilities – current

 

$

767

 

 

$

618

 

Contract liabilities are included within other current liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Revenue recognized during the three months ended March 31, 2024 and 2023 that was included in the contract liability balance as of December 31, 2023 and 2022 was $0.2 million and $0.1 million, respectively.

Disaggregation of revenue

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

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

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

(in thousands)

 

Product revenue recognized at a point in time

 

$

6,730

 

 

$

8,524

 

Service revenue recognized over time

 

 

317

 

 

 

154

 

Total revenue

 

$

7,047

 

 

$

8,678

 

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

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, 2024 and 2023, GentleWave Systems sold were covered by the warranty for a period of up to two years from the date of sale. Estimated warranty costs are recorded as a liability at the time of delivery with a corresponding provision to cost of sales. Warranty accruals are estimated based on the current product costs, the Company’s historical experience, management’s expectations

10


 

of future conditions and standard maintenance schedules. The Company evaluates this reserve on a regular basis and makes adjustments as necessary.

The following table provides a reconciliation of the change in estimated warranty liabilities for the three months ended March 31, 2024 and 2023:

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

1,269

 

 

$

1,930

 

Provision for warranties issued

 

 

200

 

 

 

195

 

Warranty costs incurred

 

 

(427

)

 

 

(368

)

Balance at end of period

 

$

1,042

 

 

$

1,757

 

Current portion

 

$

980

 

 

$

1,335

 

Non-current portion

 

 

62

 

 

 

422

 

Total

 

$

1,042

 

 

$

1,757

 

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

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”). ASUs not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s unaudited condensed consolidated financial statements.

Accounting Pronouncement Recently Adopted

None.

3. Discontinued Operations

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

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

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Revenue

 

$

1,389

 

 

$

2,046

 

Cost of sales

 

 

510

 

 

 

678

 

Gross profit

 

 

879

 

 

 

1,368

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

 

679

 

 

 

552

 

Research and development

 

 

476

 

 

 

567

 

(Loss) income from discontinued operations, net of tax

 

 

(276

)

 

 

249

 

Other income

 

 

 

 

 

22

 

Gain on sale of discontinued operations, net of tax

 

 

5,703

 

 

 

 

Net income from discontinued operations

 

$

5,427

 

 

$

271

 

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

11


 

revenue is recognized at the point in time when the delivery of the software has occurred. When software is licensed on a subscription basis, revenue is recognized over the respective license period.

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

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

(in thousands)

 

Current assets:

 

$

1,162

 

 

$

656

 

Non-current assets:

 

 

 

 

 

 

Intangible assets, net

 

 

 

 

 

661

 

Goodwill

 

 

 

 

 

8,454

 

Other

 

 

 

 

 

482

 

Total assets of discontinued operations

 

$

1,162

 

 

$

10,253

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

34

 

Accrued expenses

 

 

53

 

 

 

194

 

Accrued compensation

 

 

20

 

 

 

345

 

Operating lease liabilities

 

 

 

 

 

127

 

Total liabilities of discontinued operations

 

$

73

 

 

$

700

 

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

4. Balance Sheet Components

Inventory

Inventory consisted of the following:

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

(in thousands)

 

Raw materials

 

$

6,534

 

 

$

6,450

 

Work in process

 

 

338

 

 

 

278

 

Finished goods

 

 

5,244

 

 

 

4,346

 

Total inventory

 

$

12,116

 

 

$

11,074

 

The balance of the reserve of excess and obsolete inventory was 0.8 million for each of the periods ending March 31, 2024 and December 31, 2023.

5. 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

12


 

valuation techniques and significant management judgment or estimation. These include the Black-Scholes option-pricing model which uses inputs such as expected volatility, risk-free interest rate and expected term to determine fair market valuation.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification at each reporting date. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.

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

The following table provides the assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such value at March 31, 2024 and December 31, 2023:

 

 

March 31, 2024

 

 

 

Fair Value

 

 

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

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

17,671

 

 

$

17,671

 

 

$

 

 

$

 

Total cash equivalents at fair value

 

 

17,671

 

 

 

17,671

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

5,697

 

 

 

5,697

 

 

 

 

 

 

 

Commercial paper and corporate bonds

 

 

9,312

 

 

 

 

 

 

9,312

 

 

 

 

Total short-term investments at fair value

 

 

15,009

 

 

 

5,697

 

 

 

9,312

 

 

 

 

Total assets at fair value

 

$

32,680

 

 

$

23,368

 

 

$

9,312

 

 

$

 

 

 

 

March 31, 2024

 

 

 

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

 

$

5,697

 

 

$

5,697

 

 

$

 

 

$

 

Commercial paper and corporate bonds

 

$

9,312

 

 

 

9,313

 

 

 

1

 

 

 

(2

)

Total available-for-sale securities at fair value

 

$

15,009

 

 

$

15,010

 

 

$

1

 

 

$

(2

)

 

 

 

December 31, 2023

 

 

 

Fair Value

 

 

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

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,761

 

 

$

10,761

 

 

$

 

 

$

 

Corporate Bonds

 

 

1,827

 

 

 

 

 

 

1,827

 

 

 

 

Total cash equivalents at fair value

 

 

12,588

 

 

 

10,761

 

 

 

1,827

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

14,826

 

 

 

14,826

 

 

 

 

 

 

 

Commercial paper and corporate bonds

 

 

13,204

 

 

 

 

 

 

13,204

 

 

 

 

U.S. government agency bonds

 

 

4,743

 

 

 

 

 

 

4,743

 

 

 

 

Total short-term investments at fair value

 

 

32,773

 

 

 

14,826

 

 

 

17,947

 

 

 

 

Total assets at fair value

 

$

45,361

 

 

$

25,587

 

 

$

19,774

 

 

$

 

 

13


 

 

 

December 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

 

$

14,826

 

 

$

14,820

 

 

$

6

 

 

$

 

Commercial paper and corporate bonds

 

$

13,204

 

 

$

13,197

 

 

$

9

 

 

$

(2

)

U.S. government agency bonds

 

 

4,743

 

 

 

4,745

 

 

 

 

 

 

(2

)

Total available-for-sale securities at fair value

 

$

32,773

 

 

$