ACUTUS MEDICAL, INC. Overview
We are an arrhythmia management company focused on improving the way cardiac
arrhythmias are diagnosed and treated. Despite several decades of effort by the
incumbents in this field, the clinical and economic challenges associated with
arrhythmia treatment continue to be a huge burden for patients, providers and
payors. We are committed to advancing the field of electrophysiology with a
unique array of products and technologies which will enable more physicians to
treat more patients more effectively and efficiently. Through internal product
development, acquisitions and global partnerships, we have established a global
sales presence delivering a broad portfolio of highly differentiated
electrophysiology products. Our goal is to provide our customers with a complete
solution for catheter-based treatment of cardiac arrhythmias in each of our
geographic markets.
Our product portfolio includes novel diagnostic and mapping catheters, ablation
catheters, mapping and imaging consoles and accessories, as well as supporting
algorithms and software programs. Our foundational and most highly
differentiated product is our AcQMap imaging and mapping system. Our
paradigm-shifting AcQMap System offers a novel approach to mapping the drivers
and maintainers of arrhythmias with unmatched speed and precision. With the
ability to rapidly and accurately identify ablation targets and to confirm both
ablation success and procedural completion, we believe our AcQMap System
addresses the primary unmet need in electrophysiology procedures today.
64--------------------------------------------------------------------------------
Table of Contents
We were incorporated in the state ofDelaware onMarch 25, 2011 and are headquartered inCarlsbad, California . Early versions of our AcQMap System and certain related accessory products have been used inthe United States sinceMay 2018 andWestern Europe sinceJuly 2016 in a limited, pilot launch capacity, where our focus was on optimizing workflow and validating our value proposition. We fully commenced the launch of our commercial-grade console and software products in the first quarter of 2020. Critical to our launch and future market adoption are a series of strategic transactions, regulatory approvals, and clinical trial milestones including: ongoing development and expansion of our Bi-Lateral Distribution Agreements with Biotronik , FDA 510(k) clearance and CE Mark of our second-generation AcQMap console and SuperMap software suite; and the completion of enrollment in our US clinical study for the AcQBlate Force Sensing Ablation catheter and system. OnJune 30, 2022 , we completed the First Closing of the sale of our left-heart access portfolio to Medtronic as described further below. OnNovember 3, 2022 , we announced our achievement of the OEM Earnout Conditions (as defined in the Asset Purchase Agreement) set forth in the agreement. Further, onDecember 1, 2022 , Medtronic qualified us as an original equipment manufacturer ("OEM") and accordingly, we will manufacture this product line exclusively for Medtronic for a period of up to four years until such time that Medtronic transfers the product to a dedicated manufacturing facility and becomes the manufacturer of record. Additionally, onDecember 21, 2022 , we achieved a$17.0 million Transfer Earnout as set forth in the agreement. We market our electrophysiology products worldwide to hospitals and electrophysiologists that treat patients with arrhythmias. We have strategically developed a direct selling presence inthe United States and select markets inWestern Europe where cardiac ablation is a standard of care and third-party reimbursement is well-established. In these markets, we install our AcQMap console and workstation with customer accounts and then sell our disposable products to those accounts for use with our system. In other international markets, we leverage our partnership with Biotronik to install our AcQMap console and workstation with customer accounts and then to sell our disposable products to those accounts. Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Our currently marketed disposable products include access sheaths, diagnostic and mapping catheters, ablation catheters and accessories. We plan to leverage the geographically concentrated nature of procedure volumes and the recurring nature of our sales to drive an increasingly efficient commercial model. For the years endedDecember 31, 2022 and 2021, we generated revenue of$16.4 million and$17.3 million , respectively, of which 47% and 52%, respectively, was from customers located outside ofthe United States . Since our inception, we have generated significant losses. Our net loss was$39.6 million and$117.7 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 and 2021, we had an accumulated deficit of$518.3 million and$478.7 million , respectively, and working capital of$98.0 million and$107.8 million , respectively. Our sales organization will continue to focus on driving utilization and procedure growth in targeted geographic regions. Investments in research and development and clinical and regulatory affairs will have a focused scope on key product development initiatives. Additionally, we will continue to incur costs as a public company that we did not incur prior to our IPO or incurred prior to our IPO at lower rates, including increased costs for employee-related expenses, director and officer insurance premiums, audit and legal fees, investor relations fees, fees to members of our Board of Directors and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by theSEC , as well as Nasdaq rules. Because of these and other factors, we expect to continue to incur net losses and negative cash flows from operations for at least the next couple years.
Restructuring
In 2022, we completed an organizational workforce reduction and implemented additional cost reduction measures to reduce our operating expenses and optimize our cash resources. The restructuring was the result of a detailed review of our strategic priorities, the external environment, and cost structure and is intended to sharpen our focus and strengthen our financial position. As part of the restructuring, we intend to prioritize maximizing console utilization and procedure volume growth in targeted geographic regions, as well as a more focused scope of product development initiatives.
Repricing
EffectiveJuly 25, 2022 , and in accordance with the terms of theAcutus Medical, Inc. 2011 Equity Incentive Plan and theAcutus Medical, Inc. 2020 Equity Incentive Plan, we reduced the exercise price of outstanding options to purchase our common stock held by employees who were employed onJuly 25, 2022 (and who had not provided a notice of resignation prior to such date) to$1.34 per share, which was the closing price for our common stock onJuly 25, 2022 . 65
--------------------------------------------------------------------------------
Table of Contents
Contingent Consideration Relating to Sale of Left-heart Access Portfolio
OnJune 30, 2022 , we completed the first closing (the "First Closing") in accordance with the Asset Purchase Agreement entered into onApril 26, 2022 (the "Asset Purchase Agreement") with Medtronic, pursuant to which we agreed to sell to Medtronic certain transseptal access and sheath assets which make up our left-heart access portfolio (and which comprised the Rhythm Xience product line acquired as part of the Rhythm Xience Acquisition) (the "Products"). Pursuant to the Asset Purchase Agreement, Medtronic paid$50.0 million at the First Closing, of which$4.0 million was paid into an indemnity escrow account for a period of 18 months following the First Closing to secure our indemnification obligations under the Asset Purchase Agreement, which we recorded as restricted cash on our consolidated balance sheets as ofDecember 31, 2022 .
The Company is also eligible to receive the following contingent cash consideration pursuant to the Asset Purchase Agreement:
(i)
(ii)$17.0 million upon the earlier of (A) the Second Closing (as defined below) or (B) the Company's initial submission for CE Mark certification of the Products under the European Union Medical Devices Regulation to the reasonable satisfaction of a third-party regulatory consultant, subject to certain other conditions as set forth in the Asset Purchase Agreement (the "Transfer Earnout"); and (iii) amounts equal to 100%, 75%, 50% and 50%, respectively, of quarterlyNet Sales (as defined in the Asset Purchase Agreement) from sales of the Products achieved by Medtronic over each year over four years beginning on the first full quarter after Medtronic's first commercial sale of a Product and achievement of the OEM Earnout. The$20.0 million OEM Earnout was achieved onOctober 31, 2022 and payment was received inNovember 2022 , of which$1.6 million is held in escrow and recorded as restricted cash on the consolidated balance sheets. The$17.0 million Transfer Earnout was achieved as ofDecember 31, 2022 and recorded as a receivable on the consolidated balance sheets. Payment was received from Medtronic onJanuary 14, 2023 . No amounts under item (iii) were earned or received as ofDecember 31, 2022 .
With the achievement of the OEM Earnout Conditions (as defined in the Asset Purchase Agreement) and upon notice from Medtronic, Medtronic became the Company's exclusive distributor of the Products under the Distribution Agreement in connection with the Asset Purchase Agreement.
A second closing would occur on a date determined by Medtronic, but no later than the fourth anniversary of the First Closing, subject to the satisfaction of customary closing conditions (the "Second Closing"). Upon the Second Closing, Medtronic will acquire certain additional assets relating to the Products, primarily supplier agreements and permits and design and specification files required for Medtronic to become the manufacturer of record of the Products.
Key Business Metrics
We regularly review a number of operating and financial metrics, including the following key business metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are representative of our current business. However, we anticipate these metrics may change or may be substituted for additional or different metrics as our business grows and as we introduce new products.
Installed Base
Our mapping and therapy platform is enabled by our AcQMap console that we
install at customer sites globally. We believe our installed base is a key
driver of our business model, enabling utilization and disposable pull-through.
We define our installed base as the cumulative number of AcQMap consoles and
workstations placed into service at customer sites. Beginning in late 2019, we
began to install our second-generation AcQMap console and workstation with
customers under evaluation contracts. Under these evaluation contracts, we place
our AcQMap console and workstation with customers for no upfront fee to the
customer during the applicable evaluation period and seek to reach agreement
with the customer for the purchase of the console
66--------------------------------------------------------------------------------
Table of Contents
and workstation in the form of a contractual commitment to purchase a minimum amount of our disposable products or a cash purchase. Our total installed base as ofDecember 31, 2022 and 2021 is set forth in the table below: Year Ended December 31, 2022 2021 U.S. 32 42 Outside the U.S. 44 35 Total Acutus net system placements 76 77
Procedure Volumes
Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Procedure volumes and the utilization of our AcQMap console will be the primary driver of our business over the long-term. Our total procedure volumes as ofDecember 31, 2022 and 2021 is set forth in the table below: Year Ended December 31, 2022 2021 Procedure volumes 1,861 1,570
Factors Affecting Our Performance
There are a number of factors that have impacted, and we believe will continue to impact, or that we expect to impact, our results of operations and growth.
Market Acceptance.
The growth of our business will depend substantially on our ability to increase our installed base. Once an AcQMap console and workstation is established in a customer account, our revenue from that account becomes predominantly recurring in nature and derived from the sale of our portfolio of disposable products used with our system. Our ability to increase our installed base will depend on our ability to gain broader acceptance of our AcQMap System by continuing to make physicians and other hospital staff aware of the benefits of the AcQMap System, thereby generating increased demand for system installations and the frequency of use of our disposable products. Although we are attempting to increase our installed base through our established relationships and focused sales efforts, we cannot provide assurance that our efforts will be successful.
Commercial Organization Size and Effectiveness
As ofDecember 31, 2022 , our commercial organization consisted of 53 individuals with substantial applicable medical device, sales and clinical experience, which is comprised of sales representatives, sales managers, mappers and marketing personnel. We intend to continue to make significant investments in our commercial organization in training, developing, continuing education, and targeted increases in sales representatives, sales managers and mappers to help facilitate further adoption of our products among existing and new customer accounts. The effectiveness with which we manage our commercial organization and the speed at which newly hired personnel contribute to business performance can impact our revenue growth or our costs incurred in anticipation of such growth.
Strategic Partnerships and Acquisitions
We have in the past, and may in the future, enter into strategic partnerships and acquire complementary businesses, products or technologies. For example, we acquired our AcQBlate Force Sensing Ablation System from Biotronik inJuly 2019 and entered into ourGlobal Alliance for Electrophysiology with Biotronik inMay 2020 . In addition, as part of the Asset Purchase Agreement with Medtronic, we will be their OEM supplier of the Products for up to the next four years.
Our strategic partnerships and acquisitions have helped us establish a global sales presence delivering a broad portfolio of highly differentiated electrophysiology products. Our ability to grow our revenue will depend substantially on our ability to
67--------------------------------------------------------------------------------
Table of Contents
leverage our strategic partnerships and acquisitions to achieve distribution at a global scale, broaden our product portfolio and enable and accelerate global connectivity.
Our business strategy relies significantly on innovation to develop and introduce new products and to differentiate our products from our competitors. In 2022, research and development continued to provide both new products as well as generational improvements to the current product lines through the release of multiple versions of software and disposable products including significant improvements to our mapping system hardware. Additionally, research efforts evolved into development projects for advanced therapies, improved navigational accuracy and enhanced mapping capabilities. We expect our investments in research and development to decrease as we have a focused scope on key product development initiatives. We plan our research and development expenditures with internal initiatives, as well as potentially licensing or acquiring technology from third parties. We also expect expenditures associated with our manufacturing organization to grow over time as production volume increases and we bring new products to market. Our internal and external investments will be focused on initiatives that we believe will offer the greatest opportunity for growth and profitability. With a significant investment in research and development, a strong focus on innovation and a well-managed innovation process, we believe we can continue to innovate and grow. Introducing additional, innovative products is also expected to help support our existing installed base and help drive demand for additional installations of our system. If, however, our future innovations are not successful in meeting customers' needs or prove to be too costly relative to their perceived benefit, we may not be successful. Moreover, as cost of products sold, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth.
Product and Geographic Mix and Timing
Our financial results, including our gross margins, may fluctuate from period to period due to a variety of factors, including: average selling prices; production volumes; the cost of direct materials; the timing of customer orders or medical procedures and the timing and number of system installations; the number of available selling days in a particular period, which can be impacted by a number of factors such as holidays or days of severe inclement weather in a particular geography; the mix of products sold and the geographic mix of where products are sold; the level of reimbursement available for our products; discounting practices; manufacturing costs; product yields; headcount and cost-reduction strategies. For example, gross margins on the sale of our products by our direct selling organization inthe United States andWestern Europe are higher than gross margins on the sale of our products by Biotronik in other parts of the world. Moreover, gross margins on the sale of our proprietary products are generally higher than gross margins on the sale of products we source through our strategic partnerships with third parties. Future selling prices and gross margins for our products may fluctuate due to a variety of other factors, including the introduction by others of competing products or the attempted integration by third parties of capabilities similar to ours into their existing products. We aim to mitigate downward pressure on our selling prices by increasing the value proposition offered by our products through innovation. While we have not yet experienced significant seasonality in our results, it is not uncommon in our industry to experience seasonally weaker revenue during the summer months and end-of-year holiday season.
Regulatory Approvals / Clearances and Timing and Efficiency of New Product Introductions
InMay 2022 , we completed enrollment in ourU.S. IDE study for the AcQBlate Force Sensing Ablation System for use in right atrial flutters. We filed for PMA in the second half of 2022. InDecember 2022 , we announced receipt of MDR CE mark of the AcQMap 3D imaging and mapping catheter. InJuly 2022 , we announced approval of the AcQMap High Resolution Imaging and Mapping System and the AcQMap 3D Imaging and Mapping Catheter inJapan . InMay 2021 , we received FDA approval to initialize an atrial fibrillation IDE trial inthe United States with the AcQBlate Force Sensing Ablation System. Additionally, we received CE Mark approval for a broad suite of electrophysiology products that includes the next-generation AcQGuide MAX and AcQGuide VUE large bore delivery sheaths and the next-generation AcQMap mapping catheter inMay 2021 . Further, we received CE Mark inDecember 2020 inEurope for the use of our AcQBlate Force Sensing Ablation System and are seeking FDA PMA for this system inthe United States , as well as regulatory clearance or approval of our other pipeline products inthe United States and in international markets. 68
--------------------------------------------------------------------------------
Table of Contents
Our ability to grow our revenue will depend on our obtaining necessary regulatory approvals or clearances for our products. In addition, as we introduce new products, we expect to build our inventory of components and finished goods in advance of sales, which may cause quarterly and annual fluctuations in our results of operations.
Competition
Our industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our most significant competitors are large, well-capitalized companies. We must continue to successfully compete considering our competitors' existing and future products and related pricing and their resources to successfully market to the physicians who could use our products. Publication of clinical results by us, our competitors and other third parties can also have a significant influence on whether, and the degree to which, we are able to gain market share and increase utilization of our products.
COVID-19 Pandemic
The markets we serve could see continued impacts from COVID-19 for the foreseeable future, and the emergence of new variants of COVID-19 creates significant uncertainty as to how long COVID-19 will continue to impact our business. The magnitude of the impact of the COVID-19 pandemic on our productivity, results of operations and financial position, and its disruption to our business and our clinical programs and timelines, will depend, in part, on the length and severity of outbreaks, restrictions and other measures designed to prevent the spread of COVID-19 and on our ability to conduct business in the ordinary course.
Global Supply Chain Disruption
Our costs are subject to fluctuations, particularly due to change in the price of raw and packing materials and the cost of labor, transportation and operating supplies. In addition, it is possible that we may be negatively affected from unexpected delays resulting from global supply-chain disruptions and other adverse global conditions, including supply shortages of key electronic components and other raw materials, vendor disruptions related to COVID-19, extended lead times for raw material procurement, or geopolitical factors that could restrict the manufacturing and delivery of raw materials or other components.
Variability in Operating Results
In addition, we may experience meaningful variability in our yearly revenue and gross profit/loss as a result of a number of factors, including, but not limited to: inventory write-offs and write-downs; costs, benefits and timing of new product introductions; the availability and cost of components and raw materials; fluctuations in foreign currency exchange rates, inflation rates and interest rates; and our ability to realize the benefits of our recent corporate restructuring. Additionally, we may experience quarters in which our costs and operating expenses, in particular our research and development expenses, fluctuate depending on the stage and timing of product development. While certain of these factors may present significant opportunities for us, they also pose significant risks and challenges that we must address. See the section titled "Risk Factors" for more information.
Components of Results of Operations
Revenue
Our revenue consists primarily of revenue from: (i) the sale of our disposable products; (ii) the sale, rental or leasing of systems; and (iii) service/other revenue. Inthe United States and select markets inWestern Europe where we have developed a direct selling presence, we install our AcQMap console and workstation with our customer accounts and then generate revenue from the sale of our disposable products to these accounts for use with our system. We also generate revenue from the direct sale of our AcQMap console into hospital accounts as well as revenue through long-term customer commitments on disposable purchases. In addition, we generate revenue under our Distribution Agreement with Medtronic, as Medtronic's exclusive OEM supplier of the left-heart access products sold to Medtronic under the Asset Purchase Agreement. In other international markets, we leverage our partnership with Biotronik to install our AcQMap console and workstation with customer accounts and then generate revenue from Biotronik's sale of our disposable products to these accounts for use with our system. Our currently marketed disposable products include access sheaths, diagnostic and mapping catheters, ablation catheters and accessories.
For the years ended
69--------------------------------------------------------------------------------
Table of Contents
of our sales were denominated in currencies other thanU.S. dollars, primarily in Euros and the British Pound Sterling. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold. For the year endedDecember 31, 2022 , changes in foreign currency rates negatively impacted sales growth compared to the prior year by an estimated$0.5 million , and adversely impacted growth by 3%.
Costs and Operating Expenses
Cost of Products Sold
Cost of products sold consist primarily of raw materials, direct labor, manufacturing overhead associated with the production and sale of our disposable products and, to a more limited extent, production and depreciation of our AcQMap console and workstation that we install with our customer accounts. We depreciate equipment over a three-year period. Cost of products sold also includes expenditures for warranty, field service, freight, royalties and inventory reserve provisions. We expect cost of products sold to increase in absolute dollars in future periods as our revenue increases.
Research and Development Expenses
Research and development expenses consist primarily of salaries and employee-related costs (including stock-based compensation) for personnel directly engaged in research and development activities, clinical trial expenses, equipment costs, materials costs, allocated rent and facilities costs and depreciation.
Research and development expenses related to possible future products are expensed as incurred. We also accrue and expense costs for activities associated with clinical trials performed by third parties as incurred. All other costs relative to setting up clinical trial sites are expensed as incurred. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trials. To align resources with our current strategic direction, we implemented an organizational workforce reduction and other cost reduction measures. Due to this strategic realignment, we expect our research and development expenses to moderate in absolute dollars in the upcoming years.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and employee-related costs (including stock-based compensation) for personnel in sales, executive, finance and other administrative functions, allocated rent and facilities costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, marketing costs and insurance costs. To align resources with our current strategic direction, we implemented an organizational workforce reduction and are implementing additional cost reduction measures. Due to this on-going strategic realignment, we expect our selling, general and administrative expenses to decrease in absolute dollars in the upcoming years. Goodwill Impairment During the year endedDecember 31, 2022 , our management assessed qualitative factors and determined it was more likely than not that the fair value of the goodwill was less than its carrying amount. In performing a quantitative impairment test, we determined that goodwill was fully impaired. Consequently, a one-time expense was recorded to goodwill impairment reflecting the elimination of goodwill from the consolidated balance sheets. Refer to Note 9 -Goodwill and Intangible Assets for additional details.
Restructuring Expenses
In 2022 we undertook an organizational workforce reduction and have implemented additional cost reduction measures. Our restructuring expenses consist of severance expenses related to employees affected by the organizational workforce reduction.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration relates to ourJune 2019 acquisition of Rhythm Xience. The acquisition included potential earn-out considerations based on the achievement of certain regulatory and revenue milestones. The value of such contingencies is estimated and recorded on the consolidated balance sheets and are adjusted to fair value each period with 70
--------------------------------------------------------------------------------
Table of Contents
increases and decreases of in the estimated fair value of the contingent consideration earn-out recognized in the statement of operations and comprehensive loss.
Gain on Sale of Business
Gain on sale of business consists of the value of consideration received by us in excess of the book value of assets transferred to the buyer and net of direct selling costs. In 2022, we completed the sale of certain assets to Medtronic whereby the value received was in excess of the book value of the assets transferred, resulting in a recognized gain of$79.5 million . Gain on the sale of business also consists of consideration contingent upon the satisfaction of certain contractual conditions. Associated with the sale and included in the above recognized gain, in the current year we achieved both an OEM Earnout entitling us to$20.0 million in contingent consideration and a Transfer Earnout entitling us to$17.0 million . Additionally, over the next four years, we expect to receive a percentage of Medtronic's quarterly commercial sales of our product related to the sale of business, ranging from 100% in the first year to 50% in the fourth year. Refer to Note 4 - Sale of Business for more information. Other Income (Expense) Loss on Debt Extinguishment Loss on debt extinguishment represents the one-time loss recognized upon theJune 30, 2022 extinguishment of our 2019 Credit Agreement. Refer to Note 11 - Debt for more information.
Change in Fair Value of Warrant Liability
Warrants meeting specific conditions are required to be recorded as liabilities at fair value on the consolidated balance sheets. We issued warrants associated with various recorded transactions, some of which meet these specific conditions. The change in fair value of warrant liability recorded on our consolidated results of operations and comprehensive loss reflect changes in the fair value of these recorded liabilities. Under the terms of our 2022 Credit Agreement effectiveJune 30, 2022 , we issued warrants meeting the conditions for treatment as a liability. The recorded fair value of the liability associated with such warrants is adjusted each reporting period with an entry to the consolidated statements of operations and comprehensive loss. Refer to Note 14 - Warrants for more information.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities.
Interest Expense
Interest expense for the six months endedJune 30, 2022 primarily relates to interest paid on our 2019 Credit Agreement, which was fully repaid onJune 30, 2022 . Interest expense for the six months endedDecember 31, 2022 primarily relates to our 2022 Credit Agreement. Refer to Note 11 - Debt for more information. 71
--------------------------------------------------------------------------------
Table of Contents
Results of Operations for the Years Ended
The results of operations presented below should be reviewed in conjunction with our consolidated financial statements and related notes. The following table sets forth our results of operations for the years endedDecember 31, 2022 and 2021 (dollars in thousands): Year Ended December 31, Change 2022 2021 $ % Revenue$ 16,363 $ 17,263 $ (900) (5) % Costs and operating expenses (income): Costs of products sold 31,910 32,925 (1,015) (3) % Research and development 28,153 36,683 (8,530) (23) % Selling, general and administrative 47,654 63,523 (15,869) (25) % Goodwill impairment 12,026 - 12,026 100 % Restructuring 2,371 - 2,371 100 % Change in fair value of contingent consideration 1,053 (3,746) 4,799 * Gain on sale of business (79,465) - (79,465) 100 % Total costs and operating expenses 43,702 129,385 (85,683) (66) % Loss from operations (27,339) (112,122) 84,783 (76) % Other income (expense): Loss on debt extinguishment (7,947) - (7,947) 100 % Change in fair value of warrant liability 33 - 33 * Interest income 868 116 752 648 % Interest expense (5,149) (5,677) 528 (9) % Total other expense, net (12,195) (5,561) (6,634) 119 % Loss before income taxes (39,534) (117,683) 78,149 (66) % Income tax expense 82 - 82 * Net loss (39,616) (117,683) 78,067 (66) % Other comprehensive income (loss) Unrealized gain (loss) on marketable securities 39 (37) 76 * Foreign currency translation adjustment (691) (460) (231) 50 % Comprehensive loss$ (40,268) $ (118,180) $ 77,912 (66) % ____________________ * Not meaningful Loss from Operations Our operations resulted in a loss, however our loss from operations improved (decreased) by$84.8 million from a loss of$117.7 million for the year endedDecember 31, 2021 to a loss of$39.6 million in the year endedDecember 31, 2022 . This improvement was primarily the result of the recognized gain on the sale of business assets to Medtronic of$79.5 million and cost savings from restructuring, offset by a$12.0 million write-off of goodwill, and supplemented with a mix of other factors discussed below.
Revenue
Our revenue was
72--------------------------------------------------------------------------------
Table of Contents
Revenue by Product
The following table sets forth our revenue for disposables, systems and service/other for the years endedDecember 31, 2022 and 2021 (in thousands): Year Ended December 31, Change 2022 2021 $ % Disposables$ 12,922 $ 11,938 $ 984 8 % Systems 1,750 4,058 (2,308) (57) % Service/Other 1,691 1,267 424 33 % Total revenue$ 16,363 $ 17,263 $ (900) (5) % Total revenue decreased$0.9 million . The decrease was primarily attributable to a decrease in the volume of system sales of$2.3 million from$4.1 million in the year endedDecember 31, 2021 to$1.8 million in the year endedDecember 31, 2022 . This decrease resulted from our strategic shift in relocating low usage consoles to new sites. Otherwise, and despite the decrease in system sales, our revenue from disposables and services improved by$1.4 million from increases in procedure volumes.
Revenue by Geographic Source
The following table sets forth the geographic source of our revenue for the
years ended
Year Ended December 31, Change
2022 2021 $ %
United States $ 8,707 $ 8,325 $ 382 5 %
Outside the United States 7,656 8,938 (1,282) (14) %
Total revenue $ 16,363 $ 17,263 (900) (5) %
United States revenue grew by 5% primarily attributable to growth in disposables
sales due to increases in procedure volumes. Revenue outside the US declined
from prior year, primarily due to a decrease in capital sales.
Our revenue attributable to the United States represented 53% of our total
revenue for the year ended December 31, 2022 , compared to 48% for the year ended
December 31, 2021 . Variations in sales in insubstantial amounts may be expected
and are attributable to the timing and recognition inherent in the sales cycle.
Costs and Operating Expenses (Income)
Costs and operating expenses were
Stock-Based Compensation
The following table sets forth the stock-based compensation expense included in our results of operations for the years endedDecember 31, 2022 and 2021 (in thousands): Year Ended December 31, Change 2022 2021 $ % Cost of products sold$ 669 $ 864 $ (195) (23) % Research and development 1,736 2,181 (445) (20) % Selling, general and administrative 6,986 10,709 (3,723) (35) % Total stock-based compensation$ 9,391 $ 13,754
Our stock-based compensation decreased 32%, to$9.4 million for the year endedDecember 31, 2022 from$13.8 million for the year endedDecember 31, 2021 . This was primarily the result of our planned reduction in workforce. The savings in stock-based compensation expense from our reduction in headcount during 2022 was partially offset by$0.3 million of additional stock-based compensation from vested options associated with the re-pricing of our stock options to our employees. We expect 73
--------------------------------------------------------------------------------
Table of Contents
to realize continued cost saving in future years, however, those savings will be
partially offset by an additional
Cost of Products Sold
Cost of products sold was$31.9 million for the year endedDecember 31, 2022 , compared to$32.9 million for the year endedDecember 31, 2021 . This decrease of$1.0 million , or 3% was primarily the result of a decrease in costs associated with our reduction in workforce and a reduction in capital sales. Gross margin was negative 95% for the year endedDecember 31, 2022 , and negative 91% for the year endedDecember 31, 2021 . This decrease in gross margin was attributable to several factors including product and geographic mix and reduction in capitalized manufacturing variances carried from 2021.
Research and Development Expense
Research and development expense was$28.2 million for the year endedDecember 31, 2022 , compared to$36.7 million for the year endedDecember 31, 2021 . This decrease of$8.5 million , or 23%, was primarily attributable to$4.9 million in decreased compensation and related costs from our planned reduction in workforce.
Selling, General and Administrative Expense
Selling, general and administrative expense was$47.7 million for the year endedDecember 31, 2022 , compared to$63.5 million for the year endedDecember 31, 2021 . This decrease of$15.9 million , or 25%, was primarily attributable to$13.0 million in decreased compensation and related costs from lower headcount.
Goodwill Impairment
Restructuring
Restructuring expenses were$2.4 million for the year endedDecember 31, 2022 . This one-time expense resulted from our planned 2022 organizational workforce reduction and represents severance payments and other costs associated with employee terminations. We have realized and expect to continue realizing future cost savings as a result of our headcount reduction.
Change in Fair Value of Contingent Consideration
For the years endedDecember 31, 2022 and 2021, we recorded a change in fair value of contingent consideration consisting of an increase of$1.1 million and a decrease of$3.7 million , respectively, associated with the contingent consideration in the acquisition of Rhythm Xience. The increase in 2022 was primarily attributable to an increased in the expected term used for calculating its future value. The decrease in 2021 was primarily attributable to a decrease in projected net revenue along with a decrease to the expected term.
Gain on Sale of Business
During the year ended
The terms of our Asset Purchase Agreement with Medtronic provided for additional consideration upon our achievement of certain milestones related to our operational condition and regulatory approvals. During the year endedDecember 31, 2022 , we achieved both the contingent OEM Earnout entitling us to$20.0 million in consideration and the contingent Transfer Earnout entitling us to$17.0 million of consideration. We received payment for the OEM Earnout in the fourth quarter of 2022 and the Transfer Earnout inJanuary 2023 .
Over the next four years, we expect to receive a percentage of Medtronic's quarterly commercial sales of product related to the sale of business, ranging from 100% in the first year to 50% in the fourth year.
74--------------------------------------------------------------------------------
Table of Contents
Other Expense, Net
Other expense, net was$12.2 million for the year endedDecember 31, 2022 compared to$5.6 million for the year endedDecember 31, 2021 . This increase of$6.6 million , or 119% was primarily attributable to the one-time loss of$7.9 million recorded as a result of the extinguishment of our 2019 Credit Agreement, and other factors, partially offset by a$0.5 million reduction in interest expense.
Loss on Debt Extinguishment
During 2022, we renegotiated our 2019 Credit Agreement, replacing it with the
2022 Credit Agreement. The extinguishment of the 2019 Credit Agreement debt
resulted in our recording a one-time loss of
Change in Fair Value of Warrant Liability
For the year endedDecember 31, 2022 , we recognized a favorable change in fair value of our warrant liability that was not material. The variability in the fair value of our warrants is primarily attributable to the change in market price of the Company's common shares from the date of initial recognition of the warrant liability toDecember 31, 2022 .
During the year ended
Determination of fair value based upon several factors including price volatility, the price of the underlying warrant, the strike price of the warrant, the time until expiration of the warrants and the risk-free interest rate. As some factors are a reflection of market volatility, future amounts recorded are subject to market conditions and are therefore unpredictable.
Interest Income and Interest Expense, Net
Our interest income and interest expense are a direct reflection of amounts we hold for investment and amounts we owe to debtholders, respectively, both of which change according to our cash requirements. Additionally, as both our holdings and our debt bear interest at variable market rates, both are subject to market factors outside our immediate control. During the year endedDecember 31, 2022 interest income increased by$0.8 million resulting from increased cash balances and higher interest rates. The$0.5 million decrease in interest expense was primarily the result of a reduction in the amount of our long-term debt from 2021 to 2022, partially offset by increased interest rates.
Liquidity and Capital Resources
Our Company has limited revenue, and, since inception, we have incurred significant operating losses and negative cash flows from operations. We anticipate that we will incur significant losses for at least the next several years. As ofDecember 31, 2022 and 2021, we had cash, cash equivalents and marketable securities of$70.4 million and$107.9 million , respectively. For the years endedDecember 31, 2022 and 2021, our net losses were$39.6 million and$117.7 million , respectively, and our net cash used in operating activities was$85.0 million and$99.7 million , respectively. As ofDecember 31, 2022 and 2021, we had accumulated deficits of$518.3 million and$478.7 million , respectively, and working capital of$98.0 million and$107.8 million , respectively. Since raising$166.3 million from our IPO inAugust 2020 , we have issued additional shares of common stock. From time to time, the Company's Board of Directors authorizes the issuance of common stock for our stock-based compensation plans and for our ESPP. Additionally, inJuly 2021 , we issued 6,325,000 shares of common stock in a public offering, which included 825,000 shares of common stock issued upon the underwriter's exercise in full of an option to purchase additional shares of common stock. The price to the public for each share was$14.00 . We received gross proceeds of$88.6 million from the offering. Net of underwriting discounts and commission and other offering expenses, we received proceeds of$82.7 million . OnJune 30, 2022 , Medtronic paid us$50.0 million at the First Closing of the sale of our left-heart access portfolio to Medtronic, of which$4.0 million was paid into an indemnity escrow account for a period of 18 months to secure our indemnification obligations under the Asset Purchase Agreement. We achieved a$20.0 million OEM Earnout as set forth in the Asset Purchase Agreement onOctober 31, 2022 , which was paid to us in the fourth quarter of 2022. Additionally, we achieved a$17.0 million Transfer Earnout as set forth under the Asset Purchase Agreement onDecember 21, 2022 . Accordingly,$17.0 million was recorded as a receivable for the year endedDecember 31, 2022 and payment was received inJanuary 2023 . 75
--------------------------------------------------------------------------------
Table of Contents
Since inception, we have recorded no impairments to or write-offs of our
accounts receivable. Accounts receivable for the years ended
December 31, 2022 December 31, 2021
Trade accounts receivable $ 4,085 $ 3,633
Transfer Earnout receivable 17,000 -
Total accounts receivable $ 21,085 $ 3,633
Our management believes our current cash, cash equivalents, receivables, and
marketable securities are sufficient to fund operations for at least the next 12
months. To ensure that we have sufficient resources to fund operations,
management continues to review cost improvement opportunities and pathways to
reduce expenses and cash burn, while preserving the resources to invest in
future growth.
In the future, we may need to raise additional funds through the issuance of
debt and/or equity securities or otherwise. Until such time, if ever, that we
can generate revenue sufficient to achieve profitability, we expect to finance
our operations through equity or debt financings, which may not be available to
us on the timing needed or on terms that we deem to be favorable. To the extent
that we raise additional capital through the sale of equity or convertible debt
securities, the ownership interest of our stockholders will be diluted, and the
terms of these securities may include liquidation or other preferences that
adversely affect the rights of common stockholders. Debt financing and preferred
equity financing, if available, may involve agreements that include covenants
limiting or restricting our ability to take specific actions, such as incurring
additional debt, making acquisitions or capital expenditures or declaring
dividends. If we are unable to maintain sufficient financial resources, our
business, financial condition and results of operations will be materially and
adversely affected. We may be required to delay, limit, reduce or terminate our
product discovery and development activities or future commercialization
efforts.
Our future liquidity and capital funding requirements will depend on numerous factors, including:
•our revenue growth;
•our research and development efforts;
•our sales and marketing activities;
•our success in leveraging our strategic partnerships, including with Biotronik, as well as entrance into any other strategic partnerships or strategic transactions in the future;
•Medtronic's success in selling Products and their payment of royalties under their continuing obligation in the Asset Purchase Agreement;
•our ability to raise additional funds to finance our operations;
•the outcome, costs and timing of any clinical trial results for our current or future products;
•the emergence and effect of competing or complementary products;
•the availability and amount of reimbursement for procedures using our products;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•our ability to retain our current employees and the need and ability to hire additional management and sales, scientific and medical personnel;
•the terms and timing of any collaborative, licensing or other arrangements that we have or may establish;
•debt service requirements;
•the extent to which we acquire or invest in businesses, products or technologies; and
•the impact of the COVID-19 pandemic.
Our primary uses of capital are, and we expect will continue to be, investment in our commercial organization and related expenses, clinical research and development services, laboratory and related supplies, legal and other regulatory expenses, general administrative costs and working capital. In addition, we have acquired, and may in the future seek to acquire or invest
76--------------------------------------------------------------------------------
Table of Contents
in, additional businesses, products or technologies that we believe could complement or expand our portfolio, enhance our technical capabilities or otherwise offer growth opportunities.
Pursuant to the Biotronik License Agreement, we paid Biotronik a$3.0 million upfront fee as well as a technology transfer fee consisting of a total of$7.0 million in cash and$5.0 million in shares of our Series D convertible preferred stock. We may owe the Biotronik Parties up to$10.0 million , of which$2.0 million has been paid as ofDecember 31, 2022 , based upon the achievement of various regulatory and sales-related milestones. On an on-going basis, we agreed to pay a unit-based royalty on sales of force sensing catheters. We continue to make improvements in both operating expenses and cash burn. During 2022, we completed restructuring plans that helped strengthen our financial position and extend our cash runway. Our tangible actions, as well as achievements of the milestones related to the Medtronic Asset Purchase Agreement have set us up to be in an improved cash and liquidity position. Under Accounting Standards Codification Subtopic 205-40, Presentation of Financial Statements-Going Concern, we have the responsibility to evaluate whether conditions and/or events could raise substantial doubt about our ability to meet our future financial obligations as they become due within one year after the date that the financial statements are issued. Going concern matters are more fully discussed in Note 1 - Organization and Description of Business - Liquidity, Capital Resources and Going Concern of our condensed consolidated financial statements attached hereto.
Debt Obligations
OnJune 30, 2022 , we entered into the 2022 Credit Agreement, which provided us with a term loan facility in an aggregate principal amount of$35.0 million . The 2022 Credit Agreement bears an annual interest of 9% plus the one-month adjusted term Secured Overnight Financing Rate (as defined in the 2022 Credit Agreement) with a 2.5% minimum. The principal amount of the term loan will be paid in installments with the final principal payment due onJune 30, 2027 . The 2022 Credit Agreement can be prepaid but is subject to prepayment penalties. The 2022 Credit Agreement provides for final payment fees of an additional$1.8 million that are due upon prepayment, on the maturity date or upon acceleration. Proceeds from the 2022 Credit Agreement, along with cash on hand, were used to extinguish amounts owed under the 2019 Credit Agreement and to pay related fees and expenses and for working capital purposes. The 2022 Credit Agreement contains certain customary negative covenants, including, but not limited to, restrictions on our ability and that of our subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates. The 2022 Credit Agreement provides that, upon the occurrence of certain events of default, our obligations thereunder may be accelerated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, voluntary and involuntary bankruptcy proceedings, certain money judgments, change of control events and other customary events of default.
Our obligations under the 2022 Credit Agreement are secured by substantially all of our assets, including our intellectual property.
In connection with the 2022 Credit Agreement, we entered into a warrant purchase agreement (the "2022 Warrant Purchase Agreement") with certain affiliates ofDeerfield Management Company (collectively referred to as "Deerfield"), pursuant to which we issued warrants to purchase up to an aggregate 3,779,018 shares of our common stock, par value$0.001 per share common stock, at an exercise price of$1.1114 per warrant share for a period of eight years following the issuance thereof (the "2022 Warrants"). 77
--------------------------------------------------------------------------------
Table of Contents
Cash Flows
The following table shows a summary of our cash flows for the years ended
Year Ended
2022 2021
Net cash used in operating activities $ (85,032) $ (99,682)
Net cash provided by investing activities 104,750 19,066
Net cash (used in) provided by financing activities (12,116) 79,569
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(475) (116)
Net change in cash, cash equivalents and restricted cash
$ (1,163) As ofDecember 31, 2022 and 2021, cash, cash equivalents and restricted cash totaled$31.3 million and$24.2 million , respectively. During the year endedDecember 31, 2022 , cash, cash equivalents and restricted cash increased$7.1 million . During the year endedDecember 31, 2021 , the total of those items decreased$1.2 million .
Operating Activities
During the year endedDecember 31, 2022 , operating activities used$85.0 million of cash, cash equivalents and restricted cash, a decrease of$14.7 million from the$99.7 million cash used in the year endedDecember 31, 2021 . The$85.0 million cash used in operating activities the year endedDecember 31, 2022 was primarily the result of our cash-basis net loss from operations for the year of$86.4 million , computed as net loss from operations before the gain on sale of business and by adding back the non-cash items of stock based compensation and goodwill impairment and subtracting the non-cash gain recognized from the increase in value of contingent consideration. The$99.7 million cash used in operating activities for the year endedDecember 31, 2021 was primarily the result of our cash-basis net loss from operations for the year of$94.6 million , computed as net loss from operation and adding back non-cash stock based compensation and the non-cash loss in fair value of contingent consideration.
Investing Activities
Total cash provided by investing activities was
Cash provided by investing activities of$104.8 million during 2022 resulted from proceeds of$70.0 million from the sale of business to Medtronic and$38.7 million netted from the sale and maturity of marketable securities in excess of purchases, offset by our$4.0 million purchase of fixed assets. Cash provided by investing activities was$19.1 million during 2021. Sales and maturities of marketable securities netted against purchases provided$29.1 million , which was partially offset by purchases of property and equipment of$10.0 million . We intend to continue to invest in the purchase of fixed assets to improve and maintain our current level of customer support and our ability to efficiently manufacture and distribute our products.
Financing Activities
Cash used in financing activities was$12.1 million for the year endedDecember 31, 2022 and cash provided by financing activities was$79.6 million for the year endedDecember 31, 2021 , a decrease of$91.7 million . Cash used in financing activities during 2022 was$12.1 million , primarily due to repayment and fees of the old term loan of$45.6 million and payment of contingent consideration of$0.9 million , offset by net proceeds from new term loan of$34.2 million .
Cash provided by financing activities during 2021 was
78--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations and Commitments
We enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for preclinical trials and other services and products for operating purposes which are cancellable at any time by us, generally upon 30 days prior written notice.
Rhythm Xience
The agreement to acquire Rhythm Xience requires us to pay the former owners of Rhythm Xience up to$17.0 million in additional cash earn-out consideration based on the achievement of certain regulatory and revenue milestones, of which$7.2 million was paid as ofDecember 31, 2022 .
Biotronik
Pursuant to the Biotronik License Agreement, we are required to pay the Biotronik Parties up to$10.0 million of additional consideration, of which$2.0 million was paid as ofDecember 31, 2022 . Payments are contingent upon the achievement of various regulatory and sales-related milestones. Additionally, we are obligated to pay a unit-based royalty on sales of force sensing catheters on a continuing basis.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance withU.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue and expenses. 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. While our significant accounting policies are more fully described in Note 2-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.
Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606,
Revenue from Contracts with Customers ("ASC 606"), and ASC 842, Leases ("ASC
842"). The core principle of ASC 606 is that a company should recognize revenue
to depict the transfer of 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 or services. The following five steps are applied to
achieve that core principle:
•Step 1: Identify the contract with the customer.
•Step 2: Identify the performance obligations in the contract.
•Step 3: Determine the transaction price.
•Step 4: Allocate the transaction price to the performance obligations in the contract.
•Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
ASC 842 provides guidance on determining if an agreement contains a lease. ASC
842 defines a lease as a contract, or part of a contract, that conveys the right
to control the use of identified property, plant or equipment for a period of
time in exchange for consideration.
79--------------------------------------------------------------------------------
Table of Contents
We usually place our AcQMap System at customer sites under evaluation agreements and we generate revenue from the sale of disposable products used with the AcQMap System. Disposable products primarily include AcQMap Catheters and AcQGuide Steerable Sheaths. Outside of theU.S. , we also have the Qubic Force Device which generates revenue from the sale of the AcQBlate FORCE Ablation Catheters. We provide the disposable products in exchange for consideration, which occurs when a customer submits a purchase order and the Company provides disposables at the agreed upon prices in the invoice. Generally, customers purchase disposable products using separate purchase orders after the equipment has been provided to the customer for free with no binding agreement or requirement to purchase any disposable products. We have elected the practical expedient and accounting policy election to account for the shipping and handling as activities to fulfill the promise to transfer the disposable products and not as a separate performance obligation. We sell the AcQMap System to customers along with software updates on a when-and-if-available basis, as well as the Qubic Force Device and a transseptal crossing line of products which can be used in a variety of heart procedures and does not need to be accompanied with an AcQMap System or Qubic Force Device. We also enter into deferred equipment agreements that are generally structured such that we agree to provide an AcQMap System at no up-front charge, with title of the device transferring to the customer at the end of the contract term, in exchange for the customer's commitment to purchase disposables at a specified price over the term of the agreement, which generally ranges from two to four years. We have determined that the deferred equipment agreements include an embedded sales-type lease. We allocate contract consideration under deferred equipment agreements containing fixed annual disposable purchase commitments to the underlying lease and non-lease components at contract inception. We expense the cost of the device at the inception of the agreement and record a financial lease asset equal to the gross consideration allocated to the lease. The lease asset will be reduced by payments for minimum disposable purchases that are allocated to the lease. Lastly, we enter into short-term operating leases, for the rental of the system after an evaluation. These lease agreements impose no requirement on the customer to purchase the equipment and the equipment is not transferred to the customer at the end of the lease term. The short-term nature of the lease agreements does not result in lease payments accumulating to an amount that equals the value of the equipment nor is the lease term reflective of the economic life of the equipment. In addition to our AcQMap System and Disposable sales, we manufacture and sell left-heart access transseptal crossing products to Medtronic under a Distribution Agreement. Under our Distribution Agreement with Medtronic, we expect to produce and sell these products to Medtronic for a period of up to four years. Revenue is recognized when the title to the products are transferred to Medtronic, which occurs when the products are shipped from our facility (FOB shipping point). Stock-Based Compensation We account for all stock-based payments to employees and non-employees, including grants of stock options, restricted stock awards ("RSAs") and restricted stock units ("RSUs") to be recognized in the consolidated financial statements based on their respective grant date fair values. We estimate the fair value of stock option grants using the Black-Scholes option pricing model. The RSAs and RSUs are valued based on the fair value of the Company's common stock on the date of grant. The assumptions used in calculating the fair value of stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment. The Company expenses stock-based compensation related to stock options, RSAs and RSUs over the requisite service period. All stock-based compensation costs are recorded in cost of products sold, research and development expense or selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss based upon the respective employee's or non-employee's roles within the Company. Forfeitures are recorded as they occur. In addition, we have an employee stock purchase plan, or ESPP, which has an offering period commencing on the first trading day on or afterFebruary 1 andAugust 1 of each year and terminating on the last trading day on or beforeJuly 31 andJanuary 31 , respectively. InNovember 2021 , we amended our ESPP offering periods beginning in 2022 after theJanuary 31 purchase, to commence on the first trading day on or afterMay 15 andNovember 15 of each year and terminating on the last trading day on or beforeNovember 14 andMay 14 , respectively. On each purchase date, which falls on the last date of each offering period, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. We recognizer an expense in the amount equal to the estimated fair value of the discount. 80
--------------------------------------------------------------------------------
Table of Contents
Fair Value Measurements
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP, and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received when selling an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest and Level 3 being the lowest). In connection with certain of our acquisitions, additional contingent consideration can be earned by the sellers upon achievement of certain milestones and revenue-based targets in certain years. We classify our contingent consideration liability as Level 3. The initial fair value of the revenue-based contingent consideration was therefore calculated through the use of a Monte Carlo simulation utilizing revenue projections for the respective earn-out period, corresponding targets and approximate timing of payments as outlined in the purchase agreement. The analyses used the following assumptions: (i) expected term; (ii) risk-adjusted net sales; (iii) risk-free interest rate; and (iv) expected volatility of net sales. Estimated contingent consideration payments, as determined through the respective model, were further discounted by a credit spread assumption to account for credit risk. The fair value of the milestones-based contingent consideration was determined by probability weighting and discounting to the respective valuation date at our cost of debt. Our cost of debt was determined by performing a synthetic credit rating for us and selecting yields based on companies with a similar credit rating. The contingent consideration is revalued to fair value each period, and any increase or decrease is recorded in operating loss. The fair value of the contingent consideration may be impacted by certain unobservable inputs, most significantly with regard to discount rates, expected volatility and historical and projected performance. Significant changes to these inputs in isolation could result in a significantly different fair value measurement. Warrant Liability We account for certain common stock warrants outstanding as a liability, in accordance with ASC 815, Derivatives and Hedging, at fair value and adjust the instruments to fair value at each reporting period. OnJune 30, 2022 , we issued warrants in connection with the 2022 Credit Agreement, which were determined to be liability classified warrants. The stock warrant liability was estimated using a Black-Scholes model. The warrant liability is subject to re-measurement at each reporting period or upon conversion, and any change in fair value is recognized in our consolidated statements of operations and comprehensive loss.
Goodwill is not amortized but is subject to periodic impairment testing.Goodwill is assigned to a reporting unit and the reporting unit's goodwill is tested for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In the evaluation of goodwill for impairment, which we perform annually during the fourth quarter, we first assess qualitative factors to determine whether the existence of events or circumstances could lead to a determination that it was more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. We could also elect to perform a quantitative impairment test without first assessing qualitative factors. During the year endedDecember 31, 2022 , our management assessed qualitative factors and determined it was more likely than not that the fair value of the goodwill was less than its carrying amount. This required us to perform a quantitative impairment test prior to our standard year-end testing. In performing a quantitative impairment test, we determined that goodwill was fully impaired. We took a charge against the goodwill asset on the consolidated balance sheets and recorded a concurrent expense on the statements of operations and comprehensive loss for the full recorded balance of goodwill. 81
--------------------------------------------------------------------------------
Table of Contents
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Note 2-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, which is incorporated by reference in response to this item.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in 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, 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 and may elect to take advantage of other reduced reporting requirements in our future filings with theSEC . 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, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to avail ourselves of this provision of the JOBS Act. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies. Therefore, our consolidated financial statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of: (i)December 31, 2025 ; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.235 billion ; (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) 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 are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than$250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than$100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than$700.0 million measured on the last business day of our second fiscal quarter.
© Edgar Online, source
