PEAR THERAPEUTICS, INC.
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
Pear's actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in the "Risk Factors" section included in Part I, Item 1A of this Form
10-K. All references to years, unless otherwise noted, refer to our fiscal
years, which end on December 31 . For purposes of this section, all references to
"we," "us," "our," "Pear," or the "Company" refer to Pear Therapeutics, Inc. and
its consolidated subsidiaries.
The following discussion and analysis should also be read in conjunction with
the accompanying consolidated financial statements included in Part II, Item 8
of this Form 10-K. This section discusses 2022 and 2021 financial condition, and
results of operations and year-to-year comparisons between 2022 and 2021. For
discussion of 2021 items and year-over-year comparisons between 2021 and 2020
that are not included in this 2022 Form 10-K, refer to "Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations" found
in our Form 10-K for the year ended December 31, 2021 , that was filed with the
Securities and Exchange Commission on March 29, 2022 .
Overview
Due to the fact that we were unable to generate sufficient cash flows from operations, obtain funding to sustain operations, or reduce or stabilize expenses to the point where we could have realized a net positive cash flow, management and our board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that we could continue to operate. If the strategic process is unsuccessful, our Board may decide to pursue a liquidation or obtain relief under the US Bankruptcy Code. The Company has hired advisors to explore strategic alternatives including, if needed, filing for bankruptcy protection. Further, Perceptive has alleged that certain defaults or events of default have occurred and are continuing under the terms of our Perceptive Credit Facility. Perceptive has not delivered any formal notice of Default or Event of Default. To the extent that any such allegations are valid, Perceptive would have certain rights and remedies under the Perceptive Credit Facility. The Company disputes the allegations and is in discussions with Perceptive to resolve this dispute and otherwise to address the Company's obligations under the Perceptive Credit Facility. There can be no assurances that such discussions will result in any resolution, and any resolution, or the lack of any resolution, may result in Perceptive exercising remedies under the Perceptive Credit Facility. The Company cautions that trading in the Company's securities is highly speculative and poses substantial risks. Trading prices for the Company's securities may bear little or no relationship to the actual value realized, if any, by holders of the Company's securities. In the event of liquidation, bankruptcy or other wind-down event, holders of our securities will likely suffer a total loss of their investment. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.
Pear is a commercial-stage healthcare company pioneering a new class of medicine, referred to as PDTs, which use software to treat disease. Our vision is to advance healthcare through the widespread use of PDTs.
Two of our FDA-authorized PDTs are for the treatment of addiction. Our first
product, reSET, is indicated for the treatment of substance use disorder ("SUD")
as a monotherapy. Our second product, reSET-O, is indicated for the treatment of
opioid use disorder ("OUD") in combination with buprenorphine.
Our third product, Somryst, is indicated for the treatment of chronic insomnia.
The Company has deprioritized commercialization efforts regarding Somryst while
focusing available resources on the commercialization of reSET and reSET-O and
therefore recorded an impairment expense of $0.8 million related to the acquired
technology, which is included in cost of revenue in the Company's consolidated
statement of operations, during the year ended December 31, 2022 .
See "Recent Events" below for further details.
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Operating Segments
We operate our business in a single segment and as one reporting unit, which is how our chief operating decision maker (who is our president and chief executive officer) reviews financial performance and allocates resources.
Factors Affecting Our Performance and Results of Operations
We believe that our performance and future success depend on many factors that present significant opportunities for us but also pose risks and challenges, including those discussed more fully under the heading "Risk Factors" in Part I, Item 1A of this Form 10-K. InFebruary 2023 , our strategic focus shifted to identifying and evaluating of a range of potential strategic alternatives designed to maximize stockholder value while we continue to operate the Company and serve our patients.
Key Business Metrics
We monitor the key non-financial operating performance metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. The metrics include the following:
A.Total Prescriptions in a given period is (a) the imputed number of prescriptions based on revenue recognized under Access Agreements, plus (b) the number of prescriptions written which are not imputed under Access Agreements.
B.Fulfillment Rate in a given period is (a) the number of prescriptions for which either a patient commences therapy or there is a contractual payment obligation and revenue has been recognized divided by (b) Total Prescriptions. (Total Prescriptions times Fulfillment Rate equals Fulfilled Prescriptions.)
C.Payment Rate in a given period is (a) the number of prescriptions for which the company receives payment divided by (b) Fulfilled Prescriptions. (Fulfilled Prescriptions times Payment Rate equals Paid Prescriptions.)
D.Average Selling Price, or "ASP", in a given period is the average price received by the Company per script for which the Company receives payment.
Key Performance Operating Metric Year EndedDecember 31, 2022 Total Prescriptions 45,000+ Fulfillment Rate 53% Payment Rate 41% Average Selling Price (ASP)$1,195 Product Revenue We generate product revenue from the sale of our three FDA-authorized PDTs: reSET, reSET-O, and Somryst. We began our efforts to self-commercialize reSET and reSET-O in Q4 2019 and Somryst in Q4 2020. Sales of reSET and reSET-O are expected to reduce our net operating losses over time, but we cannot predict when we will achieve profitability. While we continue to support Somryst, our primary focus is on reSET and reSET-O. We enter into agreements with health care providers and payors and state and local governments to provide prescriptions which provide for volume-based discounts and other discounts, and in certain circumstances, value-based rebates ("Access Agreement"). We also enter into arrangements with health care providers and payors that provide for government-mandated and/or privately negotiated rebates and discounts with respect to the purchase of our products. A portion of the product revenue is recognized when the products are made available to the customer (via Access Agreements) or when a prescription is fulfilled (via third-party reimbursement), and the portion of the product revenue related to the clinician's access to our proprietary clinician dashboard, PearMD, is deferred and recognized ratably over the remaining term of the contract (if purchased via an Access Agreement) orPear Therapeutics, Inc. | 2022 Form 10-K |Page 108
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the prescription duration (if purchased via third party reimbursement). When sold under an Access Agreement and implementation services are included, we recognize the implementation services as control is transferred to the customer, generally over the remaining term of the contract.
Product revenue from our existing three FDA-authorized PDTs is and will be impacted by many factors, including the following variables: coverage and reimbursement by payors, patient and clinician adoption of PDTs, pricing, contingency management (related only to reSET and reSET-O), and product mix. In the future, if we obtain additional financing, sales from future product candidates are expected to be impacted by similar variables.
Although we provide products and services to many different types of customers,
a significant portion of our product revenue is generated from awards under
various US government, state, and local governments programs or grants. As a
result of long sales cycle and the dependency on government or external funding,
our product revenue can be unpredictable and fluctuate materially from period to
period. We cannot predict the future level of demand for our products and
services that will be generated by these customers or the future demand for our
products in the end-user marketplace. Our customer concentration exposes us to
the risk of changes in the business condition of any of our major customers or
broader changes in US government spending for opioid and substance abuse
treatments.
Coverage and Reimbursement by Payors-Our payor strategy focuses across all major
payor channels, including employers, Integrated Delivery Networks ("IDNs"),
pharmacy benefit managers ("PBMs"), commercial payors, and government payors,
including Medicaid and Medicare. We expect to increase our number of payors, and
the pricing for such payors may vary as net prices for our products may be
reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and can be subject to customary discounts and
rebates. In addition, some of our products may be subject to certain customer
incentive programs. Even if coverage is provided, the approved reimbursement
amount may not be high enough to allow us to establish or maintain pricing
sufficient to achieve profitability. In the future, as our market access team
educates payors on the clinical attributes of our products, we expect our
products to secure favorable coverage policies and to maximize the covered lives
that have reimbursement for our products.
Patient and Clinician Adoption of PDTs-To continue to grow our business, we need
additional funding and once obtained we will need to execute our current
business strategy of achieving and maintaining broad market acceptance of our
PDTs by patients and physicians. Market acceptance and adoption of our PDTs
depend on educating patients, self-insured employers, commercial and government
payors, health plans and physicians, and other government entities, as to the
distinct features, therapeutic benefits, cost savings, and other advantages of
our PDTs as compared to competitive products or other currently available
treatment options.
Pricing-In the future, assuming that we have sufficient operating capital, we
expect to grow the number of commercially available PDTs in our product
portfolio, offering a broad range of PDTs spanning multiple price points. PDTs
may be subject to competition, which may impact our pricing, and in certain
circumstances, we have offered significant discounted pricing in connection with
pilot programs. In addition, our products may be subject to legislative
prescription-pricing practices. Further, we continue to collect additional data
to enhance product performance and bolster health economics and outcomes
research ("HEOR") and associated cost savings for payors. Our average selling
price could decline over time as we engage in larger volume transactions that
extend over multiple years and provide for larger volume discounts.
Contingency Management-Costs related to clinically-validated rewards patients earn as they complete treatment goals within our reSET and reSET-O PDTs are recorded as contra revenue.
Revenue Mix-Sales of certain products and subscription, support, and professional services have, or are expected to have, higher gross margins than others. As a result, our financial performance depends, in part, on the mix of products and subscription, support, and professional services that we sell during a given period.
Cost of Revenue
Cost of revenue consists primarily of costs closely correlated or directly related to the delivery of our products, including pharmacy costs, royalties paid under license agreements related to our commercialized products,
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amortization of milestone payments capitalized related to commercialized products, hosting costs, and personnel-related costs, including salaries and bonuses, employee benefits, and stock-based compensation attributable to employees in a particular function and associated with our implementation services. In addition, it includes subcontracted costs such as software license fees, technology, and service fees directly related to our subscription and service fee revenue.
During the quarter ended
We expect the cost of revenue to increase as we further commercialize our products and increase the volume of prescriptions filled. However, we expect our cost of revenue to decrease as a percentage of total revenue over the longer-term, subject to the expected revenue growth. The majority of our cost of revenue does not fluctuate directly with increases or decreases in revenue.
Research and Development Expenses
As ofJuly 25, 2022 , we paused most investments in our pipeline in order to conserve cash. In addition, we anticipate that our personnel costs will decline as a result of the reductions in workforce that occurred in July andNovember 2022 . We expect our R&D expenses will decrease substantially in 2023 in connection with our continued cost cutting measures.
R&D expenses consist of costs incurred in performing R&D activities, which include:
•expenses incurred in connection with the development of our pipeline of PDTs;
•expenses incurred to enhance our products;
•costs in connection with third-party licensing agreements, including development and regulatory milestones;
•personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation for employees engaged in R&D functions;
•cost of clinical trials and studies;
•expenses incurred in connection with the discovery and development of our PDTs, including under agreements with third parties, such as consultants;
•expenses incurred under agreements with consultants who supplement our internal capabilities, including software development; and
•facilities, depreciation, and other expenses, which include direct and allocated expenses, such as rent and maintenance of facilities, insurance, and other operating costs for space and costs directly related to R&D functions;
Due to the worsening macroeconomic environment and the longer-term outlook of the general markets and limited cash to fund further development of our product candidates we wrote off$2.1 million of intangible assets related to acquired technology, in the year endedDecember 31, 2022 . We expense R&D costs as incurred and do not track the costs at a project level. Advance payments made for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses. The prepaid amounts are expensed as the benefits are consumed. In the early phases of development, our R&D costs are often devoted to product platform and proof-of-concept studies that are not necessarily allocable to a specific product. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we arePear Therapeutics, Inc. | 2022 Form 10-K |Page 110
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unable to determine the duration and completion costs of our R&D projects, the costs of related clinical development, or when and to what extent, we will generate revenue from the commercialization and sale of any of our product candidates.
At this time we have paused all investment in our product candidates and delayed certain enhancements to our PearConnect platform. Each of our product candidates has technical, clinical, regulatory, and commercial risk, including those discussed more fully under the heading "Risk Factors" in Part I, Item 1A of this Form 10-K.
Selling, General, and Administrative Expenses
Selling, general, and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation related to commercial, marketing, executive, finance and accounting, information technology, corporate and business development, and human resource functions. Other SG&A expenses include marketing initiatives, market research and analysis, conferences and trade shows, travel expenses, professional services fees (including legal, patent, accounting, audit, tax, and consulting fees), insurance costs, amortization of certain internal-use software, general corporate expenses, and allocated facilities-related expenses, including rent and maintenance of facilities. We expect SG&A expenses to decrease as we reduce spending primarily on personnel-related expenses and certain commercial efforts in connection with our restructuring activities, including the reductions in workforce that occurred in July andNovember 2022 .
Interest and Other Income (Expense), net
Interest expense includes interest due under our secured Amended and Restated Credit Agreement and Guaranty withPerceptive Credit Holdings III, LP (the "Perceptive Credit Facility"), as administrative agent for the lenders, which we refer to as the Perceptive Credit Facility, and accretion of the debt discount on the Perceptive Credit Facility as well as the change in the fair value of our derivative liabilities and earn-out liabilities that occurred during the period. We expect interest expense to increase as interest rates such as theLondon Interbank Offered Rate ("LIBOR") and the Secured Overnight Financing Rate ("SOFR") increase. Interest income consists of interest earned on cash balances held in interest-bearing accounts. We expect our interest income will fluctuate based on rising interest rates, our cash balances on hand, the timing and ability to raise additional funds, as well as the amount of expenditures for our commercial products, and R&D for our product candidates and ongoing business operations.
Financial Highlights
Year-over-year product revenue grew by approximately 178% to$10.4 million from$3.7 million primarily due to an increase in sales of reSET and reSET-O under Access Agreements. Year-over-year collaboration revenue grew by approximately 90% to$0.9 million from$0.5 million primarily due to the development work completed on a Japanese-language digital therapeutic for the treatment of sleep/wake disorders for the Japanese market in collaboration with SoftBank Corp. that was completed in 2022. We also recognized subscription, support, and professional services revenue of$1.4 million for the year endedDecember 31, 2022 , under a new product offering under a pilot offering of a new product by the Medicaid program of a state government . We incurred net losses of$75.5 million and$65.1 million for the year endedDecember 31, 2022 and 2021, respectively, representing a period-over-period increase in our net loss of$10.3 million or 15.9%. This increase in the net loss was primarily due to a$22.7 million increase in personnel-related expenses related to increased headcount during the first half of 2022 compared to 2021, and severance costs associated with the July andNovember 2022 reductions in workforce, partially offset by$8.5 million increase in total revenue period over period and a gain related to the change in fair value of the Public Warrants and the Private Placement Warrants of$6.4 million for the year endedDecember 31, 2022 , compared to a$0.3 million loss for the year endedDecember 31, 2021 . We had an average of 245 full-time employees for the year endedDecember 31, 2021 , and an average of 267 full-time employees for the year endedDecember 31, 2022 . We had a$3.4 million increase in costs related to being a public company period over period, primarily related to our directors' and officers' insurance.Pear Therapeutics, Inc. | 2022 Form 10-K |Page 111
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To date, we have funded our operations primarily with proceeds from sales of Legacy Pear's convertible preferred stock, proceeds as a result of the Business Combination, payments received in connection with our revenue contracts and proceeds from borrowings under various credit facilities. We have received gross cash proceeds of$175.3 million as a result of the Business Combination (see Note 3, Business Combination, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K) and gross cash proceeds of$268.2 million from sales of our Legacy Pear's convertible preferred stock; we currently have$30.0 million of debt outstanding under the Perceptive Credit Facility. Recent Events
Exploring Strategic Alternatives
We have engagedMTS Health Partners, L.P. ("MTS") as our advisor to assist with the exploration of strategic alternatives. MTS is providing a range of advisory services aimed to enhance stockholder value. The alternatives to be considered may include, but are not limited to, the sale of all or substantially all of our assets; a strategic merger or other business combination transaction; or another change of control transaction between us and a third party. If the strategic process is unsuccessful, our Board may decide to pursue a liquidation or obtain relief under the US Bankruptcy Code. The Company has hired advisors to explore strategic alternatives including, if needed, filing for bankruptcy protection. In the event of such liquidation, bankruptcy case, or other wind-down event, holders of our securities will likely suffer a total loss of their investment.
Waiver of Debt Covenants and Negotiations with Lender
The Company was not in compliance with the minimum revenue covenant for the quarter endingDecember 31, 2022 , of$18.0 million and was in compliance with the minimum cash balance covenant requirement of$5.0 million . The Company obtained a waiver of the minimum trailing twelve (12) month revenue requirement for the quarter endedDecember 31, 2022 andMarch 31, 2023 , respectively. The Company also obtained a waiver pertaining to the existence of a "going concern" qualification in the accompanying opinion of the Company's auditors in its Annual Report on Form 10-K and any resulting event of default. However, as of the date of this filing, Perceptive has alleged that certain defaults or events of default have occurred and are continuing under the terms of the Perceptive Credit Facility. Perceptive has not delivered any formal notice of Default or Event of Default. To the extent that any such allegations are valid, Perceptive would have certain rights and remedies under the Perceptive Credit Facility. The Company disputes the allegations and is in discussions with Perceptive to resolve this dispute and otherwise to address the Company's obligations under the Perceptive Credit Facility. There can be no assurances that such discussions will result in any resolution, and any resolution, or the lack of any resolution, may result in Perceptive exercising remedies under the Perceptive Credit Facility. If the acceleration of the debt were to occur, we could also be required to pay a prepayment penalty of$3.6 million . At-the-Market (ATM) Offering OnJanuary 3, 2023 , the Company entered into an ATM offering agreement (the "ATM Agreement") withH.C. Wainwright & Co., LLC ("Wainwright") andVirtu Americas LLC ("Virtu" and, collectively with Wainwright, the "Managers" and each, a "Manager"), pursuant to which the Company may offer and sell, from time to time through the Managers, shares of the Company's Class A common stock. The ATM Agreement authorized an aggregate gross proceeds of up to$150.0 million . Sales of common stock through the Manager could be made by any method that is deemed an "at-the-market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including by means of ordinary brokers' transactions at market prices, in block transactions or as otherwise agreed by the Company and the Managers. The Company will pay the designated Manager a commission of up to 3.0% of the aggregate gross proceeds from any Shares sold by the designated Manager and provide the Managers with customary indemnification and contribution rights, including for liabilities under the Securities Act. The Company also will reimburse the Managers for certain specified expenses in connection with entering into the ATM Agreement.Pear Therapeutics, Inc. | 2022 Form 10-K |Page 112
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As of
Restructuring, Reductions in Workforce, and
OnJuly 25, 2022 , the Company restructured its operations to narrow its near-term business focus and reduce its workforce due to the macroeconomic environment. As a result of the restructuring, the Company incurred a charge of$0.9 million primarily associated with the severance and health insurance expenses related to 25 full-time employees, representing approximately 9% of full-time employee at the time of the restructuring and reduction in workforce. In connection with this restructuring, we reduced spending on our pipeline candidates, discovery programs, business development, and the Company's dual platform in order to prioritize certain of its commercial efforts and will continue to reduce costs in each of these areas. The direct costs associated with the first restructuring and reduction in workforce were recorded in the quarter endedSeptember 30, 2022 . OnNovember 14, 2022 , we announced a second reduction in workforce, further reducing our headcount by approximately 59 employees, or approximately 22% of our full-time employees as ofSeptember 30, 2022 , due to the worsening macroeconomic environment. The Company recorded$2.5 million in severance charges in connection with the second reduction in workforce, related to severance payments, employee benefits, and related costs, in the fourth quarter of 2022. In addition, the Company recorded a stock-based compensation and corresponding payroll tax expense benefit of$0.1 million related to modifications of equity awards for employees impacted by the reduction in workforce. The estimated costs that the Company expects to incur in connection with the reduction in forces and cost saving initiatives are subject to a number of assumptions, and actual results may differ significantly from these estimates. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the reductions in workforce and cost saving initiatives. In the future, there may also be incremental one-time charges associated with non-work force related cost savings actions.
Economic Conditions (Impact of COVID-19)
OnJanuary 30, 2023 , theBiden Administration announced it will end the public health emergency (and national emergency) declarations related to COVID-19 onMay 11, 2023 . While the COVID-19 pandemic has not materially adversely affected our financial results and business operations throughDecember 31, 2022 , COVID-19 continues to present risks to the Company, and we continue to closely monitor the impact of the pandemic on all aspects of our business. We are unable to predict the impact that COVID-19 (including the emergence of new variants) will have on our financial position and operating results in the future.
Impact of Inflation
We are experiencing rising costs for certain inflation-sensitive operating
expenses, such as labor, and certain service providers that are heavily
dependent on labor. We do not believe these impacts were material to net income
during the year ended
FL Medicaid Coverage
EffectiveJanuary 1, 2023 , reSET® and reSET-O® were added to Florida Medicaid Preferred Drug List (PDL). reSET and reSET-O, the only FDA-authorized PDTs for the treatment of substance use disorder and opioid use disorder, respectively.Pear Therapeutics, Inc. | 2022 Form 10-K |Page 113
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Results of Operations
The tables and discussion below present the results for the periods indicated:
Year Ended December 31, Change
(in thousands, except percentages) 2022 2021 $ %
Revenues
Product revenue$ 10,417 $ 3,748 $ 6,669 178 % Collaboration and license revenue 872 460 412 90 % Subscription, support, and professional services revenue$ 1,405 $ - 1,405 * Total revenues 12,694 4,208 8,486 202 % Cost and operating expenses: Cost of revenue 8,182 5,233 2,949 56 % Research and development 48,311 37,041 11,270 30 % Selling, general, and administrative 79,551 67,619 11,932 18 % Total cost and operating expenses 136,044 109,893 26,151 24 % Loss from operations (123,350) (105,685) (17,665) (17) % Other income (expenses): Interest and other expenses, net$ (3,892) (4,144) 252 6 % Change in estimated fair value of earn-out liability 45,339 47,038 (1,699) (4) % Change in estimated fair value of warrant liabilities 6,412 (298) 6,710 * Loss on issuance of Legacy Pear convertible preferred stock $ - (2,053) 2,053 * Total other income (expense) 47,859 40,543 7,316 18 % Net loss$ (75,491) $ (65,142) $ (10,349) 16 %
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* Percentage change not meaningful.
Product revenue-Product revenue for the year ended
Collaboration and license revenue-Collaboration and license revenue for the year endedDecember 31, 2022 , was$0.9 million , compared to$0.5 million for the year endedDecember 31, 2021 , primarily due to the development work completed on a Japanese-language digital therapeutic for the treatment of sleep/wake disorders for the Japanese market in collaboration with SoftBank Corp. that was completed in 2022. See Part III Item 13, "Certain Relationships and Related Transactions, and Director Independence" below for information regarding the related party nature of the agreement.
Subscription, support, and professional services revenue - Subscription,
support, and professional services revenue for the year ended
Cost of revenue-Cost of revenue for the year endedDecember 31, 2022 , was$8.2 million , compared to$5.2 million for the year endedDecember 31, 2021 . This increase of$2.9 million was primarily due to an increased number of customers and clinics served associated with our Access Agreements, and minimum royalties related to licensing agreements for commercialized products, pharmacy, and hosting costs for our PDTs. Additionally, we recorded$0.8 million of impairment expense on the intangible assets related to acquired technology used in our Somryst commercial product for the year endedDecember 31, 2022 . Several factors positively contributed to an increased efficiency of implementing our products in clinics during 2022, including economies of scale and focusedPear Therapeutics, Inc. | 2022 Form 10-K |Page 114
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go-to market efforts resulting in increased productivity of our implementation team. Cost of revenue represented 64.5% and 124.4% of total revenue for the years endedDecember 31, 2022 and 2021, respectively. We expect cost of revenue in 2023 to decrease as a percentage of revenue as revenue increases from further economies of scale. Research and development-R&D expenses for the year endedDecember 31, 2022 , were$48.3 million , compared to$37.0 million for the year endedDecember 31, 2021 . The increase of$11.3 million was primarily due to an increase of$8.7 million of personnel-related costs from higher average headcount during the first half of 2022 and subsequent severance costs from the July andNovember 2022 reductions in workforce, and$2.1 million of impairment of a previously acquired intangible asset. We anticipate decreases in R&D costs compared to prior periods as a result of the restructuring and reductions in workforce as well as us pausing any further investment in our pipeline of product candidates. Selling, general, and administrative-SG&A expenses for the year endedDecember 31, 2022 , were$79.6 million , compared to$67.6 million for the year endedDecember 31, 2021 . The increase of$11.9 million was primarily due to an increase of$12.1 million in personnel-related costs from higher average headcount during the first half of 2022 and subsequent severance costs from the July andNovember 2022 reductions in workforce. These increases were offset by reduction in our marketing spend. We anticipate decreases in SG&A costs compared to prior periods as a result of the restructuring and reductions in workforce, reduced marketing spend as well as reductions in our travel expenses and cost savings related to the departure of our Chief Commercial Officer . Interest and other (expense) income, net-Interest and other income (expense), net, for the year endedDecember 31, 2022 , was an expense of$3.9 million compared to an expense of$4.1 million for the year endedDecember 31, 2021 . This decrease is mainly the result of$1.1 million of interest income on cash equivalents and short-term investments as a result of higher investment balances due to the proceeds of the Business Combination that closed inDecember 2021 and a$0.6 million gain from the change in the fair value of the embedded debt derivative recorded during year endedDecember 31, 2022 . Change in fair value of earn-out liabilities-For the year endedDecember 31, 2022 , we recognized a$45.3 million gain as a result of the change in fair value of the earn-out liabilities, compared to a gain of$47.0 million for the year endedDecember 31, 2021 primarily as a result of the fluctuations in the underlying share price of our Class A common stock. Change in fair value of warrant liabilities-For the year endedDecember 31, 2022 , we recognized a gain of$6.4 million related to the Public Warrants and the Private Placement Warrants. We recognized a$0.3 million loss for the year endedDecember 31, 2021 , related to the Legacy Pear Warrants, which were exercised in 2021 prior to the Business Combination. Loss on issuance of Legacy Pear convertible preferred stock-InFebruary 2021 , the Company issued shares of Legacy Pear Series D-1 Preferred Stock. The shares were recorded at their estimated fair market value on the date of issuance. In connection with the Legacy Pear Series D-1 Preferred Stock, we recorded a loss of$2.1 million for the year endedDecember 31, 2021 , which represents the amount by which the estimated fair value of the shares exceeded the sale price, net of issuance costs. Income tax-We did not incur income tax expenses for the year endedDecember 31, 2022 and 2021. Given our lack of prior earnings history, we have a full valuation allowance primarily related to our net operating loss and R&D credit carryforwards that we do not consider more likely than not to be realized.
Liquidity and Capital Resources
Exploring Strategic Alternatives
We require substantial additional capital to sustain our operations and pursue
our growth strategy, including the development of our product candidates. The
Company has engaged MTS as our investment bank to assist with the exploration of
strategic alternatives that may include, but are not limited to, the sale of all
or substantially all of our assets; a strategic merger or other business
combination transaction; or another change of control transaction between us and
a third party. If a strategic process is unsuccessful, our Board may decide to
pursue a liquidation or
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obtain relief under the US Bankruptcy Code. The Company has hired advisors to explore strategic alternatives including, if needed, filing for bankruptcy protection. These factors raise substantial doubt about our ability to continue as a going concern. For more information, refer to "-Liquidity and Capital Resources" below and Note 1, Nature of the Business, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K. Sources of Liquidity Since our inception, our primary sources of capital have been proceeds from sales of Legacy Pear convertible preferred stock, payments received in connection with collaboration agreements, payments received on our revenue contracts, include the sale of our products,, proceeds from borrowings under various credit facilities, and the Business Combination. See Note 3, Business Combination, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information. Our cash flows may fluctuate and are difficult to forecast and will depend on many factors. As ofDecember 31, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$48.3 million and$169.6 million , respectively. Based on our current operating plans inclusive of theJuly 2022 restructuring plan and reduction in force, theNovember 2022 reduction in force and further cost saving initiatives as well as strategic review process, we have sufficient cash and cash equivalents to fund our operating expenses and capital expenditures into the second quarter of 2023. Debt Financing and Covenants-OnJune 30, 2020 , the Company entered into the Perceptive Credit Facility with Perceptive. Outstanding borrowings under our secured Perceptive Credit Facility were$30.0 million as ofDecember 31, 2022 andDecember 31, 2021 . The Perceptive Credit Facility matures inJune 2025 . Prior toFebruary 1, 2023 , the Perceptive Credit Facility bore interest through maturity at a variable rate based upon the one-month LIBOR rate plus 11.0%, subject to a LIBOR floor of 1.0%. As ofDecember 31, 2022 , the interest rate was 15.1%. OnJanuary 13, 2023 , the Company and Perceptive executed the First Amendment to the Perceptive Credit Facility, which replaced LIBOR with the Secured Overnight Financing Rate ("SOFR"), effectiveFebruary 1, 2023 . As of and for the year endedDecember 31, 2022 , the effect of switching from LIBOR to SOFR would not have been material to the Company's consolidated financial statements. The Company is required to make interest-only payments untilMay 31, 2024 , after which point the Company will be required to make monthly payments of principal equal to 3.0% of the then outstanding principal until maturity onJune 30, 2025 . The Perceptive Credit Facility is secured by substantially all of the assets of the Company, including our intellectual property. The Perceptive Credit Facility requires the Company to (i) maintain a minimum aggregate cash balance of$5.0 million in one or more controlled accounts, and (ii) as of the last day of each fiscal quarter commencing with the fiscal quarter endingMarch 31, 2022 , report revenues for the trailing 12-month period that exceed the amounts that range from$18.0 million for the fiscal quarter endingMarch 31, 2022 , to$125.0 million for the fiscal quarter endingMarch 31, 2025 . For the quarter endingDecember 31, 2022 , the trailing 12-month period revenue requirement was$18.0 million . The Perceptive Credit Facility contains various affirmative and negative covenants that limit the Company's ability to engage in specified types of transactions. The Company was not in compliance with the trailing twelve month revenue covenant under the Perceptive Credit Facility as ofDecember 31, 2022 , however we requested and were granted a waiver on the trailing 12-month revenue requirement for both the quarter endedDecember 31, 2022 andMarch 31, 2023 , respectively. In addition, onFebruary 28, 2023 , the Company obtained a waiver pertaining to the existence of a "going concern" qualification in the accompany opinion of the Company's auditors in this Form 10-K and any resulting event of default. As of the date of this filing, Perceptive has alleged that certain defaults or events of default have occurred and are continuing under the terms of the Perceptive Credit Facility. Perceptive has not delivered any formal notice of Default or Event of Default. To the extent that any such allegations are valid, Perceptive would have certain rights and remedies under the Perceptive Credit Facility. The Company disputes the allegations and is in discussions with Perceptive to resolve this dispute and otherwise to address the Company's obligations under the Perceptive Credit Facility. There can be no assurances that such discussions will result in any resolution, and any resolution, or the lack of any resolution, may result in Perceptive exercising remedies under the Perceptive Credit Facility. As of thePear Therapeutics, Inc. | 2022 Form 10-K |Page 116
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date of this filing, if the acceleration of the debt were to occur, we could
also be required to pay a prepayment penalty of
As ofDecember 31, 2022 andDecember 31, 2021 , we had outstanding debt of$27.4 million and$27.0 million , net of debt issuance costs of$2.6 million and$3.0 million , respectively. See Note 7, Indebtedness, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information. Product Sales-We have three commercial products: reSET, reSET-O, and Somryst. The revenue from the sale of these products at the present time is not sufficient to cover the operating costs incurred. Our ability to achieve sufficient revenue to cover our costs is highly dependent on our PDTs achieving and maintaining broad market acceptance by patients and physicians and obtaining reimbursement from third-party payors. Subscription, Support, and Profession Services Revenue-In the fourth quarter of 2022, we entered into a 16-month pilot program to allow eligible Medicaid members in that state take part in a structured 24-week outpatient program that will be followed by at least six months of additional recovery support services. Under the pilot we will deliver, implement, and manage this program, specifically by managing the electronic tracking and distribution of incentives to the states Medicaid members who participate in this contingency management pilot. The contract is for an amount up to$4.0 million plus reimbursements for the contingency management. We recognized$1.4 million under the terms of this contract for year endedDecember 31, 2022 . Employee Stock Purchase Plan-Under the Company's 2021 Employee Stock Purchase Plan (the "2021 ESPP"), 359,910 shares of the Company's Class A common stock were issued for total consideration of$0.4 million during the year endedDecember 31, 2022 . At-The-Market Equity Offering-OnJanuary 3, 2023 , the Company entered into an ATM Agreement with the Managers, pursuant to which the Company may offer and sell, from time to time through the Managers, shares of the Company's Class A common stock for aggregate gross proceeds of up to$150 million . As ofMarch 31, 2023 , the Company has sold 843,281 shares of its Class A common stock under the ATM Agreement resulting in proceeds to the Company of$1.0 million , net of offering costs.
In the future, we may seek to obtain other additional sources of financing, including incurring term debt or issuing equity or debt securities.
Historical Cash Flows
We have incurred recurring losses from inception and anticipate net losses and negative operating cash flows for the near future. For the year endedDecember 31, 2022 and 2021, we incurred net operating losses of$75.5 million and$65.1 million , respectively.
As of
Capital Resources
Our primary uses of capital are, and we expect will continue to be for the near future, funding operating activities. We have in the past and we expect in the future to capitalize labor costs related to the development of our internal-use software. We need to raise additional capital to pursue our growth strategy and support continuing operations. Until such time as we can generate significant revenue to fund operations, we expect to seek additional capital from the issuance of equity, debt, or other capital transactions or a strategic transaction. OnJuly 25, 2022 , we restructured our business operations to narrow our near-term business focus and decreased our workforce to reduce our operating expenses. We announced a further reduction in workforce onNovember 14, 2022 . Despite our recent restructuring, we need to raise capital to support our operations absent a strategic transaction. InFebruary 2023 , we hired an investment bank to explore strategic alternatives. We may be unable to complete a strategic transaction, increase our revenue, raise additional funds, or enter into such other agreements or arrangementsPear Therapeutics, Inc. | 2022 Form 10-K |Page 117
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when needed on favorable terms, or at all, our Board may decide to pursue a liquidation or obtain relief under the US Bankruptcy Code. The Company has hired advisors to explore strategic alternatives including, if needed, filing for bankruptcy protection.
As of the date of this filing, Perceptive has alleged that certain defaults or events of default have occurred and are continuing under the terms of the Perceptive Credit Facility. Perceptive has not delivered any formal notice of Default or Event of Default. To the extent that any such allegations are valid, Perceptive would have certain rights and remedies under the Perceptive Credit Facility. The Company disputes the allegations and is in discussions with Perceptive to resolve this dispute and otherwise to address the Company's obligations under the Perceptive Credit Facility. There can be no assurances that such discussions will result in any resolution, and any resolution, or the lack of any resolution, may result in Perceptive exercising remedies under the Perceptive Credit Facility. We are also subject to various covenants related to the Perceptive Credit Facility, as well as the material adverse clause there is substantial doubt about our ability to continue as a going concern. As ofDecember 31, 2022 , we concluded that the above circumstances raise substantial doubt about our ability to continue as a going concern. See Note 7, Indebtedness, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Cash and Cash Equivalents
As ofDecember 31, 2022 , we had$48.3 million of cash and cash equivalents. InJuly 2022 andNovember 2022 we completed reductions in force and took measures to significantly reduce our operating costs, including suspension of the development of our pipeline product candidates. As noted elsewhere in this report, including Note 1, Nature of the Business, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K there is substantial doubt as to our ability to fund our planned operations for the next twelve months and to continue to operate as a going concern.
Liquidity Risks
We will require additional capital in order to pursue our strategic objectives and for the Company to survive. We have hired an investment bank to assist with the exploration of a strategic alternatives. We expect to incur substantial additional expenditures in the near term to support our ongoing activities, including costs related to being a public company. Further, we expect to continue to incur net losses for the foreseeable future and have sufficient cash on hand to fund operations into the second quarter of 2023. Our ability to fund our product development and clinical operations as well as commercialization of our product candidates will depend on the amount and timing of cash available to fund operations. Our future liquidity and capital funding requirements will depend on numerous factors, including:
•our ability to retain our current employees;
•our revenue growth;
•the ability to obtain third-party payor reimbursement for our current products;
•debt service requirements;
•our commercial activities, including sales and marketing;
•our ability to reduce or contain certain costs and expenses;
•the emergence and effect of competing or complementary products;
•the outcome, timing, and cost of meeting regulatory requirements established by the FDA, or comparable foreign regulatory authorities;
•the cash requirements of developing our programs and our ability and willingness to finance their continued development;
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•the time and cost necessary to respond to technological and market developments, including other products that may compete with one or more of our product candidates;
•the impact of the macroeconomic environment; and
•the impact of the COVID-19 pandemic.
Our operating plans may change in the future, and we will need additional funds to meet operational needs and capital requirements associated with such operating plans.
If we fail to obtain additional capital when needed, our ability to operate as a going concern will be harmed, and we may be required to delay, scale back or eliminate some or all of our research and development programs and commercialization efforts and/or reduce our selling, general and administrative expenses, be unable to attract and retain highly-qualified personnel, be unable to obtain and maintain contracts necessary to continue our operations and at affordable rates with competitive terms, refrain from making our contractually required payments when due (including debt payments) and/or be forced to cease operations, liquidate our assets and possibly seek bankruptcy protection.
See the information under the heading "Risk Factors" included in Part I, Item 1A this Form 10-K for risks related to our financial condition.
Funding Requirements
Please see the risks associated with our substantial capital requirements explained more fully under the heading "Risk Factors - If we are unable to successfully complete a strategic acquisition, we may be forced to cease operations altogether or file for bankruptcy protection." in Part I, Item 1A of this Form 10-K.
Contractual Obligations, Commitments, and Contingencies other than Debt Obligations
We are party to contractual obligations involving commitments to make payments to third parties in the future. Certain contractual obligations are reflected on our Consolidated Balance Sheet as ofDecember 31, 2022 , while others are considered future obligations. Our material cash requirements as ofDecember 31, 2022 , include the following contractual obligations and commitments arising in the normal course of business, including leases, purchases commitments, and purchase obligations described in more detail below.
Leases
We lease our headquarters inBoston, Massachusetts , under a non-cancelable operating lease with an expiration date ofJune 1, 2028 . We also lease office space inSan Francisco, California , under a non-cancelable operating lease that expires onJuly 31, 2025 , and office space inRaleigh, North Carolina , under a non-cancelable operating lease that expires onMay 31, 2026 . EffectiveJanuary 1, 2023 , the Company subleased 7,218 square feet of space inBoston, Massachusetts with a stated term of one year and renewal options for two additional years in one year increments. EffectiveJanuary 6, 2023 , the Company subleased the entirety of its 7,654 sq feet of rentable space inRaleigh, North Carolina with a stated term of one year and an option to renew for one twelve-month period, at which time a 3% rate increase will apply.
See Note 8, Leases, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Unconditional purchase commitments
We enter into agreements in the normal course of business with various vendors,
which are generally cancellable upon notice. Payments due upon cancellation
consist only of payments for services provided or expenses incurred, including
non-cancellable obligations of service providers, up to the date of
cancellation.
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OnJune 17, 2021 , and as amended onAugust 3, 2021 ,July 29, 2022 andDecember 12, 2022 we entered into a non-cancelable purchase obligation for a subscription to the Palantir Foundry cloud platform, including support services, updates, and related professional services with Palantir for$9.3 million payable over three years. As ofDecember 31, 2022 , we have paid$4.4 million and have amounts due under the terms of the agreement for the years endedDecember 31, 2023 and 2024 of$2.3 million and$2.5 million , respectively.
License Agreements
We have various licensing agreements to which we are a party and we are obligated to pay annual license maintenance fees under. In addition, we may be required to make milestone payments and to pay royalties and other amounts to third parties. Some of the payment obligations under these agreements are contingent upon future events, such as our achievement of specified milestones or generating product revenue, and the amount, timing and likelihood of such payments are not known. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain milestones. These contingent milestones may not be achieved. We cannot estimate or predict when, or if, these amounts will become due. Other license agreements require us to pay minimum annual maintenance or royalty fees.
See Note 9, Commitments and Contingencies, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 andDecember 31, 2021 , in connection with our leased property inSan Francisco, California we had$0.4 million in a letter of credit outstanding. OnMarch 10, 2023 , the issuer of the landlord's letter of credit,Silicon Valley Bank , was placed into receivership with theFDIC . Since that date the obligations ofSilicon Valley Bank have been assumed byFirst-Citizens Bank & Trust Company . The landlord has demanded a replacement letter of credit by no later thanApril 21, 2023 .
Director and Officer Indemnification
We have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated financial statements. Cash Flows
The following table provides a summary of cash flow data for each applicable period:
Year Ended December 31,
NET CASH PROVIDED BY/(USED IN) (in thousands): 2022 2021
Operating activities $ (113,895) $ (109,043)
Investing activities (9,457) 2,883
Financing activities 2,155 164,077
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(121,197)
169,978 112,061
Cash, cash equivalents and restricted cash-end of period $ 48,781 $ 169,978
Operating Activities
Net cash used in operating activities was $113.9 million for the year ended
December 31, 2022 . Net cash used in operating activities consists of a net loss
of $75.5 million , adjusted for non-cash items and the effect of changes in
working capital. Non-cash adjustments primarily include the change in fair value
of earn-out liabilities of $45.3 million , the change in fair value of warrant
liabilities of $6.4 million , and net increases in operating assets and
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liabilities (working capital) of$9.8 million , partially offset by stock-based compensation of$13.5 million , depreciation of$3.3 million and an impairment of intangible assets of$2.9 million . Our outstanding debt as ofDecember 31, 2022 , was$30.0 million . Cash interest paid for the years endedDecember 31, 2022 , and 2021 were$3,560 and$3,709 , respectively. In accordance with the lenders payment terms theDecember 2022 interest payment was paid inJanuary 2023 resulting in only eleven monthly cash payments being made during the year endedDecember 31, 2022 as compared to twelve cash payments being made during the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we had$0.4 million of accrued interest included in accrued expenses and other current liabilities on the consolidated balance sheet related to the outstanding debt. Net cash used in operating activities was$109.0 million for the year endedDecember 31, 2021 . Net cash used in operating activities consists of a net loss of$65.1 million , adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments primarily include the change in fair value of earn-out liabilities of$47.0 million , depreciation of$1.7 million , and net changes in operating assets and liabilities (working capital) of$5.9 million , partially offset by stock-based compensation of$3.8 million , loss on issuance of convertible preferred stock of Legacy Pear of 2.1 million.
Investing Activities
Net cash used in investing activities was
Net cash provided by investing activities was$2.9 million for the year endedDecember 31, 2021 , related primarily to the maturities of investments offset by the purchase of investments,$3.3 million investment in property and equipment which is primarily internal-use software, and$1.4 million in intangible assets, and a$1.0 million regulatory milestone payment.
Financing Activities
Net cash provided by financing activities was$2.2 million for the year endedDecember 31, 2022 , and related primarily to proceeds from the exercise of stock options. Net cash provided by financing activities was$164.1 million for 2021 and related to gross proceeds from the Business Combination of$175.0 million offset by associated transaction costs of$30.7 million , and proceeds of$19.9 million from the issuance of Legacy Pear convertible preferred stock.
Related Party Transactions
EffectiveMarch 15, 2022 , we entered into a development agreement with SoftBank Corp., an entity under common control withSVF II Cobbler (DE) LLC (a greater than 5% shareholder of Pear), to develop a Japanese-language digital therapeutic for the treatment of sleep/wake disorders for the Japanese market. See Note 10, Revenue and Contract Balances, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Recent Accounting Pronouncements
Refer to the accompanying notes to consolidated financial statements as of and for the years endedDecember 31, 2022 and 2021, included in Part I, Item 8 of this Form 10-K for more information regarding recently issued accounting pronouncements, the timing of their adoption, and its assessment, to the extent it has made one, of their potential impact on its financial condition and results of operations.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures
in conformity with US generally accepted accounting principles ('"US GAAP"), and
the Company's discussion and analysis of its financial condition
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and operating results require the Company's management to make judgments, assumptions and estimates that affect the amounts reported. These estimates and judgments affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management bases these estimates on historical experience, known trends and events and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Actual results may differ materially from these estimates under different assumptions or conditions, or if past experience or other assumptions do not turn out to be substantially accurate. Changes in estimates are recorded in the period in which they become known. While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We determine product; and collaboration and license; and subscription, support, and professional services revenue recognition through the following five-step framework in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments, or, collectively, ASC 606:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, Pear satisfies a performance obligation.
Performance obligations promised in a contract are identified based on the goods
and services that will be transferred to the customer that are both capable of
being distinct and are distinct in the context of the contract. If the contract
contains a single performance obligation, the entire transaction price is
allocated to the single performance obligation. To the extent a contract
includes multiple promised goods and services, the Company applies judgment to
determine whether promised goods and services are both capable of being distinct
and distinct in the context of the contract. To the extent the goods and
services are distinct, it requires an allocation of the transaction price to
each performance obligation on a relative standalone selling price basis unless
the transaction price is variable and meets the criteria to be allocated
entirely to a performance obligation or to a distinct service that forms part of
a single performance obligation. The consideration to be received is allocated
among the separate performance obligations based on relative standalone selling
prices. The Company typically determines standalone selling prices using an
adjusted market assessment approach model, or based upon observable inputs.
The Company satisfies performance obligations either over time or at a point in
time. Revenue is recognized over time if either (i) the customer simultaneously
receives and consumes the benefits provided by the entity's performance, (ii)
the entity's performance creates or enhances an asset that the customer controls
as the asset is created or enhanced, or (iii) the entity's performance does not
create an asset with an alternative use to the entity and the entity has an
enforceable right to payment for performance completed to date. If the entity
does not satisfy a performance obligation over time, the related performance
obligation is satisfied at a point in time by transferring the control of a
promised good or service to a customer.
To date, while we have recognized product revenue from the sale of our PDTs,
reSET, reSET-O, and Somryst, and although we expect to continue to recognize
revenue from the sale of these PDTs, we do not expect to generate significant
revenue in the foreseeable future.
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Valuation of Earn-Out Liabilities
As discussed in Notes 1, 3, and 4 in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K, onDecember 3, 2021 , we completed a Business Combination. In connection with the Business Combination and pursuant to the Business Combination Agreement, eligible Legacy Pear Shareholders are entitled to receive an aggregate of 12,395,625 shares of the Company's Class A common stock ("Earn-Out Shares") upon the Company achieving certain earn-out triggering events. At the time of closing, the Company recorded the earn-out liabilities upon issuance at its then estimated fair value of the Earn-Out Shares. The fair value of the Earn-Out Shares was derived utilizing a Monte Carlo Simulation Method ("MCSM") to assess the likelihood of a triggering event occurring in the specified time frame. Under each scenario, the occurrence of a triggering event is tracked. If one of the thresholds is reached, then the underlying fair value of the common stock at the time of the trigger event is utilized to determine the fair value of the Earn-Out Shares that would be issued. The mean value of the shares estimated over the course of numerous iterations are calculated to arrive at the fair value of the Earn-Out shares. The MCSM utilizes a number of inputs which include the trading price and volatility of the underlying common stock, expected term, risk-free interest rates, expected date of a qualifying event, and qualifying traded share price within the specified time frame. The determination of the fair value of these financial instruments is complex and highly judgmental due to the significant estimation required. In particular, the fair value estimate was sensitive to certain assumptions, such as the volatility of underlying shares. The earn-out liabilities to the Legacy Pear shareholders are measured at the end of each reporting period at fair value with changes in fair value reported in our statement of operations. As of the Closing Date, a liability for fair value of the Earn-Out Shares was estimated and recorded at$95.4 million . As ofDecember 31, 2022 , the estimated fair value decreased to$3.0 million , mainly due to changes in the underlying value of the shares of Pear common stock, which was$1.18 onDecember 31, 2022 .
If the applicable triggering event is achieved for a tranche, the Company will account for the Earn-Out Shares for such tranche as issued and outstanding common stock.
Stock-Based Compensation
Accounting for stock-based compensation is a critical accounting policy due to the broad-based equity awards provided to employees at all levels and the use of equity awards as part of the strategy to retain employees as a result of a change of control events. Pear issues stock-based compensation to employees and non-employees in restricted stock units, or RSUs. Compensation expenses for stock options are recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are accounted for when they occur. The fair value of the stock options is measured on the grant date using the Black-Scholes model, which utilizes the following estimates as inputs:
•Expected volatility: determined based on an average of the historical volatility of a peer group of similar public companies;
•Expected term: as our employee stock options have "plain vanilla" characteristics, the expected term is determined using the simplified method, which represents the average of the contractual term of the option and the weighted average vesting period of the option; the contractual life of the option is used for the expected life of non-employee stock options;
•Risk-free interest rate: based upon the
•Expected dividend yield: based on our history and current expectation of not paying dividends in the foreseeable future.
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