SONENDO, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and in the filings we make with theSecurities and Exchange Commission (the "SEC") from time to time. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a commercial-stage medical technology company focused on saving teeth
from tooth decay, the most prevalent chronic disease globally. We have developed
the GentleWave System, an innovative technology platform designed to treat tooth
decay by cleaning and disinfecting the microscopic spaces within teeth without
the need to remove tooth structure. Our initial focus is on leveraging the
GentleWave System, the first and only FDA-cleared system for root canal therapy
that employs a sterilized, single-use procedure instrument ("PI"), to transform
root canal therapy ("RCT"), by addressing the limitations of conventional
methods. The system utilizes our proprietary mechanism of action, which combines
procedure fluid optimization, broad-spectrum acoustic energy and advanced fluid
dynamics, to debride and disinfect deep regions of the complex root canal system
in a less invasive procedure that preserves tooth structure. The clinical
benefits of our GentleWave System when compared to conventional methods of RCT
include improved clinical outcomes, such as superior cleaning that is
independent of root canal complexity and tooth anatomy, high and rapid rates of
healing and minimal to no post-operative pain. In addition to the clinical
benefits, the GentleWave System can improve the workflow and economics of dental
practices. We began scaling commercialization of our current technology in 2017
and are focused on establishing the GentleWave Procedure as the standard of care
for RCT.
RCT is a treatment for late-stage tooth decay that aims to save the patient's
tooth instead of removing it. Conventional methods of RCT depend primarily on
instruments to manually scrape and remove tooth structure and open canals inside
the tooth in order to remove and irrigate infected tissue. We believe that
conventional methods of RCT do not adequately clean and disinfect the entire
root canal system, primarily due to the complexity and uniqueness of each root
canal and the inability of current endodontic technologies to effectively reach
the microscopic spaces within the tooth. Conventional methods of RCT also
generally require extensive use of instrumentation within the root canal system,
which can result in the removal of substantial tooth structure, weaken the tooth
and impact its long-term survival. This lack of sufficient cleaning and removal
of substantial tooth structure can result in poor clinical outcomes, such as
high treatment failure rates and significant post-operative pain. In addition,
other limitations of conventional methods of performing RCT include: a frequent
need for multiple visits to complete the procedure, a lack of standardized
procedure protocols and a complex procedure that can be difficult to perform.
Our GentleWave System represents an innovative technology platform and approach
to RCT. The GentleWave System is a Class II device and has received 510(k)
clearance from the FDA. The key components of our GentleWave System are a
sophisticated and mobile console and a pre-packaged, sterilized, single-use PI.
The GentleWave System utilizes a proprietary mechanism of action that is
designed to combine procedure fluid optimization, broad-spectrum acoustic energy
and advanced fluid dynamics to efficiently and effectively reach microscopic
spaces within teeth and dissolve and remove tissue and bacteria with minimal or
no removal of tooth structure. We have invested significant resources in
establishing a broad intellectual property portfolio that protects the
GentleWave Procedure and its unique mechanism of action, as well as future
capabilities under development. We believe our GentleWave System transforms the
patient and dental practitioner experience and addresses many of the limitations
of conventional RCT.
We are committed to continuing to generate evidence to support the clinical
benefits of the GentleWave System. These benefits have been demonstrated in-vivo
and in-vitro across two prospective, multi-center clinical studies, in
real-world, clinical practice and in over 30 peer-reviewed journal publications,
including seven independent publications and more than 23 publications by our
consultants or sponsored or funded by us. For example, results from our PURE
study demonstrated a treatment success rate of 97% at the six- and 12-month
follow-ups for patients treated using the GentleWave System.
As of September 30, 2022 , we had an installed base of approximately 935
GentleWave Systems that had performed more than 950,000 GentleWave patient
procedures since commercialization. Following the launch of CleanFlow PI in
April 2022 , which is designed to work with our existing GentleWave system and
has received 510(k) clearance from the FDA, in October 2022 , we announced the
release of our GentleWave G4 System, the next generation of our innovative
technology platform designed for an optimized doctor and patient experience to
treat tooth decay.
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In the United States and Canada , our direct sales force markets and sells the
GentleWave System to dental practitioners performing a high volume of root
canals as part of their practice. Our commercial strategy and sales model
involves a focus on driving adoption of our GentleWave System by increasing our
installed base of consoles and maximizing recurring PI revenue through increased
utilization. We have been and will continue to expand the size of our sales and
clinician support teams to support our efforts of driving adoption and
utilization of the GentleWave System. We plan to pursue marketing authorizations
and similar certifications to enable marketing and engage in other market access
initiatives over time in attractive international regions in which we see
significant potential opportunity.
As of September 30, 2022 , we had cash and cash equivalents and short-term
investments of $105.6 million , an accumulated deficit of $358.2 million , and
$40.0 million in principal outstanding under our term loan facility. For the
nine months ended September 30, 2022 , we generated revenue of $29.4 million and
incurred a net loss of $46.2 million , compared to revenue of $23.3 million and a
net loss of $34.8 million for the nine months ended September 30, 2021 .
We expect to continue to incur net losses for the next several years. We expect
to continue to make significant investments in our sales and marketing
organization by increasing the number of U.S. and Canadian sales
representatives, expanding our international marketing programs and expanding
direct to clinician digital marketing efforts to help facilitate further
adoption among existing accounts and to broaden awareness and adoption of our
products to new clinicians. We also expect to continue to make investments in
research and development, regulatory affairs and clinical studies to develop
future generations of our GentleWave products, support regulatory submissions
and demonstrate the clinical efficacy of our new products. Moreover, we are
incurring additional expenses as a result of operating as a public company,
including legal, accounting, insurance, exchange listing and SEC compliance,
investor relations, and other administrative and professional services expenses.
As a result of these expenses, we may in the future require additional financing
to fund our operations and planned growth.
We believe that our cash and cash equivalents and short-term investments,
together with anticipated revenue and available debt financing arrangements,
will be sufficient to meet our capital requirements and fund our operations
through at least the next 12 months from the date of this Quarterly Report on
Form 10-Q. We may also seek additional financing opportunistically. We may seek
to raise any additional capital by entering into partnerships or through public
or private equity offerings or debt financings, credit or loan facilities or a
combination of one or more of these funding sources. If we raise additional
funds by issuing equity securities, our stockholders may experience dilution.
Factors Affecting Our Performance and Key Business Metrics
We believe there are several important factors that impact our operating performance and results of operations. We also regularly review several operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. We believe the following factors and key business metrics are important indicators of our performance:
•
Installed base of GentleWave Systems: Inthe United States andCanada , we are initially focused on driving adoption of the GentleWave System among dental practitioners, with an initial focus on RCT. Our sales force leverages third-party data of root canal procedure volumes by practitioner, in order to enable us to efficiently and effectively identify target accounts. We believe that our current targeting strategy identifies a well-defined customer base that is accessible by our direct sales organization.
•
System utilization: Our revenue is significantly impacted by the utilization of our GentleWave System. Our objective is to establish the GentleWave Procedure as the standard of care for RCT. To accomplish this, we plan to continue expanding our team of consumable sales representatives who are partnering with our customers to provide onboarding, onsite training and continuing education, to enhance practice efficiency and clinical workflow and to drive patient referral volumes. We expect the CleanFlow PI to further increase utilization over time.
•
Gross margins: Our results of operations depend, in part, on our ability to increase our gross margins by more effectively managing our costs to produce our GentleWave console and single-use PIs, and to scale our manufacturing operations efficiently. We expect to realize operating leverage through increased scale efficiencies as our commercial operations grow. We are undertaking continuous margin improvement programs, including implementing lean manufacturing methods and working with our suppliers to reduce material costs. We have also executed several product design improvements to reduce product cost. For example, we expect the CleanFlow PI to have a positive impact on the gross margin profile of our single-use PIs. We anticipate that the combination of these strategies will drive margin improvement.
•
Commercial organization: As of
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number of employees in our commercial organization, as well as by expanding our
marketing and training programs, to help facilitate further adoption of our
products among existing and new customer accounts. Successfully recruiting and
training a sufficient number of sales and customer support employees is required
to achieve growth at the rate we expect. The rate at which we grow our
commercial organization and the speed at which newly hired personnel become
effective can impact our revenue growth and our costs incurred in anticipation
of such growth.
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted our operations, revenue and
overall financial condition, and may negatively impact our operations, revenue,
and overall financial condition in the future if new and more transmissible
vaccine-resistant variants emerge. Our customers, including endodontists, have
experienced significant financial hardship and some of them may never fully
recover. We also experienced disruptions, and may experience future disruptions,
including: delays in capital and clinical sales representatives becoming fully
trained and productive; difficulties and delays in dental practitioner outreach
and training dental practitioners to use our GentleWave System; travel
restrictions; delays in initiation, enrollment and follow-ups of our clinical
studies; challenges with maintaining adequate supply from third-party
manufacturers of components and finished goods and distribution providers; and
access to dental practitioners for training and case support. The COVID-19
pandemic also resulted in, and may in the future result in, significant
disruption to the global financial markets, reducing our ability to access
capital, which could in the future negatively affect our liquidity.
We have mitigated the disruptions in our supply of certain materials used in the
final assembly and packaging of our PIs encountered in the first quarter of
2022. We regularly explore different opportunities to implement alternative
secondary source suppliers and packaging methods in order to ensure cost
effectiveness and that we are able to source sufficient components and materials
to manufacture our products. In the event that we are unable to implement new
packaging methods or source sufficient components and materials from our current
or future suppliers to manufacture enough of our products to satisfy demand, we
may need to cease or slow down production and our business operations and
financial condition may be materially harmed. Additionally, costs of certain
materials and services have increased due to the increased demand and supply
shortage. If such inflationary pressures in costs persist, we may not be able to
quickly or easily adjust pricing, reduce costs, or implement countermeasures,
all of which would adversely impact our business, financial condition, results
of operations, or cash flows.
The duration and ultimate economic impact of the COVID-19 pandemic on our
business remains uncertain at this time. We expect that any future restrictions
on dental procedures, as a result of COVID-19 or the emergence of any vaccine
resistant variant, and other related issues including supply chain disruptions,
would have a negative impact on our operations, revenue and overall financial
condition.
Components of Our Results of Operations
Revenue
Our revenue consists primarily of product revenue and software revenue. We generate product revenue on the capital sale of our GentleWave console and recurring sales of our single-use PIs and accessories. To a lesser extent, we also derive product revenue from service and repair and extended warranty contracts with our existing customers. Software revenue relates to fees we receive for licensing our TDO practice management tool to dental practitioners. We expect our product revenue to increase in absolute dollars as we increase adoption and utilization of our GentleWave System, though revenues may fluctuate from quarter to quarter.
Cost of Sales and Gross Margin
Cost of sales consists primarily of manufacturing overhead costs, material
costs, and direct labor to produce our products, warranty, provisions for
slow-moving and obsolete inventory, and other direct costs such as shipping and
software support. A significant portion of our cost of sales currently consists
of manufacturing overhead costs. These overhead costs include personnel
compensation, including stock-based compensation expenses, facilities, the cost
of production equipment and operations supervision, quality control, material
procurement and intangible assets amortization. We provide a two-year warranty
on capital equipment upon initial sale, and we establish a reserve for warranty
repairs based on historical warranty repair costs incurred. Provisions for
warranty obligations, which are included in cost of sales, are provided for at
the time of shipment. We expect our cost of sales to increase in absolute
dollars for the foreseeable future primarily as, and to the extent, our revenue
grows, partially offset by lower unit product costs, though it may fluctuate
from period to period.
We calculate gross margin as gross profit divided by revenue. Our gross margin
has been and will continue to be affected by a variety of factors, primarily,
product mix and the resulting average selling prices, production volumes,
manufacturing costs and product
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yields, and the implementation of cost reduction strategies. Our software gross
margin is generally higher than our product gross margin. As a result of these
factors, we expect gross margin may fluctuate from period to period. We are
engaged in various efforts to improve our gross margin by reducing unit product
costs to the extent our production volumes increase, as well as through product
design improvements, reducing material costs through negotiations with suppliers
and optimizing the manufacturing process and reducing the costs to service our
installed base.
Operating Expenses
Selling, general and administrative
Selling, general and administrative ("SG&A") expenses consist primarily of
personnel compensation, including stock-based compensation, related to selling,
marketing, professional education, administration, finance, information
technology, legal, and human resource functions. SG&A expenses also include
commissions, training, travel expenses, promotional activities, conferences,
trade shows, professional services fees, audit fees, legal fees, insurance costs
and general corporate expenses including allocated facilities-related expenses.
We expect our SG&A expenses to increase in absolute dollars for the foreseeable
future as we expand our commercial infrastructure and incur additional fees
associated with operating as a public company, including legal, accounting,
insurance, exchange listing and SEC compliance, investor relations, and other
administrative and professional services expenses, though it may fluctuate from
period to period. However, over time, we expect our SG&A expenses to decrease as
a percentage of revenue.
Research and development
Research and development ("R&D") expenses consist primarily of costs incurred
for proprietary R&D programs, and include costs of product engineering, product
development, regulatory affairs, consulting services, materials, and
depreciation, as well as other costs associated with products and technologies
being developed. These expenses include employee and non-employee compensation,
including stock-based compensation, supplies, materials, consulting, related
travel expenses and facilities expenses. We expect our R&D expenses to moderate
in absolute dollars for the foreseeable future as we continue to develop,
enhance, and commercialize new products and technologies. However, we expect our
R&D expenses as a percentage of revenue to vary over time depending on the level
and timing of initiating new product development efforts.
Changes in fair value of contingent earnout
Changes in fair value of contingent earnout consists of fair value adjustments from our contingent earnout liabilities recorded in connection with the 2018 acquisition of TDO. We record a liability related to the contingent earnout provisions, which are based on actual and estimated annual sales of licenses and units, as defined in the stock purchase agreement, for each of the years endedDecember 31, 2021 and 2020. The contingent earnout period endedDecember 31, 2021 and final payment was made inFebruary 2022 .
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest expense under our
outstanding term loan, investment income, and the remeasurement of our preferred
stock warrant liabilities and our forward obligation recorded in connection with
an asset acquisition. On completion of our IPO, all of the outstanding warrants
to purchase shares of convertible preferred stock were revalued and converted
into warrants to purchase shares of common stock and the warrants liability was
reclassified into stockholders' equity. As a result, we are no longer required
to remeasure the fair value of the common stock warrants at each reporting
period. On completion of our IPO, the forward obligation was settled by the
issuance of shares of common stock and will no longer require remeasurement at
each reporting period.
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Comparison of the Three and Nine Months Ended
The following table shows our results of operations for the three months endedSeptember 30, 2022 and 2021, together with the dollar and percentage change in those items: Three Months Ended Change September 30, September 30, 2022 2021 $ % (in thousands, except percentages) Revenue $ 9,846 $ 7,887 1,959 25 % Cost of sales 7,528 5,838 1,690 29 % Gross profit 2,318 2,049 269 13 % Gross margin 24 % 26 % Operating expenses: Selling, general and administrative 12,586 8,495 4,091 48 % Research and development 4,328 4,633 (305 ) (7 )% Change in fair value of contingent earnout - 19 (19 ) (100 )% Total operating expenses 16,914 13,147 3,767 29 % Loss from operations (14,596 ) (11,098 ) (3,498 ) 32 % Other expense, net: Interest and financing costs, net (943 ) (1,076 ) 133 (12 )% Change in fair value of warrant liabilities - (159 ) 159 (100 )% Change in fair value of forward obligation - (400 ) 400 (100 )% Loss before income tax benefit (15,539 ) (12,733 ) (2,806 ) 22 % Net loss$ (15,539 ) $ (12,733 ) (2,806 ) 22 % The following table shows our results of operations for the nine months endedSeptember 30, 2022 and 2021, together with the dollar and percentage change in those items: Nine Months Ended Change September 30, September 30, 2022 2021 $ % (in thousands, except percentages) Revenue$ 29,426 $ 23,306 6,120 26 % Cost of sales 22,276 17,422 4,854 28 % Gross profit 7,150 5,884 1,266 22 % Gross margin 24 % 25 % Operating expenses: Selling, general and administrative 37,393 22,400 14,993 67 % Research and development 13,196 14,310 (1,114 ) (8 )% Change in fair value of contingent earnout - 12 (12 ) (100 )% Total operating expenses 50,589 36,722 13,867 38 % Loss from operations (43,439 ) (30,838 ) (12,601 ) 41 % Other expense, net: Interest and financing costs, net (2,759 ) (3,224 ) 465 (14 )% Change in fair value of warrant liabilities - (176 ) 176 (100 )% Change in fair value of forward obligation - (550 ) 550 (100 )% Loss before income tax expense (46,198 ) (34,788 ) (11,410 ) 33 % Net loss$ (46,198 ) $ (34,788 ) (11,410 ) 33 % 30
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Revenue
Our breakdown of revenue for the three and nine months ended
Three Months Ended Change
September 30, September 30,
2022 2021 $ %
(in thousands, except percentages)
Product revenue $ 7,795 $ 6,186 1,609 26 %
Software revenue 2,051 1,701 350 21 %
Total revenue $ 9,846 $ 7,887 1,959 25 %
Nine Months Ended Change
September 30, September 30,
2022 2022 $ %
(in thousands, except percentages)
Product revenue $ 23,440 $ 18,166 5,274 29 %
Software revenue 5,986 5,140 846 16 %
Total revenue $ 29,426 $ 23,306 6,120 26 %
Revenue increased $2.0 million , or 25%, for the three months ended September 30,
2022 compared to the prior year period, primarily driven by growth in sales
volumes. For the three months ended September 30, 2022 , we generated $2.1
million and $4.8 million from the sale of GentleWave consoles and PIs,
respectively, compared to $1.8 million and $3.7 million for the three months
ended September 30, 2021 , respectively. There were no significant changes in the
Software segment revenue.
Revenue increased $6.1 million , or 26%, for the nine months ended September 30,
2022 compared to the prior year period, primarily driven by growth in sales
volumes which generated an increase in revenue of approximately $3.9 million and
an increase in average selling price of PIs of approximately 9%. For the nine
months ended September 30, 2022 , we generated $6.9 million and $13.9 million
from the sale of GentleWave consoles and PIs, respectively, compared to $5.2
million and $10.7 million for the nine months ended September 30, 2021 ,
respectively. There were no significant changes in the Software segment revenue.
Cost of sales and gross margin
Cost of sales increased$1.7 million , or 29%, and$4.9 million , or 28%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the prior year periods, primarily due to higher sales volume. During the three and nine months endedSeptember 30, 2022 , cost of sales on per unit basis also slightly increased on consoles, partially offset by decline in cost relating to PIs. Additionally, console service cost increased and we experienced operational inefficiencies due to disruption in the supply chain in the 2022 period. There were no significant changes in the Software segment cost of sales. Gross margin decreased 2% and 1% for the three and nine months endedSeptember 30, 2022 , respectively, compared to the prior year periods, primarily due to higher cost of sales on a per unit basis and increase in service cost as aforementioned.
Selling, general and administrative expenses
SG&A expenses increased$4.1 million , or 48%, and$15.0 million , or 67%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the prior year periods, primarily driven by changes in our Product segment due to higher employee-related compensation and benefit expenses, including stock-based compensation, as a result of headcount increase due to the expansion of our commercial infrastructure and increase in sales, as well as additional expenses and fees associated with operating as a public company, including legal, accounting, insurance, exchange listing andSEC compliance, investor relations, and other administrative and professional services expenses. There were no significant changes in the Software segment selling, general and administrative expenses.
Research and development expenses
R&D expenses for both the three and nine months endedSeptember 30, 2022 were moderate compared to the prior year periods, mainly reflecting lower spending on product development and lower salaries resulting from lower headcount. There were no significant changes in any major components of the R&D expenses. 31 --------------------------------------------------------------------------------
Change in fair value of contingent earnout
There was no change in fair value of contingent earnout recorded for either the three or nine months endedSeptember 30, 2022 as the contingent earnout period endedDecember 31, 2021 and final payment was made inFebruary 2022 .
Loss from operations
Loss from operations increased$3.5 million for the three months endedSeptember 30, 2022 compared to the prior year period, primarily due to increases in operating expenses in the Product segment, partially offset by higher sales in the Product segment and higher sales and gross profit in the Software segment. The Software segment recorded income from operations of$0.5 million and$0.2 million for the three months endedSeptember 30, 2022 and 2021, respectively. Loss from operations increased$12.6 million for the nine months endedSeptember 30, 2022 compared to the prior year period, primarily due to increases in operating expenses in the Product segment, partially offset by higher sales and gross profit in the Product and Software segments. The Software segment recorded income from operations of$1.2 million and$0.6 million for the three months endedSeptember 30, 2022 and 2021, respectively.
Other expense, net
Total other expense net for both three and nine months endedSeptember 30, 2022 slightly decreased compared to the prior year periods, mainly due to interest income from our short-term investments.
Liquidity and Capital Resources
Sources of liquidity
We have incurred significant operating losses and negative cash flows from operations since our inception, and we anticipate that we will continue to incur net losses for the next several years.
OnSeptember 27, 2022 , we completed a private placement (the "Private Placement"), issuing an aggregate of 23.0 million shares of our common stock at a purchase price of$0.95 per share and pre-funded warrants to purchase an aggregate of 43.3 million shares of our common stock at a purchase price of$0.949 per pre-funded warrant. The pre-funded warrants have an exercise price of$0.001 per share of common stock, are immediately exercisable and will remain exercisable until exercised in full. The aggregate net proceeds from the Private Placement, after deducting placement agent fees and other offering expenses, were$59.1 million . As ofSeptember 30, 2022 , we had cash and cash equivalents and short-term investments of$105.6 million , an accumulated deficit of$358.2 million , and$40.0 million in principal outstanding under our term loan facility. As ofSeptember 30, 2021 , we had cash and cash equivalents of$13.7 million and an accumulated deficit of$298.3 million . For the three months endedSeptember 30, 2022 and 2021, our net losses from operations were$15.5 million and$12.7 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, our net losses from operations were$46.2 million and$34.8 million , respectively, and our net cash used in operating activities was$46.8 million and$33.9 million , respectively. Prior to our initial public offering ("IPO"), we raised a total of$281.3 million in net proceeds from private placements of convertible preferred stock, and approximately$4.2 million from the issuance of common stock and stock option exercises. OnNovember 2, 2021 , we completed our IPO of 7.8 million shares of our common stock at a public offering price of$12.00 per share. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately$83.8 million .
Funding requirements
We expect our operating expenses to increase for the foreseeable future as we continue to invest in expanding our sales and marketing infrastructure programs to both drive and support anticipated sales growth and product development. In addition, we expect our general and administrative expenses to increase for the foreseeable future as we hire personnel and expand our infrastructure to drive and support the anticipated growth in our organization. We will also incur additional expenses as we increase the size of our administrative function to support the growth of our business and operations as a public company. The timing and amount of our operating expenditures will depend on many factors, including:
•
the degree and rate of market acceptance of our current and future products and
the GentleWave Procedure;
•
the scope and timing of investment in our sales force and expansion of our
commercial organization;
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the impact of the ongoing global COVID-19 pandemic, or any other pandemic, epidemic or infectious disease outbreak, on our business; • the cost of our research and development activities; • the cost and timing of additional regulatory clearances or approvals; • the costs associated with any product recall that may occur; • the costs associated with the manufacturing of our products at increased production levels; • the costs of attaining, defending and enforcing our intellectual property rights; • whether we acquire third-party companies, products or technologies; • the terms and timing of any other collaborative, licensing and other arrangements that we may establish; • the scope, rate of progress and cost of our current or future clinical trials and registries; • the emergence of competing new products, technologies or alternative treatments or other adverse market developments; • the rate at which we expand internationally; • our ability to raise additional funds to finance our operations; • debt service requirements; and • the cost associated with being a public company. Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Based upon our current operating plan, we believe that our cash and cash equivalents, short-term investments, together with anticipated revenue and available debt financing arrangements, will be sufficient to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Report. If our actual operating expenses significantly exceed our operating plan or our debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), we may have to significantly delay or scale back our operations to reduce working capital requirements, and substantial uncertainty would exist with respect to our ability to continue as a going concern. In addition, we would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of our assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing certain of our commercial efforts, development activities and other discretionary expenditures that are within our control. These reductions in expenditures, if required, may have an adverse impact on our ability to achieve certain of our planned objectives. We have based this estimate on estimates and assumptions that may prove to be wrong, and we may need to utilize additional available capital resources or seek additional financing opportunistically. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. If our existing capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional public or private equity or debt securities or obtain an additional credit facility. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional capital through collaboration agreements, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product or grant licenses that may not be favorable to us. Additional financing may not be available at all, or in amounts or on terms unacceptable to us.
Indebtedness
OnAugust 23, 2021 , we entered into a fifth amendment to our Credit Agreement and Guaranty withPerceptive Credit Holdings, LP (the "Perceptive Loan"), which transferred the loan toPerceptive Credit Holdings III, LP ("Perceptive"). In connection with this transfer and assignment, we entered into an amended and restated credit agreement and guaranty (the "New Credit Agreement") withPerceptive Credit Holdings III, LP (the "Amended Perceptive Loan Agreement"), which provides for two additional tranches of delayed-draw term loans of$10.0 million each, for an aggregate amount of$20.0 million (the "Amended Perceptive Loan") and extended the maturity date for repayment, including with respect to amounts owed in connection with the existing delayed-draw term loan, toAugust 23, 2026 . In conjunction with the Amended Perceptive Loan, the Company paid a closing fee equal to$0.5 million as well as the lender's legal fees and expenses. The Company accounted for the amendment as a modification. In connection with the Amended Perceptive Loan Agreement, we issued a warrant to purchase 150,685 shares of our Series E convertible preferred stock at a purchase price of$20.08 per share to Perceptive. Upon the closing of our IPO, this convertible 33 --------------------------------------------------------------------------------
preferred stock warrant was converted to a warrant to purchase 150,685 shares of
our common stock at a purchase price of
OnApril 6, 2022 , we entered into Amendment No. 1 (the "Amendment") to the Amended Perceptive Loan Agreement. The Amendment extended the borrowing deadline for the first tranche of$10.0 million of delayed-draw term loans fromDecember 31, 2021 toSeptember 30, 2022 , subject to our having generated at least$36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date. The Amendment also extended the borrowing deadline for the second tranche of$10.0 million delayed-draw term loans fromMarch 31, 2022 toJune 30, 2023 , subject to (i) our having generated at least$46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) our closing market capitalization being at least$100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to Perceptive. We borrowed the first tranche of$10.0 million onJuly 29, 2022 and received a net proceeds of$9.9 million . As a condition to entering into the Amendment, onApril 6, 2022 , we also amended the warrants previously issued to Perceptive and certain of its affiliates to purchase an aggregate of 304,105 shares of our common stock. Such warrants were amended solely to reduce the exercise price of the warrants to$12.00 per share. InAugust 2022 , a portion of these warrants representing 153,421 shares were transferred to a third party and its affiliates. The interest rate for amounts borrowed under the Amended Perceptive Loan Agreement, as amended, is the greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. In connection with entering into the Amended Perceptive Loan Agreement, as amended, we also entered into an amended and restated security agreement and granted a security interest in substantially all of our assets. We are permitted to make voluntary prepayments, subject to a scaled prepayment premium that ranges from 7.0% to 1.0% of the aggregate principal amount outstanding on such prepayment date for prepayments made afterAugust 23, 2022 and beforeAugust 23, 2025 . No prepayment premium is required for payments made afterAugust 23, 2025 . The Amended Perceptive Loan Agreement, as amended, includes financial covenants that require us to (i) maintain, at all times, a minimum aggregate balance of$3.0 million in cash in one or more controlled accounts, and (ii) satisfy certain minimum revenue thresholds, measured for the 12 consecutive month period on each calendar quarter-end untilJune 30, 2026 . These thresholds increase over time and range from$26.4 million for the 12-month period endedSeptember 30, 2021 to$95.3 million for the 12-month period endedJune 30, 2026 . Failure to satisfy these financial covenants would constitute an event of default under the New Credit Agreement. The Amended Perceptive Loan Agreement, as amended, contains events of default, including, without limitation, events of default upon: (i) failure to make a payment pursuant to the terms of the agreement; (ii) violation of certain covenants; (iii) payment or other defaults on other indebtedness; (iv) material adverse change in the business or change in control; (v) insolvency; (vi) significant judgments; (vii) incorrectness of representations and warranties; (viii) regulatory matters; and (ix) failure by us to maintain a valid and perfected lien on the collateral securing the borrowing. In the event of an event of default, the lender may terminate its commitments and declare all amounts outstanding under the Amended Perceptive Loan Agreement, as amended, immediately due and payable, together with accrued interest and all fees and other obligations. The amount of such repayment will include payment of any prepayment premium applicable due to the time of such payment. In addition, upon the occurrence and during the continuance of any event of default, the applicable margin will increase by 3.00% per annum to 12.25%. As ofSeptember 30, 2022 , we had an aggregate principal balance of$40.0 million outstanding under the Amended Perceptive Loan Agreement, as amended, and we were in compliance with all covenants and conditions under such agreement.
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