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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2024


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

For the transition period from to

Commission File Number: 001-40988

Sonendo, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	20-5041718
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
26061 Merit Circle, Suite 102 Laguna Hills, CA	92653
(Address of principal executive offices)	(Zip Code)

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

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

    Title of each class

    Trading
Symbol(s)

    Name of each exchange on which registered

    Common stock, par value $0.001 per share

    SONX

    OTC Markets

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

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

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


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

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

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

As of November 8, 2024, the registrant had 418,049 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page
	Cautionary Note Regarding Forward-Looking Statements	1

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		40

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. The forward-looking statements included herein are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control, include, but are not limited to those described in Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, Item 1A. Risk Factors of our Annual Report on Form 10-K for fiscal year 2023 and in the filings we make with Securities and Exchange Commission (the “SEC”) from time to time.

•

We are an early-stage company with a history of significant net losses, we expect to continue to incur operating losses for the foreseeable future and we may not be able to achieve or sustain profitability.

•

Our common stock has been delisted from the New York Stock Exchange (“NYSE”) and is currently trading on the OTC Markets Group Inc.’s (“OTC”) OTCQX U.S. tier (the “OTCQX”). If we are unable to comply with the continued listing requirements of the OTCQX, our common stock could be moved to the OTC Pink market, which could further affect our common stock’s market price and liquidity and reduce our ability to raise capital.

•

The market price of our common stock may be volatile and an active trading market may not develop.

•

Our revenue is primarily generated from sales of our GentleWave Console and the accompanying single-use procedure instruments (“PIs”) and we are therefore highly dependent on the success of these offerings.

•

Our future operating results may be difficult to predict and could fall below expectations or any guidance we may provide.

•

The terms of our credit agreement contain operating and financial covenants and place restrictions on our operating and financial flexibility.

•

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

•

The commercial success of our GentleWave System and the GentleWave Procedure will depend upon the degree of market acceptance of our products by dental practitioners, our ability to maintain strong working relationships with our existing clinicians and dental customers and our ability to increase penetration in existing markets and expand into adjacent markets.

•

We may provide inadequate training, fail to increase our sales and marketing capabilities or fail to develop and maintain broad brand awareness in a cost-effective manner.

•

We may not be able to obtain or maintain adequate levels of third party coverage and reimbursement.

•

We may not be able to achieve or maintain satisfactory pricing and margins for our products.

•

We may not be able to compete successfully.

•

We may be unable to develop or commercialize new products on a timely basis and our products may become obsolete.

•

We have limited experience manufacturing our products in large-scale commercial quantities and we face a number of manufacturing risks that may adversely affect our manufacturing abilities, which could delay, prevent or impair our growth.

•

We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply shortages and price fluctuations that could negatively affect our business, financial condition and results of operations.

•

Any changes in our shipping arrangements or damages or losses sustained from shipping could adversely affect our business, financial condition, results of operations and prospects.

•

Our operating expenses may substantially increase and our business and financial results will be adversely affected if we receive a significant number of warranty claims or our GentleWave Systems require significant amounts of service after sale.

•

We may encounter difficulties in managing our growth, forecasting demand and managing inventory.

•

Our internal computer systems or those used by our contractors or consultants, may fail or suffer security breaches, and such failure could negatively affect our business, financial condition and results of operations.

•

Natural or man-made disasters and other similar events may significantly disrupt our business, including by causing delays in production or an increase in costs, and negatively impact our business, financial condition and results of operations.

•

The sizes of the addressable markets for our GentleWave System have not been established with precision and our potential market opportunity may be smaller than we estimate and may decline.

•

We may incur substantial liabilities and other negative impacts on our business as a result of product liability lawsuits and we may not be able to obtain or maintain insurance to cover these and other risks.

•

Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.

•

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

•

Our ability to utilize our net operating loss carryforwards and research and development credit carryforwards may be limited.

•

We are highly dependent on our senior management team.

•

Our success depends on our ability to obtain and maintain our intellectual property.

•

Anti-takeover provisions in our Certificate of Incorporation and Bylaws, as well as those under Delaware law could prevent or delay a change in control.

•

The effect of our reverse stock split on the market price and trading of our common stock cannot be predicted with any certainty.

•

The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders.

•

We are subject to additional risks and costs as a result of being a public company.

•

We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SONENDO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)


	September 30,			December 31,
	2024			2023
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,096		$	14,009
Short-term investments		4,188			32,773
Accounts receivable, net		4,445			4,790
Inventory		11,487			11,074
Prepaid expenses and other current assets		508			1,969
Current assets of discontinued operations		1,000			656
Total current assets		34,724			65,271
Property and equipment, net		691			461
Operating lease right-of-use assets		2,592			2,703
Other assets		124			128
Non-current assets of discontinued operations		—			9,597
Total assets	$	38,131		$	78,160
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	686		$	1,142
Accrued compensation		2,008			2,413
Other accrued expenses		3,202			3,072
Operating lease liabilities		884			1,250
Current portion of term loan		10,800			24,900
Other current liabilities		1,535			1,844
Current liabilities of discontinued operations		—			700
Total current liabilities		19,115			35,321
Operating lease liabilities, net of current		1,570			1,423
Term loan, net of current		6,084			12,467
Other liabilities		396			530
Total liabilities		27,165			49,741
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized —10,000,000 shares; issued and outstanding - none		—			—
Common stock, $0.001 par value; authorized — 500,000,000 shares; issued and outstanding— 418,038 shares as of September 30, 2024 and 317,737 shares as of December 31, 2023		84			64
Additional paid-in-capital		462,555			458,357
Accumulated other comprehensive income		3			11
Accumulated deficit		(451,676	)		(430,013	)
Total stockholders’ equity		10,966			28,419
Total liabilities and stockholders’ equity	$	38,131		$	78,160

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Revenue, net	$	8,036		$	8,163		$	23,397		$	25,604
Cost of sales		4,726			7,279			14,970			23,227
Gross profit		3,310			884			8,427			2,377
Operating expenses:
Selling and marketing		3,642			6,954			12,858			22,628
General and administrative		4,872			7,708			13,952			20,257
Research and development		1,588			2,787			5,345			8,478
Total operating expenses		10,102			17,449			32,155			51,363
Operating loss		(6,792	)		(16,565	)		(23,728	)		(48,986	)
Interest and other expense:
Interest expense		(1,010	)		(1,649	)		(4,608	)		(4,778	)
Other income		266			765			1,165			2,576
Total interest and other expense		(744	)		(884	)		(3,443	)		(2,202	)
Loss before income tax expense		(7,536	)		(17,449	)		(27,171	)		(51,188	)
Income tax expense		—			—			—			—
Loss from continuing operations, net of tax		(7,536	)		(17,449	)		(27,171	)		(51,188	)
Income from discontinued operations, net of tax		—			469			5,508			1,147
Net loss	$	(7,536	)	$	(16,980	)	$	(21,663	)	$	(50,041	)

Other comprehensive income (net of tax):
Unrealized (loss) gain on short-term investments		5			24			(8	)		55
Comprehensive loss	$	(7,531	)	$	(16,956	)	$	(21,671	)	$	(49,986	)
Net loss per share from continuing operations – basic and diluted	$	(15.77	)	$	(37.01	)	$	(57.18	)	$	(108.93	)
Net income per share from discontinued operations – basic and diluted	$	—		$	0.99		$	11.59		$	2.44
Net loss per share – basic and diluted	$	(15.77	)	$	(36.02	)	$	(45.59	)	$	(106.49	)
Weighted-average shares outstanding – basic and diluted		477,857			471,427			475,188			469,934

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except shares amount)


	Common Stock				Additional			Accumulated						Total
					Paid-In			Other			Accumulated			Stockholders’
	Shares		Amount		Capital			Comprehensive Income (Loss)			Deficit			Equity
Balance at December 31, 2023		317,737	$	—	$	458,421		$	11		$	(430,013	)	$	28,419
Employee stock plans		3,953		—		(4	)		—			—			(4	)
Stock-based compensation		—		—		2,890			—			—			2,890
Exercise of pre-funded warrants		30,559		—		—			—			—			—
Unrealized loss on short-term investments		—		—		—			(12	)		—			(12	)
Net loss		—		—		—			—			(6,762	)		(6,762	)
Balance at March 31, 2024		352,249	$	—	$	461,307		$	(1	)	$	(436,775	)	$	24,531
Employee stock plans		1,455		—		1			—			—			1
Stock-based compensation		—		—		703			—			—			703
Exercise of pre-funded warrants		10,468		—		—			—			—			—
Unrealized loss on short-term investments		—		—		—			(1	)		—			(1	)
Net loss		—		—		—			—			(7,365	)		(7,365	)
Balance at June 30, 2024		364,172	$	—	$	462,011		$	(2	)	$	(444,140	)	$	17,869
Employee stock plans		433		—		(2	)		—			—			(2	)
Stock-based compensation				—		630			—			—			630
Exercise of pre-funded warrants		53,433		—		—			—			—			—
Unrealized gain on short-term investments		—		—		—			5			—			5
Net loss		—		—		—			—			(7,536	)		(7,536	)
Balance at September 30, 2024		418,038	$	—	$	462,639		$	3		$	(451,676	)	$	10,966


	Common Stock				Additional			Accumulated						Total
					Paid-In			Other			Accumulated			Stockholders’
	Shares		Amount		Capital			Comprehensive Income (Loss)			Deficit			Equity
Balance at December 31, 2022		249,871	$	—	$	451,110		$	(61	)	$	(369,094	)	$	81,955
Employee stock plans		1,080		—		—			—			—			—
Stock-based compensation		—		—		1,942			—			—			1,942
Exercise of pre-funded warrants		5,311		—		1			—			—			1
Unrealized gain on short-term investments		—		—		—			56			—			56
Net loss		—		—		—			—			(15,371	)		(15,371	)
Balance at March 31, 2023		256,262	$	—	$	453,053		$	(5	)	$	(384,465	)	$	68,583
Employee stock plans		3,490		—		117			—			—			117
Stock-based compensation		—		—		2,059			—			—			2,059
Exercise of pre-funded warrants		3,546		—		—			—			—			—
Unrealized loss on short-term investments		—		—		—			(25	)		—			(25	)
Net loss		—		—		—			—			(17,690	)		(17,690	)
Balance at June 30, 2023		263,298	$	—	$	455,229		$	(30	)	$	(402,155	)	$	53,044
Employee stock plans		1,324		—		(92	)		—			—			(92	)
Stock-based compensation		—		—	$	1,784			—			—			1,784
Exercise of pre-funded warrants		234		—		—			—			—			—
Unrealized gain on short-term investments		—		—		—			24			—			24
Net loss		—		—		—			—			(16,980	)		(16,980	)
Balance at September 30, 2023		264,856	$	—	$	456,921		$	(6	)	$	(419,135	)	$	37,780

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2024			2023
Cash flows from operating activities:
Net loss	$	(21,663	)	$	(50,041	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		213			1,094
Amortization of intangible assets		51			498
Amortization of right-of-use lease assets		871			947
Excess and obsolete inventory provisions		341			2,917
Impairment of long-lived assets		161			3,392
Provision for bad debt		(176	)		571
Stock-based compensation		4,223			5,785
Amortization of debt issuance costs		1,717			456
Accretion of available for sale securities, net		(416	)		(1,831	)
Gain on sale of discontinued operations		(5,703	)		—
Changes in operating assets and liabilities:
Accounts receivable		812			(373	)
Inventory		(1,187	)		1,156
Prepaid expenses and other assets		2,195			5,887
Accounts payable		(489	)		(3,494	)
Other accrued expenses and other liabilities		(2,146	)		(2,996	)
Deferred revenue		227			(19	)
Accrued compensation		(749	)		(506	)
Net cash used in operating activities		(21,718	)		(36,557	)
Cash flows from investing activities:
Purchases of available-for-sale securities		(4,506	)		(49,978	)
Proceeds from maturities of available-for-sale securities		33,498			81,800
Purchases of property and equipment		(161	)		(843	)
Proceeds from sale of discontinued operations, net		14,208			—
Net cash provided by investing activities		43,039			30,979
Cash flows from financing activities:
Principal repayments on term loan		(22,200	)		—
Tax paid on vested stock awards under employee stock plan		(3	)		(92	)
Issuance of stock under employee stock plans		(3	)		117
Proceeds from exercise of pre-funded warrants		—			1
Principal repayments on finance lease		(28	)		(23	)
Net cash provided by (used in) financing activities		(22,234	)		3
Net decrease in cash and cash equivalents		(913	)		(5,575	)
Cash and cash equivalents at beginning of period		14,009			17,665
Cash and cash equivalents at end of period	$	13,096		$	12,090

Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	2,866		$	4,319
Supplemental schedule of non-cash investing and financing activities:
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	858		$	1,792

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

SONENDO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Description of Business

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

Basis of Presentation

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Form 10-Q and Article 10 of SEC Regulation S-X on a consistent basis with the Company’s annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet as of December 31, 2023 included herein was derived from the audited financial statements as of that date. The results of operations included in these unaudited condensed consolidated financial statements are not necessarily indicative of the results of operations to be expected for the year, any other interim period, or for any other future annual or interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed, consolidated, or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on March 11, 2024.

As discussed in Note 3, “Discontinued Operations”, on March 1, 2024, the Company divested its software segment by selling substantially all assets and liabilities of TDO Software, Inc, its wholly owned subsidiary. The sale met the criteria to be accounted for as a discontinued operation as required by Accounting Standards Codification (“ASC”) 205-20. Accordingly, the financial results of the software business are reported as discontinued operations in the accompanying unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for all periods presented. The Company's Condensed Consolidated Statements of Cash Flows include the financial results of the software business for the nine months ended September 30, 2024 and 2023. All amounts and disclosure included in the Notes to condensed consolidated financial statements reflect only the Company's continuing operations unless otherwise noted.

The accompanying unaudited condensed consolidated financial statements reflect the 1-for-200 reverse split of the Company's common stock that was approved by our Board of Directors and made effective on October 18, 2024. All share and per share information herein that relates to our common stock prior to the effective date has been retroactively restated to reflect the reverse stock split.

Certain line items on the condensed consolidated statements of operations and comprehensive loss and the condensed consolidated statements of cash flows are reclassified in the prior period to conform to current period presentation.

Liquidity and Going Concern

As of September 30, 2024, the Company had cash and cash equivalents and short-term investments of $17.3 million and $17.8 million in principal outstanding under its term loan facility.

The Company has a limited operating history, and the revenue and income potential of the Company’s business and market are unproven. The Company has experienced net losses and negative cash flows from operations since its inception and as of September 30, 2024 had an accumulated deficit of $451.7 million. During the nine months ended September 30, 2024, the Company incurred net losses of $27.2 million, used $21.7 million of cash and cash equivalents in its continuing operations, and recognized a gain of $5.7 million from sale of discontinued operations. The Company will continue to incur significant costs and expenses related to its ongoing operations until it gains greater market acceptance of its products and achieves a level of revenues adequate to support its operations.

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

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

The Company has active plans to mitigate any doubt as to the Company’s ability to continue as a going concern. Specifically, the Company has been taking steps and plans to further reduce negative cash flow through additional operating expense reductions. The Company is also actively exploring financing options, including a combination of debt, equity, and non-dilutive sources. Additionally, as detailed in Note 3 and Note 10, in March 2024, the Company closed on the sale of TDO Software, Inc. (“TDO”) and renegotiated its covenant requirements with its lender, among other terms, which resulted in the Company remitting $15 million of principal payments on its outstanding borrowings. Its plans are subject to inherent risks and uncertainties and there can be no assurance that its plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.

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

On June 4, 2024, the Company received notice from OTC that the Company’s common stock no longer met the Standards for Continued Qualification for the OTCQX per the OTCQX Rules for U.S. Companies section 2.1(A) because the Company’s stock bid price closed below $0.10 for more than 30 consecutive calendar days. The Company had a cure period of 180 calendar days to regain compliance, which expires December 2, 2024. If the Company’s bid price did not stay at or above the $0.10 minimum for ten consecutive trading days during the cure period, then the Company’s common stock would have been moved from OTCQX to the OTC Pink market.

On June 10, 2024, the Company’s shareholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s issued shares of common stock, at a specific ratio, ranging from 1:10 to 1:200, at the discretion of the Company’s board of directors at any time prior to the Company’s 2025 annual meeting of stockholders, with the exact ratio to be determined by the Company’s board of directors without further approval or authorization of the Company’s stockholders. In September 2024, the Board approved a 1-for-200 reverse stock split.

On October 16, 2024, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to implement a 1-for-200 reverse stock split of its issued and outstanding common stock, effective as of October 18, 2024. The reverse stock split correspondingly adjusted the per share exercise price of all outstanding options and all shares underlying any of the outstanding warrants by reducing the conversion ratio for each outstanding warrant and increasing the applicable exercise price or conversion price in accordance with the terms of each outstanding warrant and based on the reverse stock split ratio. No fractional shares were issued in connection with the reverse stock split. Stockholders who are entitled to fractional shares will receive a cash payment in lieu of receiving fractional shares (after taking into account and aggregating all shares of the Company’s common stock then held by such stockholder) equal to the fractional share interest multiplied by $5.00 (the per share closing price of the Company’s common stock, on a post-split basis, as last reported on the OTCQX market on November 7, 2024). The reverse stock split was announced by FINRA on its OTC Daily List on November 7,2024 and took effect at the open of trading on November 8, 2024 on the OTCQX. Upon the effectiveness of the reverse stock split, the Company became compliant with OTCQX Rule 2.1(A).

The number of shares of common stock authorized under the Amended and Restated Certificate of Incorporation is unchanged at 500,000,000 shares. The accompanying interim unaudited condensed financial statements reflect the 1-for-200 reverse split of our common stock. All share and per share information data herein that relates to the Company's common stock prior to the effective date has been retroactively restated to reflect the reverse stock split.

On November 7, 2024, the Company received notice from the OTC that the Company’s common stock no longer met the Standards for Continued Qualification for the OTCQX per the OTCQX Rules for U.S. Companies section 2.1(B) because the Company’s market capitalization has stayed below $5 million for the past 30 consecutive calendar days. The Company has a cure period of 90 calendar days to regain compliance. The 90-calendar day grace period expires February 7, 2025 and at that time if the Company’s market

capitalization has not stayed at or above $5 million for ten consecutive trading days then the Company's common stock will be removed from OTCQX and moved to the OTC Pink market.

Effects of the Macroeconomic Environment

The Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2024 reflect the Company’s estimates of the impact of the macroeconomic environment, including the impact of inflation and higher interest rates. The duration and the scope of these conditions cannot be predicted; therefore, the extent to which these conditions will directly or indirectly impact the Company’s business, results of operations and financial condition, is uncertain. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the date of this filing.

Operating Segments

The Company previously had two operating and reportable segments: Product and Software. Following the divestiture of the software business on March 1, 2024, there were no substantial assets or operations remaining of the software segment. The software segment was reported as discontinued operations as of September 30, 2024, and is presented as such for all periods in this report.

Emerging Growth Company Status

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

2. Summary Accounting Policies and Recent Accounting Pronouncements

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

Use of Estimates

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

Inventory

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

Revenue Recognition

Contracts with Customers

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

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

Performance Obligations

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

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

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

Product revenue is recognized at a point in time when the Company has transferred control to the customer, which is generally when title of the goods transfers to the customer. Sales of extended service contracts are recorded as deferred revenue until such time as the standard warranty expires, which is generally up to two years from the date of sale. Service contract revenue is recognized on a straight-line basis over time consistent with the life of the related service contract in proportion to the costs incurred in fulfilling performance obligations under the service contract.

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

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

The Company has adopted the practical expedient permitting the direct expensing of costs incurred to obtain contracts where the amortization of such costs would occur over one year or less, and it applied to substantially all the Company’s contracts.

Contract liabilities

The Company recognizes a contract liability when a customer pays for goods or services for which the Company has not yet transferred control. The balances of the Company’s contract liabilities are as follows:


	September 30,		December 31,
	2024		2023
	(in thousands)
Total contract liabilities - extended service contracts	$	1,147	$	920
Less: long-term portion		230		302
Contract liabilities – current	$	917	$	618

Contract liabilities are included within other current liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. Revenue recognized during each of the three months ended September 30, 2024 and 2023 that was included in the contract liability balance as of June 30, 2024 and 2023 was immaterial. Revenue recognized during the nine months ended September 30, 2024 and 2023 that was included in the contract liability balance as of December 31, 2023 and 2022 was $0.5 million and $0.3 million, respectively.

Disaggregation of revenue

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)
Product revenue recognized at a point in time	$	7,662	$	7,934	$	22,333	$	25,075
Service revenue recognized over time		374		229		1,064		529
Total revenue	$	8,036	$	8,163	$	23,397	$	25,604

No individual customer accounted for more than 10% of sales for the three and nine months ended September 30, 2024 and 2023.

Allowance for credit losses

At each reporting period the Company recognizes or revises its estimate of expected credit losses for financial assets and other assets within the scope of the current expected credit losses (“CECL”) model under ASC 326, which include its trade receivables. The Company records reserves for accounts receivables as they age, as adjusted based on factors including changes in credit terms, recent collection trend and existence of payment plans. As of September 30, 2024, the allowance for credit losses was approximately $0.3 million.

Warranty Reserve

The Company provides a standard warranty on its GentleWave Systems for a specified period of time. For the nine months ended September 30, 2024 and 2023, GentleWave Systems sold were covered by the warranty for a period of up to two years from the date of sale. Estimated warranty costs are recorded as a liability at the time of delivery with a corresponding provision to cost of sales. Warranty accruals are estimated based on the current product costs, the Company’s historical experience, management’s expectations of future conditions and standard maintenance schedules. The Company evaluates this reserve on a regular basis and makes adjustments as necessary.

The following table provides a reconciliation of the change in estimated warranty liabilities for the nine months ended September 30, 2024 and 2023:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
	(in thousands)
Balance at beginning of period	$	754		$	1,579		$	1,269		$	1,930
Provision for warranties issued		177			170			620			570
Changes in estimate of pre-existing warranty		—			—			(112	)		—
Warranty costs incurred		(316	)		(384	)		(1,162	)		(1,135	)
Balance at end of period	$	615		$	1,365		$	615		$	1,365
Current portion							$	574		$	1,228
Non-current portion								41			137
Total							$	615		$	1,365

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

Recent Accounting Pronouncements

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

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which expands on segment reporting requirements primarily through enhanced disclosures surrounding significant segment expenses. The ASU expands on existing segment reporting requirements to require that a public entity, including entities with a single reportable segment, disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's CODM, a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require disclosure of specific categories in the rate reconciliation and provides additional information for reconciling items that meet a quantitative threshold and further disaggregation of income taxes paid for individually significant jurisdictions. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not expect the adoption to have a material impact on its Consolidated Financial Statements.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The ASU intends to improve income statement expense disclosure requirements, primarily through enhanced disclosure about certain costs and expenses included in income statement expense captions. The amendments are effective for annual reporting periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027. Early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

3. Discontinued Operations

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

The divestiture met the criteria to be accounted for as a discontinued operation as of March 31, 2024. Accordingly, the operating results of the discontinued operations for the three and nine months ended September 30, 2024 and 2023, respectively, are presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss within income from discontinued operations as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024			2023
	(in thousands)				(in thousands)
Revenue	$	—	$	2,243	$	1,478		$	6,569
Cost of sales		—		681		511			2,056
Gross profit		—		1,562		967			4,513
Operating expenses:
General and administrative		—		398		524			1,254
Selling and marketing		—		197		162			535
Research and development		—		498		476			1,599
Income (loss) from discontinued operations, net of tax		—		469		(195	)		1,125
Other income		—		—		—			22
Gain on sale of discontinued operations, net of tax		—		—		5,703			—
Net income from discontinued operations	$	—	$	469	$	5,508		$	1,147

Software is licensed via delivery to the customer or via a service arrangement under which cloud-based access is provided on a subscription basis (software-as-a-service). When a fixed up-front license fee is received in exchange for the delivery of software, revenue is recognized at the point in time when the delivery of the software has occurred. When software is licensed on a subscription basis, revenue is recognized over the respective license period.

The following table presented assets and liabilities of discontinued operations as of September 30, 2024 and December 31, 2023:


	September 30, 2024		December 31, 2023
	(in thousands)
Current assets:	$	1,000	$	656
Non-current assets:
Intangible assets, net		—		661
Goodwill		—		8,454
Other		—		482
Total assets of discontinued operations	$	1,000	$	10,253

Current liabilities:
Accounts payable	$	—	$	34
Accrued expenses		—		194
Accrued compensation		—		345
Operating lease liabilities		—		127
Total liabilities of discontinued operations	$	—	$	700

During the three months ended September 30, 2024, no depreciation and amortization of long-lived assets was recorded in the discontinued operations. During the nine months ended September 30, 2024, $60 thousand expenses of depreciation and amortization of long-lived assets was recorded in the discontinued operations. During the three and nine months ended September 30, 2023, $0.1 million and $0.4 million expenses of depreciation and amortization of long-lived assets was recorded in the discontinued operations.

For each of the three and nine months ended September 30, 2024 and 2023, no capital expenditure was recorded in the discontinued operations.

See Note 7 “Stock based Compensation.” for stock based compensation expense recorded in the discontinued operations for each of the three and nine months ended September 30, 2024 and 2023.

4. Balance Sheet Components

Inventory

Inventory consisted of the following:


	September 30,		December 31,
	2024		2023
	(in thousands)
Raw materials	$	5,693	$	6,450
Work in process		230		278
Finished goods		5,564		4,346
Total inventory	$	11,487	$	11,074

The balance of the reserve of excess and obsolete inventory was $1.0 million and $0.8 million as of September 30, 2024 and December 31, 2023, respectively. During the three and nine months ended September 30, 2024, the Company recorded a reserve for excess and obsolete inventory of $0.1 million and $0.3 million, respectively, related to phasing out the legacy GentleWave Console (“Gen3”) and legacy molar and anterior pre-molar procedure instruments. During the nine months ended September 30, 2023, the Company recorded a reserve for excess and obsolete inventory of $1.7 million related to reduced sales volumes of legacy Gen3, and a charge of $1.2 million related to phasing out the legacy molar and anterior pre-molar procedure instruments as the Company moved to the CleanFlow procedure instruments, of which $0.6 million was due to excess and obsolete inventory.

5. Fair Value of Financial Instruments

The Company applies fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s financial instruments consist principally of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, operating lease liabilities, warrant liabilities and a term loan. Fair value is measured as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1 – Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities the Company has the ability to access.

Level 2 – Inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs that are significant to the fair value measurement and reflect the reporting entity’s use of significant management judgment and assumptions when there is little or no market data. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. These include the Black-Scholes option-pricing model which uses inputs such as expected volatility, risk-free interest rate and expected term to determine fair market valuation.

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

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

The following table provides the assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such value at September 30, 2024 and December 31, 2023:


	September 30, 2024
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	11,789	$	11,789	$	—	$	—
U.S. treasury securities		750		750		—		—
Total cash equivalents at fair value		12,539		12,539		—		—
Short-term investments:
U.S. treasury securities		1,487		1,487		—		—
Commercial paper and corporate bonds		2,701		—		2,701		—
Total short-term investments at fair value		4,188		1,487		2,701		—
Total assets at fair value	$	16,727	$	14,026	$	2,701	$	—


	September 30, 2024
	Fair Value		Cost Basis		Amounts Recognized in Accumulated Other Comprehensive Loss
					Unrealized Gains		Unrealized Losses
	(in thousands)
Available-for-sale securities:
U.S. treasury securities	$	1,487	$	1,485	$	2	$	—
Commercial paper and corporate bonds		2,701		2,700		1		—
Total available-for-sale securities at fair value	$	4,188	$	4,185	$	3	$	—


	December 31, 2023
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	10,761	$	10,761	$	—	$	—
Corporate Bonds		1,827		—		1,827		—
Total cash equivalents at fair value		12,588		10,761		1,827		—
Short-term investments:
U.S. treasury securities		14,826		14,826		—		—
Commercial paper and corporate bonds		13,204		—		13,204		—
U.S. government agency bonds		4,743		—		4,743		—
Total short-term investments at fair value		32,773		14,826		17,947		—
Total assets at fair value	$	45,361	$	25,587	$	19,774	$	—


	December 31, 2023
	Fair Value		Cost Basis		Amounts Recognized in Accumulated Other Comprehensive Loss
					Unrealized Gains		Unrealized Losses
	(in thousands)
Available-for-sale securities:
U.S. Treasury securities	$	14,826	$	14,820	$	6	$	—
Commercial paper and corporate bonds		13,204		13,197		9		(2	)
U.S. government agency bonds		4,743		4,745		—		(2	)
Total available-for-sale securities at fair value	$	32,773	$	32,762	$	15	$	(4	)

Money market funds and U.S. Treasury securities are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

Commercial paper, U.S. government agency bonds and corporate bonds are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

6. Stockholders’ Equity

Warrants

Warrants issued to Perceptive Credit Holdings III, LP (“Perceptive”) and certain of its affiliates and outstanding at December 31, 2023 included 95 warrants with exercise price of $2,190 per share and 1,518 warrants with exercise price of $2,400 per share. Warrants issued and outstanding at September 30, 2024 includes 1,518 warrants with exercise price of $2,400 per share. These warrants expire between June 2027 and August 2031.

The Company issued pre-funded warrants to certain institutional investors and accredited investors in a previous private placement. As of September 30, 2024, approximately 157.2 thousand shares have been issued pursuant to the exercise of pre-funded warrants and 59.3 thousand shares underlying the pre-funded warrants remain outstanding. The pre-funded warrants are classified as equity and are accounted for as a component of additional paid-in capital at the time of issuance. The pre-funded warrants are included in the calculation of basic and diluted loss per share.

7. Stock Based Compensation

Stock-based Compensation Expenses

The following tables present the Company’s stock-based compensation for stock-settled awards by type (i.e., stock options and restricted stock units (“RSUs”) granted under the Company’s incentive plans, and rights to purchase shares of common stock issued under the Company’s Employee Stock Purchase Plan (“ESPP”) and financial statement lines included in the accompanying unaudited condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30:


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
	(in thousands)
Options	$	233	$	645	$	880	$	2,233
RSUs		397		1,094		3,343		3,389
ESPP		—	45			—	163
Total stock-based compensation expense	$	630	$	1,784	$	4,223	$	5,785


	Three months ended September 30,
	2024						2023
	Continuing operations		Discontinued operations		Total		Continuing operations		Discontinued operations		Total
	(in thousands)
Cost of sales	$	14	$	—	$	14	$	44	$	10	$	54
Selling and marketing		47		—		47		550		6		556
General and administrative		539		—		539		1,010		19		1,029
Research and development		30		—		30		136		9		145
Total stock-based compensation expense	$	630	$	—	$	630	$	1,740	$	44	$	1,784

	Nine months ended September 30,
	2024						2023
	Continuing operations		Discontinued operations		Total		Continuing operations		Discontinued operations		Total
	(in thousands)
Cost of sales	$	324	$	79	$	403	$	262	$	31	$	293
Selling and marketing		838		59		897		1,698		18		1,716
General and administrative		2,141		140		2,281		3,156		55		3,211
Research and development	551		91			642		538		27		565
Total stock-based compensation expense	$	3,854	$	369	$	4,223	$	5,654	$	131	$	5,785

During the nine months ended September 30, 2024, the Company accelerated vesting of outstanding RSUs granted to certain non-executive employees in the continuing operations and recognized $1.6 million unamortized compensation expenses associated with these RSUs, with approximately $0.3 million expenses recorded in cost of sales, $0.6 million in selling and marketing, $0.2 million in general and administrative and $0.4 million in research and development.

During the nine months ended September 30, 2024, the Company accelerated vesting of outstanding RSUs granted to certain non-executive employees in the discontinued operations and recognized $0.3 million unamortized compensation expenses associated with these RSUs, as presented in the table above.

Compensation cost related to unvested stock options and RSUs will generally be amortized on a straight-line basis over the remaining average service period. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of September 30, 2024.


	Unamortized Compensation Costs		Weighted Average Service Period
	(in thousands)		(years)
Options	$	660		0.75
RSUs		2,978		3.28
Total unamortized compensation cost	$	3,638

Plan Activities

The following table summarizes stock option activity under the Company’s incentive plans:


	Number of Shares			Weighted Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
						(in years)	(in thousands)
Options outstanding, December 31, 2023		11,786		$	571.27	6.3	$	—
Forfeited/Expired		(3,670	)
Options outstanding, September 30, 2024		8,116		$	592.24	5.2	$	—
Options vested and exercisable, September 30, 2024		7,600		$	559.60	5.1	$	—

There were no options granted during the nine months ended September 30, 2024. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2023 was $0.83.

The following table summarizes the non-vested stock options that were outstanding as of September 30, 2024 and December 31, 2023:


	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested Options, December 31, 2023		2,217	$	1,045.01
Non-vested Options, September 30, 2024		505	$	1,736.21

The total fair value of shares vested during the nine months ended September 30, 2024 and 2023 was $2.8 million and $2.1 million, respectively.

Certain stock option grants under the 2017 Stock Incentive Plan (the “2017 Plan”) allow the recipient to exercise the options prior to the options becoming fully vested. Under the 2017 Plan, the Company retains the right to repurchase shares of its common shares that have been issued upon early exercise of options at the original issue price. During the nine months ended September 30, 2024, the Company did not repurchase any shares. There was not a material number of shares of common stock subject to repurchase as of September 30, 2024. Cash received for the early exercise of unvested stock options is initially recorded as a liability and released to equity over the vesting period. There were no early exercised stock options during the nine months ended September 30, 2024 and 2023.

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


	Number of Shares			Weighted Average Grant Date Fair Value
RSUs outstanding, December 31, 2023		16,593		$	517.03
Granted		29,194		$	7.98
Vested		(6,245	)	$	570.64
Forfeited		(4,120	)	$	502.49
RSUs outstanding, September 30, 2024		35,422		$	87.71

During the nine months ended September 30, 2024, vested RSUs included a total of 2,947 aforementioned the accelerated vesting of outstanding RSUs to certain employees.

8. Leases

The Company leases office space under operating leases with expirations ranging from March 2025 to March 2028, some of which include rent escalations or an option to extend the lease for up to three years per renewal. The exercise of lease renewal options is at the sole discretion of the Company.

During the nine months ended September 30, 2024, the Company has not entered into any new leases that would entitle the Company to significant rights or create additional obligations.

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

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

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

Future minimum lease payments under these leases are as follows:


	Lease Amounts
	(in thousands)
2024 (remaining three months)	$	202
2025		991
2026		938
2027		480
2028		122
Total future minimum lease payments		2,733
Less: Imputed Interest		(279	)
Present value of operating lease liabilities	$	2,454
Less: Current portion		884
Long-term operating lease liabilities	$	1,570

Weighted average remaining lease term in years		2.84
Weighted average discount rate		8.10	%

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)
Rent expense	$	297	$	373	$	969	$	1,140
Variable lease costs		48		17		49		81
Total	$	345	$	390	$	1,018	$	1,221


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)
Cost of sales	$	59	$	67	$	189	$	205
General and administrative		286		323		829		1,016
Total	$	345	$	390	$	1,018	$	1,221

Cash paid for operating leases	$	310	$	382	$	1,008	$	1,140

9. Commitments and Contingencies

Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business, including without limitation, actions with respect to intellectual property, employment, regulatory, product liability and contractual matters. For example, on January 22, 2024, a former employee whose position was eliminated as part of the Company’s reduction-in-force, filed a complaint against the Company, alleging various violations of California wage and hour laws, including unpaid meal and rest period premiums. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible issues based on the developments in these proceedings or matters. A liability is recorded in the accompanying unaudited condensed consolidated financial statements if it is determined that it is probable that a loss will be incurred, and that the amount (or range) of the

loss can be reasonably estimated. The Company’s management currently does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

10. Term Loan

Perceptive loan

On January 13, 2023, the Company entered into Amendment No. 2 (the “Second Amendment”) to the Amended and Restated Credit Agreement and Guaranty by and among the Company, the Subsidiary Guarantors party thereto, the Lenders party thereto and Perceptive (the “Amended Perceptive Loan Agreement”) to replace the existing benchmark rate from the one-month LIBOR with a one-month Secured Overnight Financing Rate (“SOFR”). All other terms remain unchanged on the original agreement. For the nine months ended September 30, 2024 and 2023, the interest rate for amounts borrowed under the Amended Perceptive Loan Agreement was the greater of the one-month SOFR and 2.00% plus the applicable margin of 9.25%.

On March 1, 2024, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Amended Perceptive Loan Agreement. Pursuant to the Third Amendment, the Company made a one-time $15.0 million principal repayment on March 1, 2024, and made an amortization payment of $1.8 million on the outstanding principal on March 31, 2024 and agreed to make monthly amortization payments on the outstanding principal each in the amount of $0.9 million on each payment date commencing on April 30, 2024. Accordingly, $1.0 million of the unamortized debt issuance costs were expensed in connection with the Third Amendment.

For the nine months ended September 30, 2024 and 2023, the effective interest rate of the Amended Perceptive Loan, was 21.10% and 17.39%, respectively. As of September 30, 2024 and December 31, 2023, the fair value of the Amended Perceptive Loan approximates its carrying amount.

Pursuant to the Third Amendment, future principal repayments and the net carrying value of the Perceptive Loan as of September 30, 2024, are as follows:


	Principal
	(in thousands)
Remaining 3 months of 2024	$	2,700
2025		10,800
2026		4,300
Total principal payment		17,800
Debt discounts		(916	)
Net carrying value	$	16,884

The Company is permitted to make voluntary prepayments, subject to a scaled prepayment premium that ranges from 7.0% to 1.0% of the aggregate principal amount outstanding on such prepayment date for prepayments made after August 23, 2022 and before August 23, 2025. No prepayment premium is required for payments made after August 23, 2025.

The Amended Perceptive Loan Agreement contains events of default, including, without limitation, 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. Based on the Amended Perceptive Loan Agreement, the Company has granted a security interest in substantially all of its assets.

The Amended Perceptive Loan Agreement includes financial covenants that require the Company to (i) maintain, at all times, a minimum aggregate balance of $3.0 million in cash in one or more controlled accounts, and (ii) pursuant to the Third Amendment, satisfy certain minimum revenue thresholds, measured for the consecutive 12-month periods ending on each calendar quarter-end until September 30, 2026 as follows:


For 12-month Period Ending	Revenue
	(in thousands)
September 30, 2024	$	33,000
December 31, 2024	$	31,500
March 31, 2025	$	31,000
June 30, 2025	$	33,000
September 30, 2025	$	35,935
December 31, 2025	$	40,160
March 31, 2026	$	44,950
June 30, 2026	$	51,500

Pursuant to the Third Amendment, the lender also waived the covenant requiring the absence of any “going concern” or like qualification or exception or any qualification or exception as to the scope of the audit, solely with respect to the fiscal year ending on December 31, 2023.

Failure to satisfy any covenants would constitute an event of default under the Amended Perceptive Loan Agreement. 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 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%.

Total revenue generated from continuing and discontinued operations for the 12-months period ended September 30, 2024 was $36.5 million, and the cash and cash equivalents and short term investment balance was $17.3 million as of September 30, 2024. As such, the Company was in compliance with all financial covenants and conditions under the Amended Perceptive Loan Agreement as of September 30, 2024.

11. Income Taxes

The Company maintains a full valuation allowance against its net deferred tax assets as of September 30, 2024 based on the current assessment that it is not more likely than not these future benefits will be realized before expiration. No material income tax expense or benefit has been recorded given the valuation allowance position and projected taxable losses in the jurisdictions where the Company files income tax returns. The Company has not experienced any significant increases or decreases to its unrecognized tax benefits since December 31, 2023 and does not expect any within the next 12 months.

The Company monitors changes to the tax laws in the states it conducts business and files corporate income tax returns.

Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. The Company has not completed an analysis regarding the limitation of net operating loss and R&D credit carryforwards as of September 30, 2024.

The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years 2021 through 2023 remain open to examination and the state returns remain subject to examination for tax years 2020 through 2023. Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authorities. All other state jurisdictions remain open to examination.

In October 2024, the Company was notified that it was selected for examination by the Internal Revenue Service for its federal income tax return for the fiscal year 2022 period. The Company does not expect the results of the audit to have a material impact on its financial results.

12. Segment Information

The Company previously operated and reported its results in two business segments, Product and Software. Software segment assets included goodwill and intangible assets, which were derecognized in connection with the divestiture of the software business on March 1, 2024. Following the divestiture, there were no s

Sonendo, Inc. 10-Q