SONENDO, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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 ended December 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 ended December 31, 2021 and
in the filings we make with Securities 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. As of March 31, 2022, we had an installed base of approximately 850
GentleWave Systems that had performed more than 800,000 GentleWave patient
procedures since commercialization.

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.

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 intend to expand the size of our sales and clinician support
teams to support our efforts of driving adoption and

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utilization of the GentleWave System. We also 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 a significant potential opportunity.


On November 2, 2021, we completed our initial public offering ("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. As of March 31, 2022, we had cash and cash
equivalents of $66.1 million, an accumulated deficit of $327.6 million, and
$30.0 million in principal outstanding under our term loan facility. We
generated revenue of $9.0 million and incurred a net loss of $15.5 million for
the three months ended March 31, 2022, compared to revenue of $7.4 million and a
net loss of $10.9 million for the three months ended March 31, 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 will require additional financing to fund our
operations and planned growth.

We believe that our cash and cash equivalents 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: In the United States and Canada, 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. In April 2022, we announced the launch of CleanFlow PI, which is
designed to work with our existing GentleWave system and has received 510(k)
clearance from the FDA. 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 March 31, 2022, our sales and customer support
team consisted of approximately 81 employees. We intend to continue to make
significant investments in our commercial organization by increasing the number
of employees in our commercial organization, as well as by expanding our
marketing and training programs, to

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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. We continued to experience disruptions to our
business during the three months ended March 31, 2022, as a result of customers'
continuing reluctance to start root canal procedures in light of the ongoing
risk posed by the virus. 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 recently encountered disruptions in our supply of certain materials used
in the final assembly and packaging of our PIs. We are engaged in activities to
mitigate supply disruptions, but we have experienced a reduction in our safety
stock levels and, if the supply disruptions persist, we may not be able to fully
satisfy customer orders resulting in lower utilization. We are currently
implementing alternative secondary source suppliers and packaging methods in
order to ensure 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 the 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 compensation for
personnel, 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.

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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 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
compensation for personnel, 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 ended
December 31, 2021 and 2020. The contingent earnout period ended December 31,
2021 and final payment was made in February 2022.

Other Income (Expense), Net


Other income (expense), net, consists primarily of interest expense under our
outstanding term loan, and the remeasurement to fair value each reporting
period, 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.

Results of Operations

Comparison of Three Months Ended March 31, 2022 and 2021


The following table shows our results of operations for the three months ended
March 31, 2022 and 2021, together with the dollar and percentage change in those
items:


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                                       Three Months Ended March 31,                  Change
                                         2022                 2021               $              %
                                                   (in thousands, except percentages)
Revenue                             $        9,033       $        7,427           1,606            22 %
Cost of sales                                6,754                5,685           1,069            19 %
Gross profit                                 2,279                1,742             537            31 %
Gross margin                                    25 %                 23 %
Operating expenses:
Selling, general and
administrative                              11,985                6,524           5,461            84 %
Research and development                     4,850                5,046            (196 )          (4 )%
Change in fair value of
contingent earnout                               -                   14             (14 )        (100 )%
Total operating expenses                    16,835               11,584           5,251            45 %
Loss from operations                       (14,556 )             (9,842 )        (4,714 )          48 %
Other expense, net:
Interest and financing costs, net             (966 )             (1,064 )            98            (9 )%
Loss before income tax expense             (15,522 )            (10,906 )        (4,616 )          42 %
Income tax expense                               -                    -               -             -
Net loss                            $      (15,522 )     $      (10,906 )        (4,616 )          42 %


Revenue

Our breakdown of revenue for the three months ended March 31, 2022 and 2021, respectively, is summarized below:


                     Three Months Ended March 31,             Change
                       2022                2021             $         %
                             (in thousands, except percentages)
Product revenue    $       7,203       $       5,809       1,394       24 %
Software revenue           1,830               1,618         212       13 %
Total revenue      $       9,033       $       7,427       1,606       22 %


Revenue increased $1.6 million, or 22%, for the three months ended March 31,
2022 from the comparable period in the prior year, with approximately $0.9
million of the increase attributable to higher sales volume and the rest to a
higher average selling price. For the three months ended March 31, 2022, we
generated $2.1 million and $4.3 million from the sale of GentleWave consoles and
PIs, respectively, compared to $1.8 million and $3.3 million for the three
months ended March 31, 2021, respectively. There were no significant changes in
the Software segment revenue.

Cost of sales and Gross margin


Cost of sales increased $1.1 million, or 19%, for the three months ended March
31, 2022 from the comparable period in the prior year. The increase was
primarily attributable to higher sales volume and costs relating to supply chain
disruptions that were partially offset by higher absorption of manufacturing
overhead expenses due to increased production volume. There were no significant
changes in the Software segment cost of sales.

Gross margin increased 2% for the three months ended March 31, 2022 from the
comparable period in the prior year, primarily due to higher average selling
price and improved overhead absorption.

Selling, general and administrative expenses


SG&A expenses increased $5.5 million, or 84%, for the three months ended March
31, 2022 from the comparable period in the prior year, 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 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 and SEC 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 were relatively flat for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. There were no significant changes in any major components of the R&D expenses.

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Change in fair value of contingent earnout


There was no change in fair value of contingent earnout recorded for the three
months ended March 31, 2022 as the contingent earnout period ended December 31,
2021 and final payment was made in February 2022.

Loss from operations


Loss from operations increased $4.7 million for the three months ended March 31,
2022 from the comparable period in the prior year, primarily due to increases in
operating expenses in the Product segment as partially offset by higher sales
and gross profit in the Product segment. The Software segment recorded income
from operations of $0.3 million and $0.1 million for the three months ended
March 31, 2022 and 2021, respectively.

Interest and financing costs, net

There were no significant changes in interest and financing costs, net, for the three months ended March 31, 2022 and 2021.

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. As of March 31, 2022, we had cash and
cash equivalents of $66.1 million, an accumulated deficit of $327.6 million, and
$30.0 million in principal outstanding under our term loan facility. For the
three months ended March 31, 2022 and 2021, our net losses from operations were
$15.5 million and $10.9 million, respectively, and our net cash used in
operating activities was $18.0 million and $13.1 million, respectively.

Prior to our 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. On
November 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;
•
the impact of the global COVID-19 pandemic, or any other pandemic, epidemic or
infectious disease, 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.

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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,
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), 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 the 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 the our ability to achieve certain of our planned
objectives in fiscal year 2022.

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


On June 23, 2017, we entered into a credit agreement and guaranty (the "Credit
Agreement") with Perceptive Credit Holdings, LP, which provided for a
delayed-draw term loan in an aggregate principal amount of $20.0 million. The
initial loan of $10.0 million was made in a single borrowing on June 23, 2017.
The interest rate for the loan is the greater of the 1-month LIBOR and 2.00%
plus the applicable margin of 9.25%. In connection with the loan, we granted a
security interest in substantially all of our assets to the lender.

The Credit Agreement was amended in October 2018 to provide an additional
tranche consisting of two borrowings, which were exercised on October 16, 2018
and October 7, 2019 in an aggregate principal amount of $10.0 million each. The
Credit Agreement was further amended in October 2019 to provide two additional
tranches of delayed-draw term loans of $10.0 million each, and to modify the
repayment provisions of the loan to require all principal to be due at maturity.
The additional tranches were not exercised prior to their expiration on December
31, 2020. Both amendments were evaluated and accounted for as modifications.

On August 23, 2021, we further amended the Credit Agreement to transfer and
assign the loans thereunder to Perceptive Credit Holdings III, LP. In connection
with this transfer and assignment, we entered into an amended and restated
credit agreement and guaranty (the "New Credit Agreement") with Perceptive
Credit Holdings III, LP, which provides for two additional tranches of
delayed-draw term loans of $10.0 million each and extended the maturity date for
repayment, including with respect to amounts owed in connection the existing
delayed-draw term loan, to August 2026.

The interest rate for amounts borrowed under the New Credit Agreement is the
greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. In
connection with the New Credit Agreement, 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 after
August 23, 2022 and before August 23, 2025. No prepayment premium is required
for payments made after August 23, 2025.

The New Credit Agreement 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

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amounts outstanding under the New Credit 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%.

The New Credit Agreement includes financial covenants that requires 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 twelve consecutive month period on each calendar
quarter-end until June 30, 2026. These thresholds increase over time and range
from $26.4 million for the 12-month period ended September 30, 2021 to $95.3
million for the 12-month period ended June 30, 2026. Failure to satisfy these
financial covenants would constitute an event of default under the New Credit
Agreement.

In connection with the New Credit 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. Upon the closing of our IPO, this convertible preferred
stock warrant was converted to a warrant to purchase 150,685 shares of our
common stock at a purchase price of $20.08 per share.

On December 31, 2021, the first tranche of $10.0 million loan expired. The
obligation of Perceptive Credit Holdings III, LP to make the second tranche loan
is subject to the making of the first tranche. Since the Company did not draw
the first tranche, the second tranche available by March 31, 2022 has been
forfeited.

As of March 31, 2022, we had an aggregate principal balance of $30.0 million
outstanding under the New Credit Agreement and we were in compliance with all
covenants and conditions under the New Credit Agreement.

On April 6, 2022, we entered into Amendment No. 1 to the New Credit Agreement
(the "Amended New Credit Agreement") with Perceptive Credit Holdings III, LP.
The Amended New Credit Agreement extends the first tranche of $10.0 million of
the delayed borrowing date deadline from December 31, 2021 to September 30,
2022, subject to we having generated at least $36.0 million in revenue for the
12 consecutive month period most recently ended prior to the borrowing date. The
Amended New Credit Agreement also extends the second tranche of $10.0 million
borrowing Date deadline from March 31, 2022 to June 30, 2023, subject to (i) we
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 the lender.

As a condition to entering into the Amended New Credit Agreement, on April 6,
2022, we amended the warrants previously issued to Perceptive Credit Holdings
III, LP and certain of its affiliates under the Credit Agreement and New Credit
Agreement 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.

Summary statement of cash flows


The following table summarizes the primary sources and uses of our cash flows:


                                               Three Months Ended March 31,
                                                 2022                 2021
                                                      (in thousands)
Net cash provided by (used in) :
Operating activities                        $      (18,045 )     $      (13,067 )
Investing activities                                   (56 )                (74 )
Financing activities                                  (486 )              

(645 ) Net decrease in cash and cash equivalents $ (18,587) $ (13,786)

Net Cash Used in Operating Activities


Net cash used in operating activities was $18.0 million for the three months
ended March 31, 2022, primarily consisting of net loss of $15.5 million,
non-cash items of $2.3 million and a net change in our net operating assets and
liabilities of $4.8 million. Non-cash items primarily consisted of $0.7 million
in depreciation and amortization and $1.4 million in stock-based compensation.
The change in our net operating assets and liabilities was primarily due to a
$2.0 million increase in inventory held due to higher production and changes in
prepaid expenses and other assets, accounts payable, accrued expenses and
accrued compensation attributable to timing of payment.

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Net cash used in operating activities was $13.1 million for the three months
ended March 31, 2021, primarily consisting of net loss of $10.9 million,
non-cash items of $1.5 million and a net change in our net operating assets and
liabilities of $3.7 million. Non-cash items primarily consisted of $0.8 million
in depreciation and amortization and $0.5 million in stock-based compensation.
The change in our net operating assets and liabilities was primarily due to
decrease in accounts payable, accrued expenses and accrued compensation
attributable to timing of payment.

Net Cash Used in Investing Activities


Net cash used in investing activities was $0.1 million for each of the three
months ended March 31, 2022 and 2021, as a result of purchases of property and
equipment.

Net Cash Provided by Financing Activities


Net cash used by financing activities was $0.5 million for the three months
ended March 31, 2022, primarily resulting from the payment of the remainder of
the IPO fees and contingent earnout. Net cash used in financing activities was
$0.6 million for the three months ended March 31, 2021, primarily due to payment
of contingent earnout to the former owners of TDO.

Critical Accounting Policies and Estimates


Our management's discussion and analysis of financial condition and results of
operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). The preparation of these condensed consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, the disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements, the
revenue generated, and expenses incurred, and related disclosures, during the
reporting periods. Our estimates are based on our historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions and any such differences may be material.

There were no material changes to our critical accounting policies or in the
methodology used for estimates from those described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K filed with the SEC on March 23, 2022.

JOBS Act Accounting Election and Smaller Reporting Company Status


We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act of 2012 (the "JOBS Act"). As such, we are eligible for exemptions
from various reporting requirements applicable to other public companies that
are not emerging growth companies, including, but not limited to, presenting
only two years of audited financial statements in addition to any required
unaudited interim financial statements with correspondingly reduced
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" disclosure in this Quarterly Report on Form 10-Q, not being required
to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation, and an exemption from the requirements to obtain a non-binding
advisory vote on executive compensation or golden parachute arrangements. We
have elected to take advantage of certain of the reduced disclosure obligations
in this Quarterly Report on Form 10-Q and may elect to take advantage of other
reduced reporting requirements in our future filings with the SEC. As a result,
the information that we provide to our stockholders may be different than you
might receive from other public reporting companies in which you hold equity
interests.

The JOBS Act permits an "emerging growth company" such as us to take advantage
of an extended transition period to comply with new or revised accounting
standards applicable to public companies. We have elected to avail ourselves of
this exemption and, therefore, for new or revised accounting standards
applicable to public companies, we may delay adopting new or revised accounting
standards until those standards would otherwise apply to private companies.

We will remain an emerging growth company until the earliest of (1) the last day
of our first fiscal year in which we have total annual gross revenues of at
least $1.07 billion, (b) the date that we are deemed to be a large accelerated
filer, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act'), which means the market value of our common stock
that is held by non-affiliates exceeds $700 million as of the second quarter of
that fiscal year, (c) the date on which we have issued more than $1.0 billion in
non-convertible debt securities during the prior three-year period and (d) the
last day of the 2026 fiscal year.

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We are also a "smaller reporting company" as defined in the Exchange Act. We may
continue to be a smaller reporting company even after we are no longer an
emerging growth company. We may take advantage of certain of the scaled
disclosures available to smaller reporting companies and will be able to take
advantage of these scaled disclosures for so long as our voting and non-voting
common stock held by non-affiliates is less than $250.0 million measured on the
last business day of our second fiscal quarter, or our annual revenue is less
than $100.0 million during the most recently completed fiscal year and our
voting and non-voting common stock held by non-affiliates is less than $700.0
million measured on the last business day of our second fiscal quarter.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

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