10-Q

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 June 30, 2022

☐	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<br><br>incorporation or organization)	(I.R.S. Employer<br>Identification No.)
26061 Merit Circle, Suite 102<br><br>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<br><br>Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001 per share	SONX	New York Stock Exchange

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 was9 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 August 2, 2022, the registrant had 26,615,681 shares of common stock, $0.001 par value per share, outstanding.

		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 Convertible Preferred Stock and Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		39

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 2021 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 revenue is primarily generated from sales of our GentleWave console and the accompanying single-use procedure instruments (“PIs”), as well as The Digital Office (“TDO”) software, and we are therefore highly dependent on the success of those offerings.

• 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 and upon maintaining strong working relationships with our existing customers.

• We have limited experience in training and marketing and selling our products and 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 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, price fluctuations and quality issues that could negatively affect our business, financial condition and results of operations.

• Our business, financial condition, results of operations and growth have been adversely impacted by the effects of the COVID-19 pandemic and may be adversely impacted by COVID-19 or another pandemic, epidemic or infectious disease in the future.

• We may need additional funding to finance our planned operations, and may not be able to raise capital when needed, which could force us to delay, reduce or eliminate one or more of our product development programs and future commercialization efforts.

• Our history of recurring losses and accumulated deficit raise substantial doubts about our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

• Our TDO software and 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.

• 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.

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

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.

Item 1. Financial Statements (Unaudited)

SONENDO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)


			December 31,
			2021

ASSETS
Current assets:
Cash and cash equivalents	17,598		$	84,641
Short-term investments	34,213			—
Accounts receivable, net	3,248			2,516
Inventory	12,653			8,150
Prepaid expenses and other current assets	4,010			3,552
Total current assets	71,722			98,859
Property and equipment, net	2,573			2,366
Operating lease right-of-use assets	2,417			2,746
Intangible assets, net	2,624			2,956
Goodwill	8,454			8,454
Other assets	118			118
Total assets	87,908		$	115,499
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	2,355		$	3,061
Accrued expenses	5,621			4,758
Accrued compensation	3,420			3,376
Operating lease liabilities	1,002			975
Other current liabilities	1,900			2,482
Total current liabilities	14,298			14,652
Operating lease liabilities, net of current	1,380			1,730
Term loan, net of current	26,648			26,496
Other liabilities	548			558
Total liabilities	42,874			43,436
Commitments and contingencies (Note 8)
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 — 26,615,909 shares as of June 30, 2022 and 26,383,225 shares as of December 31, 2021; outstanding — 26,569,220 shares as of June 30, 2022 and 26,336,536 shares as of December 31, 2021	27			26
Additional paid-in-capital	387,803			384,132
Accumulated other comprehensive loss	(42	)		—
Accumulated deficit	(342,703	)		(312,044	)
	45,085			72,114
Less: Treasury stock	(51	)		(51	)
Total stockholders’ equity	45,034			72,063
Total liabilities and stockholders’ equity	87,908		$	115,499

All values are in US Dollars.

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						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2022			2021			2022			2021
Product revenue	$	8,442		$	6,171		$	15,645		$	11,980
Software revenue		2,105			1,821			3,935			3,439
Total revenue		10,547			7,992			19,580			15,419
Cost of sales		7,994			5,899			14,748			11,584
Gross profit		2,553			2,093			4,832			3,835
Operating expenses:
Selling, general and administrative		12,822			7,381			24,807			13,905
Research and development		4,018			4,631			8,868			9,677
Change in fair value of contingent earnout		—			(21	)		—			(7	)
Total operating expenses		16,840			11,991			33,675			23,575
Loss from operations		(14,287	)		(9,898	)		(28,843	)		(19,740	)
Other expense, net:
Interest and financing costs, net		(850	)		(1,084	)		(1,816	)		(2,148	)
Change in fair value of warrant liabilities		—			(17	)		—			(17	)
Change in fair value of forward obligation		—			(150	)		—			(150	)
Loss before income tax expense		(15,137	)		(11,149	)		(30,659	)		(22,055	)
Income tax expense		—			—			—			—
Net loss	$	(15,137	)	$	(11,149	)	$	(30,659	)	$	(22,055	)
Other comprehensive loss (net of tax):
Unrealized loss on marketable securities		(42	)		—			(42	)		—
Net comprehensive loss	$	(15,179	)	$	(11,149	)	$	(30,701	)	$	(22,055	)
Net loss per share attributable to common stock – basic and diluted	$	(0.57	)	$	(9.16	)	$	(1.16	)	$	(18.20	)
Weighted-average shares outstanding – basic and diluted		26,468,515			1,217,759			26,437,058			1,211,571

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except shares amount)

	Common Stock							Additional		Accumulated						Total
					Treasury			Paid-In		Other			Accumulated			Stockholders’
	Shares		Amount		Stock			Capital		Comprehensive Loss			Deficit			Equity
Balance at December 31, 2021		26,336,536	$	26	$	(51	)	$	384,132	$	—		$	(312,044	)	$	72,063
Employee stock plans		82,572		—		—			242		—			—			242
Stock-based compensation		—		—		—			1,394		—			—			1,394
Net loss		—		—		—			—		—			(15,522	)		(15,522	)
Balance at March 31, 2022		26,419,108	$	26	$	(51	)	$	385,768	$	—		$	(327,566	)	$	58,177
Employee stock plans		150,112		1		—			8		—			—			9
Stock-based compensation		—		—		—			1,954		—			—			1,954
Revaluation of warrants		—		—		—			73		—			—			73
Unrealized loss on short-term investments		—		—		—			—		(42	)		—			(42	)
Net loss		—		—		—			—		—			(15,137	)		(15,137	)
Balance at June 30, 2022		26,569,220	$	27	$	(51	)	$	387,803	$	(42	)	$	(342,703	)	$	45,034
	Convertible Preferred Stock				Common Stock							Additional					Total
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
									Treasury			Paid-In		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Stock			Capital		Deficit			Deficit
Balance at December 31, 2020		17,031,887	$	281,342		1,200,335	$	2	$	(51	)	$	9,703	$	(263,545	)	$	(253,891	)
Exercise of stock options		—		—		12,797		—		—			33		—			33
Stock-based compensation		—		—		—		—		—			494		—			494
Net loss		—		—		—		—		—			—		(10,906	)		(10,906	)
Balance at March 31, 2021		17,031,887	$	281,342		1,213,132	$	2	$	(51	)	$	10,230	$	(274,451	)	$	(264,270	)
Exercise of stock options		—		—		10,214		—		—			56		—			56
Stock-based compensation		—		—		—		—		—			413		—			413
Net loss		—		—		—		—		—			—		(11,149	)		(11,149	)
Balance at June 30, 2021		17,031,887	$	281,342		1,223,346	$	2	$	(51	)	$	10,699	$	(285,600	)	$	(274,950	)

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)

	Six Months Ended
	June 30,			June 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(30,659	)	$	(22,055	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		477			761
Amortization of intangible assets		332			265
Amortization of right-of-use lease assets		552			477
Stock-based compensation		3,348			907
Change in fair value of warrant liabilities		—			17
Amortization of debt issuance costs		226			446
Change in fair value of forward obligation		—			150
Change in fair value of contingent earnout		—			(7	)
Changes in operating assets and liabilities:
Accounts receivable, net		(732	)		(346	)
Inventory		(4,503	)		(1,489	)
Prepaid expenses and other assets		(458	)		66
Accounts payable		(623	)		(839	)
Accrued expenses and other liabilities		642			(1,363	)
Deferred revenue		(149	)		(141	)
Accrued compensation		44			(714	)
Net cash used in operating activities		(31,503	)		(23,865	)
Cash flows from investing activities:
Purchases of short-term investments		(34,255	)		—
Purchases of property and equipment		(794	)		(230	)
Acquisition of intangible assets		—			(1,297	)
Net cash used in investing activities		(35,049	)		(1,527	)
Financing activities:
Payment of common stock issuance costs		(598	)		—
Issuance of stock under employee stock plans		250			89
Payment of contingent earnout		(117	)		(667	)
Principal repayments on finance lease		(26	)		(23	)
Net cash used in financing activities		(491	)		(601	)
Net decrease in cash and cash equivalents		(67,043	)		(25,993	)
Cash and cash equivalents at beginning of period		84,641			51,722
Cash and cash equivalents at end of period	$	17,598		$	25,729
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	1,706		$	1,709
Supplemental schedule of non-cash investing and financing activities:
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	223		$	283

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. (“Sonendo” or the “Company”) 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. The Company’s products include the GentleWave System, which is cleared by the United States (“U.S.”) Food and Drug Administration (“FDA”) for sale in the U.S., along with the system’s sterilized, single-use procedure instruments ("PIs"). In addition, the Company offers practice management software to enable an integrated digital office for dental practitioners.

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 Regulation S-X of the Securities and Exchange Commission (“SEC”) 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, 2021 included herein was derived from the audited financial statements as of that date. The results of operations included in these 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 U.S. 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, 2021 filed with the SEC on March 23, 2022.

Initial Public Offering and Reverse Stock Split

On October 20, 2021, the Company’s Board of Directors (the "Board") approved an amendment to the Company’s certificate of incorporation to effect a reverse split of shares of the Company’s common stock and convertible preferred stock on a 1-for-

1.825

basis (the “Reverse Stock Split”). The par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, convertible preferred stock, warrants and forward obligation issued for preferred stock, share data, per share data and related information contained in the unaudited condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased. The Reverse Stock Split was effected on October 22, 2021.

On November 2, 2021, the Company completed its initial public offering (“IPO”) of 7.8 million shares of its 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 $83.8 million. On November 2, 2021, the Company amended and restated its certificate of incorporation to provide for, among other things, the Company’s authorized capital stock to consist of 500,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. In addition, upon the closing of the IPO, all 17,031,887 outstanding shares of the Company’s convertible preferred stock were converted into an equal number of shares of common stock, 224,842 shares of common stock were issued in connection with the settlement of the outstanding forward obligation, and warrants to purchase 331,503 shares of convertible preferred stock were converted into equal number of warrants to purchase shares of common stock. The amended and restated certificate of incorporation defines the voting rights, dividends, liquidation, rights and preferences of each class of stock.

Liquidity and Management’s Plans

As of June 30, 2022, the Company had cash and cash equivalents of $17.6 million and short-term investments of $34.2 million.

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 June 30,

2022 had an accumulated deficit of $342.7 million. During the six months ended June 30, 2022, the Company incurred net losses of $30.7 million and used $31.5 million of cash and cash equivalents in operations. The Company will continue to incur significant costs and expenses related to its ongoing operations until it gains market acceptance of products and achieves a level of revenues adequate to support the Company’s 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. Based on its current operating plan, the Company expects that its existing cash and cash equivalents and short-term investments, together with anticipated revenue and available debt financing arrangements, will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the date of issuance of the accompanying unaudited condensed consolidated financial statements. If the Company's actual operating expenses significantly exceed its operating plan or its debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9), the Company may have to significantly delay or scale back its operations to reduce working capital requirements, and substantial uncertainty would exist with respect to the Company’s ability to continue as a going concern. In addition, the Company would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of its assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing the Company’s commercial efforts, development activities and other discretionary expenditures that are within the Company’s control. These reductions in expenditures, if required, may have an adverse impact on the Company’s ability to achieve certain of the Company’s planned objectives in fiscal year 2022.

COVID-19

The COVID-19 pandemic has negatively impacted our operations, revenue and overall financial condition, and may negatively impact our operations, revenue, and overall financial condition in the future if new and more transmissible vaccine-resistant variants emerge. Our customers, including endodontists, have experienced significant financial hardship and some of them may never fully recover. We also experienced disruptions, and may experience future disruptions, including: delays in capital and clinical sales representatives becoming fully trained and productive; difficulties and delays in dental practitioner outreach and training dental practitioners to use our GentleWave System; travel restrictions; delays in initiation, enrollment and follow-ups of our clinical studies; challenges with maintaining adequate supply from third-party manufacturers of components and finished goods and distribution providers; and access to dental practitioners for training and case support. The COVID-19 pandemic also resulted in, and may in the future result in, significant disruption to the global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. As of June 30, 2022, the COVID-19 pandemic did not trigger any asset impairments for the Company.

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.

Operating Segments

The Company operates two operating and reportable segments: Product and Software. Operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated regularly by the chief operating decision maker, who is the Company’s chief executive officer (“CEO”), for the purpose of allocating resources and assessing performance. Description of the activities within these segments is included in Note 12.

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, 2021.

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.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities at purchase of three months or less that can be liquidated without prior notice or penalty. Cash and cash equivalents may include US Treasury bills, deposits, money market funds and commercial paper.

Short-Term Investments

Short-term investments consist of available-for-sale U.S. Treasury securities, U.S. government agency securities, corporate bonds and commercial paper with original maturities greater than three months and remaining maturities of less than twelve months. These investments are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses reported in other comprehensive gain (loss) in the Company’s condensed consolidated statements of operations and comprehensive loss. Purchase premiums and discounts are recognized in interest expense using the effective interest method over the terms of the securities. Realized gains and losses and declines in fair value that are deemed to be other than temporary are reflected in the statements of operations and comprehensive loss using the specific-identification method.

The Company periodically reviews all available-for-sale securities for other than temporary declines in fair value below the cost basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company also evaluates whether it has plans or is required to sell short-term investments before recovery of their amortized cost bases. To date, the Company has not identified any other than temporary declines in fair value of its short-term investments.

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.

Product revenue is generated from sales of the GentleWave console and related PIs and accessories. Software revenue is generated from sales of TDO’s The Digital Office endodontist practice management software licenses. 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 primarily arise from the manufacture and delivery of the GentleWave System, related PIs and accessories, and the delivery or license of TDO software and related ancillary services. 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. 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 Company also sells extended service contracts on its GentleWave Systems. 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.

Revenue for technical support and other services is recognized ratably over the performance obligation period.

The Company generally does not experience returns. If 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 and other current liabilities 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:

	As of
	June 30,		December 31,
	2022		2021
	(in thousands)
Extended service contracts	$	137	$	251
Subscription software licenses		485		520
Total contract liabilities	$	622	$	771

Contract liabilities are included within other current liabilities in the accompanying unaudited condensed consolidated balance sheets. Revenue recognized during the three months ended June 30, 2022 that was included in the contract liability balance as of December 31, 2021 was immaterial. Revenue recognized during the three months ended June 30, 2021 that was included in the contract liability balance as of December 31, 2020 was $0.3 million. Revenue recognized during the six months ended June 30, 2022 and 2021 that was included in the contract liability balance as of December 31, 2021 and 2020 was $0.6 million and $0.8 million, respectively.

Disaggregation of revenue

The Company disaggregates revenue from contracts with customers by segment and 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 revenues disaggregated by segment and the timing of when goods and services are transferred:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(in thousands)
Product revenue recognized at a point in time	$	8,266	$	5,959	$	15,293	$	11,573
Product revenue recognized over time		176		212		352		407
Software revenue recognized at a point in time		545		344		764		518
Software revenue recognized over time		1,560		1,477		3,171		2,921
Total	$	10,547	$	7,992	$	19,580	$	15,419

No individual customer accounted for more than 10% of sales for the three or six months ended June 30, 2022 and 2021.

Warranty Reserve

The Company provides a standard warranty on its GentleWave Systems for a specified period of time. For the three and six months ended June 30, 2022 and 2021, 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 expenses expected to be incurred within 12 months from the date of sale are classified as other current liabilities while those expected to be incurred after 12 months from the date of sale are classified as other liabilities in the accompanying unaudited condensed consolidated balance sheets. 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 three and six months ended June 30, 2022 and 2021:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2022			2021			2022			2021
	(in thousands)						(in thousands)
Balance at beginning of period	$	1,615		$	1,453		$	1,620		$	1,584
Provision for warranties issued		470			330			780			660
Warranty costs incurred		(355	)		(387	)		(670	)		(848	)
Balance at end of period	$	1,730		$	1,396		$	1,730		$	1,396

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

	June 30,		December 31,
	2022		2021
	(in thousands)
Current portion	$	1,219	$	1,132
Non-current portion		511		488
Total	$	1,730	$	1,620

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.

Accounting Pronouncement Recently Adopted

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. The Company adopted ASU 2019-12 in the first quarter of 2022 as an emerging growth company. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. This will be effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, which for the Company is the first quarter of 2024, with early adoption permitted beginning first quarter of 2021. The Company early adopted the ASU on January 1, 2022 as a smaller reporting company. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)”, which clarifies and reduces diversity in an issuer’s accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The Company early adopted the ASU on January 1, 2022. The adoption did not have significant impact on the Company's unaudited condensed consolidated financial statements.

Recent Accounting Updates Not Yet Effective

In October 2021, the FASB, issued Accounting Standards Update No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity (acquirer) to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact the standard will have on its condensed consolidated financial statements.

3. Balance Sheet Components

Inventory

Inventory consisted of the following:

	As of
	June 30,		December 31,
	2022		2021
	(in thousands)
Raw materials	$	8,091	$	4,911
Work in process		382		270
Finished goods		4,180		2,969
Total inventory	$	12,653	$	8,150

The Company recorded a reserve for excess and obsolete inventory of $0.5 million and $0.7 million at June 30, 2022 and December 31, 2021, respectively.

Intangible assets, net

Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following:

	As of
	June 30, 2022
	Weighted Average Amortization Period	Gross		Accumulated<br>Amortization		Net
	(in years)	(in thousands)
Developed Technology (5 - 10 years)	4.0	$	2,445	$	946	$	1,499
Customer relationships (7 years)	2.8		1,910		1,012		898
Tradenames (10 years)	0.8		360		133		227
Total intangible assets	7.6	$	4,715	$	2,091	$	2,624
	As of
---	---	---	---	---	---	---	---
	December 31, 2021
	Weighted Average Amortization Period	Gross		Accumulated<br>Amortization		Net
	(in years)	(in thousands)
Developed Technology (5 - 10 years)	4.0	$	2,445	$	768	$	1,677
Customer relationships (7 years)	2.8		1,910		875		1,035
Tradenames (10 years)	0.8		360		116		244
Total intangible assets	7.6	$	4,715	$	1,759	$	2,956

Amortization expense was $0.1 million and $0.2 million for the three months ended June 30, 2022 and 2021, respectively, which were mostly recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for both the three months ended June 30, 2022 and 2021.

Amortization expense was $0.3 million, which were mostly recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for both the six months ended June 30, 2022 and 2021.

The following table presents estimated future annual amortization expense related to intangible assets, net as of June 30, 2022:

	Future Intangible Asset Amortization Expenses
	(in thousands)
2022 (remaining six months)	$	332
2023		618
2024		442
2025		386
2026 and thereafter		846
Total future amortization expense	$	2,624

4. Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, operating lease liabilities, warrant liabilities, forward obligation, contingent earnout, 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 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 June 30, 2022 and December 31, 2021:

	As of
	June 30, 2022
	Fair Value		Quoted Prices in Active Markets for Identical Assets<br>(Level 1)		Significant Other Observable Inputs<br>(Level 2)		Significant Unobservable Inputs<br>(Level 3)
	(in thousands)
Assets:
Cash equivalents:
Money market funds	$	12,299	$	12,299	$	—	$	—
Commercial paper		4,191		—		4,191		—
Total cash equivalents at fair value		16,490		12,299		4,191		—
Short-term investments:
U.S. Treasury securities		4,989		4,989		—		—
U.S. Government agency securities		10,004		10,004		—		—
Commercial paper and corporate bonds		19,220		—		19,220		—
Total short-term investments at fair value		34,213		14,993		19,220		—
Total assets at fair value	$	50,703	$	27,292	$	23,411	$	—

	As of
	December 31, 2021
	Fair Value		Quoted Prices in Active Markets for Identical Assets<br>(Level 1)		Significant Other Observable Inputs<br>(Level 2)		Significant Unobservable Inputs<br>(Level 3)
	(in thousands)
Assets:
Money market funds	$	84,102	$	84,102	$	—	$	—
Liabilities:
Contingent earnout	$	524	$	—	$	—	$	524

The following table summarizes the Company's short-term investments, considered available-for-sale, as of June 30, 2022. The Company did not hold any short-term investments as of December 31, 2021.

	June 30, 2022
	Fair Value		Cost Basis		Unrealized Losses<br>Recognized in<br>AOCI
Short-term investments:
U.S. Treasury securities	$	4,989	$	4,993	$	(4	)
U.S. Government agency securities		10,004		10,037		(33	)
Commercial paper and corporate bonds		19,220		19,225		(5	)
Total short-term investments at fair value	$	34,213	$	34,255	$	(42	)

Recurring liabilities included in Level 3 for the periods presented consisted of a contingent earnout.

The following tables present the rollforward of the estimated fair values for instruments classified by the Company within Level 3 of the fair value hierarchy defined above, measured using significant unobservable inputs:

	Warrant<br>liabilities		Forward<br>obligation		Contingent<br>earnout			Total
	(in thousands)
December 31, 2021	$	—	$	—	$	524		$	524
Payment of contingent earnout		—		—		(524	)		(524	)
June 30, 2022	$	—	$	—	$	—		$	—
	Warrant<br>liabilities		Forward<br>obligation		Contingent<br>earnout			Total
---	---	---	---	---	---	---	---	---	---	---
	(in thousands)
December 31, 2020	$	1,914	$	2,750	$	930		$	5,594
Payment of contingent earnout		—		—		(681	)		(681	)
Change in fair value		17		150		7			174
June 30, 2021	$	1,931	$	2,900	$	256		$	5,087

There were no transfers in or out of Level 3 during the six months ended June 30, 2022 and 2021.

Warrants

In December 2013, the Company entered into a $10.0 million term loan facility with Oxford Finance LLC. The term loan was repaid in full in June 2017. In connection with the term loan, the Company issued immediately exercisable warrants to the lender for the purchase of 27,397 shares of the Company’s Series C-1 preferred stock equal to three percent of the aggregate amount funded.

In June 2017, the Company entered into a term loan facility with Perceptive Credit Holdings, LP, which was subsequently amended (see Note 9). Upon funding of the initial loan, and each initial tranche of the amended loans, the Company issued immediately exercisable warrants to the lender for the purchase of 54,793 shares of the Company’s Series D preferred stock, and 249,313 shares of the Company’s Series E preferred stock.

In August 2021, the Company amended its term loan with Perceptive Credit Holdings, LP and Perceptive Credit Holdings III, LP and issued immediately exercisable warrants to the lender for the purchase of 150,684 shares of the Company’s Series E preferred stock. The fair value at issuance of the Series E preferred stock warrants related to the August 2021 amendment was $2.1 million.

Prior to the Company's IPO in November 2021, the Company recognized warrants to purchase shares of convertible preferred stock as liabilities, reflecting deemed liquidation provisions of the convertible preferred stock considered contingent redemption provisions that were not solely within the Company's control. Upon the closing of the IPO, the contingent redemption provisions were removed with the automatic conversion of the underlying preferred stock to common stock, and the Company revalued the convertible preferred stock warrants and reclassified the liability to stockholders' equity. The common stock warrants are no longer subject to remeasurement subsequent to the IPO.

In April 2022, the Company amended its term loan and the warrants previously issued to Perceptive Credit Holdings III, LP and certain of its affiliates to purchase an aggregate of 304,105 shares of its common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share. The amendment resulted in revaluation of warrants that was recognized in additional paid-in capital on the unaudited condensed consolidated statement of convertible preferred stock and stockholders’ equity (deficit) as of June 30, 2022.

Warrants issued and outstanding at December 31, 2021 included the following:

	Exercise price per share
27,397	$	10.95
54,793	$	17.80
249,313	$	20.08
331,503

As of June 30, 2021, warrants fully vested and outstanding had estimated fair values ranging from $7.35 to $12.62. Fair values were determined using the Black-Scholes option-pricing model with the following input assumptions for the six months ended June 30, 2021:

	Six Months Ended
	June 30, 2021
Expected volatility range (weighted average)	79.10% to 85.51% (80.38%)
Dividend yield	0.00%
Risk-free interest rates range (weighted average)	0.35% to 1.31% (1.12%)
Expected term range (average)	2.50 years to 8.27 years (6.80 years)

Assumptions were weighted by the relative fair value of the instruments. An increase in the expected volatility, risk-free interest rates, and expected term would result in an increase to the estimated value of the warrants while an increase in the dividend yield would result in a decrease to the estimated value of the warrants.

These warrants expire between December 2023 and August 2031.

5. Convertible Preferred Stock and Common Stock

Authorized Shares

On November 2, 2021, the Company amended and restated its certificate of incorporation and bylaws to provide for, among other things, the Company’s authorized capital stock to consist of 500,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.

6. Stock-based Compensation Expense

Stock-based Compensation Expenses

The following tables present the Company's stock-based compensation for equity-settled awards by type (i.e. stock options, restricted stock units ("RSUs"), and rights to purchase shares of common stock 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 six months ended June 30:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(in thousands)
Options	$	917	$	413	$	1,800	$	907
RSUs		1,024		—		1,535		—
ESPP		13		—		13		—
Total stock-based compensation expense	$	1,954	$	413	$	3,348	$	907
	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(in thousands)
Cost of sales	$	140	$	46	$	241	$	107
Selling, general and administrative		1,407		249		2,385	541
Research and development		407		118		722	259
Total stock-based compensation expense	$	1,954	$	413	$	3,348	$	907

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 June 30, 2022.

	Unamortized Compensation Costs		Weighted Average Service Period
	(in thousands)		(years)
Options	$	8,040		2.8
RSUs		13,961		3.6
Total unamortized compensation cost	$	22,001

As of June 30, 2022, the total unamortized compensation cost related to the ESPP was not material.

Plan Activities

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

			Weighted<br>Average<br>Exercise Price Per<br>Share		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
					(in years)	(in thousands)
Options outstanding, December 31, 2021	3,119,993		$	7.59
Granted	297,516		$	1.73
Forfeited	(66,588	)	$	9.21
Exercised	(69,556	)	$	3.60		$	140
Options outstanding, June 30, 2022	3,281,365		$	7.10	7.1	$	86
Options vested and exercisable, June 30, 2022	1,685,444		$	5.44	5.6	$	86
Vested and expected to vest after June 30, 2022	3,088,948		$	6.99	7.0	$	86

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2022 and 2021 was $1.16 per share and $8.00 per share, respectively.

The following table summarizes the non-vested stock options as of June 30, 2022 and December 31, 2021:

	Number of Shares		Weighted<br>Average<br>Grant Date Fair Value
Non-vested Options, December 31, 2021		1,632,852	$	7.09
Non-vested Options, June 30, 2022		1,595,921	$	6.11

The total fair value of shares vested during the six months ended June 30, 2022 and 2021 was $1.8 million and $1.0 million, respectively.

Certain stock option grants under 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 common shares that have been issued upon early exercise of options at the original issue price. During the three and six months ended June 30, 2022, the Company did not repurchase shares. There was no material amount of shares of common stock subject to repurchase as of June 30, 2022. Cash received for the early exercise of unvested stock options is initially recorded as a liability and is released to equity over the vesting period. During the six months ended June 30, 2022 and 2021, early exercised stock options vested were immaterial.

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

			Weighted<br>Average<br>Grant Date Fair Value
RSUs outstanding, December 31, 2021	338,149		$	9.37
Granted	3,158,112		$	4.69
Exercised	(73,515	)	$	8.67
Forfeited	(82,201	)	$	6.06
RSUs outstanding, June 30, 2022	3,340,545		$	5.05

7. Leases

The Company leases office space under operating leases with expirations ranging from April 2022 to March 2025, 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. Where real estate leases contain an option to renew, any period beyond the option date is only included as part of the lease term if the Company is reasonably certain to exercise the option.

As of June 30, 2022, the Company has not entered into any leases that have not yet commenced 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)
2022 (remaining six months)	$	633
2023		1,089
2024		681
2025		169
2026 and thereafter		23
Total future minimum lease payments		2,595
Less: Imputed Interest		(213	)
Present value of operating lease liabilities	$	2,382
Less: Current portion		1,002
Long-term operating lease liabilities	$	1,380
Weighted average remaining lease term in years		2.45
Weighted average discount rate		7.55	%

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				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(in thousands)
Rent expense	$	320	$	260	$	637	$	589
Variable lease costs		27		5		53		47
Total	$	347	$	265	$	690	$	636
Cash paid for operating leases	$	317	$	280	$	630	$	578
	Three Months Ended				Six Months Ended
---	---	---	---	---	---	---	---	---
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(in thousands)
Cost of sales	$	58	$	47	$	116	$	107
Selling, general and administrative		289		218		574		529
Total	$	347	$	265	$	690	$	636

8. 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. 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 has been incurred, and that the amount (or range) of the loss can be reasonably estimated. The Company’s management 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.

9. Term Loan

Perceptive loan

On August 23, 2021, the Company entered into a fifth amendment to the Credit Agreement and Guaranty with Perceptive Credit Holdings, LP (the "Perceptive Loan"), which transferred the loan to Perceptive Credit Holdings III, LP ("Perceptive"). In connection

with this transfer and assignment, the Company entered into an amended and restated credit agreement and guaranty with Perceptive (the "Amended Perceptive Loan Agreement"), which provides for two additional tranches of delayed-draw term loans of $10.0 million each, for an aggregate amount of $20.0 million (the "Amended Perceptive Loan"), and extended the maturity date for repayment, including with respect to amounts owed in connection with the existing delayed-draw term loan, to August 23, 2026. In conjunction with the Amended Perceptive Loan, the Company paid a closing fee equal to $0.5 million as well as the lender’s legal fees and expenses. The Company accounted for the amendment as a modification.

In connection with the Amended Perceptive Loan Agreement, we issued a warrant to purchase 150,685 shares of our Series E convertible preferred stock at a purchase price of $20.08 per share to Perceptive. Upon the closing of our IPO, this convertible 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 $10.0 million loan expired. The obligation of Perceptive Credit Holdings III, LP to make the second $10.0 million loan was subject to the making of the first loan. Because the Company did not draw the first loan, the second loan, which was required to be initiated on or before June 30, 2022 would have been forfeited.

On April 6, 2022, the Company entered into Amendment No. 1 (the “Amendment”) to the Amended Perceptive Loan Agreement. The Amendment extends the borrowing deadline for the first tranche of $10.0 million of delayed-draw term loans from December 31, 2021 to September 30, 2022, subject to the Company having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date, and the Company borrowed this tranche on July 29, 2022. The Amendment also extends the borrowing deadline for the second tranche of $10.0 million delayed-draw term loans from March 31, 2022 to June 30, 2023, subject to (i) the Company 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) the closing market capitalization of the Company being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to Perceptive.

As a condition to entering into the Amendment, on April 6, 2022, the Company also amended the warrants previously issued to Perceptive Credit Holdings III, LP and certain of its affiliates to purchase an aggregate of 304,105 shares of its common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share. In August 2022, a portion of these warrants representing 153,421 shares were transferred to a third party and its affiliates.

For the six months ended June 30, 2022, the effective interest rate of the Amended Perceptive Loan, as amended, was 14.70%. As of June 30, 2022 and 2021, the fair value of the Amended Perceptive Loan, as amended, approximates its carrying amount.

Future principal repayments on the Amended Perceptive Loan, as amended, as of June 30, 2022, are as follows:

	Principal
	(in thousands)
2026	$	30,000
Total	$	30,000

The Amended Perceptive Loan Agreement, as amended, 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) satisfy certain minimum revenue thresholds, measured for the 12 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 twelve month period ended September 30, 2021 to $95.3 million for the twelve month period ended June 30, 2026. Failure to satisfy these financial covenants would constitute an event of default under the agreement. During the six months ended June 30, 2022, the Company was in compliance with all financial covenants and conditions required by the outstanding Amended Perceptive Loan Agreement, as amended.

10. Income Taxes

The Company maintains a full valuation allowance against its net deferred tax assets as of June 30, 2022 based on the current assessment that it is not more likely than not that 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, 2021 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 June 30, 2022.

The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years 2018 through 2021 remain open to examination and the state returns remain subject to examination for tax years 2017 through 2021. 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.

12. Segment Information

The Company operates and reports its results in two business segments, Product and Software. The Company reports segment information based on the management approach. The management approach designates the internal reporting used by the Company's Chief Operating Decision Maker ("CODM") for decision making and performance assessment as the basis for determining the Company’s reportable segments. The performance measures of the Company’s reportable segments is primarily income (loss) from operations. Income (loss) from operations for each segment includes all revenues, related cost of net revenues, gross margin and operating expenses directly attributable to the segment.

The Company’s Product segment includes GentleWave System console and related accessories and instruments. The GentleWave System offers a novel approach to root canal therapy, using advanced fluid dynamics, broad-spectrum acoustic energy and accelerated chemistry to deliver optimal cleaning and disinfection of the root canal system.

The Company’s Software segment includes selling traditional software licenses for practice management software to enable an integrated digital office for endodontists as well as Software-as-a-Service subscriptions for the software.

The following tables present the Company’s segment information for the three and six months ended June 30, 2022 and 2021:

	2022									2021
	(in thousands, except percentage data)
	Product			Software			Total			Product			Software			Total
Revenue	$	8,442		$	2,105		$	10,547		$	6,171		$	1,821		$	7,992
Cost of sales		7,385			609			7,994			5,333			566			5,899
Gross profit		1,057			1,496			2,553			838			1,255			2,093
Gross margin		13	%		71	%		24	%		14	%		69	%		26	%
Operating expenses:
Selling, general and administrative		12,243			579			12,822			6,866			515			7,381
Research and development		3,552			466			4,018			4,222			409			4,631
Change in fair value of contingent earnout		—			—			—			(21	)		—			(21	)
Total operating expenses		15,795			1,045			16,840			11,067			924			11,991
(Loss) income from operations	$	(14,738	)	$	451		$	(14,287	)	$	(10,229	)	$	331		$	(9,898	)

	2022									2021
	(in thousands, except percentage data)
	Product			Software			Total			Product			Software			Total
Revenue	$	15,645		$	3,935		$	19,580		$	11,980		$	3,439		$	15,419
Cost of sales		13,463			1,285			14,748			10,408			1,176			11,584
Gross profit		2,182			2,650			4,832			1,572			2,263			3,835
Gross margin		14	%		67	%		25	%		13	%		66	%		25	%
Operating expenses:
Selling, general and administrative		23,770			1,037			24,807			12,932			973			13,905
Research and development		7,983			885			8,868			8,861			816			9,677
Change in fair value of contingent earnout		—			—			—			(7	)		—			(7	)
Total operating expenses		31,753			1,922			33,675			21,786			1,789			23,575
(Loss) income from operations	$	(29,571	)	$	728		$	(28,843	)	$	(20,214	)	$	474		$	(19,740	)

Segment Assets:

	As of
	June 30,		December 31,
	2022		2021
	(in thousands)
Product	$	77,269	$	104,588
Software		10,639		10,911
Total	$	87,908	$	115,499

13. Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the periods presented:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2022			2021			2022			2021
	(in thousands, except shares and per share data)
Numerator:
Net loss attributable to common stock holders	$	(15,137	)	$	(11,149	)	$	(30,659	)	$	(22,055	)
Denominator:
Weighted-average shares outstanding – basic and diluted		26,468,515			1,217,759			26,437,058			1,211,571
Net loss per share – basic and diluted	$	(0.57	)	$	(9.16	)	$	(1.16	)	$	(18.20	)

The Company incurred a net loss for the periods presented and as a result, all outstanding equity awards and warrants have been excluded from such periods because including them would be anti-dilutive. See outstanding equity awards in Note 6, Stock-based Compensation Expense and warrants in Note 4, Fair Value of Financial Instruments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 the 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 June 30, 2022, we had an installed base of approximately 900 GentleWave Systems that had performed more than 900,000 GentleWave patient procedures since commercialization. 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.

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 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 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 June 30, 2022, we had cash and cash equivalents of $17.6 million, short-term investments of $34.2 million, an accumulated deficit of $342.7 million, and $30.0 million in principal outstanding under our term loan facility. We generated revenue of $19.6 million and incurred a net loss of $30.7 million for the six months ended June 30, 2022, compared to revenue of $15.4 million and a net loss of $22.1 million for the six months ended June 30, 2021.

We expect to continue to incur net losses for the next several years. We expect to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. and Canadian sales representatives, expanding our international marketing programs and expanding direct to clinician digital marketing efforts to help facilitate further adoption among existing accounts and to broaden awareness and adoption of our products to new clinicians. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our GentleWave products, support regulatory submissions and demonstrate the clinical efficacy of our new products. Moreover, we are incurring additional expenses as a result of operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses. As a result of these expenses, we will require additional financing to fund our operations and planned growth.

We believe that our cash and cash equivalents and short-term investments, together with anticipated revenue and available debt financing arrangements, will be sufficient to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Report on Form 10-Q. We may also seek additional financing opportunistically. We may seek to raise any additional capital by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

Factors Affecting Our Performance and Key Business Metrics

We believe there are several important factors that impact our operating performance and results of operations. We also regularly review several operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. We believe the following factors and key business metrics are important indicators of our performance:

• Installed base of GentleWave Systems: 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. 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 June 30, 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

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

We have mitigated the disruptions in our supply of certain materials used in the final assembly and packaging of our PIs encountered in the first quarter of 2022. We regularly explore different opportunities to implement alternative secondary source suppliers and packaging methods in order to ensure cost effectiveness and that we are able to source sufficient components and materials to manufacture our products. In the event that we are unable to implement new packaging methods or source sufficient components and materials from our current or future suppliers to manufacture enough of our products to satisfy demand, we may need to cease or slow down production and our business operations and financial condition may be materially harmed. Additionally, costs of certain materials and services have increased due to the increased demand and supply shortage. If such inflationary pressures in costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows.

The duration and ultimate economic impact of the COVID-19 pandemic on our business remains uncertain at this time. We expect that any future restrictions on dental procedures, as a result of COVID-19 or the emergence of any vaccine resistant variant, and other related issues, including supply chain disruptions, would have a negative impact on our operations, revenue and overall financial condition.

Components of Our Results of Operations

Revenue

Our revenue consists primarily of product revenue and software revenue. We generate product revenue on the capital sale of our GentleWave console and recurring sales of our single-use PIs and accessories. To a lesser extent, we also derive product revenue from service and repair and extended warranty contracts with our existing customers. Software revenue relates to fees we receive for licensing our TDO practice management tool to dental practitioners. We expect our product revenue to increase in absolute dollars as we increase adoption and utilization of 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 personnel compensation, including stock-based compensation expenses, facilities, the cost of production equipment and operations supervision, quality control, material procurement and intangible assets amortization. We provide a two-year warranty on capital equipment upon initial sale, and we establish a reserve for warranty repairs based on historical warranty repair costs incurred. Provisions for warranty obligations, which are included in cost of sales, are provided for at the time of shipment. We expect our cost of sales to increase in absolute dollars for the foreseeable future primarily as, and to the extent, our revenue grows, partially offset by lower unit product costs, though it may fluctuate from period to period.

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily, product mix and the resulting average selling prices, production volumes, manufacturing costs and product yields, and the implementation of cost reduction strategies. Our software gross margin is generally higher than our product gross

margin. As a result of these factors, we expect gross margin may fluctuate from period to period. We are engaged in various efforts to improve our gross margin by reducing unit product costs to the extent our production volumes increase, as well as through product design improvements, reducing material costs through negotiations with suppliers and optimizing the manufacturing process and reducing the costs to service our installed base.

Operating Expenses

Selling, general and administrative

Selling, general and administrative ("SG&A") expenses consist primarily of personnel compensation, including stock-based compensation, related to selling, marketing, professional education, administration, finance, information technology, legal, and human resource functions. SG&A expenses also include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit fees, legal fees, insurance costs and general corporate expenses including allocated facilities-related expenses. We expect our SG&A expenses to increase in absolute dollars for the foreseeable future as we expand our commercial infrastructure and incur additional fees associated with operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses, though it may fluctuate from period to period. However, over time, we expect our SG&A expenses to decrease as a percentage of revenue.

Research and development

Research and development ("R&D") expenses consist primarily of costs incurred for proprietary R&D programs, and include costs of product engineering, product development, regulatory affairs, consulting services, materials, and depreciation, as well as other costs associated with products and technologies being developed. These expenses include employee and non-employee compensation, including stock-based compensation, supplies, materials, consulting, related travel expenses and facilities expenses. We expect our R&D expenses to moderate in absolute dollars for the foreseeable future as we continue to develop, enhance, and commercialize new products and technologies. However, we expect our R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts.

Changes in fair value of contingent earnout

Changes in fair value of contingent earnout consists of fair value adjustments from our contingent earnout liabilities recorded in connection with the 2018 acquisition of TDO. We record a liability related to the contingent earnout provisions, which are based on actual and estimated annual sales of licenses and units, as defined in the stock purchase agreement, for each of the years 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, investment income, and the remeasurement of our preferred stock warrant liabilities and our forward obligation recorded in connection with an asset acquisition. On completion of our IPO, all of the outstanding warrants to purchase shares of convertible preferred stock were revalued and converted into warrants to purchase shares of common stock and the warrants liability was reclassified into stockholders’ equity. As a result, we are no longer required to remeasure the fair value of the common stock warrants at each reporting period. On completion of our IPO, the forward obligation was settled by the issuance of shares of common stock and will no longer require remeasurement at each reporting period.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

The following table shows our results of operations for the three months ended June 30, 2022 and 2021, together with the dollar and percentage change in those items:

	Three Months Ended
	June 30,			June 30,
	2022			2021				%
	(in thousands, except percentages)
Revenue	$	10,547		$	7,992				32	%
Cost of sales		7,994			5,899				36	%
Gross profit		2,553			2,093				22	%
Gross margin		24	%		26	%
Operating expenses:
Selling, general and administrative		12,822			7,381				74	%
Research and development		4,018			4,631		)		(13	)%
Change in fair value of contingent earnout		—			(21	)			(100	)%
Total operating expenses		16,840			11,991				40	%
Loss from operations		(14,287	)		(9,898	)	)		44	%
Other expense, net:
Interest and financing costs, net		(850	)		(1,084	)			(22	)%
Change in fair value of warrant liabilities		—			(17	)			(100	)%
Change in fair value of forward obligation		—			(150	)			(100	)%
Loss before income tax benefit		(15,137	)		(11,149	)	)		36	%
Net loss	$	(15,137	)	$	(11,149	)	)		36	%

All values are in US Dollars.

The following table shows our results of operations for the six months ended June 30, 2022 and 2021, together with the dollar and percentage change in those items:

	Six Months Ended
	June 30,			June 30,
	2022			2021				%
	(in thousands, except percentages)
Revenue	$	19,580		$	15,419				27	%
Cost of sales		14,748			11,584				27	%
Gross profit		4,832			3,835				26	%
Gross margin		25	%		25	%
Operating expenses:
Selling, general and administrative		24,807			13,905				78	%
Research and development		8,868			9,677		)		(8	)%
Change in fair value of contingent earnout		—			(7	)			(100	)%
Total operating expenses		33,675			23,575				43	%
Loss from operations		(28,843	)		(19,740	)	)		46	%
Other expense, net:
Interest and financing costs, net		(1,816	)		(2,148	)			(15	)%
Change in fair value of warrant liabilities		—			(17	)			(100	)%
Change in fair value of forward obligation		—			(150	)			(100	)%
Loss before income tax expense		(30,659	)		(22,055	)	)		39	%
Net loss	$	(30,659	)	$	(22,055	)	)		39	%

All values are in US Dollars.

Revenue

Our breakdown of revenue for the three and six months ended June 30, 2022 and 2021, respectively, is summarized below:

	Three Months Ended				Change
	June 30,		June 30,
	2022		2021			%
	(in thousands, except percentages)
Product revenue	$	8,442	$	6,171			37	%
Software revenue		2,105		1,821			16	%
Total revenue	$	10,547	$	7,992			32	%
	Six Months Ended				Change
	June 30,		June 30,
	2022		2022			%
	(in thousands, except percentages)
Product revenue	$	15,645	$	11,980			31	%
Software revenue		3,935		3,439			14	%
Total revenue	$	19,580	$	15,419			27	%

All values are in US Dollars.

Revenue increased $2.6 million, or 32%, for the three months ended June 30, 2022 compared to the prior year period, primarily driven by growth in sales volumes which generated approximately $1.8 million increase in revenue and an increase in average selling price of PIs of approximately 8%. For the three months ended June 30, 2022, we generated $2.7 million and $4.8 million from the sale of GentleWave consoles and PIs, respectively, compared to $1.7 million and $3.7 million for the three months ended June 30, 2021, respectively. There were no significant changes in the Software segment revenue.

Revenue increased $4.2 million, or 27%, for the six months ended June 30, 2022 compared to the prior year period, primarily driven by growth in sales volume which generated approximately $2.7 million increase in revenue and an increase in average selling price of PIs of approximately 8%. For the six months ended June 30, 2022, we generated $4.8 million and $9.1 million from the sale of GentleWave consoles and PIs, respectively, compared to $3.5 million and $7.0 million for the six months ended June 30, 2021, respectively. There were no significant changes in the Software segment revenue.

Cost of sales and gross margin

Cost of sales increased $2.1 million, or 36%, and $3.2 million, or 27%, for the three and six months ended June 30, 2022, respectively, compared to the prior year periods, primarily due to higher sales volume. During the three months ended June 30, 2022, cost of sales on per unit basis also slightly increased, resulting from operational inefficiency due to disruption in the supply chain. There were no significant changes in the Software segment cost of sales.

Gross margin slightly decreased 2% for the three months ended June 30, 2022 compared to the prior year period, primarily due to higher cost of sales on a per unit basis as aforementioned. Gross margin remained consistent for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Selling, general and administrative expenses

SG&A expenses increased $5.4 million, or 74%, and $10.9 million, or 78%, for the three and six months ended June 30, 2022, respectively, compared to the prior year periods, primarily driven by changes in our Product segment due to higher employee-related compensation and benefit expenses, including stock-based compensation, as a result of 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 for both the three and six months ended June 30, 2022 were moderate compared to the prior year periods, mainly reflecting lower spending on product development and lower salaries resulting from lower headcount. There were no significant changes in any major components of the R&D expenses.

Change in fair value of contingent earnout

There was no change in fair value of contingent earnout recorded for either the three or six months ended June 30, 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 $4.4 million for the three months ended June 30, 2022 compared to the prior year period, 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 $0.5 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively.

Loss from operations increased $9.1 million for the six months ended June 30, 2022 compared to the prior year period, 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 $0.7 million and $0.5 million for the three months ended June 30, 2022 and 2021, respectively.

Other expense, net

Total other expense net for both three and six months ended June 30, 2022 slightly decreased compared to the prior year periods, mainly due to interest income from our short-term investments and lower effective interest rate resulting from the amendment to our Perceptive loan (as described below).

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 June 30, 2022, we had cash and cash equivalents of $17.6 million, short-term investments of $34.2 million, an accumulated deficit of $342.7 million, and $30.0 million in principal outstanding under our term loan facility. As of June 30, 2021, we had cash and cash equivalents of $25.7 million, an accumulated deficit of $285.6 million, and $30.0 million in principal outstanding on our term facility. For the three months ended June 30, 2022 and 2021, our net losses from operations were $15.1 million and $11.1 million, respectively. For the six months ended June 30, 2022 and 2021, our net losses from operations were $30.7 million and $22.1 million, respectively, and our net cash used in operating activities was $31.5 million and $23.9 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.

Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Based upon our current operating plan, we believe that our cash and cash equivalents, short-term investments, together with anticipated revenue and available debt financing arrangements, will be sufficient to meet our capital requirements and fund our operations through at least the next 12 months from the date of this Quarterly Report. If our actual operating expenses significantly exceed our operating plan or our debt financing arrangements become unavailable because certain borrowing requirements are not met (see Note 9 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), we may have to significantly delay or scale back our operations to reduce working capital requirements, and substantial uncertainty would exist with respect to our ability to continue as a going concern. In addition, we would prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of our assets beyond the next 12 months, including but not limited to, actions such as reducing personnel-related costs and delaying or curtailing certain of our commercial efforts, development activities and other discretionary expenditures that are within our control. These reductions in expenditures, if required, may have an adverse impact on our ability to achieve certain of our planned objectives 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 August 23, 2021, we entered into a fifth amendment to the Credit Agreement and Guaranty with Perceptive Credit Holdings, LP (the "Perceptive Loan"), which transferred the loan to Perceptive Credit Holdings III, LP ("Perceptive"). In connection with this transfer and assignment, we entered into an amended and restated credit agreement and guaranty (the "New Credit Agreement") with Perceptive Credit Holdings III, LP (the "Amended Perceptive Loan Agreement"), which provides for two additional tranches of delayed-draw term loans of $10.0 million each, for an aggregate amount of $20.0 million (the "Amended Perceptive Loan") and extended the maturity date for repayment, including with respect to amounts owed in connection with the existing delayed-draw term loan, to August 23, 2026. In conjunction with the Amended Perceptive Loan, the Company paid a closing fee equal to $0.5 million as well as the lender's legal fees and expenses. The Company accounted for the amendment as a modification.

On December 31, 2021, the first $10.0 million loan expired. The obligation of Perceptive to make the second $10.0 million loan was subject to the making of the first loan. Because we did not draw the first loan, the second loan, which was required to be initiated on or before June 30, 2022 would have been forfeited.

On April 6, 2022, we entered into Amendment No. 1 (the "Amendment") to the Amended Perceptive Loan Agreement. The Amendment extends the borrowing deadline for the first tranche of $10.0 million of delayed-draw term loans from December 31, 2021

to September 30, 2022, subject to our having generated at least $36.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date, and we borrowed this tranche on July 29, 2022. The Amendment also extends the borrowing deadline for the second tranche of $10.0 million delayed-draw term loans from March 31, 2022 to June 30, 2023, subject to (i) our having generated at least $46.0 million in revenue for the 12 consecutive month period most recently ended prior to the borrowing date; and (ii) our closing market capitalization being at least $100.0 million on each trading day of the period of 15 consecutive trading days ending on the business day the borrowing notice for the tranche is delivered to Perceptive.

As a condition to entering into the Amendment, on April 6, 2022, we also amended the warrants previously issued to Perceptive and certain of its affiliates to purchase an aggregate of 304,105 shares of our common stock. Such warrants were amended solely to reduce the exercise price of the warrants to $12.00 per share. In August, 2022, a portion of these warrants representing 153,421 shares were transferred to a third party and its affiliates.

The interest rate for amounts borrowed under the Amended Perceptive Loan Agreement, as amended, is the greater of the 1-month LIBOR and 2.00% plus the applicable margin of 9.25%. In connection with the Amended Perceptive Loan Agreement, as amended, we also entered into an amended and restated security agreement and granted a security interest in substantially all of our assets. We are permitted to make voluntary prepayments, subject to a scaled prepayment premium that ranges from 7.0% to 1.0% of the aggregate principal amount outstanding on such prepayment date for prepayments made 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, as amended, includes financial covenants that require us to (i) maintain, at all times, a minimum aggregate balance of $3.0 million in cash in one or more controlled accounts, and (ii) satisfy certain minimum revenue thresholds, measured for the 12 consecutive month period on each calendar quarter-end 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.

The Amended Perceptive Loan Agreement, as amended, contains events of default, including, without limitation, events of default upon: (i) failure to make a payment pursuant to the terms of the agreement; (ii) violation of certain covenants; (iii) payment or other defaults on other indebtedness; (iv) material adverse change in the business or change in control; (v) insolvency; (vi) significant judgments; (vii) incorrectness of representations and warranties; (viii) regulatory matters; and (ix) failure by us to maintain a valid and perfected lien on the collateral securing the borrowing. In the event of an event of default, the lender may terminate its commitments and declare all amounts outstanding under the Amended Perceptive Loan Agreement, as amended, immediately due and payable, together with accrued interest and all fees and other obligations. The amount of such repayment will include payment of any prepayment premium applicable due to the time of such payment. In addition, upon the occurrence and during the continuance of any event of default, the applicable margin will increase by 3.00% per annum to 12.25%.

As of June 30, 2022, we had an aggregate principal balance of $30.0 million outstanding under the Amended Perceptive Loan Agreement, as amended, and we were in compliance with all covenants and conditions under such agreement.

Summary Statement of Cash Flows

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

	Six Months Ended
	June 30,			June 30,
	2022			2021
	(in thousands)
Net cash used in:
Operating activities	$	(31,503	)	$	(23,865	)
Investing activities		(35,049	)		(1,527	)
Financing activities		(491	)		(601	)
Net decrease in cash and cash equivalents	$	(67,043	)	$	(25,993	)

Net Cash Used in Operating Activities

Net cash used in operating activities was $31.5 million for the six months ended June 30, 2022, primarily consisting of net loss of $30.7 million , non-cash items of $4.9 million and a net change in our net operating assets and liabilities of $5.8 million. Non-cash items primarily consisted of $1.6 million in depreciation and amortization and $3.3 million in stock-based compensation. The change

in our net operating assets and liabilities was primarily due to a $4.5 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.

Net cash used in operating activities was $23.9 million for the six months ended June 30, 2021, primarily consisting of net loss of $22.1 million, non-cash items of $3.2 million and a net change in our net operating assets and liabilities of $5.1 million. Non-cash items primarily consisted of $1.9 million in depreciation and amortization and $0.9 million in stock-based compensation. The change in our net operating assets and liabilities was primarily due to a $1.7 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.

Net Cash Used in Investing Activities

Net cash used in investing activities was $35.0 million for the six months ended June 30, 2022, as a result of purchases of short-term investments and property and equipment. Net cash used in investing activities was $1.5 million for the six months ended June 30, 2021, as a result of an acquisition of intangible assets and purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash used by financing activities was $0.5 million for the six months ended June 30, 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 six months ended June 30, 2021, primarily due to payment of contingent earnout upon achieving sales objectives.

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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

Item 1. Legal Proceedings.

From time to time, we may become involved in various claims and legal proceedings. Regardless of outcome, litigation and other legal and administrative proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are currently not a party to any legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition, and results of operations.

Item 1A. Risk Factors.

We have described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 risks and uncertainties that could cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. These risks and uncertainties are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, results of operations or the market price of our common stock. Except as set forth below, there have been no material changes to the risk factors previously described in our 2021 Annual Report on Form 10-K.

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

We rely on third-party suppliers, including in some instances single or sole source suppliers, to provide us with certain components, sub-assemblies and finished products for our products. These components, sub-assemblies and finished products are critical and, for a small number of items, there are relatively few alternative sources of supply. For example, our GentleWave console includes a number of components, including high pressure lines, high pressure pumps, fluid temperature control systems, degassing systems and user interface control systems, most of which we source externally from third party suppliers. We rely on Teledyne SSI to supply our high pressure pump, Marlow Industries, Inc. for our fluid temperature control systems and Idex Health & Science LLC for our degassing components. We do not currently have long-term supply contracts with certain of the sole and single source suppliers of these key components, and there are no minimum purchase or payment requirements. Additionally, we believe we are not a major customer to many of our suppliers. Our suppliers may therefore give other customers’ needs higher priority than ours, and we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms. These single or sole source suppliers may be unwilling or unable to supply the necessary materials and components or manufacture and assemble our products in a reliable manner and at the levels we anticipate or at levels adequate to satisfy demand for our products.

In addition, we have not been qualified or obtained necessary regulatory clearances for additional suppliers for most of the components, sub-assemblies and materials we require for our products. While we currently believe that alternative sources of supply or sterilization may be available, we cannot be certain whether they will be available if and when we need them, or that any alternative suppliers or providers would be able to provide the quantity and quality of components, materials and sterilization that we would need to manufacture and ship our products if our existing suppliers and providers were unable to satisfy our requirements. To utilize other sources, we would need to identify and qualify new providers to our quality standards and obtain any additional regulatory clearances or approvals required to change providers, which could result in manufacturing delays and increase our expenses.

Although we believe that we have stable relationships with our existing suppliers, we cannot assure you that we will be able to secure a stable supply of components or materials going forward. In the event that any adverse developments occur with our suppliers, in particular for those components that are single or sole sourced, or if any of our suppliers modifies any of the components they supply to us, our ability to supply our products may be temporarily or permanently interrupted. Obtaining substitute components could be difficult, time and resource- consuming and costly. Also, there can be no assurance that we will be able to secure a supply of alternative components at reasonable prices without experiencing interruptions in our business operations.

Quarantines, shelter-in-place and similar government orders related to the COVID-19 pandemic or other infectious disease outbreaks, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, could also impact the suppliers upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our products. We have recently encountered disruptions in our supply of certain materials used in the final assembly and packaging of our Procedure Instruments. 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 have 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.

Our dependence on third-parties subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:

▪ interruption of supply or sterilization resulting from modifications to, or discontinuation of, a third party’s operations;

▪ delays in product shipments resulting from uncorrected defects or errors, reliability issues or a third party’s failure to produce components or complete sterilizations that consistently meet our quality specifications;

▪ price fluctuations due to a lack of long-term supply arrangements with our third parties for key components or sterilization requirements;

▪ inability to obtain adequate supply or services in a timely manner or on commercially reasonable terms;

▪ difficulty identifying and qualifying alternative third parties for the supply of components or for sterilization of our products in a timely manner;

▪ inability of third parties to comply with applicable provisions of the FDA’s QSR, or other applicable laws or regulations enforced by the FDA, state and global regulatory authorities;

▪ inability to ensure the quality of products manufactured or sterilization conducted by third parties;

▪ production delays related to the evaluation and testing of products and services from alternative third parties and corresponding regulatory qualifications;

▪ trends towards consolidation within the medical device manufacturing supplier industry; and

▪ delays in delivery by our suppliers and service providers.

Although we require our third-party suppliers and providers to supply us with components and services that meet our specifications and other applicable legal and regulatory requirements in our agreements and contracts, and we perform incoming inspection, testing or other acceptance activities to ensure the components meet our requirements, there is a risk that these third parties will not always act consistent with our best interests, and may not always supply components or provide services that meet our requirements or in a timely manner. In addition, we cannot assure you that our suppliers have obtained and will be able to obtain or maintain all licenses, permits, clearances and approvals necessary for their operations or comply with all applicable laws and regulations, and failure to do so by them may lead to interruption in their business operations, which in turn may result in shortages of components supplied to us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds

On October 28, 2021, our Registration Statement on Form S-1 (File No. 333-260136) relating to our IPO was declared effective by the SEC. We received aggregate net proceeds of $83.8 million, after deducting underwriters' discounts and commissions and offering expenses of $9.8 million. There has been no material change in the planned use of the IPO proceeds as described in our prospectus dated November 1, 2021, as filed with the SEC pursuant to Rule 424(b) under the Securities Act (File No. 333-260136) on November 1, 2021.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q unless otherwise stated.

		Incorporated by Reference
Exhibit<br><br>Number	Description	Form	File No.	Exhibit	Filing Date	Filed / Furnished Herewith
3.1	Amended and Restated Certificate of Incorporation	8-K	001-40988	3.1	11/2/2021
3.2	Amended and Restated Bylaws	8-K	001-40988	3.2	11/2/2021
4.1	Form of Certificate of Common Stock	S-1/A	333-260136	4.1	10/25/2021
4.2	Fifth Amended and Restated Voting Agreement by and among Sonendo, Inc. and the investors listed therein	S-1/A	333-260136	4.2	10/25/2021
4.3	Third Amended and Restated Investors’ Rights Agreement by and among Sonendo, Inc. and the investors listed therein	S-1	333-260136	4.3	10/8/2021
4.4	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2013	S-1	333-260136	4.4	10/8/2021
4.5	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on June 30, 2014	S-1	333-260136	4.5	10/8/2021
4.6	Warrant to purchase Series C-1 preferred stock, issued to Oxford Finance LLC on December 31, 2014	S-1	333-260136	4.6	10/8/2021
4.7	Warrant to purchase Series D preferred stock	S-1	333-260136	4.7	10/8/2021
4.8	Warrant to purchase Series E preferred stock (2018)	S-1	333-260136	4.8	10/8/2021
4.9	Warrant to purchase Series E preferred stock (2019)	S-1	333-260136	4.9	10/8/2021
4.10	Warrant to purchase Series E preferred stock (2021)	S-1	333-260136	4.10	10/8/2021
4.11	Form of Credit Agreement Warrant to Purchase Stock (Perceptive Credit Holdings, III, LP)	8-K	001-40988	4.1	4/7/2022
4.12	Form of Credit Agreement Warrant to Purchase Stock (Warberg entities)					*
4.13	Schedule of Holders of Credit Agreement Warrants to Purchase Stock					*
4.14	Description of Common Stock	10-K	001-40988	4.11	3/23/2022
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					*
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					*
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					*
101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.	*
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101.SCH	Inline XBRL Taxonomy Extension Schema Document	*
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	*
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)	*

* Filed or furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Sonendo, Inc.
Date: August 10, 2022	By:	/s/ Bjarne Bergheim
		Bjarne Bergheim
		President, Chief Executive Officer and Director
		(principal executive officer)
Date: August 10, 2022	By:	/s/ Michael P. Watts
		Michael P. Watts
		Chief Financial Officer
		(principal financial and accounting officer)

EX-4.12

Exhibit 4.12

THIS WARRANT TO PURCHASE STOCK AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTION 5.3 BELOW, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

WARRANT TO PURCHASE STOCK

Company:	SONENDO, INC. a Delaware corporation (the “Company”)
Number of Shares:
Type/Series of Stock:	Common Stock
Warrant Price:	$12.00 per share
Issue Date:	August [ ___ ] , 2022
Expiration Date:

WHEREAS, reference is made to that certain Warrant to Purchase Stock, dated as of ________ (the “Existing Warrant”), between the Company and pursuant to which ________ is entitled to purchase ________ shares of Common Stock of the Company at $12.00 per share;

WHEREAS, reference is made to that certain Warrant to Purchase Stock, dated as of _______ (the “Existing ______Warrant”), between the Company and ______ pursuant to which ______ is entitled to purchase ________ shares of Common Stock of the Company at $12.00 per share;

WHEREAS, _____ assigned the Existing ______Warrant to ________ (together with any successor and permitted assignee and transferee of this Warrant (in whole or in part) or of any shares issued upon exercise hereof, a “Holder”);

WHEREAS, ________ assigned the Existing ________ Warrant to Holder; and

WHEREAS, this Warrant to Purchase Stock (this “Warrant”) is being issued in replacement of the Existing _______ Warrant and the Existing ________ Warrant.

NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the Company and Holder hereby acknowledge and agree that this Warrant replaces the Existing ________ Warrant and Existing ________ Warrant in their entirety and the Company certifies that Holder is entitled to purchase the number of fully paid and non-assessable shares (the “Shares”) of the above-stated Type/Series of Stock (the “Class”) of the Company at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Section 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

SECTION 1. EXERCISE.

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1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased (the “Aggregate Warrant Price”).

1.2 Cashless Exercise. In lieu of paying the cash amount upon exercise of this Warrant pursuant to Section 1.1, if the Fair Market Value (defined below in Section 1.3) of one Share is greater than the Warrant Price (at the date of calculation described below in Section 1.3), the Holder may elect to pay the Aggregate Warrant Price in Shares rather than cash by instructing the Company to withhold a number of Shares then issuable upon exercise of this Warrant having an aggregate Fair Market Value as of such date of calculation equal to the Aggregate Warrant Price.

1.3 Fair Market Value. If the Company’s common stock is then traded or quoted on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “Trading Market”) and the Class is common stock, the fair market value of a Share shall be the closing price or last sale price of a share of common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is then traded in a Trading Market and the Class is a series of the Company’s convertible preferred stock, the fair market value of a Share shall be the closing price or last sale price of a share of the Company’s common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company multiplied by the number of shares of the Company’s common stock into which a Share is then convertible. If the Company’s common stock is not traded in a Trading Market, the Board of Directors of the Company shall determine the fair market value of a Share in its reasonable good faith judgment.

1.4 Delivery of Certificate and New Warrant. Promptly (but in any event within three (3) Business Days following the date the Holder delivers its Notice of Exercise to the Company pursuant to Section 5.5), the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully exercised and has not expired, a new warrant of like tenor representing the Shares (and portion of this Warrant) that are not subject to the Holder’s Notice of Exercise.

1.5 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.

1.6 Treatment of Warrant Upon Acquisition of Company.

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(a) Acquisition. For the purpose of this Warrant, “Acquisition” means any transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company, (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which (pursuant to any such event) the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization (or, if such Company stockholders beneficially own a majority of the outstanding voting power of the surviving or successor entity as of immediately after such merger, consolidation or reorganization, such surviving or successor entity is not the Company); or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then total outstanding combined voting power.

(b) Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), either (i) Holder shall exercise this Warrant pursuant to Section 1.1 and/or 1.2 and such exercise will be deemed effective immediately prior to and contingent upon the consummation of such Acquisition or (ii) if Holder elects not to exercise the Warrant, this Warrant will expire immediately simultaneously with the consummation of such Acquisition.

(c) Notice of Cash/Public Acquisition. The Company shall provide Holder with prior written notice of any Cash/Public Acquisition (together with such reasonable information as Holder may reasonably require regarding the treatment of this Warrant in connection with such contemplated Cash/Public Acquisition giving rise to such notice), which Notice shall be delivered to Holder not less than seven (7) Business Days nor more than thirty (30) Business Days prior to the closing of the proposed Cash/Public Acquisition. In the event the Company does not provide such notice, then if, immediately prior to the Cash/Public Acquisition, the Fair Market Value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly notify the Holder of the number of Shares (or such other securities) issued upon such exercise to the Holder and Holder shall be deemed to have restated each of the representations and warranties in Section 4 of the Warrant as the date thereof.

(d) Non-Cash/Public Acquisitions. Upon the closing of any Acquisition other than a Cash/Public Acquisition defined above, the acquiring, surviving or successor entity shall assume the obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.

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(e) Limitations On Exercise. Any term or provision hereof to the contrary notwithstanding, the Company shall not effect the exercise of this Warrant, and no Holder shall have the right to exercise this Warrant, to the extent that after giving effect to such exercise, such Person (together with such Person’s affiliates) would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the Company’s common stock outstanding immediately after giving effect to such exercise. For purposes of the foregoing sentence, the aggregate number of shares of Company’s common stock beneficially owned by such Person and its affiliates shall include the number of shares of such common stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of common stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes or convertible shares or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act of 1934 (defined below). For purposes of this Warrant, in determining the number of outstanding shares of Company’s common stock, a Holder of this Warrant may rely on the number of outstanding shares of common stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or its transfer agent setting forth the number of shares of the Company’s common stock outstanding. For any reason at any time, upon the written or oral request of a Holder, the Company shall within two (2) Business Days confirm to the Holder the number of shares of the Company’s Common Stock then outstanding.

(f) Certain Defined Terms. As used in this Warrant:

(i) “Business Day” means any day that is not a Saturday, Sunday or a day on which banks in the State of California or the State of New York are closed.

(ii) “Expiration Date” means the “Expiration Date” referenced on the first page of this Warrant.

(iii) “Investors’ Rights Agreement” means that certain Third Amended and Restated Investors’ Rights Agreement, made as of October 26, 2018, by and among the Company and its various shareholders party thereto, as subsequently amended or otherwise modified from time to time.

(iv) “Issue Date” means the “Issue Date” referenced on the first page of this Warrant.

(v) [Reserved].

(vi) “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is

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then current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by the Holder in connection with any Acquisition were the Holder to exercise this Warrant on or prior to the closing thereof is then traded in a Trading Market, and (iii) following the closing of such Acquisition, the Holder would not be restricted from publicly re-selling all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise or convert this Warrant in full on or prior to the closing of such Acquisition, except to the extent that any such restriction (x) arises solely under federal or state securities laws, rules or regulations, and (y) does not extend beyond six (6) months from the closing of such Acquisition.

(vii) “Voting Agreement” means that certain Fifth Amended and Restated Voting Agreement, made as of December 10, 2019, by and among the Company and its various shareholders party thereto, as subsequently amended or otherwise modified from time to time.

(viii) “Warrant Price” means the “Warrant Price” referenced on the first page of this Warrant.

SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE.

2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired upon such exercise, Holder shall receive, without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

2.2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions, replacements or other similar events.

2.3 Conversion of Preferred Stock. If the Class is a class and series of the Company’s convertible preferred stock, in the event that all outstanding shares of the Class are converted, automatically or by action of the holders thereof, into common stock pursuant to the provisions of the Company’s Certificate of Incorporation, including, without limitation, in connection with the Company’s initial, underwritten public offering and sale of its common stock pursuant to an effective registration statement under the Act (the “IPO”), then from and after the

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date on which all outstanding shares of the Class have been so converted, this Warrant shall be exercisable for such number of shares of common stock into which the Shares would have been converted had the Shares been outstanding on the date of such conversion, and the Warrant Price shall equal the Warrant Price in effect as of immediately prior to such conversion divided by the number of shares of common stock into which one Share would have been converted, all subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant.

2.4 Adjustments for Diluting Issuances. Without duplication of any adjustment otherwise provided for in this Section 2, the number of shares of common stock issuable upon conversion of the Shares shall be subject to anti-dilution adjustment from time to time in the manner set forth in the Company’s Certificate of Incorporation as if the Shares were issued and outstanding on and as of the date of any such required adjustment.

2.5 No Fractional Share. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded up to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant (including as a result of a cashless exercise pursuant to Section 2.2 above), the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the Fair Market Value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.

2.6 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.

SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

3.1 Representations and Warranties. The Company represents and warrants to, and covenants and agrees with, the Holder as follows:

(a) All Shares which may be issued upon the exercise of this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of shares of the Class, common stock and other securities as will be sufficient to permit the exercise in full of this Warrant and the conversion of the Shares into common stock or such other securities.

(b) The Company covenants and agrees that upon any exercise of this Warrant in whole or in part, the Company shall take all commercially reasonable action necessary to permit the Holder to become a party to (and beneficiary of) the Investors’ Rights Agreement and the

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Voting Agreement. The Holder (and any assignee hereof) agrees that, upon exercise of this Warrant in whole or in part, it shall take all commercially reasonable action necessary to become a party to the Investors’ Rights Agreement and the Voting Agreement.

3.2 Notice of Certain Events. If the Company proposes at any time to:

(a) declare any dividend or distribution upon the outstanding shares of the Class or common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend;

(b) offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or series of the Company’s stock (other than pursuant to contractual pre-emptive rights);

(c) effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class;

(d) effect an Acquisition;

(e) effect a liquidation, dissolution or winding up of the Company; or

(f) effect an IPO;

then, in connection with each such event, the Company shall give Holder:

(1) at least seven (7) Business Days (but not more than thirty (30) Business Days) prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of outstanding shares of the Class will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above;

(2) in the case of the matters referred to in (c), (d) and (e) above at least seven (7) Business Days (but not more than thirty (30) Business Days) prior written notice of the date when the same will take place (and specifying the date on which the holders of outstanding shares of the Class will be entitled to exchange their shares for the securities or other property deliverable upon the occurrence of such event); and

(3) with respect to an IPO, at least seven (7) Business Days (but not more than thirty (30) Business Days) prior written notice of the date on which the Company proposes to file its registration statement in connection therewith.

Reference is made to Section 1.6(c) whereby this Warrant will be deemed to be exercised pursuant to Section 1.2 hereof if the Company does not give written notice to Holder of a Cash/Public Acquisition as required by the terms hereof. Company will also provide information requested by Holder that is reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements.

SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER.

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The Holder represents and warrants to the Company as follows:

4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a current view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.

4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise hereof (and the shares of common stock that are issuable upon the conversion of any such Shares or upon the exercise of this Warrant) have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof (and such shares of common stock) must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144 promulgated under the Act.

4.6 Market Stand-off Agreement. The Holder agrees that the Shares shall be subject to the market standoff provisions substantially in the form of Section 3.9 of the Investors’ Rights Agreement.

4.7 No Stockholder Rights. Except as provided in this Warrant, Holder, as a Holder of this Warrant, will not have any rights as a stockholder of the Company until the exercise of this Warrant.

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SECTION 5. MISCELLANEOUS.

5.1 Term; Automatic Cashless Exercise Upon Expiration.

(a) Term. Subject to the provisions of Section 1.6 above, this Warrant is exercisable in whole or in part at any time and from time to time on or before 6:00 PM, Eastern time, on the Expiration Date and shall be void thereafter.

(b) Automatic Cashless Exercise upon Expiration. In the event that, upon the Expiration Date, the Fair Market Value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall, promptly (but in any event within three (3) Business Days), deliver a certificate representing the Shares (or such other securities) issued upon such exercise to Holder.

5.2 Legends. Each certificate evidencing Shares (and each certificate evidencing the securities issued upon conversion of any Shares, if any) shall be imprinted with a legend in substantially the following form:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO __________, DATED AUGUST , 2022, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issued upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is an affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act.

5.4 Transfer Procedure. Subject to the provisions of Article 5.3 and upon providing the Company with written notice, Holder, may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any other transferee; provided that, in connection with any

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such transfer, Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior written consent, transfer this Warrant or any portion hereof, or any Shares issued upon any exercise hereof, or any shares or other securities issued upon any conversion of any Shares issued upon any exercise hereof, to any person or entity who directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.

5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

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_______________<br><br>_______________<br><br>_______________<br><br>Attn:
Telephone:
Email:
With a copy (which shall not constitute notice) to:
Morrison & Foerster LLP<br><br>250 West 55th Street,<br><br>New York, NY 10019<br><br>Attn:<br><br>Telephone:<br><br>Fax:<br><br>Email:
Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:
SONENDO, INC.<br>26051 Merit Circle, Suite 102<br>Laguna Hills, California 92653<br>Attn:<br>Fax:<br>Email:
With a copy (which shall not constitute notice) to:
Reed Smith LLP<br>1901 Avenue of the Stars, Suite 700<br>Los Angeles, California 90067<br>Attn:<br>Telephone:<br>Facsimile:<br>Email:

5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

5.7 Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

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5.8 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.

5.9 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its principles regarding conflicts of law.

5.10 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.

[Remainder of page left blank intentionally]

[Signature page follows]

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IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives on the Issue Date.

“COMPANY”

SONENDO, INC.

By:
Name:	(Print)
Title:

“HOLDER”

__________

By: ___________________________

Name:

Title:

[Signature Page to Warrant to Purchase Stock]

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APPENDIX 1

NOTICE OF EXERCISE

The undersigned Holder hereby exercises its right purchase _____ shares of the Common/Series _____ Preferred [circle one] Stock of SONENDO, INC. (the “Company”) in accordance with the attached Warrant To Purchase Stock, and tenders payment of the aggregate Warrant Price for such shares as follows:

[ ]	check in the amount of $__ payable to order of the Company enclosed herewith
[ ]	Wire transfer of immediately available funds to the Company’s account
[ ]	Cashless Exercise pursuant to Section 1.2 of the Warrant
[ ]	Other [Describe]

Please issue a certificate or certificates representing the Shares in the name specified below:

Holder’s Name
(Address)

By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Section 4 of the Warrant to Purchase Stock as of the date hereof.

Holder:
By:
Name:
Title:
Date:

Appendix 1

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EX-4.13

Exhibit 4.13

Schedule of Holders of Credit Agreement Warrants to Purchase Stock

Name of Warrant Holder	Number of Shares Subject to Warrant	Expiration Date
Warberg WF X, LP	54,793	June 23, 2027
Warberg WF X, LP	49,314	October 16, 2028
Warberg WF X, LP	49,314	October 7, 2029
Perceptive Credit Holdings III, LP	150,684	August 23, 2031

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Bjarne Bergheim, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Sonendo, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Omitted];

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2022	By:	/s/ Bjarne Bergheim
		Bjarne Bergheim
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael Watts, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Sonendo, Inc.;

(b) [Omitted];

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2022	By:	/s/ Michael Watts
		Michael Watts
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sonendo, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 10, 2022	By:	/s/ Bjarne Bergheim
		Bjarne Bergheim
		President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 10, 2022	By:	/s/ Michael Watts
		Michael Watts
		Chief Financial Officer

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2022

For the transition period from to

Commission File Number: 001-40988

Sonendo, Inc.

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

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

Item 1. Financial Statements (Unaudited)

SONENDO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

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

SONENDO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

SONENDO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Description of Business

Basis of Presentation

Initial Public Offering and Reverse Stock Split

1.825

Liquidity and Management’s Plans

COVID-19

Operating Segments

Emerging Growth Company Status

2. Summary Accounting Policies and Recent Accounting Pronouncements

Use of Estimates

Cash and Cash Equivalents

Short-Term Investments

Revenue Recognition

Contracts with Customers

Performance Obligations

Contract liabilities

Disaggregation of revenue

Warranty Reserve

Recent Accounting Pronouncements

Accounting Pronouncement Recently Adopted

Recent Accounting Updates Not Yet Effective

3. Balance Sheet Components

Inventory

Intangible assets, net

4. Fair Value of Financial Instruments

Warrants

5. Convertible Preferred Stock and Common Stock

Authorized Shares

6. Stock-based Compensation Expense

Stock-based Compensation Expenses

Plan Activities

7. Leases

8. Commitments and Contingencies

Contingencies

9. Term Loan

Perceptive loan

10. Income Taxes

12. Segment Information

13. Net Loss Per Share

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Factors Affecting Our Performance and Key Business Metrics

COVID-19 Pandemic

Components of Our Results of Operations

Revenue

Cost of Sales and Gross Margin

Operating Expenses

Selling, general and administrative

Research and development

Changes in fair value of contingent earnout

Other Income (Expense), Net