SEC Filing - ProSomnus Sleep Technologies, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2023

☐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: 001-41567

ProSomnus, Inc.

(Exact name of registrant as specified in its charter)

88-2978216

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

5675 Gibraltar Drive

Pleasanton, CA 94588

(Address of Principal Executive Offices)

(844) 537-5337

(Registrant’s telephone number)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒

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


Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Stock, par value $0.0001 per share	OSA	The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of Common Stock for $11.50 per share	OSAAW	The Nasdaq Stock Market LLC

As of August 8, 2023, there were 16,057,630 of the registrant’s ordinary shares outstanding.

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TABLE OF CONTENTS

PROSOMNUS, INC.

		Page

Part I	Financial Information

Item 1.	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	1

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022	2

	Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2023	3

	Condensed Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Deficit for the three and six months ended June 30, 2022	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

Part II	Other Information	30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

Exhibit Index		32

Signatures		33

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSOMNUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


			December 31,
	June 30, 2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	6,175,632	$	15,916,141
Accounts receivable, net		3,560,882		2,843,148
Inventory		1,309,982		639,945
Prepaid expenses and other current assets		1,162,921		1,846,870
Total current assets		12,209,417		21,246,104
Property and equipment, net		3,265,865		2,404,402
Finance lease right-of-use assets		4,164,545		3,650,451
Operating lease right-of-use assets		5,238,553		5,632,771
Other assets		345,653		262,913
Total assets	$	25,224,033	$	33,196,641

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,072,393	$	2,101,572
Accrued expenses		5,824,193		3,706,094
Equipment financing obligation		57,457		58,973
Finance lease liabilities		1,224,442		1,008,587
Operating lease liabilities		277,677		215,043
Total current liabilities		9,456,162		7,090,269

Equipment financing obligation, net of current portion		167,346		185,645
Finance lease liabilities, net of current portion		2,480,803		2,081,410
Operating lease liabilities, net of current portion		5,377,154		5,525,562
Senior Convertible Notes at fair value		12,928,404		13,651,000
Subordinated Convertible Notes at fair value		15,225,000		10,355,681
Earnout liability		4,610,000		12,810,000
Warrant liability		727,664		1,991,503
Total noncurrent liabilities		41,516,371		46,600,801
Total liabilities		50,972,533		53,691,070

Commitments and contingencies

Stockholders’ deficit:
Preferred stock, $0.0001 par value, 1,000,000 shares authorized at June 30, 2023 and December 31, 2022; no shares issued and outstanding		—		—
Common stock, $0.0001 par value, 100,000,000; 16,057,630 and 16,041,464 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		1,606		1,604
Additional paid-in capital		191,031,730		190,298,562
Accumulated deficit		(216,781,836)		(210,794,595)
Total stockholders’ deficit		(25,748,500)		(20,494,429)
Total liabilities and stockholders’ deficit	$	25,224,033	$	33,196,641

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

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PROSOMNUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended						Six Months Ended
		June 30,				June 30,
		2023		2022		2023		2022

Revenue		$	6,933,910	$	4,859,909	$	12,742,290	$	8,603,052

Cost of revenue			3,170,794		2,321,692		5,927,425		3,900,188

Gross profit			3,763,116		2,538,217		6,814,865		4,702,864

Operating expenses:
Sales and marketing			3,642,718		2,013,392		6,466,766		4,130,811
Research and development			1,376,036		669,348		2,395,005		1,226,980
General and administrative			4,480,124		1,289,154		7,833,131		2,642,889
Total operating expenses			9,498,878		3,971,894		16,694,902		8,000,680

Net loss from operations			(5,735,762)		(1,433,677)		(9,880,037)		(3,297,816)

Other income (expense)
Interest expense			(1,240,159)		(1,197,237)		(2,411,969)		(2,293,075)
Change in fair value of earnout liability			6,700,000		—		8,200,000		—
Change in fair value of debt			(802,430)		—		(2,629,430)		—
Change in fair value of warrant liability			2,106,398		—		1,263,839		(20,756)
Loss on extinguishment of debt			—		(192,731)		—		(192,731)
Other expense			(123,117)		—		(529,644)		—
Total other income (expense), net			6,640,692		(1,389,968)		3,892,796		(2,506,562)

Net income (loss) before income taxes			904,930		(2,823,645)		(5,987,241)		(5,804,378)

Net income (loss)		$	904,930	$	(2,823,645)	$	(5,987,241)	$	(5,804,378)

Net income (loss) per share attributable to common stockholders:
Basic		$	0.06	$	(0.71)	$	(0.37)	$	(1.47)
Diluted		$	(0.01)	$	(0.71)	$	(0.37)	$	(1.47)

Shares used in per share calculation:
Basic			16,057,630		3,958,258		16,045,110		3,950,009
Diluted			19,141,231		3,958,258		16,045,110		3,950,009

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

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PROSOMNUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED)

For the three and six months ended June 30, 2023


	Three Months Ended June 30, 2023
				Additional			Total
	Common Stock			Paid-In	Accumulated		Stockholders'
	Shares	Amount		Capital	Deficit		Deficit
Balance as of March 31, 2023	16,041,464		$ 1,604	$ 190,524,697		($ 217,686,766)	($ 27,160,465)

Issuance of shares, net of cancellations and issuance costs	16,166		2	163,571		—	163,573

Stock-based compensation expense	—		—	343,462		—	343,462

Net income	—		—	—		904,930	904,930

Balance as of June 30, 2023	16,057,630		$ 1,606	$ 191,031,730		($ 216,781,836)	($ 25,748,500)


	Six Months Ended June 30, 2023
				Additional			Total
	Common Stock			Paid-In	Accumulated		Stockholders'
	Shares	Amount		Capital	Deficit		Deficit
Balance as of January 1, 2023	16,041,464		$ 1,604	$ 190,298,562		($ 210,794,595)	($ 20,494,429)

Issuance of shares, net of cancellations and issuance costs	16,166		2	163,571		—	163,573

Stock-based compensation expense	—		—	569,597		—	569,597

Net loss	—		—	—		(5,987,241)	(5,987,241)

Balance as of June 30, 2023	16,057,630		$ 1,606	$ 191,031,730		($ 216,781,836)	($ 25,748,500)

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

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CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT (UNAUDITED)

For the three and six months ended June 30, 2022


	Three Months Ended June 30, 2022
	Redeemable Convertible Preferred Stock									Additional				Total
	Series B			Series A			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Deficit

Balance as of March 31, 2022	7,288,333		$ 12,389,547	26,245		$ 26,245,000	24,640,110		$ 2,463		$ 150,425,953		($ 206,630,008)		($ 56,201,592)

Vesting of restricted stock awards	—		—	—		—	62,781		6		(6)		—		—

Stock-based compensation expense	—		—	—		—	—		—		4,000		—		4,000

Net loss	—		—	—		—	—		—		—		(2,823,645)		(2,823,645)

Balance as of June 30, 2022	7,288,333		$ 12,389,547	26,245		$ 26,245,000	24,702,891		$ 2,469		$ 150,429,947		($ 209,453,653)		($ 59,021,237)


	Six Months Ended June 30, 2022
	Redeemable Convertible Preferred Stock									Additional				Total
	Series B			Series A			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Deficit

Balance as of January 1, 2022	7,288,333		$ 12,389,547	26,245		$ 26,245,000	24,566,386		$ 2,456		$ 150,425,960		($ 203,649,275)		($ 53,220,859)

Vesting of restricted stock awards	—		—	—		—	136,505		13		(13)		—		—

Stock-based compensation expense	—		—	—		—	—		—		4,000		—		4,000

Net loss	—		—	—		—	—		—		—		(5,804,378)		(5,804,378)

Balance as of June 30, 2022	7,288,333		$ 12,389,547	26,245		$ 26,245,000	24,702,891		$ 2,469		$ 150,429,947		($ 209,453,653)		($ 59,021,237)

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

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PROSOMNUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,987,241)	$	(5,804,378)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		360,819		191,921
Reduction of finance right-of-use asset		396,512		323,191
Reduction of operating right-of-use asset		202,183		91,016
Noncash interest		1,517,293		1,923,497
Noncash research and development		100,000		—
Loss on disposal of property and equipment		117,449		—
Bad debt expense		71,884		17,828
Stock-based compensation		569,597		4,000
Shares issued for services received		163,573		—
Change in fair value of earnout liability		(8,200,000)		—
Change in fair value of debt		2,629,430		—
Change in fair value of warrant liability		(1,263,839)		20,756
Impairment of assets		335,072		—
Loss on extinguishment of debt		—		192,731
Changes in operating assets and liabilities:
Accounts receivable		(789,618)		45,300
Inventory		(670,037)		(47,863)
Prepaid expenses and other current assets		456,020		(282,999)
Other assets		(21,087)		(1,603,015)
Accounts payable		(29,179)		1,178,667
Accrued expenses		2,118,099		565,410
Operating lease liabilities		134,094		(103,270)
Net cash used in operating activities		(7,788,976)		(3,287,208)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,211,802)		(232,330)
Net cash used in investing activities		(1,211,802)		(232,330)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit		—		13,284,403
Repayments of line of credit		—		(12,587,268)
Proceeds from issuance of subordinated notes		—		375,000
Repayments of subordinated notes		—		(75,000)
Payment of deferred financing cost		(61,653)		—
Principal payments on finance lease obligations		(658,263)		(499,038)
Principal payments on equipment financing obligation		(19,815)		(27,713)
Repayments of subordinated loan and security agreement		—		(409,911)
Proceeds from issuance of unsecured subordinated promissory notes		—		3,625,123
Repayments of unsecured subordinated promissory notes		—		(500,000)
Net cash (used in) provided by financing activities		(739,731)		3,185,596
Net decrease in cash and cash equivalents		(9,740,509)		(333,942)
Cash and cash equivalents at beginning of period		15,916,141		1,500,582
Cash and cash equivalents at end of period	$	6,175,632	$	1,166,640

Supplemental disclosure of cash flow information:
Cash paid for interest	$	656,626	$	333,917
Cash paid for franchise taxes	$	—	$	7,652
Supplemental disclosure of noncash investing and financing activities:
Acquisition of property and equipment through capital leases	$	—	$	291,031
ROU assets obtained in exchange for finance lease obligations	$	1,273,511	$	—
Issuance of redeemable convertible preferred stock warrant in connection with subordinated loan and security agreement	$	—	$	143,333

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

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PROSOMNUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — DESCRIPTION OF THE BUSINESS

Company Organization

ProSomnus, Inc., and its wholly owned subsidiaries, ProSomnus Holdings, Inc. and ProSomnus Sleep Technologies, Inc. (collectively, the “Company”) is an innovative medical technology company that develops, manufactures, and markets its proprietary line of precision intraoral medical devices for treating and managing patients with obstructive sleep apnea (“OSA”).

The Company is located in Pleasanton, California and was incorporated as a Delaware company on May 3, 2022. Its accounting predecessor company, ProSomnus Sleep Technologies, Inc. was incorporated as a Delaware company on March 2, 2016.

NOTE 2 — BASIS OF ACCOUNTING AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and in conjunction with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on April 14, 2023.

The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or any future periods. The condensed consolidated balance sheet as of December 31, 2022 has been derived from audited financial statements at that date but does not include all of the information required by GAAP for complete financial statements.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Liquidity and Management’s Plans

The Company has incurred recurring losses from operations and recurring negative cash flows from operating activities. The Company expects operating losses and negative cash flows from operations to continue for the foreseeable future.

Based on the Company’s current level of expenditures and management’s future cash flow projections, the Company believes its cash and cash equivalents of $6.2 million and working capital of $2.8 million at June 30, 2023, will not be sufficient for the Company to continue operations as a going concern for at least one year from the issuance date of these condensed consolidated financial statements. Additionally, from July 1, 2023, the Convertible Notes (as defined in Note 7) require the Company to maintain a minimum cash balance of $4.5 million on the first of each calendar month. The Company believes that these factors raise substantial doubt about its ability to continue as a going concern.

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The Company’s ability to continue as a going concern depends on its ability to execute on its strategies, which include achieving revenue growth forecast, controlling operating costs, and obtaining additional financing. The Company’s operating plan may change as a result of many factors currently unknown and there can be no assurance that the current operating plan will be achieved in the time frame anticipated by the Company. Furthermore, there can be no assurance that the Company will be able to obtain additional financing on terms acceptable to the Company, on a timely basis or at all. If adequate funds are not available to the Company on a timely basis, it may be required to delay, limit, reduce, or terminate certain commercial efforts, or pursue merger or acquisition strategies, all of which could adversely affect the holdings or the rights of the Company’s stockholders.

The accompanying 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. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from these estimates, and such differences could materially affect the results of operations reported in future periods. The Company’s significant estimates in these condensed consolidated financial statements relate to the fair values, and the underlying assumptions used to formulate such fair values, of its Convertible Notes, earn-out liability, and warrants. Estimates also include the allowance for doubtful accounts receivable, warranty and earned discount accruals, measurements of tax assets and liabilities and stock-based compensation.

Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.

This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:

Level 1 Inputs — The valuation is based on quoted prices in active markets for identical instrument.

Level 2 Inputs — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model — based valuation techniques for which all significant assumptions are observable in the market.

Level 3 Inputs — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company’s financial instruments consist primarily of cash equivalents, accounts receivable (net of allowance for doubtful accounts), accounts payable and accrued expenses, long-term debt instruments, earnout and warrant liabilities. The carrying values of our working capital balances are representative of their fair values due to their short-term maturities.

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The carrying value of our equipment financing obligation is considered to approximate its fair value because the interest rate is comparable to current rates for financing available to us. Under the fair value option as prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, Financial Instruments, we have elected to record our convertible debt instruments at fair value. The earnout and warrant liabilities are presented at fair value on the condensed consolidated balance sheets.

The following tables provide a summary of the financial instruments that are measured at fair value on a recurring basis:


			June 30, 2023
	Fair Value		Level 1		Level 2		Level 3
Senior Convertible Notes	$	12,928,404	$	—	$	—	$	12,928,404
Subordinated Convertible Notes		15,225,000		—		—		15,225,000
Earnout liability		4,610,000		—		—		4,610,000
Warrant liability		727,664		—		—		727,664


			December 31, 2022
	Fair Value		Level 1		Level 2		Level 3
Senior Convertible Notes	$	13,651,000	$	—	$	—	$	13,651,000
Subordinated Convertible Notes		10,355,681		—		—		10,355,681
Earnout liability		12,810,000		—		—		12,810,000
Warrant liability		1,991,503		—		—		1,991,503

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Cash and Cash Equivalents

The company considers all demand deposits with an original maturity to the Company of 90 days or less as cash and cash equivalents. The Company places its cash and cash equivalents with high credit-quality financial institutions. As of June 30, 2023 and December 31, 2022, the Company had $6.2 million and $15.9 million of cash and no cash equivalents, respectively.

Senior and Subordinated Convertible Notes

The Company accounts for its senior and subordinated Convertible Notes as derivatives in accordance with, ASC 815-10, Derivatives and Hedging, and ASC 815-15, Embedded Derivatives, depending on the nature of the derivative instrument. ASC 815 requires each contract that is not a derivative in its entirety be assessed to determine whether it contains embedded derivatives that are required to be bifurcated and accounted for as a derivative financial instrument. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if the combined instrument is not accounted for in its entirety at fair value with changes in fair value recorded in earnings, the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument. Embedded derivatives are measured at fair value and remeasured at each subsequent reporting period, and recorded within convertible notes, net on the accompanying condensed consolidated Balance Sheets and changes in fair value recorded in other expense within the condensed consolidated Statements of Operations. Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest date of redemption.

The Company has analyzed the redemption, conversion, settlement, and other derivative instrument features of its Convertible Notes..

●

The Company identified that the (i) redemption features, (ii) lender’s optional conversion feature, (iii) lender’s optional conversion upon merger event feature and (iv) additional interest rate upon certain events feature meet the definition of a derivative. The Company analyzed the scope exception for all the above features under ASC 815-10-15-74(a).

●

Based on the further analysis, the Company identified that the (i) lender’s optional conversion feature, (ii) lender’s optional conversion upon merger event feature and (iii) additional interest rate upon certain events feature, do not meet the settlement

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criteria to be considered indexed to equity. The Company concluded that each of these features should be classified as a derivative liability measured at fair value with the changes in fair value in the condensed consolidated statement of operations.

●

The Company also identified that the redemption features are settled in cash and do not meet the indexed to equity and the equity classification scope exception, thus, they must be bifurcated from the convertible notes and accounted for separately at fair value on a recurring basis reflecting the changes in fair value in the condensed consolidated statement of operations.

The Company determined the Convertible Notes contained multiple embedded derivatives that are required to be bifurcated, two of which are conversion features.

As per ASC 815, if there is a conversion feature that is required to be bifurcated, the cash conversion feature and beneficial conversion feature guidance is not applicable to such conversion feature and the fair value election is allowable provided the debt was not issued at a substantial premium. The Company concluded that the notes were not issued at a premium and hence the Company elected the fair value option under ASC 815-15-25. The Company elected to record changes in fair value through the condensed consolidated statement of operations as a fair value adjustment of the convertible debt each reporting period (with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive income, if applicable). The Company has also elected not to separately present interest expense related to Convertible Notes and the entire change in fair value of the instrument will be recorded as a fair value adjustment of convertible debt within the condensed consolidated statement of operations. Thus, the multiple embedded derivatives do not need to be separately bifurcated and fair valued. The Convertible Notes are reflected at their respective fair values on the condensed Consolidated Balance Sheet at June 30, 2023.

Warrants

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent reporting period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and then remeasured at fair value at each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as other income or expense on the condensed consolidated statements of operations.

Revenue Recognition

The Company creates customized precision milled intraoral devices. When devices are sold, they include an assurance-type warranty guaranteeing the fit and finish of the product for a period of 3 years from the date of sale.

The Company recognizes revenue upon meeting the following criteria:

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Identifying the contract with a customer: customers submit authorized prescriptions and dental impressions to the Company. Authorized prescriptions constitute the contract with customers.

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Identifying the performance obligations within the contract: The sole performance obligation is the shipment of a completed customized intraoral device.

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Determining the transaction price: Prices are determined by standardized pricing sheets and adjusted for estimated returns, discounts, and allowances.

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Allocating the transaction price to the performance obligations: The full transaction price is allocated to the shipment of the completed intraoral device as it is the only element in the transaction.

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Recognizing revenue as the performance obligation is satisfied: revenue is recognized upon transfer of control which occurs upon shipment of the product.

The Company does not require collateral or any other form of security from customers. Inbound shipping and handling costs related to sales are billed to customers. We charge for inbound shipping/handling and the costs are classified as Cost of Revenue. Outbound shipping costs are not billed to customers and are included in sales and marketing expenses. Taxes collected from customers and remitted to governmental authorities are excluded from revenue.

Standalone selling price for the various intraoral device models are determined using the Company’s standard pricing sheet. The Company invoices customers upon shipment of the product and invoices are due within 30 days. Amounts that have been invoiced are recorded in accounts receivable and revenue as all revenue recognition criteria have been met. Given the nominal value of each transaction, the Company does not offer a financing component related to its revenue arrangements.

Leases

The Company assesses at contract inception whether a contract is, or contains, a lease. Generally, the Company determines that a lease exists when (1) the contract involves the use of a distinct identified asset, (2) the Company obtains the right to substantially all economic benefits from use of the asset, and (3) the Company has the right to direct the use of the asset. A lease is classified as a finance lease when one or more of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset, (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset or (5) the asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if it does not meet any of these criteria.

At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for all leases, except short term leases with an original term of twelve months or less. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All right-of-use assets are periodically reviewed for impairment in accordance with standards that apply to long-lived assets. The lease liability is initially measured at the present value of the lease payments, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with the same term as the underlying leases for operating leases and the implied rate in the lease agreement for finance leases.

Lease payments included in the measurement of lease liabilities consist of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate, based on the index or rate in effect at lease commencement. The Company’s real estate operating lease agreement requires variable lease payments that do not depend on an underlying index or rate established at lease commencement. Such payments and changes in payments are recognized in operating expenses when incurred.

Lease expense for operating leases consists of the fixed lease payments recognized on a straight-line basis over the lease term plus variable lease payments as incurred. Lease expense for finance leases consists of the amortization of assets obtained under finance leases on a straight-line basis over the lease term and interest expense on the lease liability based on the discount rate at lease commencement.

Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since the effects of potentially dilutive securities are antidilutive.

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Reclassifications

Certain reclassifications have been made in how we present our ROU assets that were previously reported December 31, 2022, consolidated balance sheet, to conform to the current period presentation. However, in the consolidated balance sheet as of June 30, 2023, we have presented operating ROU assets and financing ROU assets as two separate line items. These reclassifications have no impact on previously reported earnings or cash flows.

Recent Accounting Pronouncements

The Company continues to monitor new accounting pronouncements issued by the FASB and does not believe any accounting pronouncements issued through the date of this report will have a material impact on the Company's consolidated financial statements.

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consist of the following:


	June 30, 2023		December 31, 2022
Manufacturing equipment	$	2,983,092	$	2,516,859
Computers and software		1,573,337		1,608,075
Leasehold improvements		822,134		441,956
Furniture		—		27,587
		5,378,563		4,594,477
Less accumulated depreciation and amortization		(2,112,698)		(2,190,075)
Property and equipment, net	$	3,265,865	$	2,404,402

Depreciation and amortization expense for property and equipment was $0.2 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $0.4 million and $0.2 million for the six months ended June 30, 2023 and 2022, respectively.

During the six months ended June 30, 2023, the Company disposed of property and equipment of $0.7 million which had an accumulated depreciation and amortization balance of $0.6 million. The resulting $0.1 million loss on disposal is reflected in the condensed consolidated statement of operations as other expense.

NOTE 4 — INVENTORY

Inventory consists of the following:


	June 30, 2023		December 31, 2022
Raw materials	$	1,168,998	$	561,726
Work-in-process		140,984		78,219
	$	1,309,982	$	639,945

The Company did not have any excess or obsolete inventory reserves at June 30, 2023 and December 31, 2022.

NOTE 5 — ACCRUED EXPENSES

Accrued expenses consist of the following:


	June 30, 2023		December 31, 2022
Compensation related accruals	$	2,708,925	$	2,104,008
Marketing programs		810,747		611,642
Interest		381,596		110,239
Warranty		414,191		269,496
Professional fees		637,337		129,169
Other		871,397		481,540
	$	5,824,193	$	3,706,094

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NOTE 6 — LEASES

The Company’s previous corporate office lease had a remaining term of approximately one year as of December 31, 2022. On February 28, 2023, the Company abandoned the previous corporate office premises. There is no new cash inflow generated or expected from the sale or sublease of property and leasehold improvements at the location. The Company recorded an impairment loss of $0.2 million on the ROU operating lease assets and accrued liabilities of $0.1 million in anticipation of expected CAM payments on the lease through December 31, 2023. The impairment loss and the accrued expenses are reflected as other expense in the condensed consolidated statements of operations for the three and six months ended June 30, 2023.

On May 17, 2022, the Company signed a ten-year lease for the Company’s new corporate headquarters. The lease commenced on December 15, 2022. The monthly payment is approximately $0.1 million and is subject to stated annual escalations. The Company received 5 months of free rent.

The Company’s finance leases consist of various machinery, equipment, computer-related equipment, or software and have remaining terms from less than one year to five years.

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The components of the Company’s lease cost, weighted average lease terms and discount rates are presented in the tables below:


		Six months ended			Three Months Ended