SEC Filing - ProSomnus Sleep Technologies, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2024

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

For the transition period from to

Commission File Number: 001-41567

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)

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	(1)	(1)
Warrants, each whole warrant exercisable for one share of Common Stock for $11.50 per share	(1)	(1)

(1)On April 24, 2024, the Nasdaq Stock Market LLC filed a Form 25 to delist the Company’s common stock and warrants and remove such securities from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended. Since April 18, 2024, the Company’s Common Stock and Warrants have been traded on the over-the-counter market under the symbols “OSAP” and “OSAPW”, respectively.

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 ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

As of July 29, 2024, there were 17,394,064 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

PROSOMNUS, INC.

		Page

Part I	Financial Information	1

Item 1.	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	1

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023	2

	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the three and six months ended June 30, 2024	3

	Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2023	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

Part II	Other Information	46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

Exhibit Index		48

Signatures		49

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share amounts and par value)


	June 30, 2024		December 31, 2023
ASSETS
Current assets:
Cash	$	4,605	$	6,363
Restricted cash		700		700
Accounts receivable, net		4,521		3,839
Inventory		1,472		2,039
Prepaid expenses and other current assets		3,592		1,369
Total current assets		14,890		14,310
Property and equipment, net		3,025		3,358
Finance lease right-of-use assets		3,346		3,265
Operating lease right-of-use assets		4,892		5,069
Other assets		250		285
Total assets	$	26,403	$	26,287

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,608	$	4,047
Accrued expenses and other current liabilities		4,194		6,756
Equipment financing obligation		60		57
Finance lease liabilities		1,086		1,052
Operating lease liabilities		333		304
Senior Convertible Notes at fair value, current portion		—		2,125
Debtor-in-possession (DIP) Facility		11,738		—
Total current liabilities		20,019		14,341
Equipment financing obligation, net of current portion		98		129
Finance lease liabilities, net of current portion		2,144		2,009
Operating lease liabilities, net of current portion		5,044		5,221
Senior Convertible Notes at fair value, net of current portion		—		12,152
Subordinated Convertible Notes at fair value		—		18,320
Earnout and warrant liabilities		—		716
Total liabilities not subject to compromise		27,305		52,888
Liabilities subject to compromise (Note 8)		36,572		—
Total liabilities	$	63,877	$	52,888
Commitments and contingencies
Redeemable convertible preferred stock:
Redeemable Convertible Series A Preferred Stock, $0.0001 par value, stated value $1,000; 25,000 shares designated at June 30, 2024 and December 31, 2023; 9,436 shares issued and outstanding at June 30, 2024 and December 31, 2023; liquidation preference of $14,154 at June 30, 2024 and December 31, 2023		11,555		11,555
Stockholders’ deficit:
Preferred stock, $0.0001 par value, 1,500,000 shares authorized at June 30, 2024 and December 31, 2023; no shares issued or outstanding		—		—
Common Stock, $0.0001 par value, 150,000,000 shares authorized at June 30, 2024 and December 31, 2023; 17,394,064 and 17,388,599 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively		2		2
Additional paid-in capital		197,598		196,731
Accumulated deficit		(246,629)		(234,889)
Total stockholders’ deficit		(49,029)		(38,156)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	26,403	$	26,287

See accompanying notes to unaudited condensed consolidated financial statements.

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PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenue	$	9,092	$	6,934	$	16,550	$	12,742

Operating expenses:
Cost of revenue		4,268		3,171		8,107		5,927
Sales and marketing		2,418		3,643		4,394		6,467
General and administrative		3,482		4,480		5,968		7,833
Research and development		1,173		1,376		2,123		2,395
Total operating expenses		11,341		12,670		20,592		22,622

Net loss from operations		(2,249)		(5,736)		(4,042)		(9,880)

Other (expense) income
Interest expense, net		(831)		(1,240)		(1,977)		(2,412)
Change in fair value of earnout liability		130		6,700		620		8,200
Change in fair value of debt		—		(802)		5,885		(2,629)
Change in fair value of warrant liability		38		2,106		96		1,264
Other expense, net		(21)		(123)		(74)		(530)
Total other (expense) income, net		(684)		6,641		4,550		3,893

Reorganization items, net		(12,248)		—		(12,248)		—
Net (loss) income	$	(15,181)	$	905	$	(11,740)	$	(5,987)

Net (loss) income per share attributable to common stockholders
Basic	$	(0.87)	$	0.06	$	(0.67)	$	(0.37)
Diluted	$	(0.87)	$	(0.01)	$	(0.67)	$	(0.37)

Weighted average shares of Common Stock used in per share calculation:
Basic		17,393,524		16,057,630		17,393,253		16,045,110
Diluted		17,393,524		19,141,231		17,393,253		16,045,110

See accompanying notes to unaudited condensed consolidated financial statements.

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PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT (UNAUDITED)

For the three and six months ended June 30, 2024

(In thousands, except share data)


	Redeemable Convertible
	Preferred Stock						Additional				Total
	Series A			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Capital		Deficit		Deficit
Balance as of March 31, 2024	9,436	$	11,555	17,394,064	$	2	$	197,142	$	(231,448)	$	(34,304)
Stock-based compensation expense	—		—	—		—		456		—		456
Net loss	—		—	—		—		—		(15,181)		(15,181)
Balance as of June 30, 2024	9,436	$	11,555	17,394,064	$	2	$	197,598	$	(246,629)	$	(49,029)


	Redeemable Convertible
	Preferred Stock						Additional				Total
	Series A			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Capital		Deficit		Deficit
Balance as of December 31, 2023	9,436	$	11,555	17,388,599	$	2	$	196,731	$	(234,889)	$	(38,156)
Issuance of shares, net	—		—	5,465		—		—		—		—
Issuance costs - ProSomnus Inc.	—		—	—		—		(3)		—		(3)
Stock-based compensation expense	—		—	—		—		870		—		870
Net loss	—		—	—		—		—		(11,740)		(11,740)
Balance as of June 30, 2024	9,436	$	11,555	17,394,064	$	2	$	197,598	$	(246,629)	$	(49,029)

See accompanying notes to unaudited condensed consolidated financial statements.

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PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED)

For the three and six months ended June 30, 2023

(In thousands, except share data)


				Additional				Total
	Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit		Deficit
Balance as of March 31, 2023	16,041,464	$	2	$	190,525	$	(217,687)	$	(27,160)
Issuance of shares, net	16,166		—		164		—		164
Stock-based compensation expense	—		—		343		—		343
Net income	—		—		—		905		905
Balance as of June 30, 2023	16,057,630	$	2	$	191,032	$	(216,782)	$	(25,748)


				Additional				Total
	Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit		Deficit
Balance as of December 31, 2022	16,041,464	$	2	$	190,299	$	(210,795)	$	(20,494)
Issuance of shares, net	16,166		—		164		—		164
Stock-based compensation expense	—		—		569		—		569
Net loss	—		—		—		(5,987)		(5,987)
Balance as of June 30, 2023	16,057,630	$	2	$	191,032	$	(216,782)	$	(25,748)

See accompanying notes to unaudited condensed consolidated financial statements

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PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Six Months Ended June 30,
	2024		2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,740)	$	(5,987)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		735		361
Amortization of assets obtained under finance leases		578		397
Amortization of operating right-of-use assets		177		202
Noncash research and development		—		100
Noncash interest		1,174		1,517
Allowance for credit losses		2		72
Stock-based compensation		870		570
Change in fair value of earnout liability		(620)		(8,200)
Change in fair value of debt		(5,885)		2,629
Change in fair value of warrant liability		(96)		(1,264)
Loss on disposal of property and equipment		—		117
Right-of-use asset impairment		—		335
Shares issued for services received		—		164
Non-cash reorganization items, net		10,081		—
Changes in operating assets and liabilities:
Accounts receivable, net		(684)		(790)
Inventory		567		(670)
Prepaid expenses and other current assets		(2,223)		456
Other assets		35		(21)
Accounts payable		(1,439)		(29)
Accrued expenses and other current liabilities		(1,719)		2,118
Operating lease liabilities		(148)		134
Net cash used in operating activities		(10,335)		(7,789)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(436)		(1,212)
Net cash used in investing activities		(436)		(1,212)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debtor-in-possession (DIP) Facility		9,500		—
Principal payments on finance lease obligations		(459)		(658)
Payment of deferred financing cost		—		(62)
Principal payments on equipment financing obligation		(28)		(20)
Net cash provided by (used in) financing activities		9,013		(740)
Net change in cash and restricted cash		(1,758)		(9,741)
Cash and restricted cash at beginning of period		7,063		15,916
Cash and restricted cash at end of period	$	5,305	$	6,175

Supplemental disclosure of cash flow information:
Cash paid for taxes	$	28	$	—
Cash paid for interest	$	564	$	657
Cash paid for Reorganization items, net	$	1,377	$	—

Supplemental disclosure of noncash investing and financing activities:
ROU assets obtained in exchange for finance lease obligations	$	628	$	1,274
Roll-up of Senior Secured Convertible Notes to debtor-in-possession (DIP) Facility	$	2,000	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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PROSOMNUS, INC.

(DEBTOR-IN-POSSESSION)

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.

On December 6, 2022, Lakeshore Acquisition I Corp. (“Lakeshore”) consummated a series of transactions that resulted in the combination (the “Business Combination”) of Lakeshore with ProSomnus Holdings, Inc. and its wholly-owned subsidiary, ProSomnus Sleep Technologies, Inc., pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated May 9, 2022. Pursuant to the “Merger Agreement”, Lakeshore merged with and into ProSomnus Holdings, and changed its name to ProSomnus, Inc.

The transaction was accounted for as a reverse recapitalization with ProSomnus Sleep Technologies, Inc. being the accounting acquirer and Lakeshore as the acquired Company for accounting purposes. Accordingly, all historical financial information presented in the consolidated financial statements represents the accounts of ProSomnus Sleep Technologies, Inc.

Chapter 11 Filing

The Company and certain of its existing affiliates and subsidiaries (collectively, the “Debtors”), as defined in Restructuring Support Agreement (“RSA”), filed voluntary petitions for relief (the “Chapter 11 Cases”) on May 7, 2024 (the “Petition Date”) under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), as amended in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). At that time, the Debtors’ certain senior subordinate secured debtor-in-possession term loan agreement (the “DIP Credit Agreement”) with the lenders from time-to-time party thereto (the “DIP Lenders”) and Wilmington Savings Fund Society, FSB, as administrative agent and collateral agent, on the terms and conditions set forth therein, was subject to approval by the Bankruptcy Court. On May 9, 2024, the Bankruptcy Court issued an order approving the DIP Credit Agreement on an interim basis and set the final hearing to approve the DIP Credit Agreement on a final basis for June 5, 2024. On June 5, 2024, the Bankruptcy Court entered an order approving the DIP Credit Agreement on a final basis.

At a hearing held before the Bankruptcy Court on June 26, 2024, the Bankruptcy Court determined that the Debtors’ Disclosure Statement for Amended Joint Chapter 11 Plan of Reorganization of ProSomnus, Inc. and its Debtor Affiliates (the “Plan”), including all exhibits and schedules thereto, contains adequate information and that the Debtors are authorized to solicit votes on, and pursue confirmation of, the Plan. Additionally, the Bankruptcy Court established, among other things, the confirmation hearing date for the Plan and set various deadlines associated with such confirmation hearing, including, but not limited to, the deadline for filing objections to the confirmation of the Plan.

The Debtors and their subsidiaries continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Chapter 11 Cases are being jointly administered by the Bankruptcy Court under the lead case In re ProSomnus. Inc., Case No. 24-10972 (JTD). As debtors-in-possession, the Debtors are generally permitted to continue to operate as ongoing businesses and pay debts and honor obligations arising in the ordinary course of business after the Petition Date. However, the Debtors generally may not pay third-party claims or creditors in connection with obligations arising before the Petition Date or engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. Under the Bankruptcy Code, third-party actions to collect pre-Petition Date indebtedness owed by the Debtors, as well as most litigation pending against the Debtors as of the Petition Date, are generally subject to an automatic stay. However, under the Bankruptcy Code, certain legal proceedings, such as those involving the assertion of a

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governmental entity’s police or regulatory powers, may not be subject to the automatic stay and may continue unless otherwise ordered by the Bankruptcy Court.

Among other requirements, the Chapter 11 Cases must comply with the priority scheme established by the Bankruptcy Code, under which certain post-Petition Date and secured or “priority” pre-Petition Date liabilities generally need to be satisfied before general unsecured creditors and shareholders are entitled to receive any distributions.

Events of Default

The Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations under substantially all of its then-outstanding debt instruments. However, Section 362 of the Bankruptcy Code stays creditors from taking any action to enforce the related financial obligations, and creditors’ rights of enforcement with respect to the debt instruments are subject to the applicable provisions of the Bankruptcy Code. Refer to Note 9 for additional information.

Restructuring Support Agreement

On May 7, 2024, the Company voluntarily entered into a Restructuring Support Agreement (“RSA”) with (i) certain of its existing Debtors, affiliates and subsidiaries (as set forth in the RSA, and together with the Company, the “Company Parties”); and (ii) certain sponsoring Senior Noteholders and Subordinated Noteholders (the “Sponsoring Noteholders”).

As set forth in the RSA, the Company Parties and the Sponsoring Noteholders have agreed to the principal terms of a voluntary restructuring of the Company Parties (the “Restructuring”) and the Plan. Although the Company Parties intend to pursue the Restructuring in accordance with the terms set forth in the RSA, there can be no assurance that the Company Parties will be successful in completing the Restructuring, whether on the same or different terms than those provided in the RSA.

The RSA contemplates a comprehensive financial restructuring of the Company's existing capital structure. Among other terms, the RSA provides for the following:

●

The Company Parties may receive an aggregate of $20.0 million in potential capital, including through a debtor-in-possession facility and a potential new-money equity capital raise, while also retaining existing amounts due to customers, critical vendors, equipment lenders, and trade creditors; more specifically:

o

The Sponsoring Noteholders have committed to provide the DIP Credit Agreement, which will consist of (i) $7.0 million in new money debtor-in-possession loans and (ii) the “roll-up” of (a) $4.0 million of obligations under the prepetition bridge notes (the "2024 Bridge Notes") as defined in the RSA, and (b) $2.0 million of obligations under the Senior Secured Notes (as defined in the RSA), in each case, on the terms set forth in the Definitive Documents (as defined in the RSA). The DIP Credit Agreement is expected to provide the Company Parties with sufficient liquidity to complete the Restructuring. The new money portion of the DIP Credit Agreement will be available in two draws, with $2.5 million available upon interim approval of the DIP Credit Agreement by the Bankruptcy Court;

o

General Unsecured Claims will be paid in the ordinary course of business during and after the restructuring;

o

On the Plan Effective Date as defined in the RSA, (the “Plan Effective Date”), the Company expects to consummate a new-money equity capital raise in an amount of at least $9.0 million, which will be offered for participation by the Sponsoring Noteholders and certain other third-party investors, subject to other terms as set forth in the RSA;

●

On the Plan Effective Date, ProSomnus Sleep Technologies, Inc. (as reorganized, “Reorganized ProSomnus”) will issue a single class of equity interests that will be distributed pro rata to the Subordinated Secured Noteholders (as defined in the RSA), subject to dilution on account of the management incentive plan, the New Money Common Equity (as defined in the RSA), and certain other fees, premiums, and/or other terms as set forth in the RSA;

●

Following the Plan Effective Date, Reorganized ProSomnus may establish a customary management equity incentive plan;

●

On the Plan Effective Date, there will be no recovery for holders of other equity interests in the Company Parties; and

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●

Confirmation of the Plan is anticipated, but not guaranteed, to occur within 90 days of filing the Chapter 11 Cases.

In accordance with the RSA, each Sponsoring Noteholder agreed, among other terms, to:

●

So long as its vote was properly solicited in accordance with the United States Code (the “Code”), vote to accept the Plan;

●

Negotiate the Definitive Documents in good faith; and

●

Not take any action inconsistent with the RSA and the RSA term sheet or the confirmation and consummation of the Plan.

In accordance with the RSA, the Company Parties agreed, among other terms, to:

●

Support and complete the Restructuring Transactions (as defined in the RSA) contemplated under the RSA, the RSA term sheet, and the Plan Related Documents (as defined in the RSA);

●

Negotiate the Definitive Documents in good faith;

●

Take all necessary and appropriate actions in furtherance of the Restructuring;

●

Complete the Restructuring; and

●

Comply with certain milestone for the Chapter 11 Cases (as defined in the RSA).

Certain of the transactions described in the foregoing shall be subject to approval by the Bankruptcy Court pursuant to the Chapter 11 Cases.

The financial restructuring and other transactions contemplated in the RSA will be implemented and consummated through, among other terms:

The funding of the Senior Bridge Notes (as defined below) by an ad hoc group of holders of the Company’s Senior Notes (as defined in the RSA) and Subordinated Notes (as defined in the RSA) that hold and control, in the aggregate, 100% of the Company’s issued and outstanding 2022 Senior Convertible Notes (as defined in the RSA), 100% of the issued and outstanding 2023 Senior Convertible Exchange Notes (as defined in the RSA), 94.95% of the Company’s issued and outstanding 2022 Subordinated Convertible Notes (as defined in the RSA), and 100% of the Company’s issued and outstanding 2023 Subordinated Convertible Exchange Notes (as defined in the RSA);

The voluntary commencement of the Chapter 11 Cases;

The funding of the DIP Credit Agreement by the Sponsoring Noteholders, which included a post-emergence commitment by the Sponsoring Noteholders and third-party investors to purchase equity in the reorganized Debtors on terms sufficient to ensure the feasibility of the Plan, which will be in form and substance acceptable to the Sponsoring Noteholders in their sole discretion; and

A financial restructuring of the existing capital structure of the Company Parties pursuant to the Plan, which shall be consistent with the terms set forth herein (unless otherwise agreed by the Company Parties and Sponsoring Noteholders) and otherwise reasonably acceptable to the Company Parties and Sponsoring Noteholders, to be implemented through the Chapter 11 Cases, as provided in the RSA and the RSA term sheet.

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DIP Credit Agreement

The DIP Credit Agreement was approved by the Bankruptcy Court on May 9, 2024, on an interim basis, with a final hearing set for June 5, 2024. On June 5, 2024, the Bankruptcy Court approved the DIP Credit Agreement on a final basis.

Under the DIP Credit Agreement, the DIP Lenders, as described above. The funds will be used to (a) finance the Chapter 11 Cases, (b) make other court-approved payments, and (c) provide working capital for the Debtors. As of June 30, 2024, the Debtors had borrowed $9.5 million, including rolled-up pre-bankruptcy bridge funding. The obligations are secured by liens on most of the Debtors’ assets are senior to the Company's subordinated notes but junior to the senior notes, some of which are held by the DIP Lenders.

The borrowings under the DIP Credit Agreement are due on November 7, 2024, or upon certain termination events, with an interest rate of the prime rate plus 9.00%, with an exit fee of 10.00%. The proceeds are designated for payroll, key suppliers, critical sales incentives, and restructuring, as per the approved budget. Any expense over $0.2 million requires approval from the majority of the Sponsoring Noteholders. The DIP Credit Agreement also includes a minimum liquidity requirement of $1.5 million. The DIP Credit Agreement, including all accrued interest and fees, will be equitized upon the Plan Effective Date. The DIP Credit Agreement includes typical negative covenants, restricting additional indebtedness, asset liens, investments, mergers, and dividends, with exceptions. It also has customary representations, warranties, affirmative covenants, and default events, including the dismissal or conversion of the Chapter 11 Cases, trustee appointments, and other events affecting the DIP Lenders’ rights.

Some DIP Lenders participated in the Company’s Series A Convertible Preferred Stock offering in September 2023. One DIP Lender is affiliated with Spring Mountain Capital, where Jason Orchard, a Company board member, is a Managing Director.

2024 Bridge Notes

The Sponsoring Noteholders provided the Company with pre-petition bridge notes (the “Senior Bridge Notes”) as follows:

On April 17, 2024, the Company authorized and issued the 2024 Senior Bridge Notes up to the aggregate principal amount of $5.0 million pursuant to those certain Consents to New Note Issuance and Related Indenture Amendments, dated as of April 17, 2024, among the Company and the Sponsoring Noteholders and issued under the 2022 Senior Indenture (the “Bridge Indenture Amendment”).

Principal payments for the 2024 Senior Bridge Notes are due on January 1, April 1, July 1 and October 1 of each year, commencing with October 1, 2024, until the earlier of December 6, 2025 or the 2024 Senior Bridge Notes no longer being outstanding.

Interest payments for the 2024 Senior Bridge Notes are due on January 1, April 1, July 1 and October 1 of each year, beginning on July 1, 2024, on each Conversion Date (as defined in the Bridge Indenture Amendment), as to that principal amount then being converted), on each Optional Redemption Date (as defined in the Bridge Indenture Amendment), as to that principal amount then being redeemed), and on the Maturity Date (as defined in the Senior Bridge Notes); provided, however, that the interest otherwise payable on April 1, 2024 and July 1, 2024 may instead be paid on October 1, 2024. Interest will accrue from April 17, 2024. No Senior Bridge Notes remain outstanding as of June 30, 2024.

Bankruptcy Accounting

As a result of the Chapter 11 Cases, the Company has applied the provisions of Accounting Standards Codification Topic 852, Reorganizations (“ASC 852”) in preparing the accompanying Unaudited Condensed Consolidated Financial Statements. ASC 852 requires that, for periods including and after the filing of a Chapter 11 petition, the Condensed Consolidated Financial Statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.

Accordingly, for periods beginning with the second quarter of 2024, pre-petition unsecured and undersecured claims related to the Debtors that may be impacted by the bankruptcy reorganization process have been classified as “Liabilities subject to compromise” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2024. Liabilities subject to compromise include pre-petition liabilities for which there is uncertainty about whether such pre-petition liabilities could be impaired as a result of the Chapter 11 Cases. Liabilities subject to compromise are recorded at the expected amount of the total allowed claim, even if they may ultimately be settled

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for different amounts. Refer to Note 8 for further details. The determination of how liabilities will ultimately be settled or treated cannot be made until approved by the Bankruptcy Court. Therefore, the amounts presented in Note 8 are preliminary and may be subject to future adjustments as a result of, among other things, the possibility of occurrence of certain Bankruptcy Court actions, further developments with respect to disputed claims, any rejection by the Company of executory contracts, and/or any payments by the Company of amounts classified as “Liabilities subject to compromise,” which may be allowed in certain limited circumstances.

Amounts are also subject to adjustments if the Company makes changes to its assumptions or estimates related to claims as additional information becomes available to the Company, including, without limitation, those related to the expected amounts of allowed claims, the value of any collateral securing claims and the secured status of claims. Such adjustments may be material. Additionally, as a result of the Chapter 11 Cases, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities for amounts other than those reflected in the accompanying Unaudited Condensed Consolidated Financial Statements. The possibility or occurrence of any such actions could materially impact the amounts and classifications of such assets and liabilities reported in the Company’s Condensed Consolidated Balance Sheets and could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Reorganization Items

As a result of filing the Chapter 11 Cases, the Debtors have incurred and will continue to incur significant costs associated with the bankruptcy proceedings and reorganization under the Plan. These costs, primarily related to legal and professional fees, are expected to substantially impact the Company's financial results.

From the Petition Date through [June 30, 3024], the Company incurred $12.2 million in pre-petition reorganization costs. In accordance with applicable accounting guidance, costs associated with the bankruptcy proceedings have been recorded as Reorganization items, net within the Company's Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024. Refer to Note 7 for further details.

During the six months ended June 30, 2024 and 2023, the Company’s cash flows included net cash outflows of $1.4 million and nil, respectively, related to amounts classified or expected to be classified as Reorganization items, net, which primarily consisted of payments for professional fees and bankruptcy related expenses.

Automatic Stay

Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-Petition Date claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors' pre-petition liabilities are subject to settlement under the Bankruptcy Code.

Executory Contracts

Pursuant to the terms of the Plan, all executory contracts and unexpired leases of the Debtors shall be assumed as of the Plan Effective Date, unless otherwise determined to be rejected by the Sponsoring Noteholders, subject to the consent of the Company, which consent shall not be unreasonably withheld.

Delisting of our Common Stock from NASDAQ

As previously disclosed, the Company was notified by the Nasdaq Global Market (“Nasdaq”) that the Company was not in compliance with Nasdaq’s minimum market value of listed securities of $50.0 million, Nasdaq’s minimum market value of publicly held shares of $15.0 million, or Nasdaq’s minimum bid price requirement of $1.00, each of which was required for continued listing on Nasdaq. Due to such noncompliance, Nasdaq notified the Company that it would be subject to delisting. After the Company requested an appeal hearing, which stayed the delisting action, the Company continued to evaluate its options to remain listed on Nasdaq and ultimately determined to withdraw the hearing request. Thereafter, the Company received a letter from Nasdaq which stated that trading of its common stock and warrants would be suspended at the open of business on April 18, 2024. On April 25, 2024, Nasdaq filed a Form 25 with the SEC notifying the SEC of Nasdaq’s determination to remove the Company’s securities from listing on Nasdaq. The delisting was effective 10 days after the filing of the Form 25.

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NOTE 2 — BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S GAAP”). 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on March 27, 2024.

The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or any future periods. The condensed consolidated balance sheet as of December 31, 2023 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.

In accordance with ASC Subtopic 205-40, Presentation of Financial Statements-Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet its obligations as they become due within one year after the date that the financial statements are issued. Management considered the Company’s current financial condition and liquidity sources, including cash and managed accessibility, forecasted future cash flows and the Company’s obligations due one year from the issuance date of the financial statements. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession entity pursuant to the Bankruptcy Code, the Company may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying unaudited Interim Consolidated Financial Statements. Further, the Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported in the Company’s unaudited Interim Condensed Consolidated Balance Sheet as of June 30, 2024 and going forward. In performing this evaluation, management concluded that under the standards of ASC 205-40, substantial doubt exists about the Company’s ability to continue as a going concern due to the risks and uncertainties surrounding the Chapter 11 Cases, the defaults under the Company’s debt agreements and the Company’s financial condition. The Company’s future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements. The Company’s condensed consolidated financial statements included herein do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern and instead have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of the Company’s liabilities and commitments incurred in the normal course of business.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP assuming that the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future

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effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

Management’s Plans Related to Going Concern

The Company’s ability to continue as a going concern depends principally on its ability to successfully exit the Chapter 11 Cases, including the completion of the financings proposed within the RSA. Upon the successful exit from the Chapter 11 Cases, the Company’s ability to continue as a going concern will depend upon its ability to execute on its plans to achieve revenue growth forecast, control operating costs, and obtain additional financing. The Company’s successful exit from the Chapter 11 Cases, the outcome of such exit, and the Company’s post exit operating plans are subject to many factors currently unknown and there can be no assurance that the current operating plan or cash flow break-even plan will be achieved in the time frame anticipated by the Company.

In addition to the Chapter 11 Cases, based on the Company’s current level of expenditures and future cash flow projections, the Company believes it’s current unrestricted cash balance 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, the indentures governing the Company’s Senior Convertible Notes and Subordinated Convertible Notes (as defined below and, collectively the “Convertible Notes”) contain monthly and quarterly financial covenants. Failure to comply with the covenants or obtain a waiver and extension from the holders of each series of our Convertible Notes could result in an event of default under each of the indentures governing the Convertible Notes and result in an acceleration of the Convertible Notes. The Company believes these factors raise substantial doubt about its ability to continue as a going concern.

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. Though macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn present additional uncertainty, the Company continues to use the best information available to form its critical accounting estimates. 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 consolidated financial statements relate to the fair values, and the underlying assumptions used to formulate such fair values, of its Series A Preferred Stock, Convertible Notes, earn-out liability, and warrants. Estimates also include the provision for credit losses, warranty and earned discount accruals, measurements of tax assets and liabilities and stock-based compensation.

Concentrations, Credit Risk and Market Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable and cash.

The Company sells its products to customers primarily in North America and Europe. To reduce credit risk, management performs periodic credit evaluations of its customers’ financial condition. No customers exceeded more than 10% of the Company’s accounts receivables or revenue as of and for the six months ended June 30, 2024 and December 31, 2023.

The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of June 30, 2024 and December 31, 2023, the Company had $5.1 million and $6.8 million in excess of the FDIC insured limit, respectively. The Company’s investment policy, which is predicated on capital preservation and liquidity, limits investments to instruments denominated and payable in U.S. dollars. The Company believes its credit risk is mitigated due to the high quality of the banks in which it places its deposits. Historically, the Company has not experienced significant credit losses from financial instruments.

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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, accounts receivable (net of allowance for doubtful accounts), accounts payable and accrued expenses, long-term debt instruments, earnout and warrant liabilities.

The carrying amounts of financial instruments such as cash, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate the related fair values due to the short-term maturities of these instruments. The carrying value of the Company’s equipment financing obligation is considered to approximate its fair value because the interest rate is comparable to current rates for financing available to the Company. Under the fair value option as prescribed by FASB Accounting Standards Codification (“ASC”) 825, Financial Instruments, The Company has elected to record the Company’s convertible debt instruments at fair value. The Company’s earnout and warrant liabilities are presented at fair value on the Condensed Consolidated Balance Sheets.

During the second quarter of 2024, in accordance with ASC 852, the Company adjusted the carrying amounts of all unsecured and potentially undersecured debt instruments to equal the expected amount of the allowed claim by expensing (within Reorganization items, net in the Condensed Consolidated Statements of Operations) $10.1 million and increasing the liability to the expected amount of the allowed claim. As of June 30, 2024, the entire carrying amount the Company’s debt, as well as any related remaining accrued and unpaid interest that existed as of the Petition Date, is included in the “Liabilities subject to compromise’ line in the Condensed Consolidated Balance Sheets.

As of June 30, 2024, the fair value of the Earnout liability and Warrant liability was zero. These fair values represent Level 3 measurements, as defined in ASC 820. Therefore, there were no instruments measured at fair value as of that date for these liabilities. Refer to Notes 10 and 13 for the rollforward of the Warrant liability and Earnout liability, respectively.

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


	December 31, 2023
	Fair Value		Level 1		Level 2		Level 3
Senior Convertible Notes	$	14,277	$	—	$	—	$	14,277
Subordinated Convertible Notes		18,320		—		—		18,320
Earnout liability		620		—		—		620
Warrant liability		96		—		—		96

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 highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents. At June 30, 2024 and December 31, 2023, the Company had no cash equivalents.

Restricted Cash

The Company’s restricted cash as of June 30, 2024 and December 31, 2023 of $0.7 million consisted of a letter of credit on hand with the Company's financial institution as collateral for an office lease.

Impairment of Long-Lived Assets

The Company’s long-lived assets primarily include property and equipment and finance and operating right-of-use assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or the fair value less costs to sell. During 2023, the Company moved to its new headquarters and principal manufacturing facility. Upon moving, the Company expensed a total of $0.3 million relating to the carrying value of the remaining leasehold improvements and amounts due under the remaining lease term of the previous facility. The right-of-use asset and leasehold improvements charge was recorded in other expense, net in the consolidated statements of operations for the year ended December 31, 2023.

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Senior and Subordinated Convertible Notes

Prior to the Petition Date, the Company accounted for its Notes, as derivatives in accordance with, ASC 815, Derivatives and Hedging, 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 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, the fair value election is allowable provided the debt was not issued at a substantial premium. The Company concluded that the Convertible 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 at 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 elected to separately present interest expense related to the Convertible Notes within the Condensed Consolidated Statement of Operations. Thus, the multiple embedded derivatives do not need to be separately bifurcated and fair valued. As of December 31, 2023, the Convertible Notes are reflected at their respective fair values on the Condensed Consolidated Balance Sheets.

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, par value $0.0001 (“Common Stock”), among other conditions for equity classification. This assessment, which requires the use of professional

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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 liability classified warrants are recognized as other income or expense on the Condensed Consolidated Statement of Operations.

Revenue Recognition

The Company creates customized precision milled intraoral medical devices and recognizes revenue upon meeting the following criteria:

●

Identifying the contract with a customer: Customers submit an order in the form of a prescription and oral scan to the Company.

●

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

●

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

●

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

●

Recognizing revenue as the performance obligation is satisfied at a point in time: 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. The Company charges 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. The Company does not have a financing component related to its revenue arrangements.

The Company utilizes the practical expedient which permits expensing of costs to obtain a contract when the expected amortization period is one year or less. Accordingly, the Company expenses employee sales commissions when incurred as the period over which the sales commission asset that would have been recognized is less than one year.

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.

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At the lease commencement date, the Company recognizes a right-of-use (“ROU”) asset and a lease liability for all leases, except short term leases with an original term of twelve months or less. The ROU 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 ROU asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, less any lease incentives received. All ROU 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 income (loss) per share attributable to Common Stockholders is calculated by dividing the net income (loss) attributable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period, without consideration of potentially dilutive securities.

Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. For the purposes of the diluted net income (loss) per share calculation, common stock options, RSU awards, Convertible Series A Preferred Stock, warrants to purchase common stock, earnout shares, and convertible notes are considered to be potentially dilutive securities. For the periods presented that the Company has reported a net loss, diluted net loss per common share is the same as basic net loss per common share for those periods.

Recent Accounting Pronouncements

During November 2023, the FASB issued ASU 2023-07, Segment Reporting-Improvements to Reportable Segment Disclosures. The new FASB guidance requires incremental disclosures related to a public entity’s reportable segments but does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The FASB issued the new guidance primarily to provide financial statements users with more disaggregated expense information about a public entity’s reportable segments. The ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. The guidance is effective for the Company’s 2024 Form 10-K. The Company is currently evaluating the impact of adoption on the Company’s consolidated financial statements and its related disclosures.

In December 2023, the FASB released ASU 2023-09, titled "Enhancements to Income Tax Disclosures," with the aim of improving the clarity and usefulness of income tax disclosures. The update focuses primarily on enhancing disclosures related to rate reconciliation and income taxes paid. ASU 2023-09 becomes effective for annual reporting periods starting after December 15, 2024, with early adoption permitted. While the changes prescribed by ASU 2023-09 are implemented prospectively, retrospective application is also allowed. The Company has chosen not to early adopt this standard and is currently evaluating the impact of adoption on the Company’s consolidated financial statements and its related disclosures.

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

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NOTE 3 — INVENTORY

Inventory consists of the following (in thousands):


	June 30,			December 31,
	2024		2023
Raw materials	$	1,296	$	1,967
Work-in-process		176		72
	$	1,472	$	2,039

NOTE 4 — PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):


		June 30,		December 31,
	2024		2023
Manufacturing equipment	$	4,324	$	4,042
Computers and software		1,215		1,200
Construction in progress		100		—
Leasehold improvements		846		846
		6,485		6,088
Less: accumulated depreciation		(3,460)		(2,730)
Property and equipment, net	$	3,025	$	3,358

Depreciation and amortization expense for property and equipment was $0.4 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively, and $0.7 million and $0.4 million for the six months ended June 30, 2024 and 2023.

The Company disposed property and equipment assets of $0.7 million which had an accumulated depreciation of $0.6 million during the six months ended June 30, 2023. The resulting $0.1 million loss on disposal is reflected in the Condensed Consolidated Statement of Operations within other expense. During six months ended June 30, 2024, the Company did not dispose of any property and equipment.

NOTE 5 — ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):


		June 30,		December 31,
	2024		2023
Compensation related accruals	$	1,615	$	3,387
Marketing programs		786		934
Interest		—		382
Warranty		465		465
Professional fees		1,206		632
Inventory purchases and freight		—		613
Other		122		343
	$	4,194	$	6,756

NOTE 6 — LEASES

The Company has entered into four equipment leases during the six months ended June 30, 2024, which have been classified as finance leases. The lease terms for these leases range from three to five years, with a total monthly lease payment of approximately

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$28.0 thousand. As of June 30, 2024, the Company has recorded the right-of-use (ROU) assets and lease liability for these leases, with an aggregate amount of $0.6 million.

On May 17, 2022, the Company signed a ten-yea