Hyperfine(HYPR) - 2022 Q3 - Quarterly Report

Explanatory Note This note explains the December 2021 business combination forming Hyperfine, Inc. and its Nasdaq listing under 'HYPR' - On December 22, 2021, HealthCor Catalio Acquisition Corp. (now Hyperfine, Inc.) consummated a business combination with Legacy Hyperfine and Liminal Sciences, Inc., which became wholly-owned subsidiaries[8] - Following the Business Combination, HealthCor changed its name to 'Hyperfine, Inc.', and its Class A common stock is listed on the Nasdaq Global Market under the symbol 'HYPR'[8] Cautionary Statement Regarding Forward-Looking Statements This statement warns that the report contains forward-looking statements subject to inherent risks and uncertainties, detailed in risk factors - This report contains forward-looking statements regarding the company's future events and financial performance, based on management's beliefs and assumptions[10] - Forward-looking statements are subject to inherent risks, uncertainties, and assumptions, including those detailed under 'Risk Factors' in the Annual Report on Form 10-K and this quarterly report[10][13] - Key areas of forward-looking statements include anticipated benefits of the Business Combination, product development, commercialization, regulatory approvals, market size, financial performance, and the impact of COVID-19[12][14] PART I — FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed combined and consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and detailed notes Condensed Combined and Consolidated Balance Sheets (unaudited) This table provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of September 30, 2022, and December 31, 2021 | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $132,482 | $188,498 | | Total current assets | $143,716 | $197,485 | | Total assets | $148,331 | $202,473 | | Total current liabilities | $12,459 | $15,736 | | Total liabilities | $13,348 | $16,246 | | Accumulated deficit | $(196,425) | $(136,320) | | Total stockholders' equity | $134,983 | $186,227 | Condensed Combined and Consolidated Statements of Operations and Comprehensive Loss (unaudited) This table presents the company's revenues, costs, and net loss for the three and nine months ended September 30, 2022 and 2021 | Metric (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total sales | $2,348 | $371 | $5,390 | $1,060 | | Total cost of sales | $1,660 | $709 | $4,783 | $1,774 | | Gross margin | $688 | $(338) | $607 | $(714) | | Total operating expenses | $13,970 | $16,052 | $60,852 | $38,067 | | Loss from operations | $(13,282) | $(16,390) | $(60,245) | $(38,781) | | Net loss and comprehensive loss | $(13,171) | $(16,392) | $(60,105) | $(38,766) | | Net loss per common share, basic and diluted | $(0.19) | $(8.66) | $(0.85) | $(22.56) | Condensed Combined and Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders' Equity (Deficit) (unaudited) This table details changes in the company's equity, including net loss and stock-based compensation, from December 31, 2021, to September 30, 2022 | Metric (in thousands) | Balance, Dec 31, 2021 | Net Loss (9 months ended Sep 30, 2022) | Stock-based Compensation Expense (9 months ended Sep 30, 2022) | Balance, Sep 30, 2022 | | :-------------------- | :-------------------- | :------------------------------------- | :------------------------------------------------------------- | :-------------------- | | Additional paid-in capital | $322,540 | N/A | $8,859 | $331,401 | | Accumulated deficit | $(136,320) | $(60,105) | N/A | $(196,425) | | Total stockholders' equity | $186,227 | $(60,105) | $8,859 | $134,983 | Condensed Combined and Consolidated Statements of Cash Flows (unaudited) This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 | Metric (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(56,994) | $(29,047) | | Net cash used in investing activities | $(427) | $(1,736) |\n| Net cash provided by financing activities | $2 | $35,439 | | Net (decrease) increase in cash and cash equivalents and restricted cash | $(57,419) | $4,656 | | Cash, cash equivalents and restricted cash, end of period | $133,741 | $68,942 | Notes to Condensed Combined and Consolidated Financial Statements (unaudited) This section provides detailed explanations and disclosures supporting the condensed combined and consolidated financial statements 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Hyperfine, Inc. was formed through a business combination in December 2021, aiming to provide affordable and accessible MRI with its Swoop® Portable MR Imaging System. The system is FDA-cleared and commercially available in the US, Canada, Australia, New Zealand, and Pakistan. The company is also developing a device for non-invasive brain vital sign measurement - Hyperfine, Inc. was formed on December 22, 2021, through a business combination with Legacy Hyperfine and Liminal Sciences, Inc.[27] - The company's mission is to provide affordable and accessible MRI, with its Swoop® Portable MR Imaging System™ commercially available in the U.S. (FDA 510(k) clearance in 2020), Canada, New Zealand, Pakistan, and Australia[28] - Hyperfine is in the early research and development stage of a new device to non-invasively measure key vital signs in the brain[28] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the basis of financial statement presentation, accounting policies, COVID-19 impact, segment information, use of estimates, and recent accounting pronouncements COVID-19 Outbreak The COVID-19 pandemic continues to adversely impact operations, affecting personnel, manufacturing, material availability, and hiring, with uncertain future financial impact - The COVID-19 pandemic has adversely impacted operations, including personnel, third-party manufacturing, and material availability, creating uncertainty for future financial results[33][34] - No significant impairment losses on assets have been incurred due to the COVID-19 pandemic[35] Segment Information The company aggregates Legacy Hyperfine and Liminal into a single reporting segment, with all long-lived assets and most revenue generated in the U.S - Legacy Hyperfine and Liminal are aggregated into a single reporting segment, as both focus on developing and commercializing products and services[36] - All long-lived assets are located in the United States[36] Non-U.S. Revenue | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :----- | :--------------------------------------------- | :-------------------------------------------- | | Non-U.S. Revenue | $784 | $1,947 | Use of Estimates Financial statement preparation requires significant management estimates for revenue, doubtful accounts, inventory, deferred tax assets, and stock-based compensation, which may differ from actual results - Significant estimates are made for revenue recognition, allowance for doubtful accounts, inventory valuation, deferred tax assets, and stock-based compensation expense[42] - Estimates are based on historical and anticipated results, but actual results could differ materially[39] Recent Accounting Pronouncements The company is evaluating the impact of new accounting pronouncements on Leases and Credit Losses, with the Leases pronouncement not expected to be material - ASU 2016-02, Leases (Topic 842), is effective for interim reporting periods within annual periods beginning January 1, 2023; its adoption is not expected to be material[40] - ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), is effective for the annual reporting period beginning January 1, 2023; the company is evaluating its impact[41] 3. REVENUE RECOGNITION This section details the company's revenue recognition policies, disaggregating revenue by product type, managing contract balances, and clarifying leasing arrangements and contract costs Disaggregation of Revenue Revenue is disaggregated by device and service, both showing significant growth for the three and nine months ended September 30, 2022, compared to 2021 | Revenue Type | Pattern of Recognition | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------- | :--------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Device | Point in time | $1,945 | $200 | $4,305 | $521 | | Service | Over time | $403 | $171 | $1,085 | $539 | | Total revenue| | $2,348 | $371 | $5,390 | $1,060 | Contract Balances Contract balances, including accounts receivable and deferred revenue, increased significantly from December 2021 to September 2022, with substantial growth in recognized deferred revenue Contract Balances (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Accounts receivable, net | $2,702 | $553 | | Unbilled receivables | $1,475 | $91 | | Deferred revenue | $1,449 | $730 | | Long term deferred revenue | $889 | $510 | Revenue Recognized from Deferred Revenue (in thousands) | Revenue Recognized from Deferred Revenue (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | From beginning-of-period balance | $118 | $43 | $501 | $157 | Costs of Obtaining or Fulfilling Contracts Incremental costs of obtaining contracts, such as commissions, are capitalized and amortized over the period consistent with the transfer of related goods and services Capitalized Costs in Other Long Term Assets (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Capitalized costs in Other long term assets | $251 | $158 | Transaction price allocated to remaining performance obligations Remaining performance obligations increased to $5.1 million as of September 30, 2022, with most expected to be recognized as revenue in fiscal year 2023 and thereafter Remaining Performance Obligations (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Remaining performance obligations | $5,101 | $2,800 | - Approximately 9% of remaining performance obligations are expected to be recognized in fiscal year 2022, and 91% in fiscal year 2023 and thereafter[51] 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The company measures fair value using a three-tier hierarchy, with cash equivalents and short-term items approximating fair value, and no Level 2 or 3 assets/liabilities - Fair value is measured using a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[53][54][55] - The company had no assets or liabilities valued with Level 3 inputs, and no transfers between fair value measurement levels occurred[55][56] Money Market Funds (Level 1) (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Money market funds (Level 1) | $38,007 | $48,625 | 5. INVENTORIES Total inventories slightly decreased to $4.0 million at September 30, 2022, comprising raw materials and finished goods, with manufacturing overhead including allocated labor costs Inventories (in thousands) | Inventory Type (in thousands) | September 30, 2022 | December 31, 2021 | | :---------------------------- | :----------------- | :---------------- | | Raw materials | $2,366 | $2,355 | | Finished goods | $1,636 | $1,955 | | Total inventories | $4,002 | $4,310 | - Manufacturing overhead costs include management's estimate and allocation of labor costs for warehousing, logistics, material sourcing, and production planning[58] 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, decreased to $3.4 million at September 30, 2022, while depreciation expense increased for both the three and nine months ended September 30, 2022 Property and Equipment, Net (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Property and equipment, net | $3,448 | $3,753 | Depreciation Expense (in thousands) | Depreciation Expense (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Depreciation expense | $238 | $172 | $754 | $389 | 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities increased to $8.9 million at September 30, 2022, primarily driven by a significant rise in payroll and related benefits Accrued Expenses and Other Current Liabilities (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Total accrued expenses and other current liabilities | $8,949 | $8,115 | | Payroll and related benefits | $2,896 | $441 | | SPAC bonus and other costs | $0 | $1,071 | 8. EQUITY INCENTIVE PLAN This section details activity for stock options and RSUs under the 2021 Equity Incentive Plan, including grants, exercises, forfeitures, and a stock option repricing Stock option activity Outstanding stock options decreased to 8.5 million at September 30, 2022, due to forfeitures, including 3.1 million from the former CEO, with a repricing approved in September 2022 Stock Option Activity | Metric | Outstanding at Jan 1, 2022 | Granted | Exercised | Forfeited | Outstanding at Sep 30, 2022 | | :----- | :------------------------- | :------ | :-------- | :-------- | :-------------------------- | | Options | 7,522,136 | 5,053,663 | (16,375) | (3,714,944) | 8,544,480 | - Forfeitures include 3,124,252 options from the former CEO[62] - A one-time stock option repricing was approved on September 26, 2022, effective October 31, 2022, for options held by employees other than Dr. Rothberg[67] Restricted stock unit activity Outstanding RSUs decreased to 2.0 million at September 30, 2022, due to vesting and forfeitures, including 150,000 from the former CEO, resulting in a $4.5 million compensation recapture Restricted Stock Unit Activity | Metric | Outstanding at Jan 1, 2022 | Granted | Vested | Forfeited | Outstanding at Sep 30, 2022 | | :----- | :------------------------- | :------ | :----- | :-------- | :-------------------------- | | RSUs | 117,516 | 2,464,840 | (222,096) | (322,738) | 2,037,517 | - Forfeitures include 150,000 RSUs from the former CEO[64] - A $4,501 thousand stock-based compensation expense related to the former CEO's forfeited awards was recaptured as a credit to general and administrative expense[66] Stock-based compensation expenses by functional line item Total stock-based compensation expense for the nine months ended September 30, 2022, was $8.9 million, with a $2.8 million credit to G&A for the three months due to forfeited awards Stock-based Compensation Expenses by Functional Line Item (in thousands) | Functional Line Item (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of sales | $34 | $24 | $85 | $24 | | Research and development | $339 | $207 | $1,851 | $829 | | Sales and marketing | $79 | $15 | $291 | $52 | | General and administrative | $(2,806) | $1,129 | $6,632 | $2,226 | | Total | $(2,354) | $1,375 | $8,859 | $3,131 | - The negative General and administrative expense for the three months ended September 30, 2022, is due to the recapture of $4.5 million in previously recognized expense related to the former CEO's forfeited awards[66][68] 9. NET LOSS PER SHARE Basic and diluted net loss per share were identical due to the company's net loss position, with weighted-average shares significantly increasing in 2022 Net Loss Per Share Data | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Loss | $(13,171) | $(16,392) | $(60,105) | $(38,766) | | Weighted-average common stock | 70,509,639 | 1,892,208 | 70,398,103 | 1,718,489 | | Basic and dilutive net loss per share | $(0.19) | $(8.66) | $(0.85) | $(22.56) | Anti-Dilutive Common Equivalent Shares | Anti-Dilutive Common Equivalent Shares | September 30, 2022 | September 30, 2021 | | :------------------------------------- | :----------------- | :----------------- | | Outstanding options to purchase common stock | 8,544,480 | 7,597,120 | | Outstanding Legacy Hyperfine convertible preferred stock | 0 | 46,084,168 | | Outstanding RSUs | 2,037,517 | 0 | | Earn-Out Shares | 9,450,862 | 0 | | Total anti-dilutive common equivalent shares | 20,032,859 | 53,681,288 | - Earn-Out Shares (up to 10,000,000 Class A common stock) are contingent on the Class A common stock price reaching $15.00 within three years of the Closing Date[71] 10. INCOME TAXES The company's effective income tax rate was 0.0% for the periods presented, with a full valuation allowance against deferred tax assets due to its earnings history - The estimated annual effective income tax rate was 0.0% for the three and nine months ended September 30, 2022 and 2021[73] - A full valuation allowance is recorded against net deferred tax assets, as realization is not considered more likely than not due to the company's earnings history[75] 11. RELATED PARTY TRANSACTIONS This section details transactions with related parties, including subleases from 4Catalyzer, expense allocations, a forgiven Promissory Note, and various service agreements - The company subleases office and lab space from 4Catalyzer Corporation (4C), a related party[76] Related Party Balances (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Due to related parties (4C) | $58 | $1,872 | | Due from related parties | $0 | $14 | - A $90 thousand Promissory Note with an employee was forgiven on January 11, 2022[78] 12. COMMITMENTS AND CONTINGENCIES This section outlines commitments, including a 401(k) plan and grants from the Bill & Melinda Gates Foundation, and addresses contingencies, noting no material legal proceedings Commitments The company has no 401(k) matching contributions and received $4.9 million in BMGF grants to deploy 25 Swoop devices for a multi-site study - No matching contributions were made to the 401(k) plan for the three and nine months ended September 30, 2022 and 2021[83] - Received grants totaling $4.9 million from the Bill & Melinda Gates Foundation (BMGF) for the provision and equipping of 25 sites with Swoop systems for a multi-site study[84][144] Restricted Cash (BMGF Grants) (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Restricted cash (BMGF grants) | $1,259 | $2,662 | Contingencies The company is not involved in material legal proceedings, has no recorded liabilities for indemnification, and a $1.0 million Earn-Out Shares payment is not considered probable - The company is not currently a party to any material legal proceedings[85] - No liability has been recorded for indemnification obligations due to limited history and no awareness of material claims[87] - A $1,000 thousand payment to a third-party service provider for Earn-Out Shares is not considered probable, so no liability was recognized[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results, covering business overview, COVID-19 impact, key metrics, and detailed financial performance Overview Hyperfine is a digital health company providing affordable MRI with its FDA-cleared Swoop® system, integrating AI, and developing a brain sensing platform for international expansion - Hyperfine's mission is to provide affordable and accessible imaging and monitoring through MRI, with its Swoop® Portable MR Imaging System™[90] - The Swoop system is FDA 510(k) cleared (2020) and commercially available in the US, Canada, Australia, New Zealand, and Pakistan[93] - The company is optimizing its software ecosystem with Artificial Intelligence (AI) for clinical decision support and plans to develop a brain sensing platform[92] COVID-19 The COVID-19 pandemic continues to adversely impact operations, causing sales restrictions, decreased hospital spending, and supply chain disruptions, leading to increased costs and extended lead times - COVID-19 has created commercial challenges, restricting salesforce visits to healthcare providers and slowing product demonstrations[96] - The supply chain has been adversely affected, leading to increased product costs and dramatically extended lead times for certain components, particularly semiconductors[98] - The company mitigated impacts by shifting to domestic suppliers, increasing communication, and providing advanced forecasts, but future waves could still cause greater negative impacts[98] Key Performance Metrics The company evaluates business performance using key metrics, primarily focusing on the 'Installed Base' of its Swoop systems, indicating business growth Installed Base The total installed base of Swoop systems reached 100 units as of September 30, 2022, including commercial, grant fulfillment, and research installations, doubling from the prior year Installed Base of Swoop Systems | Installation Type | As of September 30, 2022 | As of September 30, 2021 | | :---------------- | :----------------------- | :----------------------- | | Commercial systems installations | 57 | 20 | | Grant fulfillment installations | 20 | 8 | | Research units | 23 | 22 | | Total Installed Units | 100 | 50 | - Commercial system installations and RTA sales generate revenue, while grant fulfillment and research units expand clinical use cases, often at no cost to institutions[104][105][106] Factors Affecting Results of Operations Key factors influencing future results include strategic partnerships, accelerated international expansion, and technical innovation focusing on AI integration and new imaging applications Strategic partnerships and accelerated international expansion Market expansion through direct sales and distribution partners in target regions, alongside a BMGF partnership for research, are key growth drivers - The company is building an international sales strategy with direct sales and distribution partners in target regions, including Canada, Australia, New Zealand, Pakistan, and potentially larger EU countries[108] - A partnership with the Bill & Melinda Gates Foundation (BMGF) involves deploying 20 Swoop systems (out of 25 funded) for a multi-site study to validate use in maternal anemia, malnutrition, infection, and birth-related injury[108][144] Technical innovation The company focuses on enhancing the Swoop system with AI, new imaging applications, and a brain sensing platform, expecting increased R&D expenses but positive future profitability - Focus on integrating the Swoop system into clinical workflows and developing automated image analysis using Artificial Intelligence (AI)[109] - Plans to develop an enhanced MRI system for neuroimaging and other extremities, and a brain sensing platform for neuromonitoring[109] - These technical innovation activities are expected to increase research and development expenses but positively impact future results and profitability[109] Results of Operations This section details the company's financial performance for the three and nine months ended September 30, 2022, versus 2021, covering sales, costs, gross margin, and operating expenses Sales Total sales increased significantly by 532.9% for the three months and 408.5% for the nine months ended September 30, 2022, driven by higher device volume and service sales Sales (in thousands) | Sales (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Device | $1,945 | $200 | 872.5% | $4,305 | $521 | 726.3% | | Service | $403 | $171 | 135.7% | $1,085 | $539 | 101.3% | | Total sales | $2,348 | $371 | 532.9% | $5,390 | $1,060 | 408.5% | - Device sales increase was driven by higher volume and sales price, following a pricing action in Q1 2022[112] - Service sales growth was driven by an increase in the volume of installed devices, as service revenue is recurring[113] Cost of sales Total cost of sales increased by 134.1% for the three months and 169.6% for the nine months ended September 30, 2022, due to higher manufacturing, hardware, and labor costs Cost of Sales (in thousands) | Cost of Sales (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :--------------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Device | $1,215 | $508 | 139.2% | $3,511 | $1,420 | 147.3% | | Service | $445 | $201 | 121.4% | $1,272 | $354 | 259.3% | | Total cost of sales | $1,660 | $709 | 134.1% | $4,783 | $1,774 | 169.6% | - Increase in device cost of sales was driven by third-party manufacturing costs, product hardware costs, and labor costs due to increased sales volume[116][118] - Increase in service cost of sales was primarily due to higher internal overheads and labor costs[117][119] Research and development R&D expenses increased by 14.0% for the three months and 35.3% for the nine months ended September 30, 2022, due to higher personnel, stock-based compensation, and consulting costs Research and Development Expenses (in thousands) | R&D Expenses (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :-------------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Research and development | $7,338 | $6,438 | 14.0% | $22,937 | $16,949 | 35.3% | - The increase was driven by higher personnel-related costs ($5.8 million for 9 months), stock-based compensation ($1.0 million for 9 months), and consulting costs ($0.9 million for 9 months)[121][122] - Partially offset by grant fulfillments recorded as credits to R&D expenses ($1.8 million for 9 months)[122] General and administrative G&A expenses decreased by 53.2% for the three months due to a $4.5 million compensation recapture, but increased 73.1% for nine months due to higher personnel and insurance costs General and Administrative Expenses (in thousands) | G&A Expenses (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :-------------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | General and administrative | $3,198 | $6,827 | (53.2)% | $26,570 | $15,348 | 73.1% | - The 3-month decrease was primarily due to a $4.5 million credit from recaptured stock-based compensation related to the former CEO's forfeited awards[123] - The 9-month increase was driven by higher stock-based compensation ($4.4 million net), personnel costs ($3.6 million), insurance ($2.4 million), and recruitment expenses[124] Sales and marketing Sales and marketing expenses increased by 23.2% for the three months and 96.6% for the nine months ended September 30, 2022, driven by higher personnel, stock-based compensation, and travel costs Sales and Marketing Expenses (in thousands) | S&M Expenses (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :-------------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Sales and marketing | $3,434 | $2,787 | 23.2% | $11,345 | $5,770 | 96.6% | - The increase was primarily due to higher personnel-related expenses ($4.2 million for 9 months), stock-based compensation ($0.2 million for 9 months), travel ($0.7 million for 9 months), and consulting expenses ($0.4 million for 9 months)[126] - Partially offset by a decrease in marketing costs and marketing events for the three months ended September 30, 2022[125] Interest income Interest income increased significantly to $170 thousand for the three months and $203 thousand for the nine months ended September 30, 2022, primarily due to higher interest rates Interest Income (in thousands) | Interest Income (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (%) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (%) | | :----------------------------- | :------------------------------ | :------------------------------ | :--------- | :----------------------------- | :----------------------------- | :--------- | | Interest income | $170 | $3 | 5,567% | $203 | $13 | 1,462% | - The increase in interest income was primarily driven by higher interest rates during the periods[128][129] Other income (expense), net Other income (expense), net, showed an unfavorable increase in expense for both periods, primarily due to realized losses on foreign currencies Other Income (Expense), Net (in thousands) | Other Income (Expense), net (in thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change (unfavorable) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | Change (unfavorable) | | :----------------------------------------- | :------------------------------ | :------------------------------ | :------------------- | :----------------------------- | :----------------------------- | :------------------- | | Other income (expense), net | $(59) | $(5) | $(54) | $(63) | $2 | $(65) | - The unfavorable changes were primarily driven by realized losses on foreign currencies[130][131] Liquidity and Capital Resources The company funds operations primarily through stock issuance, with $132.5 million cash as of September 30, 2022, expecting to cover operations for at least 12 months despite continued cash burn Cash Cash and cash equivalents totaled $132.5 million as of September 30, 2022, with future capital requirements uncertain and dependent on development, commercialization, and regulatory costs - Cash and cash equivalents totaled $132.5 million as of September 30, 2022[136] - Future capital requirements are dependent on development costs, commercialization strategy, international expansion, and regulatory costs[136] - Inability to obtain additional funds on a timely basis could lead to delays in product development or commercialization efforts[135][136] Cash flows The company experienced a net decrease in cash of $57.4 million for the nine months ended September 30, 2022, driven by increased operating cash use and reduced financing activities Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(56,994) | $(29,047) | | Net cash used in investing activities | $(427) | $(1,736) | | Net cash provided by financing activities | $2 | $35,439 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(57,419) | $4,656 | Net cash used in operating activities Net cash used in operating activities increased to $57.0 million for the nine months ended September 30, 2022, due to a higher net loss and negative changes in operating assets and liabilities - Net cash used in operating activities increased to $57.0 million for the nine months ended September 30, 2022, from $29.0 million in 2021[138][140] - The increase in cash used was primarily due to a net loss of $60.1 million and negative changes in operating assets and liabilities of $6.5 million[138] - Non-cash items, including $8.9 million in stock-based compensation expense, partially offset the cash used[138] Net cash used for investing activities Net cash used in investing activities decreased to $0.4 million for the nine months ended September 30, 2022, from $1.7 million in 2021, primarily due to reduced purchases of property and equipment - Net cash used in investing activities decreased to $0.4 million for the nine months ended September 30, 2022, from $1.7 million in 2021[141] - This was primarily due to lower purchases of property and equipment[141] Net cash provided by financing activities Net cash provided by financing activities significantly decreased to $2 thousand for the nine months ended September 30, 2022, compared to $35.4 million in 2021, which included stock issuance proceeds - Net cash provided by financing activities was $2 thousand for the nine months ended September 30, 2022, a significant decrease from $35.4 million in 2021[142] - The 2021 financing activities included $30.5 million from Series D convertible preferred stock and $3.5 million from 4Bionics, LLC[142] Contractual obligations The company has no significant contractual obligations beyond its 401(k) plan and $4.9 million in BMGF grants for deploying Swoop devices - No significant contractual obligations as of September 30, 2022[145] - The company did not make any matching contributions to its 401(k) plan for the three and nine months ended September 30, 2022 and 2021[143] - BMGF grants totaling $4.9 million support the deployment of 25 Swoop devices for a multi-site study, with 20 units and 10 baby cradles provisioned by September 30, 2022[144] Critical Accounting Policies and Significant Judgments and Estimates Financial statements rely on estimates for revenue, doubtful accounts, inventory, deferred tax assets, and stock-based compensation, with no material changes reported except for recent pronouncements - Financial statements require estimates and assumptions for revenue recognition, allowance for doubtful accounts, inventory, deferred tax assets, and stock-based compensation[146] - No material changes to critical accounting policies and estimates were reported compared to the 2021 Annual Report on Form 10-K, except for recent accounting pronouncements[147] Recently Issued Accounting Pronouncements This section refers to Note 2 of the financial statements for details on recently issued accounting pronouncements that may impact the company's financial position - Refer to Note 2 of the condensed combined and consolidated financial statements for details on recently issued accounting pronouncements[148] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, inflation, and foreign exchange, but believes its overall exposure is limited and does not use financial instruments for speculation Interest Rate Risk Cash equivalents, including $38.0 million in money market funds, are subject to interest rate risk, but a 10% change is not expected to materially affect cash flows due to short-term nature - Cash equivalents include $38.0 million in money market funds as of September 30, 2022[150] - The company's investment policy prioritizes liquidity and capital preservation[150] - A hypothetical 10% change in interest rates is not expected to have a material effect on cash flows or operating results due to the short-term nature of cash equivalents[150] Inflation Risk Inflation has not materially affected the company's business, but inability to offset higher costs through price increases or efficiencies could cause harm - Inflation has not had a material effect on the company's business, financial condition, or results of operations, other than its impact on the general economy[151] - Inability to fully offset higher costs from inflationary pressures through price increases or manufacturing efficiencies could harm the business[151] Foreign Exchange Risk The company primarily transacts in U.S. dollars, limiting foreign currency translation risk, and does not use hedging strategies, so material impact is not expected - The company primarily operates and executes transactions in U.S. dollars[153] - Foreign currency translation risk is limited and not expected to have a material impact on financial statements[153] - The company has not utilized hedging strategies for foreign exchange exposure[153] Item 4. Controls and Procedures The principal executive and financial officers concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to identified material weaknesses in internal control over financial reporting. These weaknesses relate to limited accounting personnel post-Business Combination and misclassification of Class A ordinary shares subject to redemption. Management is actively implementing a remediation plan, including hiring experienced finance personnel Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed ineffective as of September 30, 2022, solely due to identified material weaknesses in internal control over financial reporting - Disclosure controls and procedures were not effective as of September 30, 2022[154] - The ineffectiveness was due to material weaknesses in internal control over financial reporting[154] Material Weaknesses in Internal Control Over Financial Reporting Two material weaknesses were identified: limited accounting personnel post-Business Combination and misclassification of Class A ordinary shares subject to redemption - Identified material weakness: limited accounting and financial reporting personnel and resources post-Business Combination, leading to insufficient supervision and review of outsourced accounting information[156] - Identified material weakness: misclassification of Class A ordinary shares subject to possible redemption, which was quantitatively material and required restatement[157] - Despite these weaknesses, management concluded that the financial statements are fairly stated in all material respects[159] Plan for Remediation of the Material Weaknesses in Internal Control Over Financial Reporting Management is actively remediating material weaknesses by hiring experienced accounting and finance personnel, providing training, and increasing communication with third-party professionals - Remediation plan includes hiring experienced accounting and finance resources, such as a Chief Financial Officer and Vice President, Controller[160] - The plan also involves providing accounting training, literature, research materials, and increased communication with outsourced third-party professionals[160] - Material weaknesses will not be considered remediated until effective controls are designed, implemented, and tested over a sufficient period[160] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022, other than those made for remediation - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022, other than changes made to remediate the material weaknesses[161] PART II — OTHER INFORMATION This part covers other information including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently a party to any material legal proceedings[164] Item 1A. Risk Factors This section highlights new risks related to attracting key personnel, reliance on suppliers, pricing pressures, and potential Nasdaq delisting due to low stock price - The company's business is subject to various risks and uncertainties, including those described in its 2021 Annual Report on Form 10-K[165] - Key risks include the inability to attract and retain key personnel, reliance on a limited number of suppliers, and pricing pressures from contract suppliers[166][169][172] - The Class A common stock is trading below $1.00 per share, posing a risk of delisting from Nasdaq if compliance is not regained[173] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any unregistered sales of equity securities or repurchase any equity securities during the three months ended September 30, 2022 - No unregistered sales of equity securities occurred during the three months ended September 30, 2022[174] - The company did not repurchase any of its equity securities during the three months ended September 30, 2022[175] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[176] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[177] Item 5. Other Information This item is not applicable to the company for the reporting period - Not applicable[178] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including offer letters, severance plans, certifications, and XBRL documents - Exhibits include the Offer Letter for Maria Sainz, Executive Severance Plan, and certifications (Section 302 and 906 of Sarbanes-Oxley Act)[181][183] - Inline XBRL Instance Document and Taxonomy Extension documents are also filed[181][182] Signatures The report was signed by Maria Sainz, President and Chief Executive Officer, and Alok Gupta, Chief Financial Officer, on November 10, 2022 - The report was signed by Maria Sainz, President and Chief Executive Officer, and Alok Gupta, Chief Financial Officer[186] - The signing date for the report was November 10, 2022[186]