NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share data)
NOTE 1. BUSINESS AND BASIS OF ACCOUNTING
Organization and Description of Business
Cue Health Inc. (the “Company”) was originally formed in the State of California on January 26, 2010, prior to being incorporated in the State of Delaware on December 14, 2017. The Company is a healthcare technology company committed to revolutionizing the healthcare experience by providing individuals with a convenient and connected diagnostic platform that bridges the physical and virtual care continuum. The Company’s proprietary platform, the Cue Health Monitoring System, comprised of the Cue Reader and Cue Test Kit, enables lab-quality diagnostics-led care at home, at work or at the point of care. This platform is designed to empower stakeholders across the healthcare ecosystem, including individuals, enterprises, healthcare providers and payors, and public health agencies with paradigm-shifting access to diagnostic and health data to inform care decisions. The Company’s headquarters are located in San Diego, California.
Basis of Presentation
The accompanying unaudited interim condensed financial statements should be read in conjunction with the audited annual financial statements and notes thereto for the year ended December 31, 2021. The unaudited interim condensed balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results for the fiscal year ending December 31, 2022 or any future interim period. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting and, in the opinion of management, include all adjustments necessary for the fair statement of the Company’s financial position for the periods presented. All such adjustments are of a normal, recurring nature. Certain disclosures have been condensed or omitted from the interim condensed financial statements. The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses as well as the related disclosure of contingent assets and liabilities.
Initial Public Offering
On September 28, 2021, the Company completed its initial public offering (“IPO”) of 14,375,000 shares of the Company common stock at an offering price of $16.00 per share, including 1,875,000 shares purchased pursuant to the exercise in full of the underwriters’ option to purchase additional shares. The Company received aggregate net proceeds of approximately $206.0 million after deducting underwriting commissions and legal, accounting, and consulting fees related to the IPO.
Upon completion of the IPO, Convertible Notes outstanding, see Note 10, Debt, in the principal amount of $235.5 million and accrued interest of $2.8 million were automatically converted into 18,611,914 shares of common stock. All outstanding shares of the Company’s redeemable convertible preferred stock, see Note 11, Capital Stock, were converted into 83,605,947 shares of common stock. Immediately prior to the IPO, all of the Company’s outstanding warrants to purchase redeemable convertible preferred stock were converted into the redeemable convertible preferred stock and the related warrant liabilities were reclassified to additional paid-in capital.
Use of Estimates
The preparation of the accompanying unaudited interim condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.
Significant estimates and assumptions made in the accompanying financial statements include, but are not limited to revenue recognition, net accounts receivable, equity-based compensation expense, product warranty reserve, the recoverability of its long-lived assets and net deferred tax assets (and related valuation allowance). The Company evaluates
its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.
Segment Reporting
Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. In addition, the guidance for segment reporting indicates certain quantitative materiality thresholds. The Company views its operations and manages its business in one operating segment which is consistent with how the Chief Executive Officer, who is the chief operating decision-maker, reviews the business, makes investment and resource allocation decisions, and assesses operating performance. All revenue to date is from customers located in the United States and all long-lived assets are located in the United States.
COVID-19 Impact
COVID-19 was declared a global pandemic by the World Health Organization in March 2020 and adversely impacted global commercial activity but served as a catalyst to accelerating the Company’s product pipeline. The Company’s first commercially available diagnostic test for the Cue Health Monitoring System is the Cue COVID-19 test for ribonucleic acid of SARS-CoV-2, the virus that causes COVID-19. The Company began selling and recording product revenues for its Cue COVID-19 test in August 2020 after obtaining an Emergency Use Authorization (“EUA”) from the Federal Drug Administration (“FDA”) in June 2020. Currently, 100% of the Company’s product revenues are derived from the Cue COVID-19 test. Given the unpredictable nature of the COVID-19 pandemic, the development and potential size of the COVID-19 diagnostic testing market is highly uncertain.
The FDA issued various emergency use authorizations for COVID-19 vaccines. The widely administered use of an efficacious vaccine or new therapeutic treatment for COVID-19 may reduce the demand for the Cue COVID-19 test and, as a result, the COVID-19 diagnostic testing market may not develop or grow substantially. Given the rapid development of events surrounding the pandemic, there is uncertainty to the Company’s future results and performance.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies from its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with the exception of the following:
Fair Value Measurements
At March 31, 2022, and December 31, 2021, we had $190.0 million and $0, respectively, of treasury securities that are classified within cash and cash equivalents on the balance sheet. The U.S. treasury securities are Level 1 securities that are traded by dealers or brokers in active over-the-counter markets.
Recent Accounting Pronouncements
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. The standard provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2017-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued several amendments to the standard. In November 2019, the FASB amended the standard with the issuance of ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. The amendment revised the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of ASU 2016-13 on its financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic 470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. ASU 2020-06 is effective for reporting periods beginning after December 15, 2023 with early adoption permitted for reporting periods beginning after December 15, 2020. The amendment is to be adopted through either a modified retrospective or fully retrospective method
of transition. The Company adopted this standard effective January 1, 2022, using the modified retrospective approach. The standard did not have a material impact on the financial statements for the three months ended March 31, 2022.
In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 aims to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange based on the economic substance of the modification or exchange. Early adoption is permitted and the guidance must be applied prospectively to all modifications or exchanges that occur on or after the date of adoption. The guidance is effective for annual periods beginning after December 15, 2021. The Company adopted ASU 2021-04 on January 1, 2022 under the prospective method of adoption and there was no impact to our results of operations as we did not modify or exchange any freestanding equity-classified written call options.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832). This ASU requires business entities to disclose information about government assistance they receive if the transactions were accounted for by analogy to either a grant or a contribution accounting model. The disclosure requirements include the nature of the transaction and the related accounting policy used, the line items on the balance sheets and statements of operations that are affected and the amounts applicable to each financial statement line item and the significant terms and conditions of the transactions. The ASU is effective for annual periods beginning after December 15, 2021. The disclosure requirements can be applied either retrospectively or prospectively to all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application. The Company adopted the ASU prospectively on January 1, 2022. The additional annual disclosures required are not expected to have a material impact on the financial statements.
NOTE 3. REVENUE
Product Revenue
Disaggregation of the product revenue by type of customer for the three months ended March 31, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Public sector entities | $ | 1,610 | | | $ | 62,091 | | | | | |
Private sector customers | 175,844 | | | 2,408 | | | | | |
Total product revenue | $ | 177,454 | | | $ | 64,499 | | | | | |
Product revenue for the three months ended March 31, 2022 includes an immaterial amount of service revenue generated from telemedicine and proctoring services provided to customers. Revenue generated from proctoring is recognized over the term of the contracts with customers.
The following table sets forth the Company’s product gross profit and product gross profit margin for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Product revenue | $ | 177,454 | | $ | 64,499 | | | | |
Cost of product revenue | 86,697 | | 30,035 | | | | |
Product gross profit | $ | 90,757 | | $ | 34,464 | | | | |
Product gross profit margin | 51 | % | | 53 | % | | | | |
DoD Agreement
In October 2020, the Company entered into a $480.9 million agreement with the U.S. government for the purchase of its Cue COVID-19 Test to meet the unprecedented demand for rapid and accurate molecular diagnostic testing (the
“U.S. DoD Agreement”). The Company delivered all of the agreed upon products under the agreement prior to its expiration on December 31, 2021. The U.S. DoD Agreement provided for a $184.6 million upfront payment (the “U.S. DoD Advance”) to facilitate the scaling of the Company’s manufacturing capacity, which was received upon signing the contract. The U.S. DoD Agreement did not provide for the funds to be utilized in any specific manner beyond furthering the purposes of the agreement. The Company was not required to segregate, nor was the Company required to obtain the approval of the U.S. government to use the funds advanced to it under the agreement. The remaining $296.3 million of the agreement was due to the Company upon the delivery of Cue Readers, Cue COVID-19 Test Kits and Cue Control Swab Packs. The U.S. DoD Agreement also provided that, as soon as possible after the completion of the initial U.S. DoD Agreement, the Company and the U.S. government would negotiate in good faith to enter into a follow-on supply agreement based on federal acquisition regulations (a FAR-based contract). The U.S. DoD Agreement provides the U.S. DoD with the right to purchase no more than 45% of our quarterly production for the duration of the follow-on contract at a specified discount, subject to a price floor as part of this follow-on contract. The U.S. government is also entitled to certain administrative reporting but does not receive the right to any intellectual property or know-how. The agreement term ended upon completion of the Company’s performance obligations in December 2021.
Refer to the Company’s financial statements included in its 2021 10-K for further information on its revenue arrangements.
Contract Assets and Liabilities
Contract assets primarily relate to the Company’s conditional right to consideration for performance obligations satisfied through direct-to-consumer sales but not billed at the reporting date. Net contract assets were $0.6 million and $1.1 million as of March 31, 2022 and December 31, 2021, respectively, and were recorded in other current assets on the balance sheets.
Contract liabilities primarily relate to the U.S. DoD Advance and payments received from customers in advance of performance under the contracts. Contract liabilities are recorded in current and non-current deferred revenue on the balance sheets. The activity related to contract liabilities for the three months ended March 31, 2022 is as follows:
| | | | | |
| Amount |
Balance at December 31, 2021 | $ | 92,448 | |
Unearned revenue from cash received during the period, excluding amounts recognized as revenue during the period | 2,464 | |
Revenue recognized related to contract liability balance at the beginning of the period | — | |
Balance at March 31, 2022 | $ | 94,912 | |
Grant and Other Revenue
Grant and other revenue relate to a cost reimbursement agreement with the Biomedical Advanced Research and Development Authority (“BARDA”). The Company generated $2.0 million and $0 of revenue related to the agreement with BARDA during the three months ended March 31, 2022 and 2021, respectively.
Accounts Receivable
The allowance for doubtful accounts represents the Company’s estimate of probable credit losses relating to accounts receivable and is determined based on historical experience and other specific account data. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $0.5 million and $0.3 million, respectively.
NOTE 4. INVENTORIES
As of March 31, 2022 and December 31, 2021, the Company’s inventories consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Raw materials | $ | 57,223 | | | $ | 46,273 |
Work-in-process | 16,014 | | | 10,920 |
Finished goods | 60,775 | | | 33,863 |
| | | |
Reserve | (1,445) | | | (2,668) |
Total inventories | $ | 132,567 | | | $ | 88,388 |
The Company has revised the above information as of December 31, 2021 to correct an immaterial misclassification by increasing raw materials by $12.2 million and decreasing finished goods by the same amount. This revision only impacted the classification within inventories.
NOTE 5. PREPAID EXPENSES
As of March 31, 2022 and December 31, 2021, the Company’s prepaid expenses consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Prepaid expense | $ | 28,635 | | | $ | 30,153 |
Prepaid inventory | 14,267 | | | 15,736 |
Total prepaid expenses | $ | 42,902 | | | $ | 45,889 |
NOTE 6. PROPERTY AND EQUIPMENT, NET
As of March 31, 2022 and December 31, 2021, the Company’s property and equipment, net consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Construction in progress | $ | 10,515 | | | $ | 4,082 |
Machinery and equipment | 202,493 | | | 195,001 |
Leasehold improvements | 20,444 | | | 19,302 |
Furniture and fixtures | 970 | | | 740 |
Property and equipment | 234,422 | | | 219,125 |
Accumulated depreciation and amortization | (51,672) | | | (41,669) |
Total property and equipment, net | $ | 182,750 | | $ | 177,456 |
Depreciation and amortization expense related to property and equipment was $10.0 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively. The carrying value of assets under finance leases within property and equipment as of March 31, 2022 and December 31, 2021 was $9.2 million and $9.8 million, respectively.
NOTE 7. INTANGIBLE ASSETS
As of March 31, 2022 and December 31, 2021, the Company’s intangible assets consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Capitalized software | $ | 9,741 | | | $ | 5,638 |
Accumulated amortization | (2,671) | | | (2,067) |
Capitalized software, net | 7,070 | | | 3,571 |
In-process software development | 2,170 | | | 4,102 |
Total intangible assets | $ | 9,240 | | | $ | 7,673 |
Amortization expense related to intangible assets placed in service was $0.6 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. Estimated amortization expense for each of the years ending December 31 is as follows:
| | | | | |
2022 (excluding the three months ended March 31, 2022) | $ | 2,064 |
2023 | 2,705 |
2024 | 1,884 |
2025 | 417 |
Total amortization expense | $ | 7,070 |
NOTE 8. LEASES
The Company leases real estate and manufacturing and laboratory equipment which are used in the Company’s manufacturing, research and development, and administrative activities. The Company identifies a contract that contains a lease as one which conveys a right, either explicitly or implicitly, to control the use of an identified asset in exchange for consideration. These arrangements are classified as finance leases and operating leases. Finance leases consist of laboratory and manufacturing equipment with remaining terms ranging from 1 year to 3 years. The Company’s operating leases relate to the Company’s manufacturing facilities and office space and have remaining terms from 7 years to 9 years.
Refer to the Company’s financial statements included in its 2021 10-K for further information on its lease arrangements. There were no new material leases entered into during the three months ended March 31, 2022.
The right-of-use assets and lease liabilities recognized on the Company’s balance sheet as of March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Location | | March 31, 2022 | | December 31, 2021 |
Assets | | | | | | |
Right-of-use assets operating leases | | Operating lease right-of-use assets | | $ | 84,212 | | | $ | 79,474 | |
Right-of-use assets finance leases | | Property and equipment, net | | 9,182 | | | 9,821 | |
Liabilities | | | | | | |
Operating lease liabilities (current) | | Operating lease liabilities, current | | 7,594 | | | 7,147 | |
Finance lease liabilities (current) | | Finance lease liabilities, current | | 2,620 | | | 2,621 | |
Operating lease liabilities (non-current) | | Operating lease liabilities, net of current portion | | 47,626 | | | 46,464 | |
Finance lease liabilities (non-current) | | Finance lease liabilities, net of current portion | | 2,627 | | | 3,271 | |
The components of lease expense for the three months ended March 31, 2022 and 2021 were as follows:
| | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
Operating lease cost | $ | 2,762 | | $ | 1,117 | |
Finance lease cost: | | |
Amortization of right-of-use assets | 639 | | 335 | |
Interest on lease liabilities | 51 | | 49 | |
Total lease cost | $ | 3,452 | | $ | 1,501 | |
NOTE 9. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Accrued purchases (1) | $ | 6,882 | | | $ | 285 | |
Accrued payroll and benefits | 12,165 | | | 13,693 | |
Accrued expenses | 8,535 | | | 6,371 | |
Accrued sales tax | 6,992 | | | 4,284 | |
Product warranty reserve | 5,235 | | | 4,865 | |
Total accrued liabilities and other current liabilities | $ | 39,809 | | | $ | 29,498 | |
(1) Accrued purchases primarily reflects receipts of goods and services for which we had not yet been invoiced. As we are invoiced for these goods and services, this balance will reduce and accounts payable will increase.
NOTE 10. DEBT
Revolving Credit Agreement
In February 2021, the Company entered into a loan and security agreement (“Revolving Credit Agreement”) with a group of lenders with East West Bank, acting as administrative agent and collateral agent for the lenders. In connection with entering into the Revolving Credit Agreement, the Company repaid outstanding amounts of $5.4 million and terminated the prior Loan and Security Agreement with Comerica Bank (“2015 Credit Agreement”) that was initially entered into in May 2015. The 2015 Credit Agreement, as amended, provided for a revolving line with a credit extension of up to $4.0 million and a Growth Capital A Line with a credit extension of up to $6.0 million. The Revolving Credit Agreement provided for a revolving credit facility with an aggregate maximum principal amount of $130.0 million and a letter of credit subfacility of $20.0 million. In connection with entering into the Revolving Credit Agreement, the Company repaid outstanding amounts of $5.4 million and terminated an existing loan agreement with Comerica Bank.
In May 2021, the Company repaid $63.2 million of debt outstanding under the Revolving Credit Agreement with a portion of the proceeds from the issuance and sale of Convertible Notes. In June 2021, the Company terminated the Revolving Credit Agreement and was required to pay a fee equal to 1.00% of the amount of the outstanding revolving commitment. The Company also wrote-off issuance costs of $0.7 million for a total loss on extinguishment of debt of $2.0 million. These amounts were recorded in loss on extinguishment of debt in the statements of operations during the year ended December 31, 2021. Upon agreement with East West Bank and the other lenders to the Revolving Credit Agreement, the Company kept in place its outstanding letter of credit in the amount of $12.0 million, which is cash collateralized. In November 2021, East West Bank issued to us an additional letter of credit in the amount of $0.5 million. All other obligations under the Revolving Credit Agreement have otherwise been terminated.
Convertible Notes
In May 2021, the Company issued and sold convertible promissory notes (“Convertible Notes”) with a principal amount of $235.5 million. All of the Convertible Notes were converted upon the IPO, which was a qualified conversion event. The Convertible Notes’ principal amount of $235.5 million and accrued interest of $2.8 million was converted into
18,611,914 shares of common stock at a fair value of $297.8 million using a 20% discount to the initial public offing price of $16.00 per share. The Company no longer had outstanding Convertible Notes as of December 31, 2021.
NOTE 11. CAPITAL STOCK
Amended and Restated Certificate of Incorporation
In September 2021, the Company’s board of directors approved and the Company filed its restated amended certificate of incorporation, which authorized the issuance of up to 550,000,000 shares consisting of 500,000,000 shares of common stock and 50,000,000 shares of preferred stock with a par value of $0.00001 per share, respectively.
Common Stock Warrants
As of March 31, 2022, the Company had an outstanding warrant to purchase 75,744 shares of common stock at a purchase price of $0.40 per share. The warrant was issued on August 22, 2017 and expires on August 22, 2027. All shares subject to the warrant were vested as of December 31, 2021.
NOTE 12. STOCK-BASED COMPENSATION
Stock Incentive Plans
2014 Equity Incentive Plan
In August 2014, the Company adopted the 2014 Equity Incentive Plan (“2014 Plan”) under which employees, non-employee directors and consultants of the Company may be granted incentive stock options, nonqualified stock options, stock appreciation rights, performance shares, awards of restricted stock and awards of restricted stock units.
As of December 31, 2021, with the introduction of a new stock incentive plan, shares are no longer available for future grants under the 2014 Plan.
2021 Stock Incentive Plan
In September 2021, the Company adopted the 2021 Stock Incentive Plan (“2021 Plan”) under which employees, officers and directors, as well as consultants and advisors to the Company are eligible to be granted awards (incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards). The 2021 Plan initially authorized the issuance of a maximum of 22,399,691 shares of common stock. The number of shares of common stock available for issuance under the 2021 Plan were and will be increased on the first day of each fiscal year beginning with the 2022 fiscal year, in an amount equal to the least of (i) 5% of the number of shares of the Company's common stock outstanding on the first day of such fiscal year and (ii) the number of shares of the Company's common stock determined by the Company's board of directors. As of March 31, 2022, 8,755,861 shares of common stock were available for issuance under the 2021 Plan.
2021 Employee Stock Purchase Plan
In September 2021, the Company adopted the 2021 Employee Stock Purchase Plan (“2021 ESPP”) under which employees of the Company can purchase shares of the Company’s common stock commencing on such time and such dates as the board of directors of the Company determine. The 2021 ESPP initially allowed for the sale of 2,834,754 shares of common stock. The number of shares of the Company's common stock to be sold under the 2021 ESPP were and will be increased on the first day of each fiscal year beginning with the 2022 fiscal year, in an amount equal to the least of (i) 8,504,263 shares, (ii) 1% of the number of shares of the Company's common stock outstanding on the first day of such fiscal year and (ii) a number of shares of the Company's common stock determined by the Company's board of directors. As of March 31, 2022, 4,298,784 shares of common stock were available for sale under the 2021 ESPP. The price at which stock is purchased under the 2021 ESPP is equal to 85% of the fair market value of the Company’s common stock on the lesser of either (i) the first business day of the Plan Period or (ii) the Exercise Date.
Stock-Based Compensation
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three months ended March 31, 2022 and 2021, was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Cost of product revenues | $ | 518 | | $ | 854 | | | | |
Sales and marketing | 2,813 | | | 15 | | | | | |
Research and development | 5,145 | | | 396 | | | | | |
General and administrative | 7,559 | | | 1,756 | | | | | |
Total stock-based compensation expense | $ | 16,035 | | $ | 3,021 | | | | |
In total, $0.5 million and $0.9 million of stock-based compensation expense was capitalized to inventory during the manufacturing process during the three months ended March 31, 2022 and 2021, respectively. An immaterial amount remained in inventory as of March 31, 2022.
Stock Options
A summary of stock option activity and related information for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) |
Outstanding at January 1, 2022 | 9,163,160 | | $ | 5.13 | | 6.40 |
Granted | — | | — | | |
Exercised | (294,856) | | 0.38 | | |
Forfeited | (74,964) | | 11.77 | | |
Expired | (14,833) | | 15.61 | | |
Outstanding at March 31, 2022 | 8,778,507 | | $ | 5.22 | | 6.50 |
Exercisable at March 31, 2022 | 6,151,757 | | $ | 2.89 | | 5.70 |
Vested and expected to vest at March 31, 2022 | 8,778,507 | | $ | 5.22 | | 6.50 |
There were no stock options granted during the three months ended March 31, 2022.
As of March 31, 2022, there was approximately $12.3 million of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.6 years, on a straight-line basis.
Restricted Stock Units
Under the 2014 and 2021 Plans, RSUs are generally subject to a 4-year vesting period, with 25% of the shares vesting one year from the vesting commencement date and quarterly thereafter over the remaining vesting term, but may be subject to other vesting conditions such as performance or market based conditions. Compensation expense is recognized ratably over the requisite service period.
A summary of RSU activity and related information for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Underlying Shares | | Weighted-average Grant Date Fair Value | | Aggregate Fair Value |
Outstanding, January 1, 2022 | 11,264,235 | | $ | 14.62 | | $ | 164,683 |
Granted | 5,003,537 | | 8.10 | | 40,529 |
Vested | (930,493) | | 15.93 | | (14,823) |
Forfeited | (5,204) | | 13.98 | | (73) |
Outstanding, March 31, 2022 | 15,332,075 | | $ | 12.41 | | $ | 190,316 |
As of March 31, 2022, there was approximately $171.5 million of total unrecognized compensation cost related to outstanding RSUs.
Market-Based Performance-Vesting RSUs
In September 2021, the Company issued 3,335,300 RSUs that vest based on the satisfaction of both a continued employment condition and the achievement of certain market-based performance goals. Market-based performance-vesting RSUs vest upon the achievement of certain stock price performance over a performance period. There are seven stock price targets which can be achieved over the performance period and are based on an average closing price of the Company’s common stock.
Market-based performance-vesting RSU activity for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Underlying Shares | | Weighted-average Grant Date Fair Value | | Aggregate Fair Value |
Outstanding, January 1, 2022 | $ | 3,335,300 | | | $ | 12.82 | | | $ | 42,759 | |
Granted | — | | — | | — |
Vested | — | | — | | — |
Forfeited | — | | — | | — |
Outstanding, March 31, 2022 | $ | 3,335,300 | | | $ | 12.82 | | | 42,759 |
Operational-Based Performance-Vesting RSUs
In September 2021, the Company issued 1,597,272 operational-based performance-vesting RSUs that vest based on the satisfaction of both a continued employment condition and the achievement of certain performance goals including meeting certain annual revenue targets and product development milestones.
The grant date fair value of operational-based performance-vesting RSUs was estimated based on the fair value of the Company’s common stock on the date of grant. Compensation costs are recorded when achievement of the performance goals is determined to be probable.
Operations-based performance-vesting RSU activity for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Underlying Shares | | Weighted-average Grant Date Fair Value | | Aggregate Fair Value |
Outstanding, January 1, 2021 | 1,597,272 | | $ | 16.00 | | $ | 25,556 |
Granted | — | | — | | — |
Vested | (532,424) | | 16.00 | | (8,519) |
Forfeited | — | | — | | — |
Outstanding, March 31, 2022 | 1,064,848 | | $ | 16.00 | | $ | 17,037 |
NOTE 13. INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted net income (loss) per share attributable to common stockholders is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method and the if-converted method. Dilutive potential common shares include stock options, non-vested shares, redeemable convertible preferred shares, convertible notes, restricted stock and similar equity instruments granted by the Company. Some restricted stock units vest upon certain performance and market conditions and as they vest, the shares will be included in outstanding common shares. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
Basic and diluted net income (loss) attributable to common holders per share is presented in conformity with the two- class method required for participating securities as the redeemable convertible preferred stock, common stock subject to restricted stock purchase agreements, early exercised options, and restricted shares are considered participating
securities. Under the two-class method, distributed and undistributed income allocated to participating securities are excluded from net income (loss) attributable to common stockholders for purposes of calculating basic and diluted income (loss) per share.
The following table reconciles net income and the weighted-average shares used in computing basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Numerator: | | | | | | | |
Net income (loss) | $ | 2,803 | | $ | 13,031 | | | | |
Minus: Income allocated to participating securities | — | | | 11,366 | | | | | |
Net income (loss) attributable to common stockholders – basic | $ | 2,803 | | $ | 1,665 | | | | |
| | | | | | | |
Plus: Income allocated to non-participating securities | — | | | 525 | | | | | |
Net income (loss) attributable to common stockholders - diluted | $ | 2,803 | | $ | 2,190 | | | | |
| | | | | | | |
Denominator: | | | | | | | |
Basic weighted-average common shares outstanding | 146,526,370 | | | 18,378,777 | | | | | |
Dilutive potential common stock issuable: | | | | | | | |
Common stock warrants | 72,395 | | | 73,804 | | | | | |
Preferred stock warrants | — | | | 74,149 | | | | | |
Stock options | 5,813,101 | | | 7,377,608 | | | | | |
Restricted stock units | 624,938 | | | — | | | | | |
Diluted weighted-average shares outstanding | 153,036,804 | | | 25,904,338 | | | | | |
| | | | | | | |
Net income (loss) attributable to common stockholders per share | | | | | | | |
Basic | $ | 0.02 | | $ | 0.09 | | | | |
Diluted | $ | 0.02 | | $ | 0.08 | | | | |
Outstanding anti-dilutive securities not included in the diluted net income (loss) per share attributable to common stockholders calculations were as follows (in common stock equivalent shares):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | |
Stock options | 2,701,855 | | | 2,926,821 | | | | | |
Restricted stock units | 9,634,182 | | | — | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Employee stock purchase plan – shares projected to be issued | 110,935 | | | — | | | | | |
Total | 12,446,972 | | | 2,926,821 | | | | | |
NOTE 14. INCOME TAXES
The Company’s effective income tax rate was 0% and 8.6% for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 and 2021 differed from the statutory tax rate primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets.
Refer to the Company’s financial statements included in its 2021 10-K for further information on income taxes.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Product Liability
The Company’s business exposes it to liability risks from its potential medical diagnostic products. Product liability claims could result in the payment of significant amounts of money and divert management’s attention from running the business. The Company may not be able to maintain insurance on acceptable terms, or the insurance may not provide adequate protection in the case of a product liability claim. To the extent that product liability insurance, if available, does not cover potential claims, the Company would be required to self-insure the risks associated with such claims. The Company believes it carries reasonably adequate insurance for product liability.
Product Warranty Reserve
The Company provides its customers with the right to receive a replacement of defective or nonconforming Cue Readers for a period of up to twelve months from the date of shipment. Although no explicit warranty is provided for Cue Cartridges, the Company may choose to replace Cue Cartridges that result in cancelled tests and invalid test results. All warranties are classified as current liabilities within the accrued liabilities and other current liabilities on the balance sheet. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are determined based on historical information that includes test failure rates, replacement frequency, and the overall replacement cost. The Company evaluates the reserve on a quarterly basis and makes adjustments when appropriate. Changes to test failure rates and overall replacement rates could have a material impact on our estimated liability.
The following table provides a reconciliation of the change in estimated warranty liabilities:
| | | | | |
| Amount |
Balance, December 31, 2021 | $ | 4,865 | |
Provision for warranties | 1,211 | |
Settlements | (841) | |
Balance, March 31, 2022 | $ | 5,235 | |
Standby Letters of Credit
As of December 31, 2020, the Company was party to certain letters of credit, primarily related to a letter of credit with Comerica Bank as collateral required by one of the Company’s vendors. During the year ended December 31, 2021, the Company entered into a Revolving Credit Agreement with a capacity of $130.0 million and all but one of the letters of credits were no longer required by the counterparties. The one letter of credit, totaling $6.0 million, was re-issued under the Revolving Credit Agreement.
In May 2021, the Company repaid the debt outstanding under the Revolving Credit Agreement and terminated the agreement in June 2021. Upon agreement with East West Bank and the other lenders to the Revolving Credit Agreement, the Company kept in place its outstanding letter of credit in the amount of $6.0 million. The letter of credit was increased to $12.0 million in July 2021. In November 2021, East West Bank issued an additional letter of credit in the amount of $0.5 million. All other obligations under the Revolving Credit Agreement have otherwise been terminated. In November 2021, $0.8 million of cash was restricted in relation to a customs surety on international imports. The Company also has outstanding letters of credit with Comerica Bank related to its real estate leases totaling $0.5 million as of March 31, 2022. All letters of credit are cash collateralized.