Item 1. Financial Statements
Cue Health Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts and share data)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 363,124 | | $ | 409,873 |
Restricted cash | 1,334 | | 13,837 |
Accounts receivable, net | 54,008 | | 104,589 |
Inventories | 139,047 | | 88,388 |
Prepaid expenses | 50,436 | | 45,889 |
Other current assets | 12,186 | | 7,446 |
Total current assets | 620,135 | | 670,022 |
| | | |
Property and equipment, net | 190,131 | | 177,456 |
| | | |
Operating lease right-of-use assets | 85,971 | | 79,474 |
Intangible assets, net | 10,936 | | 7,673 |
Other non-current assets | 6,902 | | 5,435 |
Total assets | $ | 914,075 | | $ | 940,060 |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 38,351 | | $ | 37,208 |
Accrued liabilities and other current liabilities | 75,820 | | 29,498 |
Income taxes payable | — | | 8,297 |
Deferred revenue, current | 85,576 | | 82,165 |
| | | |
Operating lease liabilities, current | 7,679 | | 7,147 |
Finance lease liabilities, current | 2,605 | | 2,621 |
Total current liabilities | 210,031 | | 166,936 |
| | | |
Deferred revenue, net of current portion | 10,283 | | 10,283 |
Operating leases liabilities, net of current portion | 46,455 | | 46,464 |
Finance lease liabilities, net of current portion | 1,990 | | 3,271 |
Other non-current liabilities | 4,943 | | 6,356 |
Total liabilities | 273,702 | | 233,310 |
Commitments and contingencies (Note 15) | | | |
Stockholders’ Equity (Deficit) | | | |
| | | |
Common stock, $0.00001 par value; 500,000,000 and 500,000,000 shares authorized, 147,834,377 and 146,402,991 issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 1 | | 1 |
Additional paid-in-capital | 760,637 | | 730,767 |
Accumulated deficit | (120,265) | | (24,018) |
Total stockholders’ equity | 640,373 | | 706,750 |
Total liabilities and stockholders’ equity | $ | 914,075 | | $ | 940,060 |
The accompanying notes are an integral part of these condensed financial statements.
Cue Health Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | |
Product revenue | $ | 84,351 | | | $ | 137,423 | | | $ | 261,805 | | | $ | 201,922 | |
Grant and other revenue | 3,349 | | | — | | | 5,305 | | | — | |
Total revenue | 87,700 | | | 137,423 | | | 267,110 | | | 201,922 | |
| | | | | | | |
Operating costs and expenses: | | | | | | | |
Cost of product revenue | 101,898 | | | 55,142 | | | 188,595 | | | 85,177 | |
Sales and marketing | 16,971 | | | 1,529 | | | 51,139 | | | 1,959 | |
Research and development | 44,000 | | | 4,662 | | | 72,787 | | | 12,071 | |
General and administrative | 25,411 | | | 11,382 | | | 52,321 | | | 23,252 | |
Restructuring expense | 1,883 | | | — | | | 1,883 | | | — | |
Total operating costs and expenses | 190,163 | | | 72,715 | | | 366,725 | | | 122,459 | |
(Loss) income from operations | (102,463) | | | 64,708 | | | (99,615) | | | 79,463 | |
| | | | | | | |
| | | | | | | |
Interest expense | (16) | | | (9,429) | | | (67) | | | (9,964) | |
Change in fair value of redeemable convertible preferred stock warrants | — | | | (190) | | | — | | | (190) | |
Change in fair value of convertible notes | — | | | (23,254) | | | — | | | (23,254) | |
| | | | | | | |
Other income, net | 43 | | | 24 | | | 49 | | | 61 | |
Net (loss) income before income taxes | (102,436) | | | 31,859 | | | (99,633) | | | 46,116 | |
| | | | | | | |
Income tax (benefit) expense | (3,386) | | | 12,050 | | | (3,386) | | | 13,276 | |
Net (loss) income | $ | (99,050) | | $ | 19,809 | | $ | (96,247) | | $ | 32,840 |
Net (loss) income per share attributable to common stockholders – basic | $ | (0.67) | | $ | 0.14 | | $ | (0.65) | | $ | 0.23 |
Weighted-average number of shares used in computation of net (loss) income per share attributable to common stockholders – basic | 147,498,162 | | | 18,822,474 | | | 147,014,951 | | | 18,617,247 | |
Net (loss) income per share attributable to common stockholders – diluted | $ | (0.67) | | $ | 0.14 | | $ | (0.65) | | $ | 0.22 |
Weighted-average number of shares used in computation of net (loss) income per share attributable to common stockholders – diluted | 147,498,162 | | | 26,241,564 | | | 147,014,951 | | | 26,036,337 | |
The accompanying notes are an integral part of these condensed financial statements.
Cue Health Inc.
CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| | | | | | | | | | | | | | Shares | | Amount | | | |
Balance at March 31, 2022 | | | | | | | | | | | | | | 146,958,296 | | $ | 1 | | $ | 746,352 | | $ | (21,215) | | $ | 725,138 |
Exercise of common stock options | | | | | | | | | | | | | | 219,960 | | — | | 242 | | — | | 242 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Tax withholding on exercise of stock options and issuance of shares from restricted stock units | | | | | | | | | | | | | | — | | — | | (2,749) | | — | | (2,749) |
| | | | | | | | | | | | | | | | | | | | | | |
Shares issued from restricted stock units | | | | | | | | | | | | | | 656,121 | | | — | | | — | | | — | | | — | |
Stock-based compensation | | | | | | | | | | | | | | — | | — | | 16,792 | | — | | 16,792 |
Net loss | | | | | | | | | | | | | | — | | — | | — | | (99,050) | | (99,050) |
Balance at June 30, 2022 | | | | | | | | | | | | | | 147,834,377 | | $ | 1 | | $ | 760,637 | | $ | (120,265) | | $ | 640,373 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Redeemable Convertible Preferred Stock | | Series B Redeemable Convertible Preferred Stock | | Series C Redeemable Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | |
Balance at March 31, 2021 | 8,350,743 | | $ | 7,519 | | 46,176,715 | | $ | 66,186 | | 28,998,607 | | $ | 102,618 | | | 28,618,529 | | $ | — | | $ | 12,135 | | $ | (97,405) | | $ | (85,270) |
Exercise of common stock options | — | | — | | — | | — | | — | | — | | | 425,957 | | — | | 227 | | — | | 227 |
Exercise of common stock warrant | — | | — | | — | | — | | — | | — | | | 84,118 | | — | | 77 | | — | | 77 |
Stock-based compensation expense from issuance of a fully vested warrant to vendor | — | | — | | — | | — | | — | | — | | | — | | — | | 1,239 | | — | | 1,239 |
| | | | | | | | | | | | | | | | | | | | | | |
Vesting of early exercised stock options | — | | — | | — | | — | | — | | — | | | — | | — | | 17 | | — | | 17 |
Stock-based compensation | — | | — | | — | | — | | — | | — | | | — | | — | | 2,569 | | — | | 2,569 |
Net income | — | | — | | — | | — | | — | | — | | | — | | — | | — | | 19,809 | | 19,809 |
Balance at June 30, 2021 | 8,350,743 | | $ | 7,519 | | 46,176,715 | | $ | 66,186 | | 28,998,607 | | $ | 102,618 | | | 29,128,604 | | $ | — | | $ | 16,264 | | $ | (77,596) | | $ | (61,332) |
The accompanying notes are an integral part of these condensed financial statements.
Cue Health Inc.
CONDENSED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| | | | | | | | | | | | | | Shares | | Amount | | | |
Balance at December 31, 2021 | | | | | | | | | | | | | | 146,402,991 | | $ | 1 | | $ | 730,767 | | $ | (24,018) | | $ | 706,750 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Exercise of common stock options | | | | | | | | | | | | | | 514,191 | | — | | 512 | | — | | 512 |
| | | | | | | | | | | | | | | | | | | | | | |
Tax withholding on exercise of stock options and issuance of shares from restricted stock units | | | | | | | | | | | | | | — | | — | | (3,468) | | — | | (3,468) |
| | | | | | | | | | | | | | | | | | | | | | |
Shares issued from restricted stock units | | | | | | | | | | | | | | 917,195 | | | — | | | — | | | — | | | — | |
Stock-based compensation | | | | | | | | | | | | | | — | | — | | 32,826 | | — | | 32,826 |
Net loss | | | | | | | | | | | | | | — | | — | | — | | (96,247) | | | (96,247) |
Balance at June 30, 2022 | | | | | | | | | | | | | | 147,834,377 | | $ | 1 | | $ | 760,637 | | $ | (120,265) | | $ | 640,373 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Redeemable Convertible Preferred Stock | | Series B Redeemable Convertible Preferred Stock | | Series C Redeemable Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | |
Balance at December 31, 2020 | 8,350,743 | | $ | 7,519 | | 46,176,715 | | $ | 66,186 | | 28,998,607 | | $ | 102,618 | | | 27,995,780 | | $ | — | | $ | 9,036 | | $ | (110,436) | | $ | (101,400) |
Exercise of common stock warrant | — | | — | | — | | — | | — | | — | | | 84,118 | | — | | 77 | | — | | 77 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Exercise of common stock options | — | | — | | — | | — | | — | | — | | | 1,048,706 | | — | | 258 | | — | | 258 |
Vesting of early exercised stock options | — | | — | | — | | — | | — | | — | | | — | | — | | 63 | | — | | 63 |
Stock-based compensation expense from issuance of a fully vested warrant to vendor | — | | — | | — | | — | | — | | — | | | — | | — | | 1,239 | | — | | 1,239 |
Stock-based compensation | — | | — | | — | | — | | — | | — | | | — | | — | | 5,591 | | — | | 5,591 |
Net income | — | | — | | — | | — | | — | | — | | | — | | — | | — | | 32,840 | | 32,840 |
Balance at June 30, 2021 | 8,350,743 | | $ | 7,519 | | 46,176,715 | | $ | 66,186 | | 28,998,607 | | $ | 102,618 | | | 29,128,604 | | $ | — | | $ | 16,264 | | $ | (77,596) | | $ | (61,332) |
The accompanying notes are an integral part of these condensed financial statements.
Cue Health Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash flows from operating activities | | | |
Net (loss) income | $ | (96,247) | | $ | 32,840 |
Adjustments to reconcile net income to net cash, cash equivalents and restricted cash used in operations | | | |
Depreciation and amortization | 21,585 | | | 14,500 | |
| | | |
Change in fair value of redeemable convertible preferred stock warrant liabilities | — | | | 190 | |
Change in fair value of convertible notes | — | | | 23,254 | |
Stock-based compensation expense | 32,826 | | | 6,830 | |
Loss on extinguishment of debt | — | | | 1,998 | |
Non-cash lease expense | 4,017 | | | 1,822 | |
Convertible notes issuance costs | — | | | 6,000 | |
Deferred income taxes | (2,214) | | | 588 | |
| | | |
| | | |
Non-cash interest expense | 176 | | | 230 | |
Inventory reserve (see Note 4, Inventories) | 30,581 | | | — | |
Product warranty reserve (see Note 4, Inventories) | 12,263 | | | — | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 50,581 | | | (36,109) | |
Inventories | (81,240) | | | (26,421) | |
Prepaid expenses and other current assets | (5,990) | | | (22,818) | |
| | | |
Other non-current assets | (1,094) | | | (676) | |
Operating lease right-of-use assets | (7,853) | | | — | |
Accounts payable, accrued liabilities and other current liabilities | 32,428 | | | 11,473 | |
Income taxes payable | (11,546) | | | — | |
Deferred revenue | 3,411 | | | (42,602) | |
Operating lease liabilities | (2,089) | | | (8,911) | |
Interest on finance leases | 94 | | | — | |
Net cash, cash equivalents and restricted cash used in operating activities | (20,311) | | | (37,812) | |
| | | |
Cash flows from investing activities | | | |
Purchase of property and equipment | (30,781) | | | (56,545) | |
Expenditures for software development | (3,899) | | | (2,351) | |
Net cash, cash equivalents and restricted cash used in investing activities | (34,680) | | | (58,896) | |
| | | |
Cash flows from financing activities | | | |
| | | |
Proceeds from convertible notes | — | | | 235,480 | |
| | | |
| | | |
Payments of issuance costs of convertible notes | — | | | (6,000) | |
Proceeds from exercise of common stock options | 512 | | | 258 | |
Proceeds from exercise of common stock warrant | — | | | 77 | |
| | | |
Payments of issuance costs of public offering | — | | | (1,610) | |
Proceeds from debt | — | | | 82,250 | |
Tax withholding on exercise of stock options | (3,468) | | | — | |
Proceeds from employee stock purchase plan activity | 685 | | | — | |
Debt issuance and prepayment costs | (599) | | | (2,128) | |
Repayment of debt | — | | | (87,684) | |
| | | | | | | | | | | |
Payments for finance leases | (1,391) | | | (864) | |
Net cash, cash equivalents and restricted cash (used in) provided by financing activities | (4,261) | | | 219,779 | |
| | | |
Net change in cash, cash equivalents and restricted cash | (59,252) | | | 123,071 | |
Cash, cash equivalents and restricted cash, beginning balance | 423,710 | | | 129,255 | |
Cash, cash equivalents and restricted cash, ending balance | $ | 364,458 | | | $ | 252,326 | |
| | | |
Reconciliation of cash, cash equivalents, and restricted cash | | | |
Cash and cash equivalents | $ | 363,124 | | | $ | 246,326 | |
Restricted cash, current | 1,334 | | | 6,000 | |
| | | |
Total cash, cash equivalents and restricted cash | $ | 364,458 | | | $ | 252,326 | |
| | | |
Supplemental disclosure for cash flow information | | | |
| | | |
Cash paid for interest | $ | 23 | | | $ | 760 | |
| | | |
Supplemental disclosure for non-cash investing and financing matters | | | |
Early exercised stock options liability | $ | — | | | $ | 63 | |
Right-of-use assets obtained in exchange for lease obligations | $ | 2,611 | | | $ | 38,717 | |
Prepaid rent reclassified to right-of-use assets | $ | 50 | | | $ | 15,966 | |
Purchase of property and equipment included in accounts payable | $ | 8,150 | | | $ | 11,618 | |
| | | |
| | | |
Initial public offering costs included in accounts payable | $ | — | | | $ | 2,301 | |
Software development costs included in accounts payable | $ | 704 | | | $ | — | |
The accompanying notes are an integral part of these condensed financial statements.
Cue Health Inc.
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 and six months ended June 30, 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 usage and recoverability of its inventories and 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. The majority of revenue to date is from customers located in the United States and the majority of long-lived assets are located in the United States. The Company had an immaterial amount of revenue from customers located in Canada and Singapore and an immaterial amount of long-lived assets are located in Mexico.
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.
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 six months ended June 30, 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 and six months ended June 30, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Public sector entities | $ | 3,823 | | | $ | 105,029 | | | $ | 5,433 | | | $ | 167,120 | |
Private sector customers | 80,528 | | | 32,394 | | | 256,372 | | | 34,802 | |
Total product revenue | $ | 84,351 | | | $ | 137,423 | | | $ | 261,805 | | | $ | 201,922 | |
Product revenue for the three and six months ended June 30, 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 (loss) margin for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Product revenue | $ | 84,351 | | $ | 137,423 | | $ | 261,805 | | $ | 201,922 |
Cost of product revenue | 101,898 | | 55,142 | | 188,595 | | 85,177 |
Product gross profit (loss) | $ | (17,547) | | $ | 82,281 | | $ | 73,210 | | $ | 116,745 |
Product gross profit (loss) margin | (21) | % | | 60 | % | | 28 | % | | 58 | % |
During the three and six months ended June 30, 2022, the Company recorded a charge of $42.8 million (the “inventory charge”) primarily related to excess and obsolescent inventory that is reflected within the cost of product revenue line item of the condensed statements of operations. This charge is primarily related to an overbuild of inventory and, in addition, identification of certain products which are not expected to perform in line with the Company’s quality
standards. Of the $42.8 million charge, $30.6 million was recorded to inventory reserve and $12.3 million was recorded to product warranty reserve.
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.
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 $1.6 million and $1.1 million as of June 30, 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 six months ended June 30, 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 | 3,411 | |
Revenue recognized related to contract liability balance at the beginning of the period | — | |
Balance at June 30, 2022 | $ | 95,859 | |
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 $3.3 million and $5.3 million of revenue related to the agreement with BARDA during the three and six months ended June 30, 2022, respectively. The Company generated $0 of revenue related to the agreement with BARDA during the three and six months ended June 30, 2021.
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 June 30, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $0.8 million and $0.3 million, respectively.
NOTE 4. INVENTORIES
As of June 30, 2022 and December 31, 2021, the Company’s inventories consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Raw materials | $ | 87,092 | | | $ | 46,273 |
Work-in-process | 11,218 | | | 10,920 |
Finished goods | 73,670 | | | 33,863 |
| | | |
Reserve | (32,933) | | | (2,668) |
Total inventories | $ | 139,047 | | | $ | 88,388 |
During the three and six months ended June 30, 2022, the Company recorded a charge of $42.8 million primarily related to excess and obsolescent inventory that is reflected within the cost of product revenue line item of the condensed statements of operations. This charge is primarily related to an overbuild of inventory and, in addition, identification of certain products which are not expected to perform in line with the Company’s quality standards. Of the $42.8 million charge, $30.6 million was recorded to inventory reserve and $12.3 million was recorded to product warranty reserve.
NOTE 5. PREPAID EXPENSES
As of June 30, 2022 and December 31, 2021, the Company’s prepaid expenses consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Prepaid expense | $ | 34,720 | | | $ | 30,153 |
Prepaid inventory | 15,716 | | | 15,736 |
Total prepaid expenses | $ | 50,436 | | | $ | 45,889 |
NOTE 6. PROPERTY AND EQUIPMENT, NET
As of June 30, 2022 and December 31, 2021, the Company’s property and equipment, net consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Construction in progress | $ | 21,635 | | | $ | 4,082 |
Machinery and equipment | 207,091 | | | 195,001 |
Leasehold improvements | 21,703 | | | 19,302 |
Furniture and fixtures | 1,597 | | | 740 |
Property and equipment | 252,026 | | | 219,125 |
Accumulated depreciation and amortization | (61,895) | | | (41,669) |
Total property and equipment, net | $ | 190,131 | | $ | 177,456 |
Depreciation and amortization expense related to property and equipment was $10.2 million and $8.0 million for the three months ended June 30, 2022 and 2021, respectively. Depreciation and amortization expense related to property and equipment was $20.2 million and $12.8 million for the six months ended June 30, 2022 and 2021, respectively. The carrying value of assets under finance leases within property and equipment as of June 30, 2022 and December 31, 2021 was $8.5 million and $9.8 million, respectively.
NOTE 7. INTANGIBLE ASSETS
As of June 30, 2022 and December 31, 2021, the Company’s intangible assets consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Capitalized software | $ | 13,582 | | | $ | 5,638 |
Accumulated amortization | (3,408) | | | (2,067) |
Capitalized software, net | 10,174 | | | 3,571 |
In-process software development | 762 | | | 4,102 |
Total intangible assets | $ | 10,936 | | | $ | 7,673 |
Amortization expense related to intangible assets placed in service was $0.8 million and $1.4 million for the three and six months ended June 30, 2022, respectively. Amortization expense related to intangible assets placed in service was $1.5 million and $1.7 million for the three and six months ended June 30, 2021, respectively. Estimated amortization expense for each of the years ending December 31 is as follows:
| | | | | |
2022 (excluding the six months ended June 30, 2022) | $ | 1,789 |
2023 | 3,578 |
2024 | 3,137 |
2025 | 1,670 |
Total amortization expense | $ | 10,174 |
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.
There were no new material leases entered into during the three and six months ended June 30, 2022.
The right-of-use assets and lease liabilities recognized on the Company’s balance sheet as of June 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Location | | June 30, 2022 | | December 31, 2021 |
Assets | | | | | | |
Right-of-use assets operating leases | | Operating lease right-of-use assets | | $ | 85,971 | | | $ | 79,474 | |
Right-of-use assets finance leases | | Property and equipment, net | | 8,543 | | | 9,821 | |
Liabilities | | | | | | |
Operating lease liabilities (current) | | Operating lease liabilities, current | | 7,679 | | | 7,147 | |
Finance lease liabilities (current) | | Finance lease liabilities, current | | 2,605 | | | 2,621 | |
Operating lease liabilities (non-current) | | Operating lease liabilities, net of current portion | | 46,455 | | | 46,464 | |
Finance lease liabilities (non-current) | | Finance lease liabilities, net of current portion | | 1,990 | | | 3,271 | |
The components of lease expense for the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | $ | 2,795 | | | $ | 388 | | | $ | 5,557 | | | $ | 2,967 | |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | 640 | | | 80 | | | 1,279 | | | 706 | |
Interest on lease liabilities | 43 | | | 18 | | | 94 | | | 100 | |
Total lease cost | $ | 3,478 | | | $ | 486 | | | $ | 6,930 | | | $ | 3,773 | |
NOTE 9. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Accrued purchases (1) | $ | 20,374 | | | $ | 285 | |
Accrued payroll and benefits | 19,144 | | | 13,693 | |
Accrued expenses | 10,835 | | | 6,371 | |
Accrued sales tax | 8,011 | | | 4,284 | |
Product warranty reserve (See Note 15. Commitments and Contingencies) | 15,812 | | | 4,865 | |
Restructuring accrual | 1,644 | | | — | |
Total accrued liabilities and other current liabilities | $ | 75,820 | | | $ | 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 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 six months ended June 30, 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 was 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. The Company recorded a loss of $23.3 million related to the change in estimated fair value of the Convertible Notes in its statement of operations for the six months ended June 30, 2021. 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.
Secured Revolving Facility Agreement
On June 30, 2022, the Company entered into a loan and security agreement (the “2022 Revolving Facility Agreement”) among the Company, the lenders from time to time party thereto and East West Bank, as collateral agent and administrative agent (“Agent”). The 2022 Revolving Facility Agreement provides for a $100.0 million secured revolving credit facility, with a $20.0 million letter of credit subfacility. As of June 30, 2022, there were no revolving loans outstanding and $12.5 million aggregate face amount of letters of credit outstanding under the 2022 Revolving Facility Agreement, which reduces the availability to borrow under the revolving credit facility to $87.5 million. The Company recorded $0.6 million in deferred financings costs in connection with the 2022 Revolving Facility Agreement. This balance will be amortized over two years and is classified in other non-current assets since no funds were drawn on the 2022 Revolving Facility Agreement.
The revolving loans are available subject to the Company maintaining an asset coverage ratio of not less than 1.20 to 1.00, measured as (x) the sum of specified cash and cash equivalents subject to liens in favor of Agent plus 80% of eligible accounts receivable less the amount of the Company’s outstanding sales tax liability to (y) the principal amount of the outstanding obligations under the 2022 Revolving Facility Agreement. The revolving commitments terminate and the principal amount of outstanding revolving loans, together with accrued and unpaid interest, is due and payable on June 30, 2024.
The revolving loans accrue interest at the greater of the prime rate and 3.50%. Interest on the revolving loans is payable monthly in arrears. The Company may borrow, prepay and reborrow revolving loans, without premium or penalty. The Company is required to pay a prepayment fee of 1.0% if the revolving commitments are terminated prior to the maturity date. The Company is also obligated to pay other customary fees for a loan facility of this size and type.
The Company’s obligations under the 2022 Revolving Facility Agreement are secured by substantially all of the Company’s assets, and will be guaranteed by, and secured by substantially all of the assets of, its future domestic subsidiaries. As of the closing date, there were no guarantors.
The 2022 Revolving Facility Agreement requires the Company to maintain a current ratio of not less than 1.20 to 1.00, measured quarterly. The 2022 Revolving Facility Agreement also requires the Company to maintain at least six months remaining liquidity, determined as set forth in the 2022 Revolving Facility Agreement. Additionally, the 2022 Revolving Facility Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its subsidiaries to, among other things, dispose of assets, effect certain mergers, incur debt, grant liens, pay dividends and distributions on their capital stock, make investments and acquisitions, and enter into transactions with affiliates, in each case subject to customary exceptions for a loan facility of this size and type.
The events of default under the 2022 Revolving Facility Agreement include, among others, payment defaults, material misrepresentations, breaches of covenants, cross defaults with certain other material indebtedness, bankruptcy and insolvency events, the occurrence of a material adverse effect, a change of control and judgment defaults. The occurrence of an event of default could result in the acceleration of the Company’s obligations under the 2022 Revolving Facility Agreement, the termination of the lenders’ commitments, a 2% increase in the applicable rate of interest and the exercise by Agent and the lenders of other rights and remedies provided for under the 2022 Revolving Facility Agreement or applicable law.
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 June 30, 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 June 30, 2022, 5,879,440 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. 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. As of June 30, 2022, 4,298,784 shares of common stock were available for sale under the 2021 ESPP.
Stock-Based Compensation
Stock-based compensation expense related to awards issued under the Company's incentive compensation plans for the three and six months ended June 30, 2022 and 2021, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of product revenues | $ | 885 | | $ | 343 | | $ | 1,402 | | $ | 1,197 |
Sales and marketing | 2,464 | | | 11 | | | 5,277 | | | 26 | |
Research and development | 6,423 | | | 194 | | | 11,568 | | | 590 | |
General and administrative | 7,020 | | | 2,021 | | | 14,579 | | | 3,778 | |
Total stock-based compensation expense | $ | 16,792 | | $ | 2,569 | | $ | 32,826 | | $ | 5,591 |
In total, $0.9 million and $1.4 million of stock-based compensation expense was capitalized to inventory during the manufacturing process during the three and six months ended June 30, 2022, respectively. An immaterial amount remained in inventory as of June 30, 2022.
Stock Options
A summary of stock option activity and related information for the six months ended June 30, 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 | (515,705) | | 0.55 | | |
Forfeited | (133,951) | | 13.24 | | |
Expired | (49,766) | | 13.99 | | |
Outstanding at June 30, 2022 | 8,463,738 | | $ | 5.23 | | 6.29 |
Exercisable at June 30, 2022 | 6,203,101 | | $ | 3.20 | | 5.53 |
Vested and expected to vest at June 30, 2022 | 8,463,738 | | $ | 5.23 | | 6.29 |
There were no stock options granted during the six months ended June 30, 2022.
As of June 30, 2022, there was approximately $10.8 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 2.4 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 six months ended June 30, 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 | 7,159,719 | | 7.50 | | 53,698 |
Vested | (1,507,394) | | 14.80 | | (22,309) |
Forfeited | (88,848) | | 8.98 | | (798) |
Outstanding, June 30, 2022 | 16,827,712 | | $ | 11.60 | | $ | 195,274 |
As of June 30, 2022, there was approximately $160.1 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 six months ended June 30, 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, June 30, 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 six months ended June 30, 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, June 30, 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 June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net (loss) income | $ | (99,050) | | $ | 19,809 | | $ | (96,247) | | $ | 32,840 |
Minus: Income allocated to participating securities | — | | | 17,087 | | | — | | | 28,565 | |
Net (loss) income attributable to common stockholders – basic | $ | (99,050) | | $ | 2,722 | | $ | (96,247) | | $ | 4,275 |
| | | | | | | |
Plus: Income allocated to non-participating securities | — | | | 838 | | | — | | | 1,332 | |
Net (loss) income attributable to common stockholders - diluted | $ | (99,050) | | $ | 3,560 | | $ | (96,247) | | $ | 5,607 |
| | | | | | | |
Denominator: | | | | | | | |
Basic weighted-average common shares outstanding | 147,498,162 | | | 18,822,474 | | | 147,014,951 | | | 18,617,247 | |
Dilutive potential common stock issuable: | | | | | | | |
Common stock warrants | — | | | 89,551 | | | — | | | 89,551 | |
Preferred stock warrants | — | | | 74,149 | | | — | | | 74,149 | |
Stock options | — | | | 7,255,390 | | | — | | | 7,255,390 | |
Restricted stock units | — | | | — | | | — | | | — | |
Diluted weighted-average shares outstanding | 147,498,162 | | | 26,241,564 | | | 147,014,951 | | | 26,036,337 | |
| | | | | | | |
Net (loss) income attributable to common stockholders per share | | | | | | | |
Basic | $ | (0.67) | | $ | 0.14 | | $ | (0.65) | | $ | 0.23 |
Diluted | $ | (0.67) | | $ | 0.14 | | $ | (0.65) | | $ | 0.22 |
In periods of net losses, potentially dilutive securities are not included in the calculation of diluted net income (loss) per share because to do so would be anti-dilutive.
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 June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Stock options | 8,463,738 | | | 2,838,421 | | | 8,463,738 | | | 2,838,421 | |
Restricted stock units | 16,827,712 | | | — | | | 16,827,712 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Employee stock purchase plan – shares projected to be issued | 148,963 | | | — | | | 148,963 | | | — | |
Total | 25,440,413 | | | 2,838,421 | | | 25,440,413 | | | 2,838,421 | |
NOTE 14. INCOME TAXES
The Company’s effective income tax rate for the three and six months ended June 30, 2022 was 3.3% and 3.4%, respectively. The Company’s effective income tax rate for the three and six months ended June 30, 2021 was 37.8% and 28.8%.
The effective tax rate for the six months ended June 30, 2022, differs from the statutory rate due to changes in the amount of the valuation allowance recorded against the Company’s deferred tax assets and the impact of certain state tax credits recorded in the period ended June 30, 2022.
The effective tax rate for the six months ended June 30, 2021, differs from the statutory rate due to changes in the valuation allowance, certain non-deductible expenses, and state income taxes.
During the six months ended June 30, 2022, the Company completed the application process to obtain income tax credits from the state of California related to the California Competes program and recorded a benefit of approximately $1.7 million.
During the six months ended June 30, 2022, the Company recorded amounts related to uncertain tax positions of approximately $0.3 million.
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 | 6,496 | |
Provision for warranties related to the inventory charge (see Note 4, Inventories) | 12,263 | |
Settlements | (7,812) | |
Balance, June 30, 2022 | $ | 15,812 | |
Restructuring
Restructuring actions were taken in the second quarter of 2022 in order to reduce costs and improve operations and manufacturing efficiency. As a result of these actions, for the three and six months ended June 30, 2022, the Company recorded $1.9 million of charges, which were reported as restructuring expense in the accompanying condensed statements of operations. This was accounted for as a one-time termination benefit communicated by period end without an additional service component, so the charge represents the total amount expected to be incurred. As of June 30, 2022, $1.6 million of the charges were unpaid which is included within accrued liabilities and other current liabilities in the accompanying condensed balance sheets.
Standby Letters of Credit
During the year ended December 31, 2021, 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.
On June 30, 2022, these letters of credit were re-issued under the 2022 Revolving Facility Agreement. The 2022 Revolving Facility Agreement provides for a $100.0 million secured revolving credit facility, with a $20.0 million letter of credit subfacility. As of June 30, 2022, there were no revolving loans outstanding and $12.5 million aggregate face amount of letters of credit outstanding under the 2022 Revolving Facility Agreement, which reduces the availability to borrow under the revolving credit facility to $87.5 million.
Restricted Cash
In November 2021, $0.8 million of cash was restricted in relation to a customs surety on international imports which remains restricted as of June 30, 2022. The Company also has outstanding cash collateralized letters of credit with Comerica Bank related to its real estate leases totaling $0.5 million as of June 30, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a health technology company, and our mission is to enable personalized, proactive and informed healthcare that empowers people to live their healthiest lives. Our proprietary platform, the Cue Integrated Care Platform, which is comprised of our Cue Health Monitoring System, Cue Data and Innovation Layer, Cue Virtual Care Delivery Apps, and Cue Ecosystem Integrations and Apps, enables lab-quality diagnostics-led care at home, at work or at the point of care. Our platform is designed to empower stakeholders across the healthcare ecosystem, including consumers, providers, enterprises and payors with paradigm-shifting access to diagnostic and health data to inform care decisions. We are helping pioneer a new continuous care model that we believe has the potential to significantly improve the user experience, provide measurable and actionable clinical insights, and increase efficiency within the healthcare ecosystem. We believe this model, powered by our platform, will allow users to actively manage their health, which we believe will lead to improved health outcomes and a more resilient, connected, and efficient healthcare ecosystem for all stakeholders.
The Cue Integrated Care Platform consists of the following hardware and software components: (1) our revolutionary Cue Health Monitoring System, made up of a portable, durable and reusable reader, or Cue Reader, a single-use test cartridge, or Cue Cartridge, and a sample collection wand, or Cue Wand, (2) our Cue Data and Innovation Layer, with cloud-based data and analytics capability, (3) our Cue Virtual Care Delivery Apps, including our consumer-friendly App and our Cue Enterprise Dashboard, and (4) our Cue Ecosystem Integrations and Apps, which allow for integrations with third party applications and sensors.
Our Cue Health Monitoring System is designed to deliver a broad menu of tests through one system, enabling two major testing modalities, nucleic acid amplification, or NAAT, and immunoassays, in one device. Our system is designed to handle different sample types, including saliva, blood, urine and swabs, and can detect nucleic acids, small molecules, proteins and cells. We believe this will enable us to address many of the diagnostic tests conducted in clinical laboratories,
such as tests addressing indications in respiratory health, sexual health, cardiac and metabolic health, women’s health, men’s health, and chronic disease management.
Initial Public Offering
The Company’s registration statement related to its initial public offering (“IPO”) was declared effective on September 23, 2021, and the Company’s common stock began trading on the Nasdaq Global Stock Market (“Nasdaq”) on September 24, 2021. On September 28, 2021, the Company completed its 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 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 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.
COVID-19 Impact
While the ongoing global COVID-19 pandemic has adversely impacted global commercial activity, it served as a catalyst to accelerate our product pipeline and commercialization of our platform. We began selling and recording product revenue for our COVID-19 test in August 2020 after obtaining our first FDA EUA in June 2020. Currently, all of our product revenue is related to sales of our Cue COVID-19 test.
In December 2020, the FDA issued EUA for two COVID-19 vaccines and in February 2021, the FDA issued a third EUA for a COVID-19 vaccine. The widely-administered use of an efficacious vaccine or the availability of therapeutic treatments for COVID-19 may reduce the demand for our COVID-19 test and could cause the COVID-19 diagnostic testing market to fail to grow or to decline. However, we believe the need for ongoing detection and monitoring will continue even after effective vaccines have been widely distributed and administered. We also believe COVID-19 will remain endemic for the foreseeable future and demand for a fast and accurate test to confirm a diagnosis and seek timely and appropriate treatment may fluctuate based on COVID-19 infection rates and variants. Even while vaccine efforts are underway, public health measures, like testing, will likely need to stay in effect to protect against COVID-19. However, given the unpredictable nature of the COVID-19 pandemic, the development and potential size of the COVID-19 diagnostic testing market is highly uncertain.
Certain Key Factors Affecting Our Performance
Manufacturing Capacity
We manufacture all of our Cue Cartridges in our vertically integrated facilities in San Diego, California. We also produce all of our biochemistry in-house, including critical enzymes, antibodies and primers for our Cue Cartridges. Production of our Cue Readers is performed for us by third-party contract manufacturers and production of our Cue Wands is performed by third-party contract manufacturers. We continue to optimize our manufacturing capabilities, including our fully automated production pods. A production pod is a free standing, modular environmentally controlled structure containing an automated cartridge production line. Our performance will depend on our ability to manufacture products efficiently at the quantities required to meet customer demand and quality to meet our internal standards.
Investments in Our Growth
We expect to make continued investments in our business to drive growth and to deliver our business strategies. We plan to invest in sales and marketing to drive demand for our products and services as well as research and development to enhance our platform and bring additional tests to market. We also intend to continue to invest in our supply chain and logistics operations to meet customer demand. As we continue to scale our business, we expect to hire additional personnel and incur additional expenses, including those expenses in connection with our becoming a public company.
Expanding Our Customer Base
Following the completion of our obligations under the U.S. DoD Agreement in December 2021, the future commercial success of our diagnostic products is dependent on our ability to broaden our customer base beyond the U.S. government and public sector to include enterprise employers, healthcare providers and direct-to-consumer. As a result, our long term growth depends on our ability to renew and acquire new customers. Current key strategic relationships include BARDA, Google LLC, or Google, the Mayo Clinic, the National Basketball Association, Major League Baseball, and Henry Schein, Inc. We intend to leverage our success with our COVID-19 test and the expansion of our manufacturing capabilities to enable broad distribution of our Cue Readers and awareness of our platform across different groups of customers and to enhance pull-through of our future tests.
Enhancing and Expanding Our Menu of Tests and Software Capabilities
Currently, our only commercially available test is our molecular COVID-19 test. A key part of our growth strategy is to expand our menu of tests to include other diseases, ailments and general health markers, which we expect will support our growth and continue to contribute to the utility of our platform, including the Cue Health Monitoring System. We are currently developing tests in the fields of respiratory health, sexual health, cardiac and metabolic health, women's health, men's health, and chronic disease management. As we continue to develop and expand our menu of tests, we have made, and will continue to make, significant investments in our business, particularly in research and development, sales and marketing and the hiring of additional personnel. Investing in research and development will allow us to develop new tests as well as enhance our current product offerings and our Cue Integrated Care Platform. To build out our menu of tests and bring additional products to market, we will need to hire additional personnel, such as engineers and researchers, as well as develop robust sales and marketing and customer support teams to be able to sell our products. We have filed de novo submission to the FDA for full clearance of our molecular COVID-19 test.
Regulatory Clearance of Our Diagnostic Products
Our commercial success will depend upon a number of factors, some of which are beyond our control, including the receipt of regulatory clearances, approvals or authorizations for existing or new product offerings by us, product enhancements, or additions to our proprietary intellectual property portfolio. While we have received two EUAs for our COVID-19 test, a CE mark in the European Union, an Interim Order authorization from Health Canada, regulatory approval from CDSCO, authorization from Singapore Health Sciences Authority, and registration with the Qatar Ministry of Health, our COVID-19 test has not been FDA cleared or approved and is only authorized for emergency use during the declaration that circumstances exist justifying the authorization of emergency use, and this declaration could be terminated, or our authorization could be revoked in the future. We will need to seek additional regulatory approval for our COVID-19 test if the EUA declaration or Interim Order is terminated or otherwise revised or revoked, and we will need to seek regulatory authorization, clearance or approval for our other diagnostic products in development. In addition, we will not be able to commercialize any other tests for our platform unless we obtain required regulatory clearances or other necessary approvals or authorizations. As such, our ability to navigate, obtain and maintain the required regulatory clearances, approvals or authorizations, as well as comply with other regulatory requirements, for our products will in part drive our results of operations and impact our business.
Reimbursement and Insurance Coverage
We have been granted two EUAs by the FDA for our COVID-19 test for point-of-care and at-home and over-the-counter indications. The commercial success of our COVID-19 test, and any of our subsequently developed tests, is dependent on a customer’s ability to be able to pay for or otherwise be reimbursed for the purchase of a test, whether out-of-pocket, by insurance or from a governmental or other third-party payor. We believe payment for our products, including our Cue COVID-19 Test Kits, will be billable by a physician, reimbursable by government payors or insurance companies, paid for by a self-insured employer, or eligible under FSA and HSA guidelines. For example, most of our contemplated future tests that are currently offered by others through central labs are reimbursable by health plans and governmental payors if properly ordered by a physician. These third-party payors decide which products will be covered and establish reimbursement levels for those products. Coverage criteria and reimbursement rates for clinical laboratory tests are subject to adjustment by payors, and current reimbursement rates could be reduced, or coverage criteria restricted in the future. If the Cue Health Monitoring System, including any of our current or future tests, are not reimbursable or covered by insurance, our business may be materially and adversely impacted.
Seasonality
We anticipate that fluctuations in customer and user demand for our COVID-19 test may be similar to those related to influenza, which typically increases during the fall and winter seasons. Although our products will be available throughout the year, we anticipate that we may experience higher sales during the fall and winter seasons, relative to the
spring and summer seasons. However, as our portfolio of diagnostic offerings increases beyond our COVID-19 test, we expect the impact of this seasonality on our results to decrease.
Results of Operations
The following table sets forth a summary of our results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
(dollars in thousands) | (unaudited) |
Revenue: | | | | | | | |
Product revenue | $ | 84,351 | | | $ | 137,423 | | | $ | 261,805 | | | $ | 201,922 | |
Grant and other revenue | 3,349 | | | — | | | 5,305 | | | — | |
Total revenue | 87,700 | | | 137,423 | | | 267,110 | | | 201,922 | |
Operating costs and expenses: | | | | | | | |
Cost of product revenue | 101,898 | | | 55,142 | | | 188,595 | | | 85,177 | |
Sales and marketing | 16,971 | | | 1,529 | | | 51,139 | | | 1,959 | |
Research and development | 44,000 | | | 4,662 | | | 72,787 | | | 12,071 | |
General and administrative | 25,411 | | | 11,382 | | | 52,321 | | | 23,252 | |
Restructuring expense | 1,883 | | | — | | | 1,883 | | | — | |
Total operating costs and expenses | 190,163 | | | 72,715 | | | 366,725 | | | 122,459 | |
(Loss) Income from operations | (102,463) | | | 64,708 | | | (99,615) | | | 79,463 | |
Interest expense | (16) | | | (9,429) | | | (67) | | | (9,964) | |
Change in fair value of redeemable convertible preferred stock warrants | — | | | (190) | | | — | | | (190) | |
Change in fair value of convertible notes | — | | | (23,254) | | | — | | | (23,254) | |
| | | | | | | |
Other income, net | 43 | | | 24 | | | 49 | | | 61 | |
Net (loss) income before income taxes | (102,436) | | | 31,859 | | | (99,633) | | | 46,116 | |
Income tax (benefit) expense | (3,386) | | | 12,050 | | | (3,386) | | | 13,276 | |
Net (loss) income | $ | (99,050) | | $ | 19,809 | | $ | (96,247) | | $ | 32,840 |
Net (loss) income per share attributable to common stockholders – diluted | $ | (0.67) | | $ | 0.14 | | $ | (0.65) | | $ | 0.22 |
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table sets forth a summary of our results of operations for the three months ended June 30, 2022 and 2021 and the changes between periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $ Change | | % Change |
(dollars in thousands) | (unaudited) |
Revenue: | | | | | | | |
Product revenue | $ | 84,351 | | $ | 137,423 | | $ | (53,072) | | (39)% |
Grant and other revenue | 3,349 | | — | | 3,349 | | n.m |
Total revenue | 87,700 | | 137,423 | | (49,723) | | (36%) |
Operating costs and expenses: | | | | | | | |
Cost of product revenue | 101,898 | | 55,142 | | 46,756 | | 85% |
Sales and marketing | 16,971 | | 1,529 | | 15,442 | | 1,010% |
Research and development | 44,000 | | 4,662 | | 39,338 | | 844% |
General and administrative | 25,411 | | 11,382 | | 14,029 | | 123% |
Restructuring expense | 1,883 | | — | | 1,883 | | n.m |
Total operating costs and expenses | 190,163 | | 72,715 | | 117,448 | | 162% |
(Loss) Income from operations | (102,463) | | 64,708 | | (167,171) | | (258%) |
Interest expense | (16) | | (9,429) | | 9,413 | | (100%) |
Change in fair value of redeemable convertible preferred stock warrants | — | | (190) | | 190 | | (100%) |
Change in fair value of convertible notes | — | | | (23,254) | | | 23,254 | | | (100%) |
| | | | | | | |
Other income, net | 43 | | 24 | | 19 | | 79% |
Net (loss) income before income taxes | (102,436) | | | 31,859 | | | (134,295) | | | (422) | % |
Income tax (benefit) expense | (3,386) | | | 12,050 | | | (15,436) | | | (128) | % |
Net (loss) income | $ | (99,050) | | $ | 19,809 | | $ | (118,859) | | (600) | % |
Net (loss) income per share attributable to common stockholders – diluted | $ | (0.67) | | $ | 0.14 | | $ | (0.81) | | (595) | % |
n.m. = not meaningful
Revenue was $87.7 million in the three months ended June 30, 2022, compared to $137.4 million in the three months ended June 30, 2021. The decrease was primarily due to the completion of our obligations under the U.S. DoD Agreement in December 2021 which was offset by an increase in sales to private customers. Revenue during the three months ended June 30, 2022 was primarily driven by product sales to private sector customers of $80.5 million along with product sales to public sector clients of $3.8 million.
Cost of Product Revenue was $101.9 million in the three months ended June 30, 2022, compared to $55.1 million in the three months ended June 30, 2021. This increase was primarily due to the inventory charge of $42.8 million. Our product gross profit margin, or product gross profit as a percentage of product revenue, was a loss of approximately 21% in the three months ended June 30, 2022 compared to approximately 60%, in the three months ended June 30, 2021. This decrease was primarily due to the inventory charge, as well as supply chain constraints and associated higher component, transport costs, customer mix and a reduction in overall production volume relative to our manufacturing capacity.
Sales and Marketing Expense was $17.0 million in the three months ended June 30, 2022, compared to $1.5 million in the three months ended June 30, 2021. This increase related to increased sales and marketing personnel costs to support a broadening of our customer base, planned additions to our product offering and higher expenses related to our overall marketing and brand expansion efforts.
Research and Development Expense was to $44.0 million in the three months ended June 30, 2022, compared to $4.7 million in the three months ended June 30, 2021. This increase was primarily driven by additional headcount, materials and other resource utilization associated with the expansion of our platform, including new test development and
overall enhancement of our software platform for products under development, as well as costs related to the clinical studies conducted for our submissions to the FDA requiring 510(k) clearances for of our COVID-19 and influenza tests and EUA of our COVID-19 / influenza multiplex test.
General and Administrative Expense was $25.4 million in the three months ended June 30, 2022 compared to $11.4 million in the three months ended June 30, 2021. This increase was primarily related to an increase in stock-based compensation expenses, headcount growth to support our overall expansion as well as accounting and other consulting-related costs to support our operations as a public company.
Interest Expense was $0.0 million in the three months ended June 30, 2022 compared to $9.4 million in the three months ended June 30, 2021. This decrease was primarily driven by debt repayment activity in the prior year. Our interest expense prior to February 2021 primarily consisted of expense related to our prior loan and security agreement with Comerica Bank. In February 2021, we entered into the Revolving Credit Agreement. In connection with the Revolving Credit Agreement, we repaid outstanding amounts of $5.4 million and terminated the 2015 Credit Agreement we initially entered into in May 2015. In May 2021, we repaid the outstanding balance under the Revolving Credit Agreement. In June 2021, we terminated the Revolving Credit Agreement.
Change in Fair Value of Convertible Notes was $0 and $23.3 million in the three months ended June 30, 2022 and 2021, respectively reflecting fair value adjustments associated with the Convertible Notes issued by us in May 2021. We did not incur any gains or losses associated with changes in fair value of the Convertible Notes during the three months ended June 30, 2022 as the Convertible Notes were not outstanding during that period.
Income Tax (Benefit) Expense was $(3.4) million in the three months ended June 30, 2022 compared to $12.1 million in the three months ended June 30, 2021. Our effective tax rate was a benefit of 3.3% in the three months ended June 30, 2022, compared to 37.8% in the three months ended June 30, 2021. The fluctuation in our provision/(benefit) and effective tax rate was primarily due to the net pre-tax loss generated by the Company during the three months ended June 30, 2022, and the benefit from the approval of the California Competes state income tax credits. The tax expense recorded for the three months ended June 30, 2021 was primarily related to the tax liability arising from income from operations which exceeded available net operating loss carryforwards and the discrete impact of the non-deductible items.
Comparison of the Six Months Ended June 30, 2022 and 2021
The following table sets forth a summary of our results of operations for the six months ended June 30, 2022 and 2021 and the changes between periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change | | % Change |
(dollars in thousands) | (unaudited) |
Revenue: | | | | | | | |
Product revenue | $ | 261,805 | | | $ | 201,922 | | | $ | 59,883 | | | 30 | % |
Grant and other revenue | 5,305 | | | — | | | 5,305 | | | n.m |
Total revenue | 267,110 | | | 201,922 | | | 65,188 | | | 32 | % |
Operating costs and expenses: | | | | | | | |
Cost of product revenue | 188,595 | | | 85,177 | | | 103,418 | | | 121 | % |
Sales and marketing | 51,139 | | | 1,959 | | | 49,180 | | | 2,510 | % |
Research and development | 72,787 | | | 12,071 | | | 60,716 | | | 503 | % |
General and administrative | 52,321 | | | 23,252 | | | 29,069 | | | 125 | % |
Restructuring expense | 1,883 | | | — | | | 1,883 | | | n.m |
Total operating costs and expenses | 366,725 | | | 122,459 | | | 244,266 | | | 199 | % |
(Loss) income from operations | (99,615) | | | 79,463 | | | (179,078) | | | (225) | % |
Interest expense | (67) | | | (9,964) | | | 9,897 | | | (99) | % |
Change in fair value of redeemable convertible preferred stock warrants | — | | | (190) | | | 190 | | | (100) | % |
Change in fair value of convertible notes | — | | | (23,254) | | | 23,254 | | | (100) | % |
| | | | | | | |
Other income (expense), net | 49 | | | 61 | | | (12) | | | (20) | % |
Net (loss) income before income taxes | (99,633) | | | 46,116 | | | (145,749) | | | (316) | % |
Income tax (benefit) expense | (3,386) | | | 13,276 | | | (16,662) | | | (126) | % |
Net (loss) income | $ | (96,247) | | | $ | 32,840 | | | $ | (129,087) | | | (393) | % |
Net (loss) income per share attributable to common stockholders – diluted | $ | (0.65) | | | $ | 0.22 | | | $ | (0.87) | | | (404) | % |
n.m. = not meaningful
Revenue was $267.1 million in the six months ended June 30, 2022, compared to $201.9 million in the six months ended June 30, 2021. This increase was due to expansion of our customer base and increases in production capacity. Revenue during the six months ended June 30, 2022 was primarily driven by product sales to private sector customers of $256.4 million along with product sales to public sector clients of $5.4 million.
Cost of Product Revenue was $188.6 million in the six months ended June 30, 2022, compared to $85.2 million in the six months ended June 30, 2021. This increase was driven by an increase in the sales of our products as well as due to the inventory charge of $42.8 million. Our product gross profit margin, or product gross profit as a percentage of product revenue was approximately 28% in the six months ended June 30, 2022 compared to approximately 58% in the six months ended June 30, 2021. This decrease was primarily due to the inventory charge, as well as supply chain constraints and associated higher component, transport costs, customer mix and a reduction in overall production volume relative to our manufacturing capacity.
Sales and Marketing Expense was $51.1 million in the six months ended June 30, 2022, compared to $2.0 million in the six months ended June 30, 2021. This increase related to increased sales and marketing personnel costs to support a broadening of our customer base, planned additions to our product offering and higher expenses related to our overall marketing and brand expansion efforts.
Research and Development Expense was $72.8 million in the six months ended June 30, 2022, compared to $12.1 million in the six months ended June 30, 2021. This increase was primarily driven by additional headcount, materials and other resource utilization associated with the expansion of our platform, including new test development and overall enhancement of our software platform for products under development, as well as costs related to the clinical studies
conducted for our submissions to the FDA requiring 510(k) clearance for of our COVID-19 and influenza tests and EUA of our COVID-19 / influenza multiplex test.
General and Administrative Expense was $52.3 million in the six months ended June 30, 2022, compared to $23.3 million in the six months ended June 30, 2021. This increase was primarily related to an increase in stock-based compensation expenses, headcount growth to support our overall expansion as well as accounting and other consulting-related costs to support our operations as a public company.
Interest Expense was $0.1 million in the six months ended June 30, 2022, from $10.0 million in the six months ended June 30, 2021. This decrease was primarily driven by debt repayment activity in the prior year. Our interest expense prior to February 2021 primarily consisted of expense related to our prior loan and security agreement with Comerica Bank. In February 2021, we entered into the Revolving Credit Agreement. In connection with the Revolving Credit Agreement, we repaid outstanding amounts of $5.4 million and terminated the 2015 Credit Agreement we initially entered into in May 2015. In May 2021, we repaid the outstanding balance under the Revolving Credit Agreement. In June 2021, we terminated the Revolving Credit Agreement.
Change in Fair Value of Convertible Notes was $0 and $23.3 million in the six months ended June 30, 2022 and 2021, respectively reflecting fair value adjustments associated with the Convertible Notes issued by us in May 2021. We did not incur any gains or losses associated with changes in fair value of the Convertible Notes during the six months ended June 30, 2022 as the Convertible Notes were not outstanding during that period.
Income Tax (Benefit) Expense was $(3.4) million in the six months ended June 30, 2022 compared to $13.3 million in the six months ended June 30, 2021. Our effective tax rate was a benefit of 3.4% in the six months ended June 30, 2022, compared to 28.8% in the six months ended June 30, 2021. The fluctuation in our provision/(benefit) and effective tax rate was primarily due to the net pre-tax loss generated by the Company during the six months ended June 30, 2022, and the benefit from the approval of the California Competes state income tax credits. The tax expense recorded for the six months ended June 30, 2021 was primarily related to the tax liability arising from income from operations which exceeded available net operating loss carryforwards and the discrete impact of the non-deductible items.
Liquidity and Capital Resources
Overview
As of June 30, 2022, we held $363.1 million of cash and cash equivalents as a result of our IPO proceeds and other financing activities. Our primary cash needs are for the funding of day-to-day operations, financing capital investments and to address our working capital needs. Our largest source of operating cash generation is from sales to our customers. Our primary uses of cash from operating activities are for personnel-related expenses, material and supply costs for manufacturing, direct costs to deliver our products, and sales and marketing expenses and research and development initiatives.
On June 30, 2022, the Company entered into the 2022 Revolving Facility Agreement. The 2022 Revolving Facility Agreement provides for a $100.0 million secured revolving credit facility, with a $20.0 million letter of credit subfacility. As of June 30, 2022, there were no revolving loans outstanding and $12.5 million aggregate face amount of letters of credit outstanding under the 2022 Revolving Facility Agreement, which reduces the availability to borrow under the revolving credit facility to $87.5 million.
Based on our current business plan, we believe our anticipated operating cash flows, together with our existing cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
We expect that our near and longer-term liquidity requirements will consist of working capital and general corporate expenses associated with the growth of our business, including, without limitation, expenses associated with scaling up our operations and continuing to increase our manufacturing capacity, sales and marketing expense associated with rollout of our over-the-counter, at home COVID-19 test to commercial customers, including directly to consumers, increasing market awareness of our platform and brand generally to individual consumers, enterprises and other target customers, additional research and development expenses associated with expanding our care offerings, expenses associated with continuing to build out our corporate infrastructure and expenses associated with being a public company. Our short-term capital expenditure needs relate primarily to the expansion of our research and development capabilities, expanding production capacity and optimization of existing business processes.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
(dollars in thousands) | (unaudited) |
Net cash, cash equivalents and restricted used in operating activities | $ | (20,311) | | | $ | (37,812) | |
Net cash, cash equivalents and restricted cash used in investing activities | (34,680) | | | (58,896) | |
Net cash, cash equivalents and restricted cash (used in) provided by financing activities | (4,261) | | | 219,779 | |
Net change in cash, cash equivalents and restricted cash | $ | (59,252) | | | $ | 123,071 | |
Cash Flows from Operating Activities
Net cash, cash equivalents and restricted cash used in operating activities was $20.3 million in the six months ended June 30, 2022, primarily reflecting our net loss of $96.2 million, net of non-cash cost items and changes in operating working capital. Non-cash cost adjustments were primarily driven by inventory charges of $12.3 million, stock-based compensation expense of $32.8 million and depreciation and amortization expenses of $21.6 million. The timing of our revenue and collections decreased our accounts receivable. Inventory increase was driven by our effort to limit the effects of a potential future supply chain disruption combined with a tempering of COVID-19 testing demand in the latter part of the first quarter.
Net cash, cash equivalents and restricted cash used in operating activities was $37.8 million in the six months ended June 30, 2021, primarily reflecting our net income of $32.8 million, net of non-cash cost items and changes in operating working capital. Non-cash cost adjustments were primarily driven by the change in fair value of the Convertible Notes of $23.3 million and depreciation and amortization expenses of $14.5 million. The timing of our revenue and collections increased our accounts receivable. The expected increase in demand for our products drove the increase in inventory and prepaid expenses and other assets. The increase in deferred revenue recognized was due to the increase in product deliveries to the U.S. government.
Cash Flows from Investing Activities
Net cash, cash equivalents and restricted cash used in investing activities was $34.7 million for the six months ended June 30, 2022, reflecting purchases of property and equipment of $30.8 million to expand our R&D and production capabilities. We also invested $3.9 million in the development of internal-use software related to COVID-19 Testing apps for commercial customers.
Net cash, cash equivalents and restricted cash used in investing activities was $58.9 million in the six months ended June 30, 2021, primarily reflecting purchases of property and equipment of $56.5 million to expand our production capabilities of our COVID-19 Test Kits in relation to the U.S. DoD Agreement.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2022 of $4.3 million was primarily driven by $3.5 million in tax withholding on stock option exercises and RSU vesting and $1.4 million in payments for finance leases. These cash outflows were offset by proceeds of $0.7 million from the employee stock purchase plan and $0.5 million from stock options exercised.
Net cash, cash equivalents and restricted cash provided by financing activities was $219.8 million for the six months ended June 30, 2021, primarily reflecting proceeds received from our Convertible Notes issued in May 2021, partially offset by the proceeds and subsequent repayment of our Revolving Credit Agreement in May 2021.
Commitments and Contingencies
See Note 15, Commitments and Contingencies, to our unaudited interim condensed financial statements included elsewhere in this quarterly report for a summary of our commitments as of June 30, 2022.
Our material cash commitments at June 30, 2022 related to finance leases of manufacturing equipment totaling $6.5 million, real estate leases under non-cancelable operating lease agreements in the amount of $69.9 million, that expire at various dates through 2031. We expect to fund these commitments using our existing cash on hand.
As of June 30, 2022, there were no revolving loans outstanding and $12.5 million aggregate face amount of letters of credit outstanding under the 2022 Revolving Facility Agreement, which reduces the availability to borrow under the revolving credit facility from $100 million to $87.5 million. We also had outstanding cash collateralized letters of credit with Comerica Bank related to our real estate leases totaling $0.5 million which is reflected on the balance sheet as restricted cash. In November 2021, $0.8 million of cash was restricted in relation to a customs surety on international imports.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Company's critical accounting policies and estimates from its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 to our financial statements included elsewhere in this document.
Emerging Growth Company Status
We are an “emerging growth company” (as defined in the JOBS Act). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies who have adopted new or revised accounting pronouncements.