QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
Emerging growth company |
Page |
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1 |
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2 |
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PART I. |
4 |
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Item 1. |
4 |
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4 |
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5 |
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6 |
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8 |
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9 |
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Item 2. |
25 |
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Item 3. |
42 |
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Item 4. |
43 |
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PART II. |
45 |
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Item 1. |
45 |
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Item 1A. |
45 |
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Item 2. |
81 |
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Item 3. |
82 |
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Item 4. |
82 |
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Item 5. |
82 |
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Item 6. |
83 |
• | the impact on our business of the civil settlement agreement with the U.S. government that resolved the investigation by the U.S. Department of Justice (the “DOJ”) related to insurance reimbursement claims submitted to various federal employee health plans under the Federal Employee Health Benefits (“FEHB”) program, and the extent to which we may be able to validate and establish processes to support the submission of claims for reimbursement to health plans under the FEHB program in the future, if at all, and our ability to obtain, maintain or increase insurance coverage for our hearing aids in the future; |
• | the timing or results of claims audits and medical records reviews by third-party payors; |
• | the expense, timing and outcome of the purported securities class action litigation alleging that certain of our disclosures about our business, operations and prospects, including reimbursements from third-party payors, violated the federal securities laws and the purported derivative action alleging that our directors breached their fiduciary duties by failing to implement and maintain an effective system of internal controls; |
• | our ability to continue to maintain the listing of our securities on The Nasdaq Stock Market LLC (“Nasdaq”), including our ability to execute a plan to regain compliance with the Nasdaq requirements regarding the timely filing of periodic financial reports with the Securities and Exchange Commission (the “SEC”); |
• | estimates of our future revenue and expenses, including the extent of any losses we incur from hearing aids delivered to customers where we have not submitted an insurance claim and may not receive payment; |
• | estimates of our future capital needs and our ability to raise capital on favorable terms, if at all, including the timing of future capital requirements and the terms or timing of any future financings; |
• | our expectations with regard to changes in the regulatory landscape for hearing aid devices, including the anticipated implementation of a pending over-the-counter |
• | our ability to attract and retain customers; |
• | our expectations concerning additional orders by existing customers; |
• | our expectations regarding the potential market size and size of the potential consumer populations for our products and any future products, including our ability to obtain, maintain or increase insurance coverage of and reimbursement of insurance claims for Eargo hearing aids, which is substantially dependent on, among other things, the outcomes of our efforts to validate and establish processes to support the submission of claims for reimbursement from various federal health plans, any third-party payor audits and pending regulations; |
• | our ability to release new hearing aids and the anticipated features of any such hearing aids and our ability to transition our existing customers to new hearing aids, including when older models are discontinued; |
• | developments and projections relating to our competitors and our industry, including competing products; |
• | our ability to maintain our competitive technological advantages against new entrants in our industry; |
• | the pricing of our hearing aids; |
• | our expectations regarding the availability, supply, cost and inflationary pressures related to the component parts of our hearing aids; |
• | our expectations regarding the ability to make certain claims related to the performance of our hearing aids relative to competitive products; |
• | our commercialization and marketing capabilities and expectations; |
• | our relationships with, and the capabilities of, our component manufacturers, suppliers and freight carriers; |
• | the implementation of our business model and strategic plans for our business, products and technology; |
• | the scope of protection we are able to establish and maintain for intellectual property rights covering our products, including the projected terms of patent protection; |
• | our ability to effectively manage our business in light of the civil settlement agreement with the U.S. government, third-party payor claims audits and medical records reviews, purported securities class action and derivative litigations, and pending regulations; |
• | our ability to retain existing talent and attract new, highly skilled talent; |
• | our estimates regarding the COVID-19 pandemic, including but not limited to, its duration and its impact on our business and results of operations; and |
• | our future financial performance. |
September 30, |
December 31, |
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2021 |
2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Operating lease right-of-use |
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Property and equipment, net |
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Intangible assets, net |
— | |||||||
Goodwill |
— | |||||||
Other assets |
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Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
Accrued expenses |
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Sales returns reserve |
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Settlement liability |
— | |||||||
Long-term debt, current portion |
— | |||||||
Other current liabilities |
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Deferred revenue, current portion |
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Lease liability, current portion |
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Total current liabilities |
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Lease liability, noncurrent portion |
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Long-term debt, noncurrent portion |
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Total liabilities |
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Commitments and contingencies (Note 6) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock; $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
) | ||||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
Three months ended September 30, |
Nine months ended September 30, |
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2021 |
2020 |
2021 |
2020 |
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Revenue, net |
$ | ( |
) | $ | $ | $ | ||||||||||
Cost of revenue |
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Gross profit (loss) |
( |
) | ||||||||||||||
Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Total operating expenses |
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Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income (expense), net: |
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Interest income |
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Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income (expense), net |
— | ( |
) | — | ( |
) | ||||||||||
Loss on extinguishment of debt |
— | ( |
) | — | ( |
) | ||||||||||
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Total other income (expense), net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
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Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income tax provision |
— | — | — | — | ||||||||||||
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Net loss and comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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Net income (loss) attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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Net income (loss) per share attributable to common stockholders, basic and diluted |
$ | ( |
) | $ | — | $ | ( |
) | $ | ( |
) | |||||
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Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic and diluted |
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Convertible preferred stock |
Common stock |
Additional paid-in |
Accumulated |
Total stockholders’ |
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Shares |
Amount |
Shares |
Amount |
capital |
deficit |
equity |
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Balance December 31, 2020 |
— | $ | — | $ | $ | $ | ( |
) | $ | |||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
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Balance March 31, 2021 |
— | — | ( |
) | ||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options and release of restricted stock units |
— | — | — | — | ||||||||||||||||||||||||
Issuance of common stock in connection with employee stock purchase plan |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
|
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Balance June 30, 2021 |
— | — | ( |
) | ||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options and release of restricted stock units |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
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Balance September 30, 2021 |
— | $ | — | $ | $ | $ | ( |
) | $ | |||||||||||||||||||
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Convertible preferred stock |
Common stock |
Additional paid-in |
Accumulated |
Total stockholders’ |
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Shares |
Amount |
Shares |
Amount |
capital |
deficit |
deficit |
||||||||||||||||||||||
Balance December 31, 2019 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance March 31, 2020 |
— | ( |
) | ( |
) | |||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance June 30, 2020 |
— | ( |
) | ( |
) | |||||||||||||||||||||||
Issuance of Series E convertible preferred stock, net of issuance costs of $ |
— | — | — | — | — | |||||||||||||||||||||||
Issuance of Series E convertible preferred stock, upon extinguishment of convertible notes (Note 7) |
— | — | — | — | — | |||||||||||||||||||||||
Gain on extinguishment of Series C and Series C-1 convertible preferred stock |
— | ( |
) | — | — | — | ||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||
Net loss and comprehensive loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Balance September 30, 2020 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
Operating activities: |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Non-cash interest expense and amortization of debt discount |
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Non-cash operating lease expense |
||||||||
Bad debt expense |
||||||||
Loss on disposal of property and equipment |
— | |||||||
Loss on extinguishment of debt |
— | |||||||
Change in fair value of financial instruments |
— | |||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
( |
) | ( |
) | ||||
Inventories |
( |
) | ( |
) | ||||
Prepaid expenses and other current assets |
||||||||
Other assets |
( |
) | ||||||
Accounts payable |
||||||||
Accrued expenses |
||||||||
Sales returns reserve |
|
|
|
|
|
|
( |
) |
Settlement liability |
— | |||||||
Other current liabilities |
||||||||
Deferred revenue |
( |
) | ( |
) | ||||
Operating lease liabilities |
( |
) | ( |
) | ||||
Other liabilities |
— | ( |
) | |||||
|
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|||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
|
|
|
|
|||||
Investing activities: |
||||||||
Purchases of property and equipment |
( |
) | ( |
) | ||||
Capitalized software development costs |
( |
) | ( |
) | ||||
Cash paid for acquisition of business |
( |
) | — | |||||
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|||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
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|
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Financing activities: |
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Proceeds from stock options exercised |
||||||||
Proceeds from employee stock purchase plan purchases |
— | |||||||
Proceeds from debt financing |
— | |||||||
Proceeds from convertible preferred stock issuance, net of issuance costs |
— | |||||||
Proceeds from issuance of convertible notes, net of issuance costs |
— | |||||||
Proceeds from PPP loan |
— | |||||||
Repayment of PPP loan |
— | ( |
) | |||||
Debt repayments |
— | ( |
) | |||||
Payments of deferred offering costs |
— | ( |
) | |||||
|
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|||||
Net cash provided by financing activities |
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|||||
Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Supplemental disclosure of cash flow information: |
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Cash paid for taxes |
$ | $ | — | |||||
|
|
|
|
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Cash paid for interest |
$ | $ | ||||||
|
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|
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Non-cash operating activities: |
||||||||
Lease liability obtained in exchange for right-of-use |
$ | $ | ||||||
|
|
|
|
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Non-cash investing and financing activities: |
||||||||
Property and equipment and capitalized software costs in accounts payable and accrued liabilities |
$ | $ | ||||||
|
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|
|
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Stock-based compensation included in capitalized software costs |
$ | $ | — | |||||
|
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|
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Convertible preferred stock issuance costs included in accounts payable |
$ | $ | ||||||
|
|
|
|
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Acquisition liability in accrued liabilities |
$ | $ | — | |||||
|
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Deferred offering costs in accounts payable and accrued liabilities |
$ | — | $ | |||||
|
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|||||
Derivative liability in connection with issuance of convertible promissory notes on issuance |
$ | — | $ | |||||
|
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Issuance of Series E convertible preferred stock upon extinguishment of convertible notes |
$ | — | $ | |||||
|
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Settlement of derivative liability in connection with extinguishment of convertible notes |
$ | — | $ | |||||
|
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Issuance of convertible preferred stock warrants in connection with debt financing |
$ | — | $ | |||||
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Total |
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(in thousands) |
||||
Balance December 31, 2020 |
$ | — | ||
Addition due to business acquisition |
||||
Balance September 30, 2021 |
$ | |||
September 30, |
December 31, |
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2021 |
2020 |
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(in thousands) |
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Raw materials |
$ | $ | ||||||
Finished goods |
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Total inventories |
$ | $ | ||||||
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|
September 30, |
December 31, |
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2021 |
2020 |
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(in thousands) |
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Capitalized software |
$ | $ | ||||||
Tools and lab equipment |
||||||||
Furniture and fixtures |
||||||||
Leasehold improvements |
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Computer and equipment |
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|
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Less accumulated depreciation and amortization |
( |
) | ( |
) | ||||
|
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|
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Total property and equipment, net |
$ | $ | ||||||
|
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|
Gross carrying value |
Accumulated amortization |
Net carrying value |
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(in thousands) |
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Developed technologies |
$ | $ | $ | |||||||||
Other |
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Total intangible assets, net |
$ | $ | $ | |||||||||
Amount |
||||
(in thousands) |
||||
Remainder of 2021 |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
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Total |
$ | |||
September 30, |
December 31, |
|||||||
2021 |
2020 |
|||||||
(in thousands) |
||||||||
Accrued compensation |
$ |
$ |
||||||
Accrued warranty reserve |
||||||||
Refunds due to customers |
||||||||
Accrued vendor costs |
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Other accruals |
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Total accrued expenses |
$ | $ | ||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
(in thousands) |
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Sales returns reserve, beginning balance |
$ | $ | ||||||
Reduction of revenue |
||||||||
Utilization of sales returns reserve |
( |
) | ( |
) | ||||
Sales returns reserve, ending balance |
$ | $ | ||||||
Nine months ended September 30, |
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2021 |
2020 |
|||||||
(in thousands) |
||||||||
Allowance for doubtful accounts, beginning balance |
$ | $ | ||||||
Charged to expense |
||||||||
Accounts written off, net of recoveries |
( |
) | ( |
) | ||||
Allowance for doubtful accounts, ending balance |
$ | $ | ||||||
Nine months ended September 30, |
||||||||
2021 |
2020 |
|||||||
(in thousands) |
||||||||
Accrued warranty reserve, beginning balance |
$ | $ | ||||||
Charged to cost of revenue |
||||||||
Utilization of accrued warranty reserve |
( |
) | ( |
) | ||||
Accrued warranty reserve, ending balance |
$ | $ | ||||||
(in thousands) |
||||
Goodwill |
$ | |||
Intangible assets |
||||
Total fair value of consideration |
$ | |||
Operating leases |
||||
(in thousands) |
||||
Remainder of 2021 |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
Thereafter |
||||
|
|
|||
Total minimum future lease payments |
||||
Present value adjustment for minimum lease commitments |
( |
) | ||
|
|
|||
Total lease liability |
$ | |||
|
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
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(in thousands) |
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Cost of revenue |
$ | $ | $ | $ | ||||||||||||
Research and development |
||||||||||||||||
Sales and marketing |
||||||||||||||||
General and administrative |
||||||||||||||||
Total stock-based compensation |
$ | $ | $ | $ | ||||||||||||
Number of shares |
Weighted average exercise price |
Weighted average remaining contractual term |
Aggregate intrinsic value |
|||||||||||||
(in years) |
(in thousands) |
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Balance December 31, 2020 |
$ | $ | ||||||||||||||
Grants |
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Exercises |
( |
) | ||||||||||||||
Cancelled/forfeited |
( |
) | ||||||||||||||
Balance September 30, 2021 |
$ | $ | ||||||||||||||
Vested and exercisable at September 30, 2021 |
$ | $ | ||||||||||||||
Nine months ended September 30, | ||||
Valuation assumptions: |
2021 |
2020 | ||
Expected volatility |
||||
Expected term |
- years | |||
Risk-free interest rate |
||||
Dividend yield |
— | — |
Number of shares |
Weighted average grant date fair value per share |
|||||||
Balance December 31, 2020 |
$ | |||||||
RSUs granted |
||||||||
RSUs vested |
( |
) | ||||||
RSUs forfeited |
( |
) | ||||||
Balance September 30, 2021 |
$ | |||||||
Nine months ended | ||
Valuation assumptions: |
September 30, 2021 | |
Expected volatility |
||
Expected term |
||
Risk-free interest rate |
||
Dividend yield |
— |
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Convertible preferred stock |
— | — | ||||||||||||||
Common stock options issued and outstanding |
||||||||||||||||
Restricted stock units |
— | — | ||||||||||||||
Shares issuable pursuant to ESPP |
— | — | ||||||||||||||
Convertible preferred stock warrants |
— | — | ||||||||||||||
|
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|
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|
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|
|
|||||||||
Total |
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Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in thousands, except share and per share amounts) |
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Numerator: |
||||||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Gain on extinguishment of Series C and Series C-1 convertible preferred stock |
— | — |