SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash and cash equivalents consist of bank deposits. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash consists primarily of cash that serves as collateral for the Company’s standby letters of credit. Any cash that is legally restricted from use is classified as restricted cash. If the purpose of restricted cash relates to acquiring long-term assets, liquidating a long-term liability, or is otherwise unavailable for a period longer than one year from the balance sheet date, the restricted cash is classified as a long-term asset. Otherwise, restricted cash is presented in current assets in the balance sheets. As of September 30, 2021, the Company had $12.0 million of restricted cash included in current assets on the balance sheet. Accounts Receivable The Company grants credit to customers in the normal course of business and the resulting accounts receivables are stated at their net realizable value. The allowance for doubtful accounts represents the Company’s estimate of probable credit losses relating to accounts receivables 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 September 30, 2021, the Company’s allowance for bad debt was $0.3 million. Inventories Inventory is valued at lower of cost or net realizable value on a first in, first out basis. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. Inventory owned by the Company that is on hand with contract manufacturers is disclosed as inventory on consignment. Provisions for excess and obsolete inventory are primarily based on the Company’s estimates of forecasted sales, usage levels, and expiration dates, as applicable for certain disposable products, and assumptions about obsolescence. Unabsorbed manufacturing costs are treated as expense in the period incurred. 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 replace Cue Cartridges that result in invalid test results. All warranties are classified as current liabilities and 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 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 product warranty reserve is recorded within accrued liabilities and other current liabilities on the balance sheets and in costs of product revenue in the statements of operations. The following table provides a reconciliation of the change in estimated warranty liabilities:
Fair Value Measurements and Financial Instruments The carrying value of the Company’s cash and cash equivalents, accounts receivables and accounts payable approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the Company’s long-term borrowings approximates its fair value. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows: Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities. The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company records subsequent adjustments to reflect the increase or decrease in estimated fair value at each reporting date in current period earnings. Property and Equipment, Net Property and equipment, net, which consist of manufacturing equipment, laboratory equipment, computers and software, office equipment and leasehold improvements, are stated at cost less depreciation. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful life or the remaining lease term, including any renewal periods that the Company is reasonably certain to exercise. Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. The estimated useful lives are as follows:
The Company completed a review of the estimated useful lives of its assets upon receiving FDA EUAs of the Company’s Cue COVID-19 Test in June 2020. This review, based on expected technological advances and demand expectations, reduced the useful life of laboratory equipment from to five years and the useful life of manufacturing equipment from to three years. The change in useful lives was accounted for as a change in accounting estimate on a prospective basis effective June 1, 2020. For the nine months ended September 30, 2020, the change in estimate resulted in an increase in depreciation and amortization expense of $2.2 million, an increase in net loss of $2.2 million and an increase in basic and diluted net loss per share of $0.14 . Intangible Assets Intangible assets are recorded at cost and amortized on a straight-line basis over their estimated useful lives. Intangible assets consist of capitalized software costs incurred in the development of the Cue Health App (the “App”). The Company determined that costs incurred during the application development stage that are directly related to the actual development of the software application are capitalized, while costs incurred in the preliminary project and post implementation stage are expensed as incurred. Additionally, indirect costs related to the software development during the application development stage are expensed as incurred. As the App is constantly updated to the next version once it has reached technological feasibility, the Company separates costs on a reasonable basis between maintenance and upgrades that extend the functionality and useful life of the App. The maintenance costs are expensed as incurred. The Company has concluded that given the rapid changes in technology, the software has a relatively short useful life of three years and is amortized on a straight-line basis. Amortization expense related to the App is recorded in cost of product revenue. Leases The Company determines if an arrangement is a lease at inception and if so, determines whether the lease qualifies as an operating or finance lease. Lease balances are included in the balance sheets as right-of-use assets and lease liabilities. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. When the Company’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at commencement dates in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would expect to pay to borrow over a similar term, and on a collateralized basis, an amount equal to the lease payments in a similar economic environment. The Company’s lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Deferred Offering Costs The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the financing, these costs are recorded as a reduction of the proceeds received from the equity financing. If a planned equity financing is abandoned, the deferred offering costs are expensed immediately as a charge to operating expenses in the condensed statements of operations. There were no deferred offering costs recorded in the Company’s balance sheets as of December 31, 2020. As of September 30, 2021, the deferred offering costs were offset against the proceeds received upon the completion of the IPO. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or an asset group may not be recoverable. If such triggering event is determined to have occurred, the asset’s or asset group’s carrying value is compared to the future undiscounted cash flows expected to be generated. If the carrying value exceeds the undiscounted cash flows of the asset, then an impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value. There were no impairment indicators and no impairment was recorded for the nine months ended September 30, 2021 and the year ended December 31, 2020. Common Stock Warrants Common stock warrants are measured at their estimated fair value upon issuance and recorded in additional paid-in capital. Common stock warrants are classified as equity and no subsequent remeasurement is required. Redeemable Convertible Preferred Stock Warrants The Company accounts for its redeemable convertible preferred stock warrants as liabilities based upon the characteristics and provisions of each instrument. The redeemable convertible preferred stock warrants classified as liabilities are recorded on the Company’s balance sheets at their fair values on the date of issuance and are revalued on each subsequent balance sheet date, with fair value changes recognized as increases or reductions in the statement of operations. All of the Company’s outstanding redeemable convertible preferred stock warrants were exercised and converted into shares of Series A and Series B redeemable convertible preferred stock prior to the IPO. Convertible Notes The Company elected to account for Convertible Notes issued in May 2021 using the fair value option. Such instruments are recognized at estimated fair value, with changes in estimated fair value recorded as a component of earnings in the statements of operations unless the change is a result of a change in credit risk, in which case such change in estimated fair value is recorded within other comprehensive income. Direct issuance costs are expensed as incurred and are included in interest expense in the statements of operations. Increases or decreases in the fair value of the Convertible Notes can result from updates to assumptions such as the expected timing or probability of a qualified financing event, or changes in discount rates. Judgment is used in determining these assumptions as of the initial valuation date and at each subsequent reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period. Upon completion of the IPO, outstanding Convertible Notes in the principal amount of $235.5 million and accrued interest of $2.8 million were automatically converted into 18,611,914 shares of commons stock, based on interest accrued through September 27, 2021 and a 20% discount to the IPO price of $16.00 per share. The Company no longer has Convertible Notes outstanding as of September 30, 2021. Redeemable Convertible Preferred Stock Prior to the completion of the IPO, the Company had multiple classes of redeemable convertible preferred stock, all of which were classified as temporary equity in the accompanying condensed balance sheet as the redemption of the shares were outside of the Company's control. In connection with the completion of the IPO in September 2021, all outstanding shares of redeemable convertible preferred stock were automatically converted into an aggregate of 83,605,947 shares of common stock. Revenue Recognition Product Revenue The Company generates revenue from the sale of its Cue Health Monitoring System to government entities, healthcare providers, commercial customers, and through agreements with distributors. See Note 3, Revenue Recognition, for details. The Company considers purchase orders, which are governed by agreements with customers, to be a contract with a customer. The contract terms with customers range in length, from one-time purchases to six-month or twelve-month commitments on a subscription basis where customers purchase a fixed number of products on a monthly basis. The timing of revenue recognition is based on the satisfaction of performance obligations promised to the customer. Cue Readers, Cue Enterprise Dashboards, and Cue Test Kits, composed of Cue Cartridges and Cue Wands, are considered distinct performance obligations. The App is integral to the functionality of the Cue Reader and these components form a single performance obligation. Revenue allocated to Cue Readers and Cue Test Kits is recognized when control of the promised goods has transferred to customers, generally upon shipment, in an amount that reflects the consideration the Company expects to receive in exchange for those goods. Revenue allocated to Cue Enterprise Dashboards is recognized ratably over the term of the service. The Company’s contracts with its customers do not provide for open return rights, except within a reasonable time after receipt of goods in the case of defective or non-conforming product. The Company estimates returns of products due to defective or nonconforming products and records a provision for estimated expenses related to product warranty at the time products are sold. The transaction price is measured as the amount of consideration the Company expects to receive in exchange for the goods transferred to customers. A contract’s transaction price is allocated to each distinct performance obligation on a relative standalone selling price basis. The Company estimates standalone selling prices for groups of customers with similar circumstances and characteristics. The Company recognizes receivables when there is an unconditional right to payment, which represents the amount the Company expects to collect in a transaction and is most often equal to the transaction price in the contract. Payment terms are typically 30 to 45 days. The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. See Note 3, Revenue Recognition, for details regarding disaggregation of product revenue by type of customer for the three and nine months ended September 30, 2021 and 2020. Deferred Revenue In October 2020, the Company received a $184.6 million upfront payment (“U.S. DoD Advance”) from the U.S. DoD to increase production capacity of its Cue COVID-19 Test. The Company concluded that the activities related to increasing production do not represent a performance obligation as those activities do not transfer a product or service to the customer. Instead, the upfront payment is an advanced payment for future goods or services because the agreement with the U.S. government included an option to renew the contract which included a material right to obtain products in a future contract at a specified discount, subject to a price floor, from prices offered to commercial customers with similar volume of purchases. Deferred revenue is recognized upon satisfaction of performance obligations by reference to the total goods or services expected to be provided to the customer, including an estimate of future performance obligations under expected contract renewals, and the corresponding expected consideration. Grant and Other Revenue Arrangements under which the Company receives grants or contracts to conduct research and development activities constitute non-exchange transactions. Revenue from such is recognized to the extent of costs incurred in the period during which the related costs are incurred, provided that the conditions under which the grants and contracts were provided have been met and only perfunctory performance obligations are outstanding. Costs are included in research and development expenses. The Company may enter into collaboration agreements with third parties to conduct research and development activities. The Company evaluates its collaboration agreements for proper classification in its statements of operations based on the nature of the underlying activity. When the Company has concluded that it has a customer relationship with one of its collaborators, the Company follows the guidance in ASC Topic 606, Revenue from Contracts with Customers. See Note 3, Revenue Recognition, for details regarding the Company’s agreements with the Biomedical Advanced Research and Development Authority (“BARDA”) and Janssen. Contract Assets and Liabilities Contract assets primarily relate to the Company’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning of and end of the year ended December 31, 2020, as well as changes in the balance, were not material. Contract liabilities primarily relate to the U.S. DoD Advance and were recorded in current and non-current deferred revenue on the balance sheets. See Note 3, Revenue Recognition, for details regarding the activity related to contract liabilities for the nine months ended September 30, 2021. Revenue Contracts In the second quarter of 2021, the Company entered into a purchase agreement to provide a customer with Cue Readers and in excess of 1,000,000 Cue Test Kits between the effective date of the agreement and December 2021 based on a pre-defined monthly delivery schedule. In the third quarter of 2021, the customer increased its order of Cue Readers and Cue COVID-19 Test Kits. The customer may change the quantities ordered and may terminate the order and/or agreement with a 45 days’ notice. In May 2021, the Company entered into a purchase agreement to provide a customer a one-time order of 1,000 Cue Readers and 300,000 Cue COVID-19 Test Kits on a monthly basis during the 12-month period following the agreement execution date. In August 2021, the Company and customer amended the purchase agreement to reduce the number of Cue COVID-19 Test Kits to 10,000 test kits on a monthly basis until the agreement expiration date. The agreement may be terminated for cause by either party with a 30 days’ notice. In September 2021, the contract with the U.S. Department of Defense (“U.S. DoD Agreement”) was amended to extend delivery of the 6,000,000 Cue Test Kits and other deliverables to December 31, 2021. Cost of Product Revenue Cost of product revenue includes the cost of materials, direct labor, inclusive of salaries and other related costs, including stock-based compensation, depreciation, and manufacturing overhead costs used in the manufacturing of the Cue Test Kits as well as contract manufacturing costs associated with production of the Cue Readers. Cost of product revenue also includes amortization of intangible assets. Shipping and Handling Costs The Company elected to account for shipping and handling as activities to fulfill the promise the goods and records them as cost of product revenue. Sales and Marketing Expenses Sales and marketing expense consist primarily of salaries and other related costs, including stock-based compensation, for personnel in sales and marketing, customer support and business development functions. Research and Development Expenses Research and development expenses are expensed as incurred. Research and development expenses are primarily comprised of costs and expenses for salaries and other related costs, including stock-based compensation, associated with research and development personnel, contract services, laboratory supplies, facilities, depreciation, and outside services. Costs associated with the Company’s grant and collaboration agreements as well as costs associated with products produced for research and development purposes are recorded within research and development expenses. Accrued Research and Development Costs The Company records accrued expenses for estimated costs of its research and development activities conducted by third-party service providers, which include clinical trial activities, based on the estimated amount of services or supplies provided but not yet invoiced and include these costs in accrued liabilities in the balance sheets and within research and development expense in the statements of operations. Any payments made in advance of services or supplies provided are recorded as prepaid assets, which are expensed as the services or supplies are received. The Company estimates the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. Significant judgments and estimates are made in determining the accrued balance in each reporting period. As actual costs become known, the Company adjusts its accrued estimates. General and Administrative Expenses The Company’s general and administrative expense consists primarily of salaries and other related costs, including stock-based compensation, for personnel in its executive, finance, corporate and business development and administrative functions. General and administrative expense also includes professional fees for legal, patent, accounting, information technology, depreciation, auditing, tax and consulting services, travel expenses and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs. Patent Costs Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain. These costs are included in general and administrative expenses. Fair Value of Common Stock Prior to the IPO, the fair value of the shares of common stock underlying the Company’s stock-based awards was estimated on each grant date by its board of directors. In order to determine the fair value of its common stock underlying option grants, the Company’s board of directors considered, among other things, valuations of its common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Stock-Based Compensation The Company estimates the fair value of stock options using the Black-Scholes-Merton (“BSM”) option pricing model on the date of grant. The fair value of equity instruments expected to vest are recognized and amortized on a straight-line basis over the requisite service period of the award, which is generally to four years; however, the Company’s equity compensation plans provide for any vesting schedule as the Company’s Board of Directors may deem appropriate. The Company recognizes forfeitures as incurred. The BSM option pricing model incorporates various estimates, including the fair value of the Company’s common stock, expected volatility, expected term and risk-free interest rates. The weighted-average expected term of options was calculated using the simplified method. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility incorporates the historical volatility over the expected term of the award of comparable companies whose share prices are publicly available. The risk-free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield was zero, as the Company has never declared or paid dividends and has no plans to do so in the foreseeable future. For stock-based compensation awards with both performance and market-condition vesting, such as restricted stock units, cost is measured at the grant date, based on the fair value of the award considering the market conditions, and recorded over the requisite service period if the performance condition is probable. The Company estimates the fair value of stock-based payment awards considering the market conditions on the date of grant using a Monte Carlo simulation model. Comprehensive Income Comprehensive income is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources. There have been no items qualifying as other comprehensive income and, therefore, the Company’s comprehensive income was the same as its reported net income. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the bases of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. Out-of-period Correction Certain immaterial cost of product revenue expenses of $3.0 million were not recognized by the Company in the three and six months ended June 30, 2021. This immaterial prior period error was recognized as an out-of-period adjustment to cost of product revenue in the statements of operations for the three and nine months ended September 30, 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 is currently evaluating the impact of ASU 2020-06 on its financial statements and its adoption method.
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