Sight Sciences, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included in Park I, Item 1, “Financial Statements,” within this Quarterly Report and our audited consolidated financial statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data,” in our Annual Report. Certain statements included in this discussion and analysis constitute “forward-looking statements” that are subject to considerable risks and uncertainties. Please see the information under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report.

Overview

Sight Sciences’ mission is to develop transformative, interventional technologies that allow eyecare providers to procedurally elevate the standards of care – empowering people to keep seeing. We are passionate about improving patients’ lives by helping them preserve their sight. Our objective is to develop and market products for use in new treatment paradigms and to create an interventional mindset in eyecare whereby our products may be used in procedures which supplant conventional outdated approaches. Our business philosophy is grounded in the following principles:

• comprehensively understanding disease physiology;
• developing products that are intended to preserve, protect, and restore natural physiological functionality to diseased eyes;
• developing and marketing products with proven clinical evidence that achieve superior effectiveness versus current treatment paradigms while minimizing complications or side effects;
• providing intuitive, patient-friendly, interventional solutions to ophthalmologists and optometrists (together, "ECPs"); and
• delivering compelling economic value to all stakeholders, including patients, providers and third-party payors such as Medicare and commercial insurers.

Our initial product development has focused on the treatment of two of the world’s most prevalent and underserved eye diseases, glaucoma and dry eye disease (“DED”). We have commercialized products in each of our two reportable operating segments, Surgical Glaucoma and Dry Eye. Our Surgical Glaucoma segment consists of sales of the OMNI® Surgical System ("OMNI") and the SION® Surgical Instrument ("SION"), while our Dry Eye segment includes sales of the TearCare® System ("TearCare"), and related components and accessories. Each product is primarily sold through a highly involved direct sales model that offers intensive education, training and customer service. We believe this philosophy and model not only enable us to differentiate our products and company from competitors, but also expand our addressable market by educating ECPs, patients and other stakeholders on our products and evolving treatment paradigms. Outside of the U.S., we have established direct commercial operations in the United Kingdom and Germany. We sell OMNI in several other countries through distributors.

We sell OMNI and SION to facilities where ophthalmic surgeons perform outpatient procedures, such as ambulatory surgery centers ("ASCs") and hospital outpatient departments ("HOPDs"), which are typically reimbursed by Medicare or private payors for procedures using our products. We sell TearCare to ECPs. Currently, there is no meaningful reimbursement coverage by Medicare or private payors for MGD procedures, including TearCare, and patients typically pay out-of-pocket for TearCare, although some payors may agree to provide case-based coverage outside of a formal policy. We are continuing our controlled commercial launch and are focused on our comprehensive, clinical data-driven long-term market development plan that aims to improve awareness and patient access to TearCare. We have dedicated meaningful resources to execute our commercial strategy as we reduce operating expenses and improve cost efficiencies to better align our operating structure for long-term, profitable growth. The overall success of our approach to eyecare to date is evidenced by over 250,000 estimated uses of Surgical Glaucoma products and their predicates in over 2,000 hospitals and ASCs in the U.S. and Europe, and over 60,000 estimated uses of TearCare in over 1,500 eyecare facilities in the U.S. through June 30, 2024.

We do not currently operate any manufacturing facilities and instead contract with third parties for our production requirements. We believe our suppliers will be able to meet our current and anticipated manufacturing needs across all our products. We plan to continue to utilize third party contract manufacturers for our products and any related components.

Revenue in our Surgical Glaucoma segment for the six-months ended June 30, 2024 and 2023 was $38.5 million and $38.7 million, respectively, with gross margins for the same periods of 88.0% and 87.6%, respectively. Revenue in our Dry Eye segment for the six-months ended June 30, 2024 and 2023 was $2.1 million and $3.6 million, respectively, with gross margins for the same periods of 44.4% and 54.4%, respectively. Given the earlier stage of TearCare’s commercial development, we expect our Dry Eye segment’s gross margins to be lower than our Surgical Glaucoma segment’s gross margins for the near- and medium-term due to the allocation of fixed labor and overhead costs to the segment's cost of goods sold. In addition, we expect lower demand and related gross margin in the Dry Eye segment in the second half of 2024 due to our increase in dry eye pricing effective October 1, 2024, which we believe will have a significant negative impact on cash-pay volumes. We expect TearCare procedure revenues will return to a growth trajectory upon receipt of positive payer coverage determinations that provide for sufficient and equitable reimbursement. We currently anticipate that we and our customers will begin receiving these coverage and payment determinations in 2025. In the first two quarters of 2024, approximately 95% of our revenue was generated from customers in the U.S.

We believe in the importance of continued strategic investment in initiatives that:

• further demonstrate our products’ clinical effectiveness and safety to potential customers, patients, payors and regulators including establishing OMNI and SION as standards of care of interventional glaucoma treatment among MIGS-trained surgeons, developing the standalone MIGS market, and pursuing coverage and equitable reimbursement for TearCare;
• enhance our commercial capabilities and expertise, including resources dedicated to sales, marketing and education;
• ensure the broadest possible patient access to the treatment alternatives that our products are cleared to offer; enhance and improve upon our existing product technologies;
• develop our existing international markets and expand into new international markets; and
• allow us to create transformational and interventional technology innovation with new products, devices or drugs, in glaucoma and ocular surface disease or in new eye disease areas.

As a result, we intend to continue to invest in clinical studies, sales and marketing, education initiatives, market access, and product development. However, we are also focused on disciplined expenditures, and seek to grow our operating expenses at a lower rate than revenue. Because of these and other factors, we expect to continue to incur net losses for at least the next several years, and we may seek additional debt and equity financing to fund our operations and planned growth.

To date, our primary sources of capital have been private placements of redeemable convertible preferred stock, debt financing agreements, the sale of common stock in our IPO, and revenue from the sale of our products. As of June 30, 2024, we had an outstanding term loan balance of $35.0 million (excluding debt discount and amortized debt issuance costs), cash and cash equivalents of $118.2 million and an accumulated deficit of $323.4 million.

Factors Affecting Our Business and Results of Operations

We believe there are several important factors that have impacted and that will continue to impact our business, financial condition, and results of operations. Except as described in Part II, Item 1A, "Risk Factors," of this Quarterly Report, except as described below, there have been no material changes to such factors from those described in our Annual Report under the heading "Factors Affecting Our Business and Results of Operations."

The availability of sufficient coverage and reimbursement for procedures involving our OMNI technology is fundamental to our business and prospects, with Medicare providing reimbursement for procedures that account for a majority of our sales revenues. As such, our business and results of operation are in material part dependent upon Medicare reimbursement policies applicable to OMNI procedures. Recent occurrences that could reasonably be expected to materially impact Medicare reimbursement for OMNI procedures include the following:

• In May 2024, five of the seven Medicare Administrative Contractors (“MACs”), published proposed local coverage determinations (the “Proposed LCDs”) that, if finalized, will establish new Medicare coverage policies for certain minimally invasive glaucoma surgical procedures ("MIGS procedures") performed in these MACs' jurisdictions. Unlike the LCDs previously published and later withdrawn by these MACs in 2023, the Proposed LCDs do not characterize the OMNI procedure as investigational. If the Proposed LCDs are finalized and go into effect in their current form, Medicare coverage will remain available under the LCDs for MIGS procedures involving the OMNI technology. Each of the Proposed LCDs, if finalized in their current form, would adopt a non-coverage policy when an aqueous shunt or stent procedure is performed with another surgical MIGS procedure, such as canaloplasty or goniotomy, at the same time in the same patient eye. We expect this proposed non-coverage for multiple MIGS procedures, if finalized, may reduce overall MIGS procedure volumes. Given OMNI's comprehensive treatment of the conventional outflow pathway, we believe OMNI provides an effective single MIGS procedure option for cases that were previously treated with a combination of MIGS procedures, but we cannot assure you that the Proposed LCDs, if finalized, will not have an adverse impact on future OMNI sales and therefore adversely affect our business, financial condition and results of operations.
• In July 2024, CMS issued the calendar year (CY) 2025 Hospital Outpatient Prospective Payment System (OPPS) and ASC Payment System proposed rule (the “Proposed Rule”) setting forth proposed Medicare payment rates for hospital outpatient and ASC services in 2025. Pursuant to the Proposed Rule, Current Procedural Terminology (CPT) code 66174, which is a code used to report procedures performed with our OMNI technology, was awarded device-intensive status for procedures performed in the ASC setting. If the final rule, which we expect will be issued in the fourth quarter of 2024, confirms device-intensive status for CPT code 66174, then Medicare facility reimbursement for such procedures performed in the ASC setting will increase by approximately $600 compared to 2024 ASC facility reimbursement amounts. We believe that such an increase in reimbursement, if finalized, would materially benefit us and our customers, and allow our OMNI technology to compete more effectively in the marketplace in 2025. Device-intensive designations are granted for a period of one year only and are based on CMS’ review of applicable claims data. If CPT code 66174 does not meet the eligibility criteria for device-intensive status in CY2025 or any subsequent calendar year, then Medicare reimbursement for this service when performed in the ASC will accordingly decrease at the start of the next year after device-intensive status is removed.

Components of Our Results of Operations

Revenue

We currently derive the majority of our U.S. revenue from the sale of our OMNI and SION products to ASCs and HOPDs and our TearCare products to ECPs. To date, the revenue from our Surgical Glaucoma segment has accounted for over 90% of our total revenue, substantially all of which was generated from sales within the U.S. Our Surgical Glaucoma customers place orders based on their expected procedure volume and reorder as needed, typically on a biweekly, monthly or bimonthly basis. Our TearCare customers typically purchase a TearCare System which consists of one or more TearCare SmartHubsTM (“SmartHubs”), multiple single-use TearCare SmartLids® (“SmartLids”) and other accessories. After utilizing their initial inventory, customers can reorder SmartLids as needed. No single customer accounted for 10% or more of our revenue for the six months ended June 30, 2024 and 2023.

The growth in our revenue is driven by the demand for elective surgery and treatment utilizing our products in the United States and Europe. Such demand is often lower during summer months because of ECP vacations and in winter months because of fewer business or surgery days due to holidays and adverse weather conditions.

Cost of Goods Sold and Gross Margin

Our components and products are produced by third-party suppliers and manufacturers. Our cost of goods sold consists primarily of amounts paid for our products to third-party manufacturers, and our manufacturing overhead costs, which consist primarily of personnel expenses, including salaries, benefits and stock-based compensation, and reserves for excess, obsolete and non-sellable inventory. Cost of goods sold also includes depreciation expenses for production equipment which we provide to our third-party manufacturers and certain direct costs, such as shipping and handling costs.

We calculate gross margin as gross profit divided by revenue. Our gross margin has been and we believe it will continue to be, affected by a variety of factors, including differences in segment gross margins, changes in average selling prices, product sales mix, production and ordering volumes, manufacturing costs, product yields, and headcount. In general, we expect our gross margins to increase over the long term to the extent our production and ordering volumes increase and as we spread the fixed portion of our overhead costs over a larger number of units produced. We intend to use our design, engineering and manufacturing know-how and capabilities to further advance and improve the efficiency of our suppliers’ manufacturing processes, which we believe will reduce costs and increase our gross margins. Our gross margins could fluctuate from quarter to quarter as our product mix varies, we transition to new suppliers, introduce new products, and adopt new manufacturing processes and technologies.

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of costs associated with engineering, product development, clinical studies to develop and support our products, including clinical trial design, clinical trial site initiation and study costs, internal and external costs associated with our regulatory compliance and quality assurance functions, medical affairs, cost of products used for clinical trials and other costs associated with products and technologies – either new or enhancements of existing platforms – that are in development. These expenses also include personnel expenses, including salaries, benefits and stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, depreciation expenses for equipment and an allocation of information technology ("IT") and facility overhead expenses. Our R&D expenses as a percentage of revenue may vary over time depending on the level and timing of new product development efforts, as well as clinical development, clinical trial and other related activities. We expect our R&D expenses to increase for the next several years as we continue to invest in our active clinical trial programs, develop new products, and improve our existing products.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation related to selling, marketing and corporate functions, allocation of IT and facility overhead expenses, bad debt expense, finance, legal and human resource costs. Other SG&A expenses include training, travel expenses, promotional activities, marketing initiatives, market research and analysis, conferences and trade shows, professional services fees (including external legal, audit, consulting and tax fees), insurance costs, and general corporate expenses.

Investment Income

Investment income primarily consists of interest and amortization on held-to-maturity investments in treasury securities.

Interest Expense

Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the accretion of debt discount and amortization of debt issuance costs associated with our term loan agreement.

Loss on Debt Extinguishment

The loss on debt extinguishment is associated with the Company's termination and settlement of the MidCap Term Loan.

Other Expense, Net

Other expense, net primarily consists of income and expenses that do not originate from the Company's primary business.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023 (dollars in thousands)

(unaudited)

Revenue. Our Surgical Glaucoma revenue for the three months ended June 30, 2024 was $20.2 million, a decrease of $1.2 million, or 5.4%, from the prior year comparable period. The overall decrease in Surgical Glaucoma revenue was primarily attributable to a decrease in the number of OMNI units sold and a lower average selling price primarily due to product mix in the three months ended June 30, 2024. This decline in units sold was primarily driven by a decrease in unit utilization per ordering facility. Our Dry Eye revenue decreased 45.7% in the three months ended June 30, 2024 compared to the prior year comparable period primarily due to fewer new customers added in the period, which led to lower SmartHub revenue and fewer SmartLids purchased. The primary driver of fewer new customers added and lower units sold was due to the Company’s focus on the next phase of its commercial strategy for its Dry Eye segment which involves achieving market access.

Cost of Goods Sold. Cost of goods sold was $3.0 million during the three months ended June 30, 2024, a decrease of $0.4 million from $3.4 million in the prior year comparable period. Our Surgical Glaucoma cost of goods sold decreased less than $0.1 million as compared to the prior year comparable period. The decrease was primarily driven by lower sales volumes and product sales mix. Our Dry Eye cost of goods sold decreased $0.3 million in the three months ended June 30, 2024 compared to the comparable period in 2023, primarily driven by lower sales volumes and product mix.

Gross Profit. Our total gross profit was $18.3 million in the three months ended June 30, 2024, a decrease of $1.7 million from the prior year comparable period. Our total gross margin for the three months ended June 30, 2024 increased to 85.8%, up from 85.6% in the prior year comparable period, primarily due to increased mix toward our higher gross margin Surgical Glaucoma segment, partially offset by declines in gross margin of both segments. Gross margin in our Surgical Glaucoma segment was 88.0% for the quarter ended June 30, 2024, a decrease from 88.6% for the prior year comparable period, primarily due to product sales mix. In our Dry Eye segment, gross margin decreased from 54.8% in the second quarter of 2023 to 46.5% in the second quarter of 2024, primarily due to product sales mix and higher overhead costs per unit due to lower volumes.

Research and Development Expenses. R&D expenses during the three months ended June 30, 2024 decreased $0.9 million, or 17.3%, to $4.3 million. The decrease was primarily driven by a $0.7 million decrease in clinical studies and general research and development expenses, as well as a $0.4 million decrease in payroll expenses.

Selling, General, and Administrative Expenses. SG&A expenses were $26.7 million for the three months ended June 30, 2024, a decrease of $3.4 million from the prior year comparable period. The decrease was primarily driven by a $2.9 million decrease in personnel expenses, including lower commissions during the current period. In addition, the Company saw a $0.7 million decrease in marketing expenses, a $0.7 million decrease in travel and entertainment expenses, and a $0.3 million decrease in facilities expenses. These decreases were partially offset by a $0.8 million increase in accounting and legal expenses, as well as a $0.5 million increase in stock-based compensation expenses.

Investment Income. Investment income was $1.5 million for the three months ended June 30, 2024, a decline of $0.3 million from the prior year comparable period. The decline was due to lower investment balances during the current year.

Interest Expense. Interest expense decreased $0.2 million, due to lower lending rates associated with the refinanced debt agreement during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Loss on Debt Extinguishment. Loss on debt extinguishment was $0.0 million for both the three months ended June 30, 2024 and 2023.

Other Expense, Net. Other expense, net was expense of less than $0.1 million for both the three months ended June 30, 2024 and 2023.

Comparison of the Six Months Ended June 30, 2024 and 2023 (dollars in thousands)

(unaudited)

Revenue. Revenue for the six months ended June 30, 2024 was $40.6 million, a decrease of $1.7 million, or 3.9%, from the prior year comparable period. The overall decrease in Surgical Glaucoma revenue was primarily attributable to a decrease in the number of OMNI units sold in the six months ended June 30, 2024. This decline in units sold was primarily driven by a decrease in unit utilization per ordering facility and a lower average selling price primarily due to product mix. Our Dry Eye revenue decreased 40.1% in the six months ended June 30, 2024 versus the prior year comparable period primarily due to fewer new customers added in the period, which led to lower SmartHub revenue and fewer SmartLids purchased, partially offset by a higher average selling price for SmartHubs.

Cost of Goods Sold. Cost of goods sold was $5.8 million during the six months ended June 30, 2024, a decrease of $0.6 million from $6.4 million in the prior year comparable period. Our Surgical Glaucoma cost of goods sold decreased $0.2 million as compared to the prior year comparable period. The decrease was primarily driven by product sales mix and a one-time prior year inventory scrap expense. Our Dry Eye cost of goods sold decreased $0.4 million in the six months ended June 30, 2024 compared to the prior year comparable period, primarily driven by lower sales volumes and product mix.

Gross Profit. Our total gross profit was $34.8 million in the six months ended June 30, 2024, a decrease of $1.1 million from the prior year comparable period. Our total gross margin for the six months ended June 30, 2024 increased to 85.7%, up from 84.8% in the prior year comparable period. Gross margin in our Surgical Glaucoma segment was 88.0% for the six months ended June 30, 2024, an increase from 87.6% for the prior year comparable period, primarily due to a one-time prior year inventory scrap expense. In our Dry Eye segment, gross margin decreased from 54.4% in the six months ended June 30, 2023 to 44.4% in the six months ended June 30, 2024, primarily due to product sales mix and higher overhead costs per unit due to lower volumes.

Research and Development Expenses. R&D expenses during the six months ended June 30, 2024 decreased $0.9 million, or 9.5%, to $9.0 million. The decrease was primarily driven by a $0.7 million decrease in clinical studies and general research and development expenses, as well as $0.6 million decrease in payroll expenses. These were partially offset by a $0.3 million increase in legal and stock-based compensation expenses.

Selling, General, and Administrative Expenses. SG&A expenses were $53.2 million for the six months ended June 30, 2024, a decrease of $5.5 million from the prior year comparable period. The decrease was primarily driven by a $5.9 million decrease in personnel expenses, including lower commissions during the current period. In addition, the Company saw a $2.2 million decrease in marketing expenses, including sales training and demos, a $1.1 million decrease in travel and entertainment expenses, and a $0.6 million decrease in facilities expenses. These decreases were partially offset by a $3.4 million increase in accounting and legal expenses, as well as a $1.4 million increase in stock-based compensation expenses.

Investment Income. Investment income was $3.2 million for the six months ended June 30, 2024, a decline of $0.4 million from the prior year comparable period. The decline was due to lower investment balances during the current year.

Interest Expense. Interest expense decreased $0.3 million, due to lower lending rates associated with the refinanced debt agreement during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Loss on Debt Extinguishment. Loss on debt extinguishment was $2.0 million for the six months ended June 30, 2024 as compared to $0.0 million in the six months ended June 30, 2023. The increase in the current year is driven by the Company's loss on the termination and settlement of the MidCap Term Loan.

Other Expense, Net. Other expense, net was expense of $0.1 million and $0.0 million for the six months ended June 30, 2024 and 2023.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

Net Cash Used in Operating Activities.

Net cash used in operating activities for the six months ended June 30, 2024 was $19.3 million, consisting primarily of a net loss of $28.6 million, as well as a net change in our operating assets and liabilities of $1.4 million, partially offset by non-cash charges of $10.7 million. The net change in our operating assets and liabilities was primarily due to a $5.7 million increase in accounts receivable and a $1.3 million decrease in other noncurrent liabilities. Accrued and other current liabilities increased $1.9 million, while both inventory and prepaid expenses and other current assets increased by $1.2 million. In addition, accrued compensation increased by $0.9 million and accounts payable increased by $0.6 million. The non-cash charges primarily consisted of $8.8 million related to stock-based compensation expense, $1.0 million of noncash loss on the extinguishment of debt, $0.4 million of depreciation and amortization and $0.3 million of noncash operating lease expense.

Net cash used in operating activities for the six months ended June 30, 2023 was $30.9 million, consisting primarily of a net loss of $31.8 million and a net change in our operating assets and liabilities of $7.7 million, partially offset by non-cash charges of $8.7 million. The net change in our operating assets and liabilities was primarily due to a $3.0 million increase in accounts receivable and a $2.0 million increase in inventory to support the continued growth of our operations. We had a $0.2 million increase in accounts payable, while accrued compensation and accrued and other current liabilities decreased by an aggregate of $4.5 million, primarily driven by the timing of payments on invoices and bonuses. The non-cash charges primarily consisted of $7.3 million related to stock-based compensation, $0.5 million of noncash operating lease expense, $0.3 million of depreciation, and $0.3 million of accretion of debt discount and amortization of debt issuance costs.

Net Cash Used in Investing Activities.

Net cash used in investing activities for the six months ended June 30, 2024 and 2023 was $0.2 million and $0.2 million, respectively, in both cases for purchases of property and equipment.

Net Cash (Used in) Provided by Financing Activities.

Net cash used in financing activities for the six months ended June 30, 2024 was $0.5 million, consisting primarily of the costs associated with the refinancing of the outstanding term loan agreement. Net cash provided by financing activities for the six months ended June 30, 2023 of $0.6 million, which primarily relates to the exercise of common stock options and proceeds from employee stock plan purchases, partially offset by taxes paid on the net share settlement of restricted stock units.

Liquidity and Capital Resources

Sources of Liquidity

To date, our primary sources of capital have been private placements of redeemable convertible preferred stock, debt financing agreements, the sale of common stock in our IPO, and revenue from the sale of our products. Since our inception, we have raised an aggregate of approximately $402.4 million in net proceeds from sales of our redeemable convertible preferred stock and common stock and borrowed $32.9 million of net proceeds under our term loans. In January 2024, we entered into a Loan and Security Agreement (the “Hercules Loan Agreement”) with Hercules Capital, Inc (“Hercules”) and certain of its affiliates (collectively with Hercules, the “Lenders”), which provides for a senior secured term loan facility in the aggregate principal amount of up to $65.0 million. We used the proceeds from an initial $35.0 million tranche funded under the Hercules Loan Agreement to discharge our indebtedness under our prior secured credit facility with MidCap Financial Services and certain of its affiliates (the “Prior Lenders”). While our indebtedness to Lenders remains outstanding, we are required to use commercially reasonable efforts to grant to Lenders the option to invest up to $3.0 million in our next round of equity financing, if any, broadly marketed to multiple investors on the same terms, conditions and pricing offered to investors in such subsequent equity financing.

As of June 30, 2024, we had cash and cash equivalents of $118.2 million, an accumulated deficit of $323.4 million and $35.0 million outstanding under our term loan agreement (before debt discount) with Hercules. Based on our current planned operations, we expect our cash and cash equivalents and additional borrowings available under the Hercules Loan Agreement will enable us to fund our operations for at least the next 12 months and the foreseeable future.

Hercules Capital Loan Agreement

The Hercules Loan Agreement provides for a senior secured term loan facility in the aggregate principal amount of up to $65.0 million. An initial tranche of $35.0 million (the “Initial Loan”) was funded under the Hercules Loan Agreement on January 22, 2024 (the “Closing Date”). In addition to the Initial Loan, the Hercules Loan Agreement provides for additional tranches as follows: $5.0 million available in a single draw through December 15, 2024, $10.0 million available to draw upon the achievement of certain performance milestones through September 15, 2025, and $15.0 million available for us to draw on through the interest only period in increments of $5.0 million, subject to the sole approval of Hercules' investment committee (the “Tranche Loans,” and together with the Initial Loan, the “Term Loans”).

The Hercules Loan Agreement includes a maturity date of July 1, 2028, with an interest only period running for 30 months, extendable for an additional 6 months for a total of 36 months upon the achievement of certain milestones. The Term Loans accurate interest at a floating annual rate of the greater of 10.35% or the Wall Street Journal prime rate plus 2.35%, with the initial interest rate under the Term Loans equal to 10.85%. The final payment fee is set at 5.95% of the funded balance. In conjunction with the funding of the Initial Loan, we issued warrants to the Lenders to purchase up to an aggregate of 135,686 shares of our common stock at an exercise price of $5.159 per share. Each warrant is exercisable for a period of seven years from the date of issuance and is tradeable in accordance with the provisions of Rule 144 of the Securities Act.

Our obligations under the Hercules Loan Agreement are guaranteed by us and our future subsidiaries, subject to exceptions for certain foreign subsidiaries. Our obligations under the agreement are secured by substantially all of our assets, including our material intellectual property. Additionally, we are subject to customary affirmative and negative covenants, including covenants that limit or restrict the ability of us to, among other things, incur indebtedness, grant liens, merge or consolidate, make investments, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock and enter into certain transactions with affiliates, in each case subject to certain exceptions. We are also subject to certain minimum cash and revenue covenants under the Hercules Loan Agreement.

MidCap Loan Agreements

In January 2019, we entered into credit and security agreements with the Prior Lenders. These agreements were amended and restated in November 2020, providing for a maximum $40.0 million credit facility consisting of a $35.0 million senior secured term loan (the "2020 Term Loan") and a $5.0 million revolving loan (the "2020 Revolver” and together with the 2020 Term Loan, the “MidCap Credit Facility”). In July 2023, we terminated the 2020 Revolver. In January 2024, we terminated the Amended and Restated Credit and Security Agreement (Term Loan) “(the “MidCap Term Loan Agreement”) and paid off in full the secured obligations thereunder in connection with our entry into the Hercules Loan Agreement.

The MidCap Term Loan Agreement extended the maturity date of the 2020 Term Loan to November 1, 2025 and adjusted the stated floating interest rate to reserve-adjusted SOFR, plus 7.00%. Principal payments under the MidCap Term Loan Agreement were extended and scheduled to begin in December 2024. The final payment fee was amended to 6.0%.

Our obligations under the MidCap Term Loan Agreement were guaranteed by us and our future subsidiaries, subject to exceptions for certain foreign subsidiaries. Our obligations under the agreements were secured by substantially all of our assets, including our material intellectual property. Additionally, we were subject to customary affirmative and negative covenants, including covenants that limited or restricted our ability to, among other things, incur indebtedness, grant liens, merge or consolidate, make investments, dispose of assets, make acquisitions, pay dividends or make distributions, repurchase stock and enter into certain transactions with affiliates, in each case subject to certain exceptions.

The MidCap Credit Term Loan Agreement contained events of default that included, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, cross-defaults and bankruptcy and insolvency events.

Leases

Our corporate headquarters are located in Menlo Park, California, where we lease approximately 11,000 square feet of office, research and development, engineering and laboratory space pursuant to a lease that commenced on August 1, 2021, and expires on October 31, 2026.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Estimates

Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that the assumptions and estimates associated with stock-based compensation expense have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider this to be a critical accounting estimate.

There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates described in our audited consolidated financial statements for the year ended December 31, 2023, included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report.

JOBS Act Accounting Election

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period under the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financial statements to those of other public companies more difficult.

Recently Issued Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the notes to our unaudited condensed consolidated financial statements in this Quarterly Report for recent accounting pronouncements not yet adopted as of the date hereof.

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risk. There have been no material changes to such risks from those described in our Annual Report under the heading "Quantitative and Qualitative Disclosures About Market Risk."

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our principal executive officer and our principal financial and accounting officer, evaluated our disclosure controls and procedures. The term "disclosure controls and procedures," (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer, and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are not aware of any material changes to the risks and uncertainties described under the heading "Risk Factors" in our Annual Report or Quarterly Report on Form 10-Q for the three months ended March 31, 2024, which are incorporated herein by reference. The risks described in our Annual Report and our Quarterly Report on Form 10-Q for the three months ended March 31, 2024 are not the only ones we face. Additional risks we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results, liquidity, and future prospects.