# Sight Sciences, Inc. (SGHT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sight Sciences, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1531177/000095017024030278/sght-20231231.htm
Accession: 0000950170-24-030278
Filing date: 2024-03-13
Report date: 2023-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/SGHT/
All MD&A years: /company/SGHT/mda/
Previous year: /company/SGHT/mda/fy2022/ (FY 2022)
Next year: /company/SGHT/mda/fy2024/ (FY 2024)

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create an interventional mindset in eyecare whereby our products may be used in procedures which supplant conventional outdated approaches.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:

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comprehensively understanding disease physiology;

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developing products that are intended to preserve, protect, and restore natural physiological functionality to diseased eyes;

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developing and marketing products with proven clinical evidence that achieve superior effectiveness versus current treatment paradigms while minimizing complications or side effects;

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providing intuitive, patient-friendly, interventional solutions to ophthalmologists and optometrists (together, "ECPs"); and

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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 service 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 meibomian gland disease ("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 220,000 estimated uses of Surgical Glaucoma products and their predicates in over 1,900 hospitals and ASCs in the U.S. and Europe, and over 50,000 estimated uses of TearCare in over 1,500 eyecare facilities in the U.S. through December 31, 2023.

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.

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Revenue in our Surgical Glaucoma segment for the years ended December 31, 2023 and 2022 was $74.3 million and $65.6 million, respectively, with gross margins for the same periods of 88.1% and 87.4%, respectively. Revenue in our Dry Eye segment for the years ended December 31, 2023 and 2022 was $6.7 million and $5.7 million, respectively, with gross margins for the same periods of 54.8% and 29.1%, 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. For all periods presented, substantially all of our revenue was generated from customers in the U.S.

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

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further demonstrate our products’ clinical effectiveness and safety to potential customers, patients, payors and regulators including establishing OMNI and SION as the standards of care of interventional glaucoma treatment among MIGS-trained surgeons, develop the standalone MIGS market, and pursue coverage and equitable reimbursement for TearCare;

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enhance our commercial capabilities and expertise, including resources dedicated to sales, marketing and education;

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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;

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develop our existing international markets and expand into new international markets; and

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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 December 31, 2023, we had an outstanding term loan balance of $35.0 million (excluding debt discount and amortized debt issuance costs), cash and cash equivalents of $138.1 million and an accumulated deficit of $294.8 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. These factors include, but are limited to:

Product Development

We believe our product development approach is a key differentiator of our team and our company. We are focused on continuous innovation and design and utilize input from our network of expert employees (including ophthalmologists on staff), advisors and customers to rapidly iterate our pre-and post-commercial product designs with the aim of better satisfying the needs of our customers and their patients, delivering the most effective, safe, and consistent outcomes, and increasing adoption and utilization of our solutions. We believe it is critical to our product development approach to comprehensively understand the disease physiology, treat the underlying causes with an interventional mindset, and create products with an intuitive design and strong clinical evidence. Once our products are launched, our customer feedback loop helps us further develop our products. This is particularly evident in the evolution of OMNI, which originated from the combined functionality of two internally developed, commercial predicate devices, each of which had their own multiple commercial iterations. Our future growth is dependent on our ability to continue innovating and applying our expertise of disease physiology to improve existing products and develop new products.

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Reimbursement Rates and Coverage

In the U.S., healthcare providers use separate billing codes to report the provision of medical procedures and use of supplies to third-party payors, such as government programs or private insurance, and seek reimbursement for all or a portion of those costs. Physician fee payment rates for products covered by temporary Current Procedural Terminology (“CPT”) codes are set by the multi-state, regional contractors, or Medicare Administrative Contractors (“MACs”), which are responsible for administering Medicare claims. MACs have in the past, and may in the future, change coverage terms, and there can be no assurance that coverage and adequate reimbursement will be obtained from, or maintained by, the MACs. In June 2023, for instance, five of the seven MACs published draft local coverage determinations (the “Draft LCDs”), which identified certain procedures as investigational in patients over the age of 18 for glaucoma management, including canaloplasty in combination with trabeculotomy (ab interno), which is a procedure associated with OMNI. The Draft LCDs, as amended, were published in final form during the quarter ended December 31, 2023, with a future effective date of January 29, 2024, and subsequently withdrawn in late December 2023. Had the Draft LCDs, as amended, not been withdrawn, canaloplasty followed by trabeculotomy (ab interno) would have been rendered non-covered as of January 29, 2024 with respect to Medicare Part B beneficiaries in the states administered by these MACs, which states accounted for approximately 63% of our total Surgical Glaucoma revenue in 2022. Any updated or new local coverage determinations or other coverage policies that may establish a policy of Medicare non-coverage, or materially restrict coverage, for one or more of our products would have materially and adversely impacted our business, financial condition, and results of operations.

Market Education and Training on the Benefit of Our Products vis-à-vis Existing Treatment Alternatives

One of the key drivers of our success is educating ophthalmologists, optometrists, patients, and third-party payors about the clinical and safety benefits of our products and of the benefits of more proactive, interventional approach to treating glaucoma and DED. We believe the required market education and development is best accomplished through a differentiated, highly involved commercial approach. As such, we devote significant resources to onboarding our sales professionals and to continuously augmenting their knowledge and capabilities. Our sales professionals provide ECPs with the necessary education, training and support to adopt and continue to safely use our products. We believe that increasing acceptance and usage of our products will require continued investment in our sales force and education efforts to ensure ECPs, patients and third-party payors learn more about our products and appreciate our benefits to their target patient populations.

Maximizing Product Usage by Customers

Demand for our products will be highly dependent on our ability to develop their potential addressable markets and maximize the breadth of patients our products can serve. OMNI is indicated for canaloplasty followed by trabeculotomy to reduce elevated intraocular pressure (“IOP”) in adult patients with primary open-angle glaucoma (“POAG”) in the U.S. and with open-angle glaucoma (“OAG”) in the EU. We believe OMNI is the only device that is authorized by the FDA as an ab interno procedure to: reduce IOP in adult patients with POAG across the spectrum of disease severity; be used in mild-to-moderate Combination Cataract or Standalone Procedures; access 360 degrees of the diseased conventional outflow pathway through a single clear corneal incision; and facilitate two consecutive procedures, canaloplasty and trabeculotomy, to comprehensively treat all three known areas of resistance in the conventional outflow pathway in a single operating room visit. Our ability to establish OMNI as the standard of care for all POAG patients by continuing to grow its adoption and utilization in Combination Cataract Procedures and by pioneering the development of the market for interventional Standalone Procedures will have a substantial impact on our future growth.

We introduced our SION Surgical Instrument in the third quarter of 2022. SION satisfies the American Academy of Ophthalmology definition of goniotomy and is registered with the FDA as a Class I 510(k) exempt device. SION’s bladeless design, micro-engineered and precision manufactured using specialized lasers, excises tissue without cutting. SION grasps and removes diseased tissue as the surgeon sweeps the instrument around Schlemm’s canal with a single smooth motion. The bladeless technology of SION was developed with leading ophthalmic surgeons to improve safety and ease of use by eliminating the need to navigate sharp instrumentation within the eye’s anterior chamber and iridocorneal angle anatomy. SION allows us to serve specific subsets of customers who may prioritize a faster or simpler procedure. Our target customers for SION include three types of combination cataract MIGS surgeons that are distinct from target OMNI customers: (1) high volume cataract surgeons seeking to perform the quickest MIGS procedures, (2) surgeons who are initially less experienced with MIGS such as surgical fellows at academic institutions and (3) surgeons looking for the most cost effective MIGS procedures. We believe that these use cases have very little overlap with the use cases for our

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OMNI device. Our ability to establish SION as a product with differentiated ease of use, safety and efficacy will be an important driver of SION’s commercial growth and success.

TearCare is a unique open-eye heating and expression device designed to melt and remove meibomian gland obstructions. We believe TearCare has a compelling physiological profile to address obstruction from meibomian gland disease ("MGD"), which is the primary cause of evaporative DED, a disease characterized by low quality tears that evaporate prematurely. The current DED treatment market primarily consists of an abundance of OTC and prescription eyedrops that seek to lubricate the ocular surface, alleviate inflammation and/or increase tear production. However, OTC and prescription eyedrops are incapable of clearing obstructions in the meibomian glands and do not address MGD’s eyelid-borne physiology and poor tear quality. MGD is associated with up to 86% of DED cases and is a leading root cause of evaporative DED, which is characterized by low quality tears that evaporate prematurely. Clinical studies have demonstrated that treating MGD by liquefying and removing clogged meibum is the most effective method to eliminate obstructions and restore the lipid layer of tear film, thereby preventing premature evaporation of tears. TearCare was designed to be administered during the course of a routine office visit to an ECP, which makes it convenient for patients, and allows providers to maintain procedural throughput in their practices. Our ability to improve patient access and market education on TearCare and the benefits of proactive MGD treatment will be key drivers of TearCare’s future growth.

Operational Excellence and Cost Efficiency

We aim to achieve operating and financial milestones with optimal capital efficiency, and focus on our market value relative to invested capital as a key measurement of our performance. To date, we have raised $402.4 million in net proceeds from equity and debt financings, including $252.2 million from our IPO. With a portion of these net proceeds (our December 31, 2023 cash and equivalents was $138.1 million), we have developed and commercially launched two clinically differentiated products, funded multiple completed and ongoing clinical trials, and built our management team and company infrastructure to support the continued growth of our business. We believe this level of operational and commercial progress relative to our total capital investment to date compares favorably to medical technology peers and we seek to design products that can achieve attractive long-term gross margins. However, during the year ended December 31, 2023, global and regional economies, as well as the markets we serve, have experienced significant volatility, including as a result of the impacts of macroeconomic conditions, such as inflation, supply shortages, and geopolitical pressures. While the impact of these factors is not readily determinable, we have not been materially impacted by these macroeconomic conditions. However, the duration and scope of these conditions cannot be predicted with certainty, and it is uncertain what impacts, if any, these pressures may have on our ability to support the efficient and sustainable growth of our business.

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. During the years ended December 31, 2023 and 2022, the revenue from our Surgical Glaucoma segment 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 years ended December 31, 2023 and 2022.

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.

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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 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.

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.

Other Income (Expense), Net

Other income (expense), net consists of interest income and amortization on held-to-maturity investments in treasury securities.

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Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

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Revenue. Revenue in the year ended December 31, 2023 was $81.1 million, an increase of $9.7 million, or 13.6%, compared to the prior year. In 2023, Surgical Glaucoma and Dry Eye sales contributed $74.3 million and $6.7 million, respectively, compared to $65.6 million and $5.7 million, respectively, in 2022. The overall increase in Surgical Glaucoma revenue was primarily attributable to an increase in the number of OMNI and SION units sold in the year ended December 31, 2023. This growth in units was driven by both a growth in the number of ordering facilities, as well as an increase in unit utilization per ordering facility. Our Dry Eye revenues increased in the year ended December 31, 2023 due to an increase in total TearCare procedures performed versus the prior year.

Cost of Goods Sold. Cost of goods sold during the year ended December 31, 2023, decreased $0.5 million, or 3.9%, compared to the prior year. Our Surgical Glaucoma cost of goods sold increased $0.5 million as compared to the comparable period in 2022. The increase was driven by increased sales activity, and product mix, partially offset by lower per-unit production costs as a result of continued manufacturing efficiencies. Dry Eye cost of goods sold decreased $1.0 million compared to the prior year, driven primarily by charges associated with the voluntary recall of our SmartHub 1.0 devices in 2022, as well as increased efficiencies driven by increased volumes.

Gross Profit. Our total gross profit was $69.2 million for the year ended December 31, 2023, an increase of $10.2 million, or 17.3%, compared to the prior year. Total gross margin increased to 85.3% for the year ended December 31, 2023, up from 82.7% in the prior year period. The increase in gross margin was primarily due to increased sales volume in OMNI units and manufacturing efficiencies. Gross margin in our Surgical Glaucoma segment was 88.1% for the year ended December 31, 2023, an increase from 87.4% for the prior year period. In our Dry Eye segment, gross margin increased from 29.1% in 2022, to 54.8% for the year ended December 31, 2023.

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Research and Development Expenses. R&D expenses were $17.6 million for the year ended December 31, 2023, a decrease of $5.3 million, or 23.2%, compared to the prior year. The decrease was primarily attributable to a $2.3 million decrease in costs associated with clinical studies and general R&D. In addition, the Company saw a $1.2 million decrease in consulting, legal, and professional services and a $0.5 million decrease in personnel expenses, including payroll and related benefits.

Selling, General, and Administrative Expenses. SG&A expenses were $108.9 million for the year ended December 31, 2023, a decrease of $11.2 million, or 9.3%, compared to the prior year period. The decrease was primarily attributable to a $5.1 million decrease in personnel expenses, including payroll and related benefits, commissions, and incentive compensation. In addition, the Company saw a $3.9 million decrease in marketing expenses, a $3.2 million decrease in consulting, recruiting, and professional services, and a $0.8 million decrease in facilities expenses. These decreases were offset by a $2.0 million increase in legal, accounting and related expenses, and a $0.7 million increase in stock-based compensation expense.

Interest Expense. Interest expense was $5.4 million, an increase of $0.9 million, or 21.1%, compared to the prior year period due to an increase in lending rates during the year ended December 31, 2023.

Other Income (Expense), Net. Other income, net was $7.2 million, an increase of $5.0 million, or 225.6%, for the year ended December 31, 2023 as compared to $2.2 million for the year ended December 31, 2022. The income is attributable to the amortization of purchase discounts on held-to-maturity cash-equivalent investments. The Company began investing in treasury securities in June 2022.

Cash Flows

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

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Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $47.2 million, consisting primarily of a net loss of $55.5 million and a net change in our operating assets and liabilities of $9.1 million, partially offset by non-cash charges of $17.5 million. The change in our net operating assets and liabilities was primarily due to a $7.4 million decrease in accrued and other current liabilities and accrued compensation. This was due to a decline in sales commissions and incentive compensation, as well as reduced purchasing of inventory due to the impacts of the Draft LCDs in the fourth quarter of 2023. The Company also had a $2.2 million increase in inventory to support the planned growth in operations. These were partially offset by $0.8 million decrease in prepaid expenses and other current assets due to lower insurance premiums, as well as a $0.7 million decrease in accounts receivable. The non-cash charges primarily consisted of $14.6 million related to stock-based compensation, $0.6 million of depreciation, $0.6 of accretion of debt discount and amortization of debt issuance costs, and $1.0 million of noncash operating lease expense.

Net cash used in operating activities for the year ended December 31, 2022 was $76.0 million, consisting primarily of a net loss of $86.2 million and a net change in our operating assets and liabilities of $5.7 million, partially offset by non-cash charges of $16.0 million. The change in our net operating assets and liabilities was primarily due to a $6.8 million increase in accounts receivable and a $3.3 million increase in inventory to support the continued growth of our operations. The Company had a $0.7 million decrease in accounts payable, while accrued compensation, as well as accrued and other current liabilities, increased $4.0 million, driven by the timing of payments on invoices and bonuses. The non-cash charges primarily consisted of $13.0 million related to stock-based compensation, $0.7 million of depreciation, $0.7 million of accretion of debt discount and amortization of debt issuance costs, and $0.5 million of noncash operating lease expense.

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Net Cash Used in Investing Activities

Net cash used in investing activities in the years ended December 31, 2023 and 2022 was $0.8 and $1.0 million, consisting of purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities in the years ended December 31, 2023 and 2022 was $1.1 and $1.2 million, which primarily relates to proceeds from the exercise of common stock options and proceeds from employee stock purchase plan purchases.

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 through December 31, 2023, 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 Trust 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 December 31, 2023, we had cash and cash equivalents of $138.1 million, an accumulated deficit of $294.8 million and $35.0 million outstanding under our term loan agreement with our Prior Lenders (before debt discount). 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.

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.

The Amended and Restated Credit and Security Agreement (Term Loan) evidencing the 2020 Term Loan (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. As of December 31, 2023, we were in compliance with all financial and non-financial covenants under the MidCap Term Loan Agreement.

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.

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In January 2024, we terminated the MidCap Term Loan Agreement and paid off in full the secured obligations thereunder in connection with our entry into the Hercules Loan Agreement.

Hercules Capital Loan Agreement

In January 2024, we entered into the Hercules Loan Agreement, which provides for a maximum $65.0 million credit facility. An initial tranche of $35.0 million (the “Initial Loan”) was funded under the credit agreement on January 22, 2024 (the “Closing Date”). In addition to the Initial Loan, the Hercules Loan Agreement provides for additional tranches available as follows: $5.0 million available in a single draw through December 15, 2024 (together with the Initial Loan, the “Tranche I Commitment”), $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 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 a period 30 months, extendable up to 36 months upon the achievement of certain milestones. The agreement contains a floating rate of the greater of 10.35% or the Prime Rate plus 2.35%, with the initial interest rate under the agreement of 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 seven year 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.

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 minimum revenue covenants under the Hercules Loan Agreement.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements

Critical Accounting Estimates

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on 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.

While our significant accounting policies are more fully described in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting estimates, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Stock-Based Compensation

We maintain an equity incentive plan that permits the grant of share-based awards, such as stock options and restricted stock units (RSUs), to employees and directors. We recognize equity-based compensation expense for awards of equity instruments based on the grant date fair value of those awards. We estimate the fair value of our stock option awards made to employees and directors based on the estimated fair values as of the grant date using the Black-Scholes option-pricing model, net of estimated forfeitures. The model requires us to make a number of assumptions, including expected volatility, expected term, risk-free interest rate, and expected dividend yield.

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The fair value of RSU awards is determined based on the number of units granted and the closing price of the Company's common stock as of the grant date. We expense the fair value of our equity-based compensation awards on a straight-line basis over the requisite service period, which is the period in which the related services are received.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements appearing under Part II, Item 8 for more information about recent accounting pronouncements, the timing of their adoption, and our assessment.