RxSight, Inc. 10-Q

Item 1: Financial Statements (Unaudited) RXSIGHT, INC. CONDENSED CONSOLIDATED BA LANCE SHEETS (In thousands, except number of shares and per share amounts) June 30, December 31, 2021 2020 (1) (Unaudited) Assets Current assets: Cash and cash equivalents $ 41,731 $ 13,994 Short-term investments 19,998 54,981 Accounts receivable 3,936 2,865 Inventories 8,543 8,288 Prepaid and other current assets 1,338 1,372 Total current assets 75,546 81,500 Property and equipment, net 12,686 13,287 Operating leases right-of-use assets 4,749 5,319 Restricted cash 561 461 Other assets 1,344 110 Total assets $ 94,886 $ 100,677 Liabilities, redeemable common stock, stock options, convertible preferred stock and stockholders' deficit Current liabilities: Accounts payable $ 2,342 $ 1,134 Accrued expenses and other current liabilities 4,781 4,174 Warrant liability 2,614 5,018 Lease liabilities 1,365 1,274 Total current liabilities 11,102 11,600 Long-term warrant liability — 3,828 Long-term lease liabilities 4,374 5,079 Term loan, net 39,506 24,399 Total liabilities 54,982 44,906 Commitments and contingencies ( Note 12) Redeemable common stock: Common stock, $ 0.001 par value, 24,545,966 shares authorized, 3,813,450 shares issued and outstanding as of December 31, 2020 — 80,780 Notes receivable for common stock issued — ( 803 ) Redeemable stock options — 53,085 Convertible preferred stock: Preferred stock, $ 0.001 par value, 16,572,792 shares authorized, 14,376,272 shares issued and outstanding as of June 30, 2021 and December 31, 2020 (redeemable), respectively 353,300 353,300 Stockholders' deficit: Common stock, $ 0.001 par value, 24,545,966 shares authorized, 4,124,211 shares issued and outstanding as of June 30, 2021 4 — Additional paid-in capital 137,838 — Notes receivable for common stock issued ( 365 ) — Series G common stock, $ 0.001 par value, 1 share authorized and outstanding as of June 30, 2021 and December 31, 2020 — — Series W common stock, $ 0.001 par value, 1 share authorized and no shares outstanding as of June 30, 2021 and December 31, 2020 — — Accumulated other comprehensive loss ( 3 ) ( 3 ) Accumulated deficit ( 450,870 ) ( 430,588 ) Total stockholders' deficit ( 313,396 ) ( 430,591 ) Total liabilities, redeemable common stock, stock options, convertible preferred stock and stockholders' deficit $ 94,886 $ 100,677 (1) The balance sheet at December 31,2020 has been derived from the audited consolidated financial statements included in RxSight, Inc.'s final prospectus for its public offering filed on July 29, 2021. See accompanying notes to unaudited condensed consolidated financial statements. 5 RXSIGHT, INC. CONDENSED CONSOLIDATED STATEMEN TS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (In thousands, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Sales $ 4,897 $ 2,706 $ 8,381 $ 5,594 Cost of sales 5,709 3,180 8,074 5,989 Gross profit (loss) ( 812 ) ( 474 ) 307 ( 395 ) Operating expenses: Selling, general and administrative 6,502 3,249 12,113 6,948 Research and development 6,563 5,084 13,206 10,861 Total operating expenses 13,065 8,333 25,319 17,809 Loss from operations ( 13,877 ) ( 8,807 ) ( 25,012 ) ( 18,204 ) Other income (expense), net: Change in fair value of warrants 1,214 ( 4,178 ) 1,214 ( 11,585 ) Expiration of warrant — — 5,018 — Interest expense ( 826 ) ( 4 ) ( 1,524 ) ( 9 ) Interest and other income 15 147 32 459 Loss before income taxes ( 13,474 ) ( 12,842 ) ( 20,272 ) ( 29,339 ) Income tax expense 3 40 10 45 Net loss ( 13,477 ) ( 12,882 ) ( 20,282 ) ( 29,384 ) Accretion to redemption value of redeemable preferred stock and redeemable stock options — ( 4,097 ) — ( 8,343 ) Net loss attributable to common stockholders ( 13,477 ) ( 16,979 ) ( 20,282 ) ( 37,727 ) Other comprehensive loss Unrealized gain (loss) on short-term investments ( 4 ) ( 112 ) 3 ( 35 ) Foreign currency translation gain (loss) 1 3 ( 3 ) 2 Total other comprehensive loss ( 3 ) ( 109 ) — ( 33 ) Comprehensive loss $ ( 13,480 ) $ ( 12,991 ) $ ( 20,282 ) $ ( 29,417 ) Net loss per share: Attributable to redeemable common stock, basic and diluted $ — $ ( 4.66 ) $ — $ ( 10.46 ) Attributable to Series G common stock, basic and diluted $ ( 0.32 ) $ ( 0.58 ) $ ( 0.48 ) $ ( 1.24 ) Attributable to common stock, basic $ ( 3.28 ) $ — $ ( 5.00 ) $ — Attributable to common stock, diluted $ ( 3.53 ) $ — $ ( 5.23 ) $ — Weighted-average shares used in computing net loss per share: Attributable to redeemable common stock, basic and diluted — 3,645,699 — 3,608,190 Attributable to Series G common stock, basic and diluted 1 1 1 1 Attributable to common stock, basic 4,106,403 — 4,052,920 — Attributable to common stock, diluted 4,166,439 — 4,113,249 — See accompanying notes to unaudited condensed consolidated financial statements. 6 RXSIGHT, INC. CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK, STOCK OPTIONS, CONVERTIBLE PREFERR ED STOCK AND STOCKHOLDERS’ DEFICIT (UNAUDITED) (In thousands, except number of shares) Three and Six Months Ended June 30, 2020 Notes receivable for redeemable Redeemable convertible preferred Accumulated other Redeemable common stock common stock Redeemable stock Common stock Additional paid-in comprehensive Accumulated Total stockholders' Shares Amount issued stock options Shares Amount Shares Amount capital income (loss) deficit deficit Balance at December 31, 2019 3,563,884 $ 56,422 $ ( 855 ) $ 59,631 14,374,455 $ 327,581 1 $ - $ - $ 46 $ ( 419,855 ) $ ( 419,809 ) Exercise of stock options 11,351 303 - ( 257 ) - - - - - - - - Stock-based compensation expense - - - - - - - - 623 - - 623 Accretion to redemption value of redeemable stock options - - - ( 2,924 ) - - - - - - 2,924 2,924 Accretion to redemption value of redeemable stock - 3,493 - - - 7,170 - - ( 623 ) - ( 10,040 ) ( 10,663 ) Unrealized gain on short-term investments and cash equivalents, net of tax - - - - - - - - - 77 - 77 Foreign currency translation adjustment - - - - - - - - - ( 1 ) - ( 1 ) Change in notes receivable for common stock issued - - 84 - - - - - - - - - Net loss - - - - - - - - - - ( 16,502 ) ( 16,502 ) Balance at March 31, 2020 3,575,235 $ 60,218 $ ( 771 ) $ 56,450 14,374,455 $ 334,751 1 $ - $ - $ 122 $ ( 443,473 ) $ ( 443,351 ) Exercise of stock options 211,590 5,128 - ( 4,293 ) - - - - - - - - Stock-based compensation expense - - - - - - - - 1,083 - - 1,083 Accretion to redemption value of redeemable stock options - - - ( 2,259 ) - - - - - - 2,259 2,259 Accretion to redemption value of redeemable stock - 4,975 - - - 6,355 - - ( 1,083 ) - ( 10,247 ) ( 11,330 ) Unrealized gain on short-term investments and cash equivalents, net of tax - - - - - - - - - ( 112 ) - ( 112 ) Foreign currency translation adjustment - - - - - - - - - 3 - 3 Change in notes receivable for common stock issued - - ( 6 ) - - - - - - - - - Net loss - - - - - - - - - - ( 12,882 ) ( 12,882 ) Balance at June 30, 2020 3,786,825 $ 70,321 $ ( 777 ) $ 49,899 14,374,455 $ 341,106 1 $ - $ - $ 13 $ ( 464,343 ) $ ( 464,330 ) See accompanying notes to unaudited condensed consolidated financial statements 7 RXSIGHT, INC. CONDENSED CONSOLIDATED statements of REDEEMABLE COMMON STOCK, STOCK OPTIONS, CONVERTIBLE PREFERRED STOCK AND stockholders’ DEFICIT (UNAUDITED) (In thousands, except number of shares) Three and Six Months Ended June 30, 2021 Notes receivable for redeemable Convertible Notes receivable for Accumulated other Redeemable common stock common stock Redeemable preferred stock Common stock Additional paid-in common stock comprehensive Accumulated Total stockholders' Shares Amount issued stock options Shares Amount Shares Amount capital issued income (loss) deficit deficit Balance at December 31, 2020 3,813,450 $ 80,780 $ ( 803 ) $ 53,085 14,376,272 $ 353,300 1 $ - $ - $ - $ ( 3 ) $ ( 430,588 ) $ ( 430,591 ) Exercise of stock options 280,545 6,922 - ( 5,715 ) - - - - - - - - - Stock-based compensation expense - - - - - - - - 1,239 - - - 1,239 Unrealized gain on short-term investments and cash equivalents, net of tax - - - - - - - - - - 7 - 7 Foreign currency translation adjustment - - - - - - - - - - ( 4 ) - ( 4 ) Change in notes receivable for common stock issued - - ( 14 ) - - - - - - - - - - Reclassification of 4,093,995 shares of redeemable common stock to 4,093,995 shares of common stock ( 4,093,995 ) ( 87,702 ) 817 - - - 4,093,995 4 87,698 ( 817 ) - - 86,885 Reclassification of redeemable common stock options to common stock options - - - ( 47,370 ) - - - - 47,370 - - - 47,370 Net loss - - - - - - - - - - - ( 6,805 ) ( 6,805 ) Balance at March 31, 2021 - $ - $ - $ - 14,376,272 $ 353,300 4,093,996 $ 4 $ 136,307 $ ( 817 ) $ - $ ( 437,393 ) $ ( 301,899 ) Exercise of stock options - - - - - - 30,215 - 125 - - - 125 Stock-based compensation expense - - - - - - - - 1,406 - - - 1,406 Unrealized gain on short-term investments and cash equivalents, net of tax - - - - - - - - - - ( 4 ) - ( 4 ) Foreign currency translation adjustment - - - - - - - - - - 1 - 1 Change in notes receivable for common stock issued - - - - - - - - - 452 - - 452 Net loss - - - - - - - - - - - ( 13,477 ) ( 13,477 ) Balance at June 30, 2021 - $ - $ - $ - 14,376,272 $ 353,300 4,124,211 $ 4 $ 137,838 $ ( 365 ) $ ( 3 ) $ ( 450,870 ) $ ( 313,396 ) See accompanying notes to unaudited condensed consolidated financial statements 8 RXSIGHT, INC. CONDENSED CONSOLIDATED STATEMEN TS OF CASH FLOWS (In thousands) Six Months Ended June 30, 2021 2020 Operating Activities: Net loss $ ( 20,282 ) $ ( 29,384 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,944 1,832 Amortization of right-of-use lease assets 15 106 Amortization of debt issuance costs and premium 229 — Change in fair value of warrants ( 1,214 ) 11,585 Gain on expiration of warrant ( 5,018 ) — Amortization of discount on short-term investments ( 15 ) ( 401 ) Stock-based compensation 2,645 1,706 Provision for excess and obsolete inventory 1,749 47 Change in operating assets and liabilities: Accounts receivable ( 1,071 ) ( 175 ) Inventories ( 2,004 ) ( 1,912 ) Prepaid and other assets ( 1,250 ) 443 Accounts payable 1,195 ( 197 ) Accrued expenses and other liabilities 846 ( 3,678 ) Net cash used in operating activities ( 22,231 ) ( 20,028 ) Investing Activities: Purchases of property and equipment ( 1,321 ) ( 1,398 ) Maturity of short-term investments 40,000 73,000 Purchase of short-term investments ( 4,999 ) ( 47,900 ) Net cash provided by investing activities 33,680 23,702 Financing Activities: Proceeds from term loan 15,000 — Payments of debt issuance costs ( 122 ) — Principal payments on finance lease liabilities ( 16 ) ( 103 ) Payments of deferred offering costs ( 242 ) — Change in notes receivable for redeemable common stock issued 439 78 Proceeds from exercise of stock options 1,332 882 Net cash provided by financing activities 16,391 857 Effect of foreign exchange rate on cash, cash equivalents and restricted cash ( 3 ) 2 Net increase in cash, cash equivalents and restricted cash 27,837 4,533 Cash, cash equivalents and restricted cash - beginning of period 14,455 8,830 Cash, cash equivalents and restricted cash - end of period $ 42,292 $ 13,363 Supplemental disclosure of cash flow information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 598 $ 374 Cash paid for income taxes $ 14 $ 46 Cash paid for interest on financing leases $ 3 $ 9 Cash paid for interest on term loan $ 1,291 — Non-cash investing and financing activities: Right-of-use assets obtained in exchange for lease obligations: Operating lease $ — $ 1,893 Lease obligations recorded for right-of-use assets: Operating lease $ — $ 1,893 Acquisition of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 76 $ 142 Accretion to redemption value of redeemable stock and stock options $ — $ 26,543 Deferred offering costs included in accrued expenses $ ( 1,233 ) $ — Payment-in-kind interest income added to principal of notes receivable $ 26 $ 27 Reclassification of 4,093,995 shares of redeemable common stock to 4,093,995 shares of common stock $ 87,702 $ — Reclassification of redeemable common stock options to common stock options $ 47,370 $ — See accompanying notes to unaudited condensed consolidated financial statements. 9 RXSIGHT, INC. NOTES TO CONDENSED CONSOLIDATED F INANCIAL STATEMENTS Note 1 - Organization and Basis of Presentation RxSight®, Inc. (the “Company”) is a Delaware corporation headquartered in Aliso Viejo, California with two wholly owned subsidiaries. One subsidiary is located in Amsterdam, Netherlands, with registered branches in the United Kingdom and Ireland (closed in 2020). The Netherlands entity also has a wholly owned subsidiary in Germany. A second subsidiary, closed in 2020, was located in Tijuana, Mexico. The Company is engaged in the research and development, manufacture and sale of light adjustable intraocular lenses used in cataract surgery along with capital equipment used with the lenses. The Company’s products, which include the light adjustable lens (“LAL”® or “RxLAL”®) and a specially designed machine for delivering light to the eye, the Light Delivery Device (“LDD™”), are approved by the United States (“U.S.”) Food and Drug Administration (“FDA”) for sale in the U.S. and have regulatory approval in the U.S and Europe. The Company began marketing its products in the U.S. during the second quarter of 2019 and in Europe during the third quarter of 2019. The RxLAL is a premium intraocular lens (“IOL”) which is partially reimbursable under Medicare. The Company competes with other IOLs in the premium market in the U.S. and Europe. The accompanying consolidated financial statements include the accounts of RxSight, Inc. and its wholly owned subsidiaries, RxSight, B.V., located in the Netherlands, RxSight GmbH, located in Germany, and RxSight S de R.L. de C.V., located in Mexico. All significant inter-company balances and transactions have been eliminated in consolidation. Basis of Presentation The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The unaudited interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. The operating results presented in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s final prospectus for its IPO, filed pursuant to Rule 424(b) under the Securities Exchange Act of 1933, as amended, with the SEC on July 29, 2021 (the “Prospectus”). Initial Public Offering and Reverse Stock Split On July 22, 2021, the Company’s Board of Directors approved an amendment to the Company’s Articles of Incorporation to effect a reverse split of shares of the Company’s common stock, excluding Series G and Series W common stock, and convertible preferred stock on a 1-for-10.33 basis (the “Reverse Stock Split”). The par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Reverse Stock Split was effected on July 23, 2021. Accordingly, all common stock, excluding Series G and Series W common stock, options to purchase common stock, convertible preferred stock, share data, per share data and related information contained in the accompanying condensed consolidated financial statements and notes have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased. The Reverse Stock Split resulted in an adjustment to the convertible preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. On July 29, 2021 , the Company completed its initial public offering ("IPO") through an underwritten sale of 7,350,000 shares of its common stock at a price of $ 16.00 per share. The aggregate net proceeds from the offering, inclusive of an additional 898,549 common shares sold upon the partial exercise of the underwriters’ purchase 10 option, after deducting underwriting discounts and commissions and other offering expenses, were approximately $ 120.0 million. On July 29, 2021, the Company restated its articles of incorporation and bylaws which provide for, among other things, the Company’s authorized capital stock to consist of 900,000,000 shares of common stock, par value $ 0.001 per share, and 100,000,000 shares of convertible preferred stock, par value $ 0.001 per share. The restated articles define the voting rights, dividends, liquidation, rights and preferences of each class of stock. Immediately prior to the completion of the offering, 14,376,272 outstanding shares of the Company's convertible preferred stock were converted into an aggregate of 14,850,993 shares of common stock and 225,945 warrants to purchase Series H convertible preferred stock were exercised and converted into 225,945 shares of common stock. Liquidity and Financial Position As of June 30, 2021, the Company had cash, cash equivalents and short-term investments of $ 61.7 million. The Company began generating revenue from its principal operations in 2019. The Company has a limited operating history, and the revenue and income potential of the Company’s business and market are unproven. The Company has experienced recurring net losses and negative cash flows from operating activities since its inception. For the three months ended June 30, 2021 and 2020, the Company incurred losses from operations of $ 13.9 million and $ 8.8 million, respectively. For the six months ended June 30, 2021 and 2020, the Company incurred losses from operations of $ 25.0 million and $ 18.2 million, respectively. Due to the Company’s continuing research and development activities and expansion of its sales and marketing efforts, the Company expects to continue to incur net operating losses into the foreseeable future. Successful transition to attaining profitable operations is dependent upon gaining market acceptance of the Company’s products and achieving a level of revenues adequate to support the Company’s cost structure. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company believes that existing capital resources, including the net proceeds from the IPO in July 2021, will be sufficient to meet projected operating requirements for at least 12 months from the date of issuance of the accompanying condensed consolidated financial statements, though the Company expects to continue to incur operating losses and negative cash flows. COVID-19 The Company has been actively monitoring the novel coronavirus, or COVID-19, situation and its impact. In response to the pandemic, numerous state and local jurisdictions imposed “shelter-in-place” orders, quarantines and other restrictions. Starting in March 2020 in the United States, governmental authorities recommended, and in certain cases required, that elective, specialty and other procedures and appointments be suspended or canceled. Similarly, in March 2020, the governor of California, where the Company’s headquarters are located, issued “stay at home” orders limiting non-essential activities, travel and business operations. Such orders or restrictions resulted in reduced operations at the Company’s headquarters, slowdowns and delays, travel restrictions and cancellation of events. These orders and restrictions significantly decreased the number of procedures performed using the Company’s products during March and April 2020. In response to the impact of COVID-19, the Company implemented a variety of measures to help manage through the impact and position it to resume operations quickly and efficiently once these restrictions were lifted. These measures included: remote work as needed, suspension of non-essential travel, restrictions on in-person work-related meetings, the wearing of personal protective equipment, social distancing, increased facility cleaning and air purification in all of the Company’s buildings and daily health monitoring of all Company employees to prevent or contain COVID-19 exposure. In addition, the Company took steps to preserve liquidity, reduce expenses and monitor operations to mitigate the impact on its current and future financial condition. The impact of COVID-19 continues to change and cannot be predicted. As a result, the Company expects the pandemic could continue to negatively impact its business, financial condition and results of operations. Note 2 - Summary of Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make informed estimates, judgments and assumptions that affect the reported amounts in the condensed consolidated 11 financial statements and disclosures in the accompanying notes as of the date of the accompanying condensed consolidated financial statements. On an on-going basis, management evaluates the most critical estimates and assumptions for continued reasonableness. In particular, management makes estimates with respect to revenue recognition; valuation of the Company’s common stock, warrants and other equity awards; estimated probability and timing of redemption of equity instruments, the realization of income tax assets and estimates of tax liabilities, and excess, obsolete and slow-moving inventory. Actual results may differ materially from the estimates used in the preparation of the accompanying condensed consolidated financial statements under different assumptions or conditions. Significant Accounting Policies There have been no significant changes to the accounting policies during the six months ended June 30, 2021 as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in the Prospectus. Cash Equivalents Cash equivalents consist of investments in money market accounts. The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase that can be liquidated without prior notice or penalty to be cash equivalents. Short-term Investments Short-term investments are classified based on the maturity date of the related securities. Based on the nature of the assets, the Company’s short-term investments, which are government securities, are classified as available-for-sale and are recorded at their estimated fair value as determined by prices for identical or similar securities at the balance sheet date. The Company’s short-term investments consist of Level 2 financial instruments in the fair value hierarchy. Unrealized gains and losses are recorded as a component of other comprehensive loss within stockholders’ deficit on the condensed consolidated balance sheets. Realized gains and losses are included as other income (expense) in the accompanying condensed consolidated statements of operations and comprehensive income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determination at each balance sheet date. The Company periodically reviews its investments for unrealized losses other than credit losses and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In determining whether the carrying value is recoverable, management considers the following factors:  whether the investment has been in a continuous realized loss position for over 12 months;  the duration to maturity of investments;  intention and ability to hold the investment to maturity and if it is not more likely than not that we will be required to sell the investment before recovery of the amortized cost basis;  the credit rating, financial condition and near-term prospects of the issuer; and  the type of investments made. The Company recorded $ 1,000 of unrealized gains and $ 2,000 of unrealized losses related to short-term investments as of June 30, 2021 and December 31, 2020, respectively. To date, the Company has not identified any unrealized losses other than credit losses for its short-term investments as determined by prices for identical or similar securities at the balance sheet date. The Company’s short-term investments consist of Level 2 financial instruments in the fair value hierarchy. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company’s policy is to invest cash in institutional money market funds and marketable securities of the U.S. government to limit the amount of credit exposure. The Company currently maintains a portfolio of cash equivalents and short-term investments in short-term 12 money market funds and U.S. treasury bills. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. The Company has not experienced material losses on cash equivalents and short-term investments. Accounts Receivable As of June 30, 2021, the Company had one customer who individually accounted for approximately 10 % of accounts receivable, and as of December 31, 2020, the Company had one customer who individually accounted for approximately 35 % of accounts receivable. After evaluation of the collectability of accounts receivable, the Company did no t record an allowance for doubtful accounts as of June 30, 2021 and December 31, 2020. Inventories Inventories consist of raw materials, work-in-process and finished goods. Raw materials are comprised of chemicals and parts used in the production of the Company lenses, injectors, and LDDs. Finished goods are comprised of lenses, injectors, accessories and LDDs. Inventories are valued at the lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. The carrying value of inventories is reviewed for potential impairment whenever indicators suggest that the cost of inventories exceeds the carrying value and management adjusts the inventories to its net realizable value. The cost of finished goods and work-in-process is comprised of raw materials, direct labor, other direct costs and related production overhead to the extent that these costs do not exceed the net realizable value of the goods produced. The Company periodically reviews inventories for potential impairment, estimated losses from obsolescence, material expirations or unmarketable inventories and writes down the cost of inventories to net realizable value at the time such determinations are made. Net realizable value is determined using the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Fair Value of Financial Instruments The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s financial instruments consist principally of cash, cash equivalents, short-term investments, accounts receivable, accounts payable, operating lease liabilities, warrant liabilities and a term loan. Fair value is measured as the price that would be received from the sale of an asset or 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 that are consistent with the market, income or cost approach are used to measure fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1—Observable inputs such as unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 2—Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability, for substantially the full term of the asset or liability, through correlation with market data. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. Level 3—One or more significant inputs that are unobservable and supported by little or no market activity and reflect the use of significant management judgment and assumptions. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. These include the Black-Scholes option-pricing model which uses inputs such as expected volatility, risk-free interest rate and expected term to determine fair market valuation. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification at each reporting date. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the 13 fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented. Cash, cash equivalents, accounts receivable and accounts payable are carried at their estimated fair value because of the short-term nature of these assets and liabilities. The Company’s short-term investments in government securities are carried at fair value, determined based on publicly available quoted market prices for identical securities at the measurement date. The Company believes the fair values of its operating lease liabilities and term loan at June 30, 2021 and December 31, 2020 approximated their carrying values, based on the borrowing rates that were available for loans with similar terms as of that date. Warrants to Purchase Stock The Company recognizes the freestanding warrants to purchase shares of convertible preferred stock as liabilities at fair value as these warrant instruments are embedded in contracts that may be cash settled. The convertible preferred stock warrants were issued for no cash consideration as detachable freestanding instruments but can be converted to convertible preferred stock at the holder’s option based on the exercise price of the warrant. However, the deemed liquidation provisions of the convertible preferred stock are considered contingent redemption provisions that are not solely within the control of the Company. Therefore, the convertible preferred stock is classified in temporary equity on the accompanying condensed consolidated balance sheets, and the warrants to purchase the convertible preferred stock are classified as liabilities. The Company recognized a freestanding warrant to purchase a share of Series W common stock as a liability at fair value because this instrument was not indexed to the Company’s own stock as the settlement calculation incorporated variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares. The common stock warrant was issued for cash consideration as a freestanding instrument and could be converted to one share of common stock, Series W, at the holder’s option based on the exercise price of the warrant and prior to the expiration date of March 31, 2021. The warrants were recorded on the accompanying condensed consolidated balance sheets at their fair value on the date of issuance and were subject to re-measurement to fair value at each balance sheet date. Changes in fair value were recognized as a component of other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive loss. Upon issuance of the Series W common stock warrant, the Company engaged valuation specialists to assist with determining its fair value using a Monte Carlo simulation approach. In addition, the Company engaged the valuation specialists to derive an estimated fair value of the preferred stock warrants using a probability weighted expected return model/option pricing model (“PWERM/OPM”) hybrid valuation model. Pursuant to the terms of the preferred stock warrants, upon the conversion of the class of preferred stock underlying the warrant, the warrants automatically become exercisable for shares of the Company’s common stock based upon the conversion ratio of the underlying class of preferred stock. The exercise of the common stock warrant or consummation of a qualified initial public offering would result in the automatic conversion of all classes of the Company’s preferred stock into common stock. Upon such conversion of the underlying classes of preferred stock, the warrants would be classified as a component of equity and will no longer be subject to remeasurement. Accordingly, the Company continued to adjust the warrant liabilities for changes in fair value through the date of the conversion of the underlying convertible preferred stock into common stock which occurred upon the completion of the Company's IPO in July 2021. Deferred Offering Costs The Company capitalized deferred offering costs consisting of all direct and incremental legal, professional, accounting and other third-party fees incurred in connection with the Company’s IPO. As of June 30, 2021, the total deferred offering costs of $ 1.2 million were included in other assets on the accompanying condensed consolidated balance sheet. Upon the completion of the IPO in July 2021, the total deferred offering costs of $ 1.2 million were reclassified to additional paid-in capital. Net Loss per Share The Company computes basic net (loss) per share for common stock using the two-class method required for companies with participating securities based upon the weighted-average number of common shares outstanding during the period. Diluted net (loss) per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company’s stock options, warrants and the shares issuable upon the conversion of the 14 preferred stock. For stock options and preferred stock, the calculation of diluted (loss) per share requires an adjustment for the additional share of undistributed earnings and accretion to redemption value for the period that the common stockholders are entitled to if exercise is assumed. For warrants that are recorded as a liability in the accompanying condensed consolidated balance sheets, the calculation of diluted (loss) per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of the warrants is dilutive to the loss per share for the period, an adjustment is made to net (loss) used in the calculation to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. The following tables show the computation of basic and diluted net (loss) per share for the three and six months ended June 30, 2021 and 2020 (common stock in thousands, except share and per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Common Stock Numerator: Net (loss) available to stockholders, basic $ ( 13,477 ) $ ( 16,979 ) $ ( 20,282 ) $ ( 37,727 ) Effect of dilutive securities: Preferred stock warrants 1,214 — 1,214 — Net (loss) available to stockholders, diluted $ ( 14,691 ) $ ( 16,979 ) $ ( 21,496 ) $ ( 37,727 ) Denominator: Weighted-average shares outstanding, basic 4,106,403 3,645,699 4,052,920 3,608,190 Effect of dilutive securities: Preferred stock warrants 60,036 — 60,329 — Weighted-average shares, diluted 4,166,439 3,645,699 4,113,249 3,608,190 Basic net (loss) per share $ ( 3.28 ) $ ( 4.66 ) $ ( 5.00 ) $ ( 10.46 ) Diluted net (loss) per share $ ( 3.53 ) $ ( 4.66 ) $ ( 5.23 ) $ ( 10.46 ) Series G Common Stock Numerator: Net (loss) available to stockholder, basic $ ( 0.32 ) $ ( 0.58 ) $ ( 0.48 ) $ ( 1.24 ) Effect of dilutive securities: Preferred stock warrants — — — — Net (loss) available to stockholder, diluted $ ( 0.32 ) $ ( 0.58 ) $ ( 0.48 ) $ ( 1.24 ) Denominator: Weighted-average shares outstanding, basic and diluted 1 1 1 1 Basic net (loss) per share $ ( 0.32 ) $ ( 0.58 ) $ ( 0.48 ) $ ( 1.24 ) Diluted net (loss) per share $ ( 0.32 ) $ ( 0.58 ) $ ( 0.48 ) $ ( 1.24 ) 15 The following outstanding potentially dilutive securities were excluded from the calculation of diluted net (loss) per share attributable to common stockholders because their impact under the “treasury stock method” and “if-converted method” was anti-dilutive for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Redeemable convertible preferred stock - 14,849,188 - 14,849,188 Convertible preferred stock 14,850,993 - 14,850,993 - Preferred stock warrants - 227,762 - 227,762 Redeemable stock options 4,610,950 3,272,454 4,368,665 3,338,396 Revenue Recognition The Company’s revenue is generated from the sale of light adjustable intraocular lenses ("RxLAL") used in cataract surgery along with a specifically designed machine for delivering light to the eye, the Light Delivery Device (LDD), to adjust the lens post-surgery, as needed. Revenue is recognized from sales of products in the U.S. and Europe. Customers are primarily comprised of ambulatory surgery centers, hospitals, and physician private practices. The Company recognizes revenue when promised goods or services are transferred to customers at a transaction price that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. Specifically, the Company applies the following five steps to recognize revenue: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation. The Company applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods promised within each customer contract to determine the individual deliverables in its product offerings as separate performance obligations and assesses whether each promised good or service is distinct. The transaction price is determined based on the consideration expected to be received, based either on the stated value in contractual arrangements or the estimated cash to be collected in non-contracted arrangements. The Company recognizes revenue as the amount of the transaction price that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied, considering whether or not this occurs at a point in time or over time. The Company elected to account for shipping costs as fulfillment costs rather than a promised service and excludes from revenue any taxes collected from customers that are remitted to government authorities. The Company’s LDD contracts contain multiple performance obligations bundled for one transaction price, with all obligations generally satisfied within one year. For these bundled arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s LDD contracts include a combination of the following performance obligations: (1) LDD capital asset and related components, (2) training and (3) device service (initial year). Each of these three performance obligations are considered distinct. The LDD capital asset is distinct because the customer can benefit from it together with other resources that are readily available to the customer. Training on the use of the machine is offered as a distinct activity after installation of the LDD to enhance the customer’s ability to utilize the machine by having an industry professional provide best practices and customize training to the specific needs of the customer. Each LDD comes with a twelve-month manufacturer’s warranty (service-type) that includes preventative maintenance, unscheduled service (labor and parts) and software updates. After the first year, service contracts can be purchased separately on a standalone basis. The Company recognizes revenue as performance obligations are satisfied by transferring control of the product or service to a customer. Specifically, revenue for the LDD capital asset is recognized at a point in time at installation. Revenue for training is also recorded at a point in time, generally 30 days after installation. Revenue for the device service is recognized ratably over time after installation, generally 12 months. The Company has determined that the transaction price is the invoice price, net of adjustments, if any. The allocation to the separate performance obligations is based upon the relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific 16 factors including, but not limited to, features and functionality of the products and services, geographies, type of customer and market conditions. The Company regularly reviews and updates standalone selling prices as necessary. RxLALs are held at customer sites on consignment. The single performance obligation is satisfied, and revenue is recognized for RxLALs upon customer notification that the RxLALs have been implanted in a patient. For the three and six months ended June 30, 2021 and 2020, credits related to returns and rebates on list prices were not significant. The Company adopted the practical expedient permitting the direct expensing of costs incurred to obtain contracts where the amortization of such costs would occur over one year or less, and it applied to substantially all the Company’s contracts. For the three and six months ended June 30, 2021 and 2020, revenue from contracts with customers consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 LDD (including training) $ 2,965 $ 2,050 $ 4,802 $ 4,209 LAL 1,792 619 3,321 1,290 Service warranty, service contracts, and accessories 140 37 258 95 $ 4,897 $ 2,706 $ 8,381 $ 5,594 As of June 30, 2021 and December 31, 2020, the Company recognized deferred revenue on its condensed consolidated balance sheets of $ 380,000 and $ 345,000 , respectively, related to the service agreement performance obligation. Revenue for service agreements is recognized ratably over the term of each contract. The following table represents the deferred revenue activity for the six months ended June 30, 2021 and 2020, respectively (in thousands): 2021 2020 Balance at beginning of period $ ( 345 ) $ ( 41 ) Consideration earned during the period ( 272 ) ( 194 ) Recognized during the period 237 74 Balance at end of period $ ( 380 ) $ ( 161 ) Recent Accounting Pronouncements In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs should be presented as a prepaid expense in the balance sheet and expensed over the term of the hosting arrangement. The Company adopted the standard on January 1, 2021, and adoption did not have a material impact on its condensed consolidated financial statements. In June 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for convertible instruments. This new guidance eliminates certain models that require separate accounting for embedded conversion features and eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. Accordingly, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance can be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods 17 within those fiscal years. The Company is in the process of determining the impact of the adoption of the standard on its condensed consolidated financial statements. Emerging Growth Company Status The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to not take this exemption and, as a result, will adopt new or revised accounting standards on the relevant effective dates on which adoption of such standards is required for other public companies that are not emerging growth companies. Note 3 – Short-Term Investments Short-term investments, principally U.S. Treasury bills, are available-for-sale and consisted of the following (in thousands): As of June 30, 2021 Amortized Cost Unrealized Gain, Net Estimated Fair Value Government securities $ 19,997 $ 1 $ 19,998 As of December 31, 2020 Amortized Cost Unrealized Loss, Net Estimated Fair Value Government securities $ 54,983 $ ( 2 ) $ 54,981 All available-for-sale securities held as of June 30, 2021 and December 31, 2020 had a maturity of less than one year . Note 4 – Inventories Inventories consisted of the following (in thousands): June 30, 2021 December 31, 2020 Finished goods $ 4,288 $ 5,092 Raw materials 3,380 1,827 Work-in-process 2,716 1,685 10,384 8,604 Less: reserve for excess and obsolete inventory ( 1,841 ) ( 316 ) $ 8,543 $ 8,288 At June 30, 2021 and December 31, 2020, finished goods included $ 3.0 million and $ 2.7 million of inventory held on consignment at customer sites, respectively. Note 5 – Fair Value Measurements The table and disclosures below (in thousands) present the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. 18 As of June 30, 2021 Level I Level II Level III Total Assets: Money market securities $ 40,693 $ — $ — $ 40,693 Government securities — 19,998 — 19,998 Total assets at fair value $ 40,693 $ 19,998 $ — $ 60,691 Liability: Convertible preferred stock warrant liability $ — $ — $ ( 2,614 ) $ ( 2,614 ) Total liabilities at fair value $ — $ — $ ( 2,614 ) $ ( 2,614 ) As of December 31, 2020 Level I Level II Level III Total Assets: Money market securities $ 11,822 $ — $ — $ 11,822 Government securities — 54,981 — 54,981 Total assets at fair value $ 11,822 $ 54,981 $ — $ 66,803 Liabilities: Common stock warrant liability $ — $ — $ ( 5,018 ) $ ( 5,018 ) Redeemable convertible preferred stock warrant liability — — ( 3,828 ) ( 3,828 ) Total liabilities at fair value $ — $ — $ ( 8,846 ) $ ( 8,846 ) The Series W warrant fair value was determined by management, with input and assistance from a third-party valuation specialist, upon issuance and was revalued as of each reporting date until expiration. The valuation specialist utilized a Monte Carlo Simulation ("MCS") under the income method utilizing assumptions and financial data prepared by the Company. This valuation approach uses a discounted cash flow (“DCF”) method to calculate the starting equity value of the Company based upon future cash flow generation. The starting equity value of the Company was determined utilizing significant unobservable inputs, including (1) forecasted financial projections for the next five years developed by management, (2) a terminal value assigned using an exit multiple method, and (3) a discount rate based on the weighted average cost of capital. Then a simulated equity value of the Company as of the expected exercise date was determined using the MCS method. The MCS inputs included: (1) the assumed amount of time until the exercise of the warrant, (2) the risk-free interest rate over the period until the assumed warrant exercise, (3) the assumed volatility in the value of the equity of the company, and (4) the starting equity value of the Company as determined from the discounted cash flow method. In order to determine the overall value of the warrant, the valuation specialists also simulated the payments for sales-based, operating and regulatory milestones based upon similar inputs to determine the expected overall purchase price of the Company. The net difference between the expected purchase price and the average simulated equity value determines the “option payoff”. Finally, management assigned a probability that the warrant will be exercised, which was applied to the present value of the “option payoff” to arrive at the recorded value reflected in the accompanying condensed consolidated financial statements. The Series W warrant expired unexercised on March 31, 2021 and the remaining value was recorded in the Statement of Operations and Comprehensive Loss in the three and six months ended June 30, 2021. The fair value of the preferred stock warrants was determined by management, with input and assistance from a third-party valuation specialist using a probability weighted expected return model/option pricing model (“PWERM/OPM”) hybrid valuation model. This method essentially utilizes a combination of market and income method approaches for each part of the calculation of enterprise value using assumptions and financial data prepared by the Company and combines them in a probabilistic manner. The valuation considered several future scenarios for the Company, each of which assumed a shareholder exit either through initial public offering (“IPO”), sale (“M&A”) or dissolution. Based upon the current IPO market, M&A values for private companies and the historical likelihood of dissolution or no exit, the Company concluded that the probabilities and time frames were reasonable. Implicit in the timing used in the application of the PWERM/OPM Hybrid Method is also the possibility of no exit. The option pricing model's significant unobservable inputs included: (1) the assumed time until a liquidity event, (2) the risk-free interest rate over the period until the assumed liquidity event, (3) the assumed volatility in the value of the equity of the company (which corresponds to the model's underlying asset volatility), (4) the enterprise value and 19 preferred investment amount and (5) the key price points in the Company's capital structure in terms of exit levels on the assumed liquidation date. A significant increase (decrease) in any of these inputs in isolation, particularly the estimated price of the Company’s preferred stock, would have resulted in a significantly higher (lower) fair value measurement. The following table sets forth changes in the estimated fair values for the Company’s warrant liabilities measured using significant unobservable inputs (in thousands): Six Months Ended Year Ended June 30, 2021 December 31, 2020 Beginning of period $ 8,846 $ 71,881 Exercise of preferred stock warrants — ( 24 ) Expiration of common stock warrant ( 5,018 ) — Change in fair value of common stock warrant — ( 64,628 ) Change in fair value of preferred stock warrants ( 1,214 ) 1,617 End of period $ 2,614 $ 8,846 Note 6 – Term Loan In October 2020, the Company entered into a loan facility (“Term Loan”) with an initial draw of $ 25 million. Proceeds were used to help fund the Company’s ongoing operations. As part of the Term Loan, the lender committed to providing further loans of up to $ 35 million to the Company at its election (or for one specific draw, upon occurrence of a revenue milestone) during various draw periods in the future, provided the Company is not in default at the time of the additional loan draws. In March 2021, the Company drew an additional $ 5 million from the facility for the purpose of funding ongoing operations. In June 2021, the Company drew an additional $ 10 million from the facility for the purpose of funding ongoing operations. As of June 30, 2021 and December 31, 2020, the Company was in compliance with all covenants. For the three and six months ended June 30, 2021, cash interest paid for all borrowings under the Term Loan was 9.25 %. The effective interest rate during the three and six months ended June 30, 2021 was 10.90 % and 11.09 %, respectively. As of June 30, 2021 future principal payments due under the Term Loan were as follows (in thousands): Year Ended December 31, 2021 (remainder) $ — 2022 — 2023 1,739 2024 20,870 2025 17,391 Total 40,000 Less: unamortized issuance costs and exit fee ( 494 ) Term loan, net $ 39,506 Note 7 – Common Stock Warrant Liability Warrant Agreement and Share Purchase Agreement On October 12, 2017, the Company issued to a “Strategic Partner” a warrant to purchase Series W common stock (the “Warrant Agreement”) for a non-refundable payment of $ 60 million. This Series W common stock warrant (the “Series W Warrant”) had an initial expiration date of December 31, 2018 unless extended as provided for in the Warrant Agreement. On December 27, 2018, the Strategic Partner chose to extend the expiration date of the Series W Warrant, by making an additional non-refundable payment of $ 40 million, until the sooner of the achievement of performance milestones (as defined in the Warrant Agreement) or November 22, 2021. On March 20 18, 2020, the Company and the Strategic Partner signed an amendment to the Warrant Agreement that removed the milestone triggers for early exercise and changed the expiration date to March 31, 2021. Concurrent with the Warrant Agreement, the Strategic Partner and the Company entered into a Share Purchase Agreement (the “Purchase Agreement”). Under the Purchase Agreement, the Strategic Partner purchased one share of the Company’s non-voting $ 0.001 par value per share Series G common stock for $ 0.01 . Upon exercise of the Series W Warrant, the Strategic Partner would have received one share of voting, $ 0.001 par value, Series W common stock. Per the Warrant Agreement, the exercise price of the Series W Warrant was $ 630.0 million plus adjustments for the Company’s cash, working capital, indebtedness, and transaction expenses, subject to an escrow holdback of $ 92.0 million and a shareholder representative holdback of $ 0.5 M. The Warrant Agreement also provided for potential aggregate milestone payments of up to $ 827 million for various sales-based and operating milestones and $ 185 million for certain regulatory milestones, either at the time of the Series W Warrant’s exercise or at dates subsequent, as defined in the Warrant Agreement. Upon notice of exercise of the Series W Warrant by the Strategic Partner and receipt of the required funds, a Special Redemption, as defined in the Company’s Articles of Incorporation, would have triggered automatic redemption of all the Company’s outstanding capital instruments, except for the Series G common stock and Series W common stock, and the Strategic Partner would have acquired the Company. Special Redemption On October 25, 2017, the Company adopted the 12th Amended and Restated Articles of Incorporation (the “Amendment”). Under Article IV of the Amendment, if the Strategic Partner had exercised the Series W Warrant, an automatic redemption, conversion, termination and cancellation of all then outstanding shares of the Company’s capital stock, options and warrants would have occurred without any further action required. Immediately prior to the automatic redemption, all outstanding preferred shares would have converted to common shares, unvested stock options would have accelerated and became fully vested and all stock options would have terminated along with any preferred stock warrants outstanding. Shareholders, option holders and warrant holders would have had the right to receive the initial per share price less the strike price as defined in the Warrant Agreement. The Strategic Partner would have advanced (through an exchange agent) the funds to the Company, which would then have disbursed the funds to all shareholders, option holders and warrant holders. If the Series W Warrant was terminated or expired unexercised, Article IV of the Amendment would terminate and would be of no further force and effect. In December 2020, management determined that exercise of the Series W Warrant was no longer probable, at which point further accretion to redemption value of common stock, preferred stock and stock options ceased. On March 31, 2021, the Series W Warrant terminated as the Strategic Partner did not provide notice of exercise. A gain of $ 5.0 million was recorded on the expiration of the Series W Warrant in the accompanying condensed consolidated statements of operations and comprehensive loss for the six months ended June 30, 2021. Upon termination, amounts recorded in temporary equity for common stock and stock options were reclassified to common stock and additional paid-in capital within permanent equity as these instruments were no longer redeemable. Note 8 – Convertible Preferred Stock and Stockholders’ Deficit Convertible Preferred Stock The Amendment authorized eight classes of preferred stock, Series A through F, the “Prior Preferred Stock” and Series G and H, the “Senior Preferred Stock”. All of the Company’s convertible preferred stock has been classified as temporary equity on the accompanying condensed consolidated balance sheets, as all such preferred stock is redeemable either at the option of the holder or upon an event outside the control of the Company (i.e., a change in control). The redeemable convertible preferred stock was previously redeemable per the Special Redemption (see Note 7) or upon certain change in control events (including liquidation, sale or transfer of control of the Company); however, all change in control events are outside of the Company’s control. In the event of the Special Redemption, the holders would have received redemption proceeds as defined in the Warrant Agreement. In the event of liquidation, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of the Company’s Amendment. 21 As a result of management’s determination that the Special Redemption was probable, but not certain, the Company began accreting to the expected redemption value of the redeemable convertible preferred stock in October 2017. In December 2020, management determined that the Special Redemption was no longer probable, at which point accretion to redemption value ceased. As of March 31, 2021, the Series W Warrant expired unexercised, and all redemption provisions of the Special Redemption lapsed. The following table summarizes information related to issuance of the Company’s preferred stock (in thousands, except number of shares and per share amounts): As of June 30, 2021 Par Value Date of Issuance Shares Price at Issuance Shares Authorized(1) Shares Issued and Outstanding(1) Liquidation Preference Carrying Value (2) Share Capital Series A $ 0.001 Feb-2000 $ 40.81 355,921 355,903 $ 14,523 $ 13,535 Series B $ 0.001 May-2003 $ 9.07 1,741,452 1,741,399 15,795 39,715 Series C $ 0.001 Feb-2007 $ 12.92 1,168,344 1,168,311 15,086 28,136 Series D $ 0.001 Aug-2009 $ 18.08 663,808 663,728 12,000 18,503 Series E $ 0.001 Oct-2011 $ 20.66 353,339 353,327 7,300 10,350 Series F $ 0.001 May-2012 $ 25.83 507,744 499,159 12,891 18,305 Series G $ 0.001 Jun-2015 $ 12.40 5,832,685 5,788,878 71,759 135,682 Series H $ 0.001 Feb-2017 $ 12.40 5,949,499 3,805,567 47,174 89,074 16,572,792 14,376,272 $ 196,528 $ 353,300 As of December 31, 2020 Par Value Date of Issuance Shares Price at Issuance Shares Authorized(1) Shares Issued and Outstanding(1) Liquidation Preference Carrying Value (2) Share Capital Series A $ 0.001 Feb-2000 $ 40.81 355,921 355,903 $ 14,523 $ 13,535 Series B $ 0.001 May-2003 $ 9.07 1,741,452 1,741,399 15,795 39,715 Series C $ 0.001 Feb-2007 $ 12.92 1,168,344 1,168,311 15,086 28,136 Series D $ 0.001 Aug-2009 $ 18.08 663,808 663,728 12,000 18,503 Series E $ 0.001 Oct-2011 $ 20.66 353,339 353,327 7,300 10,350 Series F $ 0.001 May-2012 $ 25.83 507,744 499,159 12,891 18,305 Series G $ 0.001 Jun-2015 $ 12.40 5,832,685 5,788,878 71,759 135,682 Series H $ 0.001 Feb-2017 $ 12.40 5,949,499 3,805,567 47,174 89,074 16,572,792 14,376,272 $ 196,528 $ 353,300 (1) The shares authorized, issued and outstanding do not reflect any anti-dilution provisions of Series C, Series D, Series E and Series F as a result of the Series G financing. (2) The carrying value reflects the gross proceeds received from the sale of the preferred stock less issuance costs and the fair value at issuance of preferred stock warrants classified as a liability, plus accretion of redemption value. Common Stock Each share of common stock is entitled to one vote. Common stock reserved for future issuance consisted of the following: June 30, 2021 December 31, 2020 Conversion of preferred stock 14,850,993 14,851,007 Preferred stock warrants 225,945 225,945 Common stock warrant — 1 Stock options issued and outstanding under the 2006 and 2015 plans 4,570,118 4,201,935 Total shares of common stock reserved 19,647,056 19,278,888 22 Note 9 – Stock-Based Compensation Expense As of June 30, 2021 and December 31, 2020, the Company had two stock-based incentive compensation plans, the Calhoun Vision, Inc. 2015 Equity Incentive Plan and the Calhoun Vision, Inc. 2006 Stock Plan (collectively the “Plans”). Option awards are generally granted with an exercise price of no less than 100% of estimated fair market value on the date of grant. Time based awards generally vest over four years as follows: one fourth of the total number of shares vest and become exercisable on the one-year anniversary; 1/48th of the total number of shares subject to the option vest and become exercisable on each monthly anniversary thereafter for the remaining 3 years. The purpose of the Plans is to provide a means by which eligible recipients of stock awards may be given an opportunity to benefit from increases in the value of the common stock in order to retain or procure the services of the employees, members of the Board and consultants. Prior to the Company's IPO in July 2021, the Company’s board of directors, with input from management, considered numerous objective and subjective factors to determine the fair value of common stock. The factors included, but were not limited to: (i) third-party valuations of the Company’s common stock; (ii) the Company’s stage of development; (iii) the status of research and development efforts; (iv) the rights, preferences and privileges of the Company’s convertible preferred stock relative to those of the Company’s common stock; (v) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; (vi) equity market conditions affecting comparable public companies; (vii) general U.S. market conditions and (viii) the lack of marketability of the Company’s common stock. After completion of the Company’s IPO in July 2021, the fair value of common stock is based on the closing price of the Company’s common stock as reported on the Nasdaq Global Select Market. In determining the fair value of the stock options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. Expected term —The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term. Expected volatility —Since the Company was privately held and did not have any trading history for its common stock, the expected volatility was estimated based on the average historical volatilities for comparable publicly traded medical device companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option. Dividend yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero. 23 A summary of stock option activities for the six months ended June 30, 2021 is as follows: Shares Available for Grant Number of Options Weighted Average Exercise Price Weighted Average Grant Date Fair Value Weighted Avg Remaining Contractual Life (Years) Options outstanding as of December 31, 2020 252,310 4,201,935 $ 9.57 6.46 Issued 575,490 Granted ( 734,127 ) 734,127 $ 15.64 $ 9.01 Exercised ( 310,760 ) $ 4.29 $ 1.92 Forfeited 40,634 ( 40,634 ) $ 15.47 $ 10.75 Expired 14,550 ( 14,550 ) Options outstanding as of June 30, 2021 148,857 4,570,118 $ 10.83 6.68 Exercisable as of June 30, 2021 3,001,219 $ 8.30 5.43 As of June 30, 2021 and December 31, 2020 the intrinsic value of options vested was $ 37.8 million and $ 26.2 million, respectively, and of all options outstanding was $ 45.8 million and $ 26.4 million, respectively. During the six months ended June 30, 2021 and 2020, the total cash received from the exercise of stock options was $ 1.3 million and $ 881,000 , respectively. The total fair value less strike price of these options was $ 3.5 million and $ 2.5 million, respectively. Stock-based compensation expense was classified in the accompanying condensed consolidated statements of operations and comprehensive loss as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 540 $ 556 $ 1,137 $ 914 Selling, general and administrative 686 363 1,149 523 Cost of goods sold 180 164 359 269 $ 1,406 $ 1,083 $ 2,645 $ 1,706 As of June 30, 2021 and December 31, 2020, there were 1,568,899 and 1,177,165 unvested options, respectively. Total unrecognized expense related to unvested stock options was approximately $ 13.4 million and $ 9.8 million as of June 30, 2021 and December 31, 2020, respectively. Amounts are expected to be recognized over a weighted average period of approximately 2.8 and 2.9 years, respectively. The following table presents the range and weighted-average assumptions, used in the Black-Scholes option pricing model to determine the fair value of stock options: Six Months Ended June 30, 2021 Range Weighted Average Expected volatility 62.3 % to 63.7 % 63.6 % Risk-free interest rate 0.6 % to 1.6 % 1.1 % Expected life (in years) 5.52 to 10.00 years 6 years Expected dividend yield 0.0 % 0.0 % Grant date fair value $ 15.60 to $ 19.94 $ 15.64 Note 10 – Income Taxes The Company maintains a full valuation allowance against its net deferred tax assets as of June 30, 2021 and December 31, 2020 based on the current assessment that it is not more likely than not these future benefits will be 24 realized before expiration. No material income tax expense or benefit has been recorded given the valuation allowance position and projected taxable losses in the jurisdictions where the Company files income tax returns. The Company has not experienced any significant increases or decreases to its unrecognized tax benefits since December 31, 2020 and does not expect any within the next 12 months. The Company is subject to U.S. federal and various states income taxes. The federal returns for tax years 2017 through 2020 remain open to examination and the state returns remain subject to examination for tax years 2016 through 2020. Carryforward attributes that were generated in years where the statute of limitations is closed may still be adjusted upon examination by the Internal Revenue Service or other respective tax authorities. All other state jurisdictions remain open to examination. Note 11 – Leases The Company has operating and finance leases for facilities and certain equipment. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company does not combine lease and non-lease components in the recognition of lease expense. As of June 30, 2021 and December 31, 2020 the Company held three leases for office, manufacturing and warehouse facilities in Aliso Viejo, California. The three leases are for 19,680 , 42,106 and 48,036 square feet and expire on June 30, 2023 , September 30, 2024 and January 31, 2026 , respectively. For one of the facilities operating leases, the lessor provided $ 900,000 in tenant allowances. The following table presents the lease balances within the condensed consolidated balance sheets (in thousands): June 30, December 31, Leases Classification 2021 2020 Assets Operating Operating leases right-of-use assets 4,749 $ 5,319 Finance Property and equipment, net 43 58 Total lease assets 4,792 5,377 Liabilities Current Operating Lease liabilities 1,344 1,247 Finance Lease liabilities 21 27 Noncurrent Operating Long-term lease liabilities 4,347 5,042 Finance Long-term lease liabilities 27 37 Total lease liabilities $ 5,739 $ 6,353 25 For the three and six months ended June 30, 2021 and 2020, the components of operating and finance lease expenses were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, Lease Cost Classification 2021 2020 2021 2020 Operating lease cost Cost of goods sold $ 3 $ 2 $ 7 $ 6 Research and development 79 35 158 64 Selling, general and administrative expenses 402 414 803 720 Finance lease cost Amortization of right-of-use asset included in Research and development expenses — 42 — 83 Amortization of right-of-use asset included in Selling, general and administrative expenses 7 13 14 25 Finance lease cost Interest expense 1 4 3 9 Maturities of the Company’s operating and finance lease liabilities as of June 30, 2021 were as follows (in thousands): Operating Finance Year Ended December 31, Leases Leases 2021 (remainder) $ 934 $ 13 2022 1,881 23 2023 1,682 18 2024 1,456 — 2025 951 — 2026 79 — Total lease payments 6,983 54 Less: imputed interest 1,292 6 Total lease liabilities $ 5,691 $ 48 The weighted average remaining lease term and weighted average discount rate used to determine lease liabilities related to the Company’s operating and finance leases as of June 30, 2021 and December 31, 2020 were: June 30, December 31, Lease Term and Discount Rate 2021 2020 Weighted average remaining lease term (years) Operating leases 3.75 4.21 Finance leases 2.15 2.42 Weighted average discount rate Operating leases 10.5 % 10.5 % Finance leases 10.5 % 10.5 % Note 12 – Commitments and Contingencies Legal Matters 26 From time-to-time, the Company may be involved in certain legal proceedings or regulatory matters arising in the ordinary course of business, including without limitation, actions with respect to intellectual property, employment, regulatory, product liability and contractual matters. In connection with these proceedings or matters, the Company regularly assesses the probability and amount (or range) of possible issues based on the developments in these proceedings or matters. A liability is recorded in the consolidated financial statements if it is determined that it is probable that a loss has been incurred, and that the amount (or range) of the loss can be reasonably estimated. Because of the uncertainties related to any pending proceedings or matters, the Company is currently unable to predict their ultimate outcome and, with respect to any legal proceeding or regulatory matter where no liability has been accrued, to make a reasonable estimate of the possible loss (or range of loss) that could result from an adverse outcome. At June 30, 2021 and December 31, 2020, there were no legal proceedings, regulatory matters, or other disputes or claims for which a material loss was considered probable or for which the amount (or range) of loss was reasonably estimable. However, regardless of the outcome, legal proceedings, regulatory matters, and other disputes and claims can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors. Note 13 – Subsequent Events On July 6, 2021, the Company re-incorporated in Delaware. This jurisdictional change had no impact to the capital structure, stockholder rights, assets, or liabilities of the Company. On July 28, 2021, the Company’s Board of Directors and stockholders adopted and approved the Company’s 2021 Equity Inventive Plan (“2021 Plan”). The 2021 Plan provides for the grant of incentive stock options to employees and any subsidiary corporations’ employees, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, and performance awards to employees, directors, and consultants and subsidiary corporations’ employees and consultants. The 2015 Plan was terminated immediately prior to effectiveness of the 2021 Plan with respect to the grant of future awards. The number of shares of the Company’s common stock available for issuance under the 2021 Plan is equal to 7,260,406 shares of common stock plus up to 4,840,271 shares of common stock remaining under the 2015 Plan and 2006 Plan. The number of common shares reserved for issuance under the 2021 Plan will be increased automatically on the first day of each fiscal year beginning with the 2022 fiscal year and ending on the ten year anniversary of the date our board of directors approved the 2021 Plan, by a number equal to the lesser of: (i) 7,260,406 shares of our common stock; (ii) 4 % of the outstanding shares of our common stock on the last day of our immediately preceding fiscal year; or (iii) such lesser number of shares of our common stock as the administrator may determine. On July 28, 2021, the Company’s Board of Directors and stockholders adopted and approved the Company’s 2021 Employee Stock Purchase Plan (“2021 ESPP”). The number of shares of the Company’s common stock available for issuance under the 2021 ESPP is equal to 484,027 shares of common stock. The number of common shares reserved for issuance under the 2021 ESPP will be increased automatically on the first day of each fiscal year beginning with our 2020 fiscal year, by a number equal to the lesser of: (i) 1,452,081 shares; (ii) 1 % of the outstanding shares of our common stock on the last day of our immediately preceding fiscal year; or (iii) such other amount as the administrator may determine. Each of the Company's 2021 Plan and 2021 ESPP provides for annual automatic increases in the number of shares reserved thereunder, and the 2021 Plan also provides for increases to the number of shares that may be granted thereunder based on awards under the 2015 Plan (“2015 Plan”) or 2006 Stock Plan (“2006 Plan”) that expire, are forfeited, or otherwise repurchased by the Company. On July 30, 2021, the Board of Directors approved the issuance of 640,567 equity awards to the Company's named executive officers and certain non-employee directors, consisting of 17,577 restricted stock units and 622,990 stock option awards. The awards will vest over one to four years of service. On August 3, 2021, the Board of Directors approved the issuance of equity awards to certain non-employee directors, consisting of 40,134 restricted stock units. The awards will vest over one to three years of service. On August 31, 2021, the Board of Directors approved the issuance of 768,520 equity awards to employees, consisting of 600,018 restricted stock units and 168,502 stock option awards. The awards will generally vest over four years of service. 27 28 Item 2: M ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes thereto for the year ended December 31, 2020, included in our prospectus dated July 29, 2021 filed with the U.S. Securities and Exchange Commission, pursuant to Rule 424(b)(4) under the Securities Act. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See “Special Note Regarding Forward-Looking Statements.” We are a commercial-stage medical technology company dedicated to improving the vision of patients following cataract surgery. Our proprietary RxSight system, comprised of our LAL, LDD and accessories, is the first and only commercially available IOL technology that enables doctors to customize and optimize visual acuity for patients after cataract surgery. Our LAL is made of proprietary photosensitive material that changes shape in response to specific patterns of ultraviolet light generated by our LDD. With the RxSight system, the surgeon performs a standard cataract procedure to implant the LAL, determines refractive error with patient input after healing is complete, and then uses the LDD to modify the lens with the exact amount of visual correction needed to achieve the patient’s desired vision outcomes. Alternative IOL technologies, in contrast, are not adjustable following the procedure and therefore require patients to make pre-operative choices about their visual preferences, which can often result in patient dissatisfaction when visual outcomes fail to meet expectations. We designed our RxSight system to maximize patient and doctor satisfaction through superior visual outcomes. In the pivotal study that formed the basis for our FDA approval, the observed rate of eyes with 20/20 or better uncorrected distance visual acuity for our LAL was 70.1%. This compares favorably to the results of pivotal studies with similar study designs and patient populations that supported FDA approval of Alcon’s Acrysof Toric (38.4%), and J&J’s Tecnis Toric (43.6%). We began commercializing our solution in the United States in the third quarter of 2019 and are focused on establishing the RxSight system as the standard of care for premium IOL procedures. As of June 30, 2021, we had an installed base of 130 LDDs in ophthalmology practices, and since our inception, surgeons have performed over 11,000 surgeries with our RxSight system. We compete in the IOL market in the U.S. The LAL is a premium IOL which is partially reimbursable under Medicare, and in some cases by private payors. Premium IOLs are sold at a higher price point than conventional IOLs, as they provide refractive correction of vision unlike a conventional IOL that only replaces the natural lens with a clear lens (which is the standard for Medicare reimbursement). Our products are also approved for sale in Europe and Mexico. We are not actively marketing our products for sale in Europe or Mexico; however, we have approval in both for improving uncorrected visual acuity by adjusting the LAL power to correct residual postoperative refractive error. We have one customer in Germany and one in Mexico, both of which have participated in our clinical studies and perform commercial cases. We compete in the IOL market in the U.S. We are a Delaware corporation, headquartered in Aliso Viejo, California, and have one wholly owned subsidiary. Our subsidiary is located in Amsterdam, Netherlands, which has one wholly owned subsidiary in Germany and a registered branch in the United Kingdom. Our commercial strategy is focused on a “land and expand” model through which we aim to drive new customer adoption, which generally begins with the sale of an LDD, and then helps the customer incorporate the LAL into their practice to drive utilization and premium procedure growth. We believe this commercial strategy over time may provide a degree of predictability in terms of our commercial growth and a consumable revenue stream from sales of our LALs. We are currently focused on driving adoption with surgeons performing a high volume of premium cataract procedures. Market Scope estimates that there are approximately 4,000 surgeons that perform cataract surgeries in the United States as of 2020, and we estimate that approximately 1,600 surgeons performed approximately 70 to 80% of the premium procedures in the United States in 2020. We believe this provides an attractive and concentrated market opportunity addressable with a focused sales force. We currently employ a sales team that, as of June 2021 includes 6 sales directors, and a group of over 40 clinical specialists, field service and customer service personnel. We believe increasing the number of sales representatives, practice development personnel and clinical trainers will help facilitate further adoption of our products among existing customer accounts as well as broaden awareness of our products to new accounts. While we intend to initially focus our growing commercial efforts in the U.S., in the future, we may selectively pursue commercial expansion in Asia, Europe, 29 Australia or other geographies with significant market opportunity for premium IOLs, leveraging our CE and FDA approvals. Our near-term research and development activities are focused on enhancements to the RxSight system to improve the patient and doctor experience, expand the range of patients that can be treated, as well as expand its indications and drive adoption. We believe that over time, our adjustable lens solution can be used to address a broad range of cataract surgery patients, including those that would otherwise elect for a conventional cataract procedure today. Additional development and clinical studies that are designed to provide clinical evidence of the safety and effectiveness of our existing and future generations of products are also anticipated. Finally, we may in the future seek to acquire or invest in additional businesses, products or technologies that we believe could complement or expand our portfolio, enhance our technical capabilities or otherwise offer growth opportunities. On July 29, 2021, we completed our IPO, which resulted in the issuance and sale of 8,248,549 shares of common stock, including 898,549 shares sold pursuant to the exercise of the underwriters’ over-allotment option at the IPO price of $16.00 per share. We received net proceeds of approximately $120.0 million from the IPO, after deducting underwriters’ discounts and commissions of $9.2 million and offering costs of $2.7 million. Prior to our IPO, our primary sources of capital had been private placements of preferred stock, a structured transaction with a strategic partner, debt financing and revenue from sales of our products. Since inception, we raised a total of $191.3 million in net proceeds from private placements of preferred stock, $120 million from a strategic partner, approximately $39.2 million in net proceeds from a credit facility, and approximately $11.0 million from issuance of common stock primarily from stock option exercises. As of June 30, 2021, we had cash and cash equivalents of $41.7 million, short-term investments of $20.0 million, long-term debt of $39.5 million and an accumulated deficit of $450.9 million. We generated sales of $8.4 million and had a net loss of $20.3 million for the six months ended June 30, 2021, compared to sales of $5.6 million and a net loss of $29.4 million for the six months ended June 30, 2020. We intend to continue to make significant investments in our sales and marketing organization, primarily sales representatives, clinical applications specialists and technical service personnel to support new customers and upgrades and practice development personnel to facilitate adoption of use of our LALs among existing accounts. We will expand our marketing efforts with additional advertising and customer tools to expand their local advertising. We will also continue to make significant investments in research and development and clinical expenses to make enhancements in our current products. As a public company, we will incur costs that we have not previously incurred or have previously incurred at lower rates, including increased costs for employee-related expenses, director and officer insurance premiums, audit and legal fees, investor relations fees, fees to members of our board of directors and expenses for compliance with public-company reporting requirements. Because of these and other factors, we expect to continue to incur substantial net losses and negative cash flows from operations for at least the next several years. Facility lease agreements We currently lease three facilities housing our headquarters, manufacturing, research and development and administrative offices in Aliso Viejo, California. The facility leases are for approximately 109,822 square feet in the aggregate. The leases terminate, respectively, on (i) September 30, 2024, with one option to extend for five years; (ii) January 31, 2026, with three options to extend for five years each; and (iii) March 31, 2023 with two options to extend for five years each. COVID-19 pandemic We are subject to the continuing risks related to the public health crises, primarily the global pandemic associated with COVID-19. In December 2019, a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease COVID-19, has spread to most countries, and all 50 states within the United States. The COVID-19 outbreak has negatively impacted and may continue to negatively impact our operations and revenues and overall financial condition, similar to other medical device manufacturers, by decreasing the number of our products sold. RxSight has a limited commercial history, as all but eight months of commercial history has occurred during the COVID-19 crisis. Total IOL procedure volume dropped 17% in the US and 25% globally from 2019 to 2020 due principally to the COVID-19 pandemic, as health care organizations globally have prioritized the treatment of patients with COVID-19. In the United States, governmental authorities had recommended, and in certain cases required, that elective, specialty and other 30 procedures and appointments, be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of COVID-19. These measures and challenges may continue for the duration of the pandemic, which is uncertain, and will reduce our revenue while the pandemic continues. Numerous state and local jurisdictions imposed, and in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Starting in mid-March 2020, the governor of California, where our headquarters is located, issued “shelter-in-place” or “stay at home” orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities. Such orders or restrictions have resulted in our headquarters closing, work stoppages, slowdowns and delays, travel restrictions and cancellation of training and other events, among other effects, thereby negatively impacting our operations. Other disruptions or potential disruptions to our business and supply chain include restrictions on our personnel and personnel of partners to travel and access customers for training and case support; delays in approvals by regulatory bodies; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our RxSight system. In addition, even after the “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19 were significantly reduced in the second quarter of 2021, we continue to experience disruptions to our business, including patients and customers continuing to be cautious in restarting elective procedures in light of the continued risk posed by the virus. As we continue to actively advance our clinical, discovery and research programs, we are in close contact with the third parties we engage with, who are primarily located in the United States, and are assessing the impact of the COVID-19 pandemic on each of our programs, expected timelines and costs on an ongoing basis. In light of ongoing developments relating to the COVID-19 pandemic, the focus of healthcare providers on fighting the virus, and consistent with the FDA’s industry guidance for conducting clinical trials, we and our contract research organizations have made certain adjustments to the operation of our clinical trials in an effort to ensure the monitoring and safety of patients and minimize risk to trial integrity during the pandemic and generally. Other COVID-related guidance recently released by the FDA includes statistical considerations for clinical trials conducted during the COVID-19 public health emergency and post marketing adverse event reporting for medical products during a pandemic. We may need to make further adjustments in the future, including implementation of new policies and procedures. While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. We expect any further shelter-in-place policies and restrictions on elective surgical procedures worldwide to have a substantial near-term impact on our revenue. During the COVID-19 pandemic, our customers, including doctors, have experienced financial hardship and some of them may not fully recover. This could lead to some of these customers temporarily or permanently shutting down, filing for bankruptcy or being acquired by larger health systems, leading to reduced procedures and/or additional pricing pressure on our products. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States which may continue even after the pandemic. The occurrence of any such events may lead to reduced disposable income and access to health insurance which could adversely affect the number of our RxSight systems sold after the pandemic has ended. Key business metrics We regularly review several operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate our business plan and make strategic decisions. We believe the number of LDDs installed, LALs implanted and the number of doctors performing surgery with our products are indicators of our ability to drive adoption and generate revenue. We believe these are important metrics for our business. Due to our limited commercial history, all but eight months of which have occurred during the COVID-19 pandemic, we are not yet able to assess seasonality and other trends, and we will continue to evaluate our business in the future using these and other financial metrics as we observe trends in our business. We believe the number of LDDs sold in each quarter and installed at the end of each period are important metrics as they represent an installed base into which we can sell our LALs. 31 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 LDDs Sold — — 10* 9 15 15 20* 23 13 25 Installed Base at End of Period — — 10 19 34 49 69 92 105 130 * One LDD placed for rent Q3 2019 at a university & one LDD converted from clinical to commercial use in Q3 2020 We believe the number of LALs sold (reported as implanted in a patient) in each quarter is an important metric indicative of adoption and utilization of our RxSight system. While an important metric, the COVID-19 pandemic and severe weather in the first quarter 2021 impacted trends in our business. In the second quarter of 2020, the number of our LALs sold decreased as compared to the first quarter of 2020 as ambulatory surgery centers (ASCs), where most cataract surgeries are performed, were closed to elective surgeries for six or more weeks. In the third quarter 2020, LALs sold increased as compared to the second quarter of 2020, reflecting, we believe, some resurgence of surgeries when ASCs re-opened, with sales of LALs in the fourth quarter of 2020 continuing to increase sequentially, despite seasonal holidays. During the first quarter of 2021, however, the U.S. saw a resurgence in COVID-19 cases attributed to holiday travel and gatherings and severe weather in Texas and other southern states, resulting in reduced LAL sales for such period. 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 LALs Sold — 26 336 575 719 662 1,513 1,577 1,567 1,825 Components of results of operations Sales Our revenue consists of the sale of LALs used in cataract surgeries, the LDDs for delivering light to the LALs to adjust the lens post-surgery, as needed, and service and accessories (UV protective glasses and LAL insertion devices). Revenue is derived from sales of products primarily in the U.S. and sales to a single customer in each of Germany and Mexico. Customers are primarily comprised of ophthalmic practices (LDD sales) and ambulatory surgery centers (LAL sales). We expect revenue to increase in absolute dollars as we expand our sales organization and sales territories, add customers, expand the base of doctors that are trained to use our products, and expand awareness of our products with new and existing customers and as doctors perform more procedures using our products. LALs are held at customer sites on consignment. The single performance obligation is satisfied, and revenue is recognized for LALs upon customer notification that the LALs have been implanted in a patient. Our LDD contracts contain multiple performance obligations bundled into one transaction price, with all obligations generally satisfied within one year. The LDD capital asset and related components revenue is recognized upon installation and customer acceptance training is recognized upon completion of training by at least one doctor and the initial warranty and service agreement are recognized ratably over the service period. After the first year, service contracts can be purchased separately on a standalone basis. The Company deferred revenue of $380,000 and $345,000 related to such service agreements as of June 30, 2021 and December 31, 2020, respectively. Revenue for such service agreements will be recognized over the term of each contract. For the three and six months ended June 30, 2021, and 2020, revenue from contracts with customers consisted of the following: Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 (in thousands) (in thousands) LDD (including training) $ 2,965 $ 2,050 $ 4,802 $ 4,209 LAL 1,792 619 3,321 1,290 Accessories and Service Warranty 140 37 258 95 $ 4,897 $ 2,706 $ 8,381 $ 5,594 For the three months ended June 30, 2021, we had one customer who individually accounted for approximately 13% of revenue. For the six months ended June 30, 2021, we had no customer who individually accounted for 10% or more of revenue. For the three months ended June 30, 2020, we had one customer who individually accounted for 32 approximately 54% of revenue. For the six months ended June 30, 2020, we had one customer who individually accounted for approximately 39% of revenue. Cost of sales Cost of sales consists of materials, labor and manufacturing overhead internally to produce the Company’s products as well as the cost of shipping and handling. Overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management, including stock-based compensation. Cost of sales also includes depreciation expense for production equipment and certain direct costs such as shipping costs and royalty and license fee expense. Shipping costs billed to customers are included in sales. We expect cost of sales to increase in absolute dollars as our revenue grows and more of our products are sold. We calculate gross margin as gross profit/loss divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, including average selling prices, product sales mix, production and ordering volumes, manufacturing costs, product yields, headcount and cost-reduction strategies. Our gross margin could fluctuate from quarter to quarter as we introduce new products, and as we adopt new manufacturing processes and technologies. Our LDD, as is typical of many medical device capital equipment products, has a low gross margin, as the material cost of the LDD is significant, representing close to 50% of the total cost to manufacture. In addition, we do not mark up our LDD substantially, as LDDs, as sold, generate LAL procedures. Our LAL gross margin is higher, with low material cost but high fixed overhead costs. As our manufacturing volume of the LAL increases, we expect the gross margin may improve significantly. Operating expenses Selling, general and administrative expenses Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to administrative, selling and marketing functions, education programs for doctors, commercial operations and analytics, finance, information technology and human resource functions. Other SG&A expenses include sales commissions, travel expenses, promotional activities, marketing initiatives, market research and analysis, conferences and trade shows, training for doctors, professional services fees (including legal, audit and tax fees), insurance costs, general corporate expenses and facilities-related expenses. We expect SG&A expenses to continue to increase in absolute dollars as we expand our sales and marketing organization and infrastructure to both drive and support the anticipated growth in revenue and due to additional legal, accounting, insurance and other expenses associated with being a public company. Research and development expenses Research and development expenses consist of expenses incurred in performing research and development and engineering activities for new products and technology, clinical studies and regulatory submissions and compliance. The expenses include compensation and benefits (including stock-based compensation), costs incurred at clinical trial sites, regulatory and manufacturing engineering costs, including those related to various laboratory and research equipment and supplies, expense of pre-approved inventory utilized for clinical trial and research purposes, costs incurred in the development of manufacturing processes in excess of capitalizable value, fees paid to consultants and contract clinical organizations and direct FDA related costs and costs related to FDA premarket approval submission preparation. Research and development expenses are expensed as incurred. We expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of our new product development efforts, as well as our clinical development, clinical trials and registries and other related activities. Change in fair value of warrants Change in fair value of warrants consists of gains and losses resulting from the remeasurement of the fair value of our preferred stock warrant liabilities at each balance sheet date. We continued to record adjustments to the estimated fair value of the preferred stock warrants until the conversion of the underlying convertible preferred stock into common stock which occurred upon the completion of it's IPO in July 2021. 33 Interest expense Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our indebtedness. Interest and other income, net Interest and other income, net consists primarily of interest income earned on our cash and cash equivalents. Accretion to redemption value of redeemable preferred stock and preferred stock options Due to the Special Redemption provision in place in our Articles of Incorporation and until the unexercised Series W Warrant expiration on March 31, 2021, all equity instruments were redeemable and evaluated as probable of redemption through early December 2020. No accretion was calculated during the three and six months ended June 30, 2021. For common and preferred stock, the value of the accretion was calculated as the estimated future redemption amount accreted to the estimated redemption date using the effective interest rate. For stock options the value of accretion was calculated at the estimated future redemption amount less the strike price, recognized over the same period as the corresponding service period for which stock-based compensation is recognized. Comprehensive income (loss) All components of comprehensive income (loss), including net income (loss), are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on short-term investments and foreign currency translation adjustments. Results of operations Comparison of the three months ended June 30, 2021 and 2020 The following table summarizes our results of operations for the three months ended June 30, 2021, and 2020, together with the dollar increase or decrease and percentage change in those items. Three months ended June 30 Change (in thousands, except share amounts, per-share data and percentages) 2021 2020 ($) (%) Sales $ 4,897 $ 2,706 $ 2,191 81.0 % Cost of sales 5,709 3,180 2,529 79.5 Gross loss $ (812 ) $ (474 ) $ (338 ) 71.3 % Operating expenses: Selling, general and administrative 6,502 3,249 3,253 100.12 Research and development 6,563 5,084 1,479 29.1 Total operating expenses 13,065 8,333 4,732 56.8 Loss from operations $ (13,877 ) $ (8,807 ) $ (5,070 ) 57.6 % Other income (expense), net: Change in fair value of warrants 1,214 (4,178 ) 5,392 (129.1 )% Interest expense (826 ) (4 ) (822 ) 20,550.0 Interest and other income 15 147 (132 ) (89.8 ) Loss before income taxes (13,474 ) (12,842 ) (632 ) 4.9 Income tax expense 3 40 (37 ) (92.5 ) Net loss $ (13,477 ) $ (12,882 ) $ (595 ) 4.6 % Accretion to redemption value of redeemable preferred stock and redeemable stock options — (4,097 ) 4,097 (100.0 ) Net loss attributable to common stockholders (13,477 ) (16,979 ) 3,502 (20.6 ) Other comprehensive income (loss) Unrealized gain on short-term investments (4 ) (112 ) 108 (96.4 ) Foreign currency translation loss 1 3 (2 ) (66.7 ) Total other comprehensive income (loss) (3 ) (109 ) 106 (97.2 ) Comprehensive loss $ (13,480 ) $ (12,991 ) $ (489 ) 3.8 % 34 Sales Sales increased by $2.2 million to $4.9 million for the three months ended June 30, 2021, from $2.7 million for the three months ended June 30, 2020. The increase in total sales was primarily due to sales of 1,163 more LALs with an increased average selling price and 10 more LDDs. Cost of sales Cost of sales increased by $2.5 million to $5.7 million for the three months ended June 30, 2021, from $3.2 million for the three months ended June 30, 2020, primarily due to the increase in the number of LALs and LDDs sold. The increase was impacted by the recording of a $1.7 million reserve for excess LAL inventory as a result of the recent introduction of an updated LAL including our ActivShield technology. Gross margin increased to (16.6)% in the three months ended June 30, 2021 from (17.5)% for the three months ended June 30, 2020 due to improved operating leverage. Selling, general and administrative expenses Selling, general and administrative expenses increased by $3.3 million to $6.5 million for the three months ended June 30, 2021, from $3.2 million for the three months ended June 30, 2020, an increase of 100%. This increase was primarily attributable to an increase in selling and marketing personnel costs of $1.6 million due mainly to additional headcount as well as increased travel costs of $0.4 million when compared to the three months ended June 30, 2020, due to temporary reduction in travel costs caused by COVID-19, as well as increased consulting and temporary personnel expenses of $0.3 million. General and administrative temporary labor and consulting costs increased by approximately $0.5 million driven by temporary personnel costs as well as an increase in consulting expenses in preparation for our IPO in July 2021. General and administrative personnel expenses also increased by $0.3 million due primarily to an increase in headcount as well as temporary reductions in salaries that were in place for the three months ended June 30, 2020. Research and development expenses Research and development expenses increased by $1.5 million to $6.6 million for the three months ended June 30, 2021, from $5.1 million for the three months ended June 30, 2020, an increase of 29%. This increase was primarily attributable to increased material costs of $1.0 million, which included $0.7 million in expensed LALs and an increase of $0.2 million in personnel costs due primarily to higher incentive pay as well as temporary reductions in salaries that were in place for the three months ended June 30, 2020, as well as an increase in clinical study expense of $0.2 million. Other income (expense), net Other income (expense), net, increased by $4.4 million to $0.4 million for the three months ended June 30, 2021 from a $4.0 million loss for the three months ended June 30, 2020 due to the change in the fair value of liability classified warrants of $5.4 million partially offset by reduced interest income of $0.1 million and an increase in interest expense of $0.8 million interest expense on our term loan. Accretion to redemption value of redeemable preferred stock and redeemable stock options Accretion to redemption value of redeemable preferred stock and redeemable stock options was $0.0 million for the three months ended June 30, 2021, and $4.1 million for the three months ended June 30, 2020, due to the expiration of the Common W warrant liability on March 31, 2021. Other comprehensive income (loss) Other comprehensive income (loss) decreased by $0.1 million to $0.0 million for the three months ended June 30, 2021, from income of $0.1 million for the three months ended June 30, 2020, due primarily to a decrease of $0.1 million in the unrealized gain on short-term investments. 35 Comparison of the six months ended June 30, 2021, and 2020 The following table summarizes our results of operations for the six months ended June 30, 2021, and 2020, together with the dollar increase or decrease and percentage change in those items: Six months ended June 30 Change (in thousands, except share amounts, per-share data and percentages) 2021 2020 ($) (%) Sales $ 8,381 $ 5,594 $ 2,787 49.8 % Cost of sales 8,074 5,989 2,085 34.8 Gross profit (loss) $ 307 $ (395 ) $ 702 (177.7 )% Operating expenses: Selling, general and administrative 12,113 6,948 5,165 74.3 Research and development 13,206 10,861 2,345 21.6 Total operating expenses 25,319 17,809 7,510 42.2 Loss from operations $ (25,012 ) $ (18,204 ) $ (6,808 ) 37.4 % Other income (expense), net: Change in fair value of warrants 1,214 (11,585 ) 12,799 (11047.9 )% Expiration of warrant 5,018 — 5,018 0.0 Interest expense (1,524 ) (9 ) (1,515 ) 16,833.3 Interest and other income 32 459 (427 ) (93.0 ) Loss before income taxes (20,272 ) (29,339 ) 9,067 (30.9 ) Income tax expense 10 45 (35 ) (77.8 ) Net loss $ (20,282 ) $ (29,384 ) $ 9,102 (31.0 )% Accretion to redemption value of redeemable preferred stock and redeemable stock options - (8,343 ) 8,343 (100.0 ) Net loss attributable to common stockholders (20,282 ) (37,727 ) 17,445 (46.2 ) Other comprehensive income (loss) Unrealized gain (loss) on short-term investments 3 (35 ) 38 (108.6 ) Foreign currency translation gain (3 ) 2 (5 ) (250.0 ) Total other comprehensive income (loss) - (33 ) 33 (100.0 ) Comprehensive loss $ (20,282 ) $ (29,417 ) $ 9,135 (31.1 )% Sales Sales increased by $2.8 million to $8.4 million for the six months ended June 30, 2021, from $5.6 million for the six months ended June 30, 2020. The increase in sales was due to sales of 2,011 more LALs with an increased average selling price and eight more LDDs sold. In mid-March 2020, ambulatory surgery centers (ASCs), where most cataract surgeries were performed, were closed to elective surgeries for six or more weeks, contributing to the increase when comparing the six months 2021 and 2020. Cost of sales Cost of sales increased by $2.1 million to $8.1 million for the six months ended June 30, 2021, from $6.0 million for the six months ended June 30, 2020, due to the increase in the number of products sold and associated service warranties. The increase was also driven by the recording of a $1.7 million reserve for excess LAL inventory as a result of the recent introduction of an updated LAL including our ActivShield technology. Gross margin increased to 3.7% for the six months ended June 30, 2021, from a 7.1% loss due to improved operating leverage on a higher volume of units sold. Selling, general and administrative expenses Selling, general and administrative expenses increased by $5.2 million to $12.1 million for the six months ended June 30, 2021, from $6.9 million for the six months ended June 30, 2020. The increase was primarily driven 36 by an increase in selling and marketing personnel related expenses of $2.7 million due mainly to additional headcount, increased travel costs of $0.3 million due the temporary reduction in selling and marketing travel costs during the six months ended June 30, 2020 caused by COVID-19, an increase in general and administrative personnel costs of $0.6 million, higher general and administrative audit, tax, and legal costs and $0.6 million higher selling, general and administrative stock-based compensation expenses. Research and development expenses Research and development expenses increased by $2.3 million to $13.2 million for the six months ended June 30, 2021, from $10.9 million for the six months ended June 30, 2020, an increase of 22%. This increase was primarily attributable to an increase of $0.7 million in personnel costs due primarily to increased personnel headcount and reinstatement of incentive pay, increased material costs of $1.4 million, which included $0.7 million in expensed LALs, as well as an increase in stock-based compensation expense of $0.2 million. Other income (expense), net Other income (expense), net, increased by $15.9 million to $4.7 million for the six months ended June 30, 2021, from a $11.1 million loss for the six months ended June 30, 2020, due primarily to the change in fair value of warrant liabilities of $17.8 million, offset by a decrease in interest income of $0.4 million due to lower cash and short-term investment balances and an increase in interest expense of $1.5 million due to higher interest expense on our term loan. Accretion to redemption value of redeemable preferred stock and redeemable stock options Accretion to redemption value of redeemable preferred stock and redeemable stock options decreased by $8.3 million to $0.0 million for the six months ended June 30, 2021, from $8.3 million for the six months ended June 30, 2020, due to management no longer accreting common stock, preferred stock and stock options to redemption value in 2021 after it was determined in December 2020 that exercise of the Series W Warrant was no longer probable. Other comprehensive income (loss) Other comprehensive income (loss) increased by $0.03 million to $0.0 million for the six months ended June 30, 2021, from ($0.03) million for the six months ended June 30, 2020, due primarily to reduction in the unrealized gain on short-term investments. Liquidity and capital resources Sources of liquidity We have incurred significant operating losses and negative cash flows from operations since our inception, and we anticipate that we will incur significant losses for at least the next several years. As of June 30, 2021, we had cash, cash equivalents and short-term investments of $61.7 million. For the six months ended June 30, 2021, and 2020, our loss from operations were $25.0 million and $18.2 million, respectively. We had an accumulated deficit of $450.9 million as of June 30, 2021. Prior to our IPO completed in July 2021, our primary sources of capital were private placements of preferred stock, a structured transaction with a strategic partner, debt financing and revenue from sales of our products. Funding requirements Our future liquidity and capital funding requirements will depend on numerous factors, including:  our revenue growth;  our research and development efforts;  our sales and marketing activities;  our ability to raise additional funds to finance our operations;  the outcome, costs and timing of any clinical trial results for our current or future products;  the emergence and effect of competing or complementary products; 37  our ability to maintain, expand, enforce and defend our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or other intellectual property rights;  our ability to retain our current employees and the need and ability to hire additional management, sales, research and development, scientific and customer support personnel;  the terms and timing of any collaborative, licensing or other arrangements that we have or may establish;  debt service requirements;  the extent to which we acquire or invest in businesses, products or technologies; and  the impact of the COVID-19 pandemic. Based on our current planned operations, we expect that our current cash, cash equivalents and short-term investments will be sufficient to fund our operations for the next 12 months after the date our most recent financial statements were issued. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. We may require additional financing to fund working capital and pay our obligations. We may seek to raise any necessary additional capital through a combination of public or private equity offerings and/or debt financings. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us, if at all. If adequate funds are not available on acceptable terms when needed, we may be required to significantly reduce operating activities, which may have a material adverse effect on our business and/or results of operations and financial condition. If we do raise additional capital through public or private equity or convertible debt offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Additional capital may not be available on reasonable terms, or at all. See the section of this Quarterly Report on Form 10-Q titled “Risk Factors” for additional risks associated with our substantial capital requirements. Summary statement of cash flows The following table sets forth the primary sources and uses of cash, cash equivalents, and restricted cash for each of the periods presented below: Six months ended June 30, (unaudited) 2021 2020 Net cash (used in) provided by: Operating activities $ (22,231 ) $ (20,028 ) Investing activities 33,680 23,702 Financing activities 16,391 857 Effect of foreign exchange rate on cash, cash equivalents and restricted cash (3 ) 2 Net increase in cash, cash equivalents and restricted cash $ 27,837 $ 4,533 Cash used in operating activities Net cash used in operating activities for the six months ended June 30, 2021, was $22.2 million, consisting primarily of a net loss of $20.3 million, a non-cash gain on expiration of an unexercised warrant of $5.0 million, an increase in operating assets and liabilities of $2.3 million, partially offset by non-cash stock-based compensation of $2.6 million, provision for excess and obsolete inventory of $1.7 million, and depreciation and amortization of $1.9 million. Net cash used in operating activities for the six months ended June 30, 2020, was $20.0 million, consisting primarily of a net loss of $29.4 million, an increase in operating assets and liabilities of $5.5 million, offset by the 38 non-cash change in fair value of liability classified warrants of $11.6 million, depreciation of $1.8 million and stock-based compensation of $1.7 million. Cash used in investing activities Net cash provided by investing activities for the six months ended June 30, 2021, was $33.7 million, consisting of net maturities of short-term investments of $35.0 million, offset by net purchases of property and equipment of $1.3 million. Net cash provided by investing activities for the six months ended June 30, 2020, was $23.7 million, consisting of net maturities of short-term investments of $25.1 million, offset by net purchases of property and equipment of $1.4 million. Cash from financing activities Net cash from financing activities for the six months ended June 30, 2021, was $16.4 million, consisting primarily of proceeds from a draw on the Company’s term loan of $15.0 million and proceeds from stock options exercised of $1.3 million. There were no significant financing cash flow activities in the six months ended June 30, 2020. Contractual obligations and commitments We also have a standby letter of credit, expiring September 30, 2024, issued by a financial institution as a required security for one operating lease. The aggregate amount of the letter of credit was $0.6 million and $0.4 million as of December 31, 2019 and December 31, 2020. Term Loan In October 2020, we entered into a loan and security agreement, or the Credit Agreement, with Bank of America, as collateral agent, and Oxford Finance LLC, or Oxford Finance, as lender. The Credit Agreement provides for a tranche one loan advance in the amount of $25.0 million, which was fully funded on the closing date by the lender, a second tranche of $5.0 million in the first quarter of 2021, which was advanced on March 29, 2021, and a third tranche of $10.0 million in the second quarter of 2021, which was advanced on June 28, 2021. The Credit Agreement also provides for an additional two tranches in the amount of $5.0 million each in 2021, subject to remaining in compliance with the terms of the credit facility. A final tranche in an amount of $10.0 million is available in the first quarter of 2022, subject to our achievement of a revenue milestone and remaining in compliance with the terms of the credit facility. We refer to our tranche one loan advance, tranche two loan advance, tranche three loan advance, tranche four loan advance, tranche five loan advance, and tranche six loan advance collectively as our credit facility. The credit facility is secured by substantially all of our personal property other than our intellectual property, but includes any accounts receivable, other amounts owed and any proceeds of intellectual property. We also entered into a negative pledge arrangement with the collateral agent and lenders where we agreed not to encumber any of our intellectual property. Outstanding borrowings under the credit facility bear interest at an annual rate equal to the greater of (i) the Wall Street Journal 30-day LIBOR plus 9.09% and 0.16% or (ii) 9.25%. At our election, we may also switch to an interest rate equal to 10.25% plus the greater of (i) The Wall Street Journal Prime rate or (ii) 7%. The interest rate resets monthly on the last day of the month prior to the month in which interest accrues, and an actual/360-day convention applies. If we are considered to be in default, additional interest of 5% applies. We are required to make monthly payments of interest only through December 1, 2023, or the interest-only period; provided that the interest-only period maybe extended to December 1, 2024. The Term Loan requires 36 months of interest-only payments, followed by 23-months of amortization. If the Company is in compliance with the Performance to Plan covenant through October 31, 2023, the interest-only period is extended by 12 months, and the amortization period is reduced by 11 months. Payments are due on the first day of each month in arrears. All unpaid amounts under the Term Loan mature on October 1, 2025. We may repay the Term Loan at any time without penalty; however, the loan must be prepaid in full or in specific increments and amounts prepaid may not be subsequently reborrowed. The loan may also be accelerated by the lender in the event of a default. 39 Borrowings under the credit facility are pre-payable at any time without penalty; however, the loan must be prepaid in full or in part one time in an amount not less than $5.0 million and amounts prepaid may not be subsequently reborrowed. If the loan is not fully prepaid by December 31, 2021, the Company will become subject to an additional fee (the “Exit Fee”). The fee is 3% of the original loan amount if prepaid between January 1, 2022, and October 31, 2022 ($750k); 4% if prepaid between November 1, 2022 and October 31, 2023 ($1.0 million); and 5% ($1.25 million) if paid subsequently, including at maturity. The loan may be accelerated by Oxford in the event of a default. The credit facility also includes certain customary affirmative and negative covenants, including certain financial covenants if the lenders make us the additional tranche advances. We were in compliance with all covenants under the credit facility as of June 30, 2021. Critical accounting policies, significant judgments and use of estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported expenses incurred during the reporting periods. 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. While our significant accounting policies are more fully described in the notes to our financial statements included elsewhere in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements and understanding and evaluating our reported financial results. There were no material changes to our critical accounting policies or in the methodology used for estimates from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Prospectus of July 29. 2021. Off-balance sheet arrangements We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Indemnification agreements We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement, misappropriation or other violation claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these arrangements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these agreements is minimal. Recent accounting pronouncements See the section titled “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Emerging growth company and smaller reporting company status We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, presenting only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus, not being required to comply with the auditor attestation requirements of Section 404 of the 40 Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements. We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests. 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. However, we have chosen to irrevocably “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the consummation of this offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. ITEM 3. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK Qualitative and Quantitative Disclosures About Market Risk We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates. Interest Rate Risk Our cash, cash equivalents and marketable securities as of June 30, 2021 consisted of $20.0 million, invested in government securities as well as $41.7 million invested in bank deposits and money market funds. Our historical interest income has not fluctuated significantly. We do not believe that a hypothetical 10% change in interest rates would have a material impact on our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of June 30, 2021, we had $40.0 million in variable rate debt outstanding. Our Credit Agreement bears interest at an annual rate equal to the greater of (i) the Wall Street Journal prime rate plus 9.09% or (ii) 9.25%. A hypothetical change in interest rates of 10% would have resulted in a change of $0.1 million in interest expense in for the three months ended June 30, 2021. Foreign Currency Exchange Risk Our reporting currency is the U.S. dollar and our sales outside the United States are primarily denominated in Euros and GBP. For the years ended December 31, 2020 and 2019, approximately 0.3% and 0.5%, respectively, of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which are primarily in the United States and Europe. If our operations in countries outside of the United States grows, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. In addition, because we conduct business in currencies other than U.S. dollars, but report 41 our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could impact our results of operations. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies. We do not believe that a hypothetical 10% change in the relative value of the U.S. dollar to other currencies would have a material impact on our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Effects of Inflation Inflation generally affects us by increasing our cost of labor and research and development contracts. We do not believe that inflation has had a material effect on our financial results during the periods presented.