UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38809

AVEDRO, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	13-4223265
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
201 Jones Road Waltham, Massachusetts	02451
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 768-3400

~~Indicate~~Securities byregistered ~~check~~pursuant ~~mark whether the registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(db) of the ~~Securities Exchange~~ Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	AVDR	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

~~Securities~~As ~~registered~~of ~~pursuant~~October to31, ~~Section~~2019, ~~12(b)~~the registrant had 17,520,793 shares of ~~the~~common ~~Act:~~stock, $0.00001 par value per share, outstanding.

Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock AVDR The Nasdaq Stock Market LLC

As of August 6, 2019, the registrant had 17,135,084 shares of common stock, $0.00001 par value per share, outstanding.

Avedro, Inc.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our current beliefs and expectations. These forward-looking statements may be accompanied by such words as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “target,” “will” and other words and terms of similar meaning. Reference is made in particular to forward-looking statements regarding:

•

our expectations with respect to (i) the anticipated financial impact and potential benefits to us related to acquisition by Glaukos Corporation, or Glaukos, or the Merger and (ii) other matters related to the Merger, including our expectations regarding the timing of the closing of the Merger;

•

our ability to support the establishment of consistent and favorable payment policies for our treatment of corneal ectatic disorders in the United States;

•

our ability to commercialize our products successfully;

•

our ability to obtain the required regulatory approvals and clearances to market and sell our products in the United States, the European Union and certain other countries;

•

the outcome or success of our clinical trials;

•

the rate and degree of market acceptance of our products;

•

our ability to significantly grow our commercial sales and marketing organization and manage our anticipated growth;

•

the effects of increased competition as well as innovations by new and existing competitors in our market;

•

our ability to obtain additional funding for our operations;

•

our ability to pay our debts as they come due and comply with our ongoing financial covenants under our credit agreement;

•

our ability to maintain, protect and enhance our intellectual property rights and proprietary technologies and operate our business without infringing the intellectual property rights and proprietary technology of third parties; and

• ~~the future trading prices of~~ our ~~common~~expectations ~~stock~~regarding ~~and~~ the ~~impact~~use of ~~securities~~our ~~analysts;~~existing ~~reports~~cash onand ~~these~~cash ~~prices~~equivalents.

These forward-looking statements involve risks and uncertainties, including those that are described in ~~the~~Part II, Item A, “Risk Factors” section of this ~~report~~Quarterly Report on Form 10-Q and elsewhere within this ~~report~~Quarterly Report, or included in other periodic reports, that could cause actual results to differ materially from those reflected in such statements. You should not place undue reliance on these statements. Forward-looking statements speak only as of the date of this report. We do not undertake any obligation to publicly update any forward-looking statements.

NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “Avedro,” the “Company,” “we,” “us” and “our” refer to Avedro, Inc. and its subsidiaries.

NOTE REGARDING TRADEMARKS

All trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Unaudited Condensed Financial Statements	1
	Condensed Balance Sheets as of June 30, 2019 and December 31, 2018	1
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018	1
	Condensed Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018	2
	Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	2
	Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2019 and 2018	3
	Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018	3
	Condensed Statements of Cash Flows for the Six-Months Ended June 30, 2019 and 2018	5
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3334
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Avedro, Inc.

Condensed Balance Sheets

(amounts in thousands except share data)

(unaudited)

	June 30,			December 31,
	September 30,			December 31,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	5752,~~838~~146		$	9,769
Accounts receivable, net (a)		1112,~~603~~328			4,725
Inventories		4,~~922~~482			4,259
Prepaid expenses and other current assets		23,~~368~~264			1,919
Total current assets		7672,~~731~~220			20,672
Equipment and furniture, net		1,~~348~~542			1,524
Restricted cash		551			551
Deferred offering costs		—			2,829
Other assets		~~322~~218			291
Total assets	$	7874,~~952~~531		$	25,867
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,~~974~~483		$	2,126
Accrued expenses and other current liabilities		56,~~002~~322			5,366
Current portion of license obligation		—			250
Deferred revenue		~~771~~784			688
Total current liabilities		78,~~747~~589			8,430
Deferred revenue		3436			12
Long-term debt obligations		20,~~313~~489			19,939
Derivative and warrant liability		~~393~~900			2,206
Other non-current liabilities		~~424~~422			445
Total liabilities	$	2830,~~911~~436		$	31,032
Commitments and contingencies (Note 6)
Convertible preferred stock:
Series AA convertible preferred stock, $0.00001 par value; authorized shares zero and 32,650,000 at June 30, 2019 and December 31, 2018, respectively; issued and outstanding shares zero and 7,161,719 at June 30, 2019 and December 31, 2018, respectively; no liquidation preference at June 30, 2019		—			31,852
Series AA convertible preferred stock, $0.00001 par value; authorized shares zero and 32,650,000 at September 30, 2019 and December 31, 2018, respectively; issued and outstanding shares zero and 7,161,719 at September 30, 2019 and December 31, 2018, respectively; no liquidation preference at September 30, 2019		—			31,852
Series BB convertible preferred stock, $0.00001 par value; authorized shares zero and 5,950,000 at June 30, 2019 and December 31, 2018, respectively; issued and outstanding zero and shares 1,332,708 at June 30, 2019 and December 31, 2018, respectively; no liquidation preference at June 30, 2019		—			11,789
Series BB convertible preferred stock, $0.00001 par value; authorized shares zero and 5,950,000 at September 30, 2019 and December 31, 2018, respectively; issued and outstanding zero and shares 1,332,708 at September 30, 2019 and December 31, 2018, respectively; no liquidation preference at September 30, 2019		—			11,789
Series CC convertible preferred stock, $0.00001 par value; authorized shares zero and 9,529,571 and zero at June 30, 2019 and December 31, 2018, respectively; issued and outstanding shares zero and 2,141,467 at June 30, 2019 and December 31, 2018, respectively; no liquidation preference at June 30, 2019		—			24,782
Series CC convertible preferred stock, $0.00001 par value; authorized shares zero and 9,529,571 at September 30, 2019 and December 31, 2018, respectively; issued and outstanding shares zero and 2,141,467 at September 30, 2019 and December 31, 2018, respectively; no liquidation preference at September 30, 2019		—			24,782
Stockholders’ equity (deficit):
Preferred stock, $0.00001 par value; 10,000,000 and zero shares authorized at June 30, 2019 and December 31, 2018, respectively; no shares issued and outstanding at June 30, 2019 and December 31, 2018		—			—
Preferred stock, $0.00001 par value; 10,000,000 and zero shares authorized at September 30, 2019 and December 31, 2018, respectively; no shares issued and outstanding at September 30, 2019 and December 31, 2018		—			—
Common stock, $0.00001 par value; authorized shares 200,000,000 and 66,905,000 at June 30, 2019 and December 31, 2018, respectively; issued and outstanding shares 17,133,849 and 1,412,003 at June 30, 2019 and December 31, 2018, respectively		2			2
Common stock, $0.00001 par value; authorized shares 200,000,000 and 66,905,000 at September 30, 2019 and December 31, 2018, respectively; issued and outstanding shares 17,506,228 and 1,412,003 at September 30, 2019 and December 31, 2018, respectively		2			2
Additional paid-in capital		~~242~~245,~~270~~389			108,532
Accumulated deficit		(~~192~~201,~~231~~296	)		(182,122	)
Total stockholders’ equity (deficit)		5044,~~041~~095			(73,588	)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	7874,~~952~~531		$	25,867

(a) Includes $~~581~~551 and $573 from related parties as of ~~June~~September 30, 2019 and December 31, 2018, net of allowance of $~~162~~63 and $198, respectively.

The accompanying notes are an integral part of these unaudited condensed financial statements.

Avedro, Inc.

Condensed Statements of Operations

(amounts in thousands except share and per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue (a)	$	1011,~~289~~046		$	68,~~295~~018		$	1930,~~062~~108		$	1119,~~449~~467
Cost of goods sold (b)		2,~~781~~404			2,~~744~~861			57,~~065~~469			58,~~362~~223
Gross profit		78,~~508~~642			35,~~551~~157			1322,~~997~~639			611,~~087~~244
Operating expenses:
Selling, general and administrative		1012,~~467~~966			67,~~528~~179			2033,~~688~~654			1118,~~816~~995
Research and development		3,~~901~~809			23,~~755~~117			811,~~186~~995			58,~~709~~826
Total operating expenses		1416,~~368~~775			910,~~283~~296			2845,~~874~~649			1727,~~525~~821
Loss from operations		(68,~~860~~133	)		(5,~~732~~139	)		(1423,~~877~~010	)		(1116,~~438~~577	)
Other expense:
Interest income		~~342~~285			5979			~~537~~822			65144
Interest expense		(~~706~~705	)		(~~666~~682	)		(12,~~406~~111	)		(1,~~293~~975	)
Other expense, net		(204	)		(162	)		(35	)		(469	)
Other (expense) income, net		(512	)		167			(547	)		(302	)
Total other expense, net		(~~568~~932	)		(~~769~~436	)		(~~904~~1,836	)		(12,~~697~~133	)
Net loss	$	(79,~~428~~065	)	$	(65,~~501~~575	)	$	(1524,~~781~~846	)	$	(1318,~~135~~710	)
Net loss per share of common stock, basic and diluted	$	(0.4352	)	$	(43.6396	)	$	(1.2474	)	$	(913.4742	)
Weighted average shares of common stock used to compute net loss per share, basic and diluted		17,~~110~~307,~~507~~914			1,~~404~~408,~~598~~540			1214,~~763~~295,~~822~~164			1,~~386~~393,~~357~~833

(a) Includes related party activity of $~~547~~479 and $~~421~~519 for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and $1,~~127~~606 and $~~933~~1,452 for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

(b) Includes related party activity of $9847 and $41116 for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and $~~210~~257 and $~~167~~404 for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

The accompanying notes are an integral part of these unaudited condensed financial statements.

Avedro, Inc.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(amounts in thousands except share data)

(unaudited)

	Convertible Preferred Stock $0.00001 Par Value												Common Stock					Additional						Total
	Series AA				Series BB				Series CC				$0.00001 Par Value					Paid-In			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Capital			Deficit			Equity (Deficit)
Balance at March 31, 2018		7,161,719	$	31,852		1,332,708	$	11,789		—	$	—		1,402,515		$	2	$	107,938		$	(163,634	)	$	(55,694	)
Issuance of Series CC convertible preferred stock, net of issuance costs		—		—		—		—		2,141,467		24,782		—			—		—			—			—
Exercise of common stock options		—		—		—		—		—		—		5,737			—		8			—			8
Share-based compensation		—		—		—		—		—		—		—			—		131			—			131
Net loss		—		—		—		—		—		—		—			—		—			(6,501	)		(6,501	)
Balance at June 30, 2018		7,161,719	$	31,852		1,332,708	$	11,789		2,141,467	$	24,782		1,408,252		$	2	$	108,077		$	(170,135	)	$	(62,056	)
Balance at March 31, 2019		—	$	—		—	$	—		—	$	—		17,066,926		$	2	$	241,073		$	(184,803	)	$	56,272
Exercise of common stock options		—		—		—		—		—		—		659			—		1			—			1
Exercise of common stock options		—		—		—		—		—		—		58,577			—		104			—			104
Share-based compensation		—		—		—		—		—		—		—			—		225			—			225
Share-based compensation		—		—		—		—		—		—		—			—		1,093			—			1,093
Net loss		—		—		—		—		—		—		—			—		—			(5,575	)		(5,575	)
Vesting of restricted stock units		—		—		—		—		—		—		1,157			—		—			—			—
Balance at September 30, 2018		7,161,719	$	31,852		1,332,708	$	11,789		2,141,467	$	24,782		1,408,911		$	2	$	108,303		$	(175,710	)	$	(67,405	)
Exercise of common stock warrant		—		—		—		—		—		—		7,189			—		—			—			—
Net loss		—		—		—		—		—		—		—			—		—			(7,428	)		(7,428	)
Balance at June 30, 2019		—	$	—		—	$	—		—	$	—		17,133,849		$	2	$	242,270		$	(192,231	)	$	50,041
Exercise of common stock options		—		—		—		—		—		—		286,958			—		496			—			496
Share-based compensation		—		—		—		—		—		—		—			—		2,712			—			2,712
Vesting of restricted stock units		—		—		—		—		—		—		23,865			—		—			—			—
Shares withheld to pay statutory withholding taxes for vesting of restricted stock units														(3,893	)		—		(89	)					(89	)
Exercise of common stock warrant		—		—		—		—		—		—		65,449			—		—			—			—
Net loss		—		—		—		—		—		—		—			—		—			(9,065	)		(9,065	)
Balance at September 30, 2019		—	$	—		—	$	—		—	$	—		17,506,228		$	2	$	245,389		$	(201,296	)	$	44,095

	Convertible Preferred Stock $0.00001 Par Value																		Common Stock					Additional						Total
	Series AA						Series BB						Series CC						$0.00001 Par Value					Paid-In			Accumulated			Stockholders’
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount		Capital			Deficit			Equity (Deficit)
Balance at December 31, 2017		7,161,719		$	31,852			1,332,708		$	11,789			—		$	—			1,363,050		$	2	$	107,478		$	(157,000	)	$	(49,520	)
Issuance of Series CC convertible preferred stock, net of issuance costs		—			—			—			—			2,141,467			24,782			—			—		—			—			—
Exercise of common stock options		—			—			—			—			—			—			45,~~202~~861			—		6263			—			6263
Share-based compensation		—			—			—			—			—			—			—			—		~~537~~762			—			~~537~~762
Net loss		—			—			—			—			—			—			—			—		—			(1318,~~135~~710	)		(1318,~~135~~710	)
Balance at June 30, 2018		7,161,719		$	31,852			1,332,708		$	11,789			2,141,467		$	24,782			1,408,252		$	2	$	108,077		$	(170,135	)	$	(62,056	)
Balance at September 30, 2018		7,161,719		$	31,852			1,332,708		$	11,789			2,141,467		$	24,782			1,408,911		$	2	$	108,303		$	(175,710	)	$	(67,405	)
Balance at December 31, 2018		7,161,719		$	31,852			1,332,708		$	11,789			2,141,467		$	24,782			1,412,003		$	2	$	108,532		$	(182,122	)	$	(73,588	)
Cumulative effect of accounting change		—			—			—			—			—			—			—			—		—			5,672			5,672
Exercise of common stock options		—			—			—			—			—			—			61348,~~562~~520			—		~~112~~608			—			~~112~~608
Share-based compensation		—			—			—			—			—			—			—			—		25,~~343~~055			—			25,~~343~~055
Issuance of common stock in connection with initial public offering, net of issuance costs of $8,975		—			—			—			—			—			—			5,000,000			—		61,025			—			61,025
Conversion of convertible preferred stock into common stock		(7,161,719	)		(31,852	)		(1,332,708	)		(11,789	)		(2,141,467	)		(24,782	)		10,635,894			—		68,423			—			68,423
Reclassification of a warrant to purchase shares of convertible preferred stock into a warrant to purchase common stock		—			—			—			—			—			—						—		1,835			—			1,835
Vesting of restricted stock units		—			—			—			—			—			—			1538,~~049~~914			—		—			—			—
Exercise of common stock warrant		—			—			—			—			—			—			9,341			—		—			—			—
Shares withheld to pay statutory withholding taxes for vesting of restricted stock units																				(3,893	)		—		(89	)					(89	)
Net loss		—			—			—			—			—			—			—			—		—			(15,781	)		(15,781	)
Exercise of common stock warrant		—			—			—			—			—			—			74,790			—		—			—			—
Balance at June 30, 2019		—		$	—			—		$	—			—		$	—			17,133,849		$	2	$	242,270		$	(192,231	)	$	50,041
Net loss		—			—			—			—			—			—			—			—		—			(24,846	)		(24,846	)
Balance at September 30, 2019		—		$	—			—		$	—			—		$	—			17,506,228		$	2	$	245,389		$	(201,296	)	$	44,095

The accompanying notes are an integral part of these unaudited condensed financial statements.

Avedro, Inc.

Condensed Statements of Cash Flows

(amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1524,~~781~~846	)	$	(1318,~~135~~710	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		~~343~~536			~~330~~498
Noncash interest expense		~~374~~550			~~284~~450
Change in assets and liabilities held at fair value (Note 5)		22529			~~460~~282
Bad debt expense		(3648	)		—13
Share-based compensation		25,~~343~~055			~~537~~762
Other non-cash reconciling items		—			59
Changes in assets and liabilities:
Accounts receivable		(12,~~361~~074	)		(1,~~349~~405	)
Prepaid expenses and other current assets		(~~271~~1,167	)		~~189~~407
Inventories		(~~656~~407	)		(~~157~~276	)
Accounts payable and accrued expenses		1,~~120~~943			~~(151~~1,460	)
Deferred revenue		(78	)		~~288~~216
Other non-current assets and liabilities		85188			(489	)
Net cash used in operating activities		(1319,~~825~~733	)		(1216,~~703~~383	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture		(~~171~~353	)		(~~142~~256	)
Net cash used in investing activities		(~~171~~353	)		(~~142~~256	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series CC convertible preferred stock		—			24,782
Proceeds from initial public offering, net of underwriting discounts and commissions		65,100			—
Proceeds from the exercise of common stock options		112			62
Initial public offering costs		(2,847	)		—
Payment for asset purchase obligation		(281	)		(65	)
Proceeds from the exercise of common stock options		608			63
Principal payments on capital lease obligation		(19	)		(18	)
Payment for statutory withholding taxes related to vesting of restricted stock		(89	)		—
Net cash provided by financing activities		62,065			24,761
Payment for asset purchase obligation		(281	)		(97	)
Increase in cash, cash equivalents and restricted cash	$	48,069		$	11,916
Principal payments on capital lease obligation		(28	)		(27	)
Net cash provided by financing activities		62,463			24,721
Increase in cash, cash equivalents and restricted cash	$	42,377		$	8,082
Cash, cash equivalents and restricted cash—beginning of period	$	10,320		$	9,401
Cash, cash equivalents and restricted cash—end of period	$	5852,~~389~~697		$	2117,~~317~~483
Cash paid for interest	$	1,~~032~~561		$	1,~~009~~523
Supplemental disclosure of non-cash investing and financing activities
Purchase of equipment and furniture included in accounts payable and accrued expenses	$	17		$	126
Net value of medical devices used for internal purposes transferred from inventory	$	184		$	120
Deferred offering costs included in accounts payable and accrued expenses	$	—		$	125
Conversion of convertible preferred stock to common stock	$	68,423		$	—
Conversion of convertible preferred stock warrants to common stock warrants	$	1,835		$	—

The accompanying notes are an integral part of these unaudited condensed financial statements.

Avedro, Inc.

Notes to Condensed Financial Statements (Unaudited)

(Amounts in thousands, except share and per share amounts)

1. Nature of Business and Basis of Presentation

Organization

Avedro, Inc. (“Avedro” or the “Company”) was incorporated in Delaware on November 6, 2002. The Company is an ophthalmic pharmaceutical and medical device company developing and commercializing a suite of products based on its proprietary corneal collagen cross-linking technology platform (the “Avedro Cross-Linking Platform”) to address a wide variety of ophthalmic disorders and conditions, primarily associated with corneal weakness. The primary components of the Avedro Cross-Linking Platform are proprietary pharmaceutical formulations of riboflavin (vitamin B2), a “single dose pharmaceutical,” sold primarily in conjunction with the Company’s innovative devices for the delivery of metered doses of UVA light, a “medical device”. The technological advances that the Company has made with the Avedro Cross-Linking Platform have enabled the Company to expand the use of corneal cross-linking beyond the traditional areas in which it has been historically applied. In April 2016, the Company received ~~United~~U.S. ~~States~~ Food and Drug Administration (“FDA”) clearance for the single dose pharmaceuticals Photrexa Viscous and Photrexa, and the KXL System medical device. The Company sells these products in the United States through a direct sales force and distributes its products outside of the United States through international medical device distributors.

As of ~~June~~September 30, 2019, the Company has devoted the majority of its efforts to business planning, research and development, starting up production, developing markets, raising capital, recruiting management and technical staff and commercializing its newly approved products in the United States.

Unaudited Interim Condensed Financial Statements

The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited interim condensed financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The condensed balance sheet at December 31, 2018 has been derived from audited financial statements at that date, but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited interim condensed financial statements and the notes accompanying them should be read in conjunction with the audited financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 21, 2019.

Changes in Presentation

Changes have been made to the prior period presentation in the condensed balance sheets to conform to the current period presentation. Amounts previously classified as deferred rent are now included in other non-current liabilities.

Reverse Stock Split

On January 31, 2019, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a reverse split on the outstanding shares of the Company’s common stock and convertible preferred stock on a one-for-4.45 basis (the “Reverse Stock Split”). The Reverse Stock Split became effective on February 1, 2019 and has been shown on a retroactive basis within all periods presented. The par values of the common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split.

Initial Public Offering

In February 2019, the Company closed its initial public offering (“IPO”), in which it issued and sold 5,000,000 shares of common stock at a public offering price of $14.00 per share, for net proceeds to the Company of approximately $61,025, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into an aggregate of 10,635,894 shares of common stock and all warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase up to an aggregate of 202,981 shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability to additional paid-in-capital. Subsequent to the closing of the IPO, there were no shares of preferred stock or warrants to purchase shares of convertible preferred stock outstanding.

Merger Agreement

On August 7, 2019, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Glaukos Corporation (“Glaukos”) and Atlantic Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Glaukos (“Merger Sub”), pursuant to which, among other things, the Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Glaukos (the “Merger”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, which has been approved by the board of directors of each of Glaukos and the Company, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time (other than shares of the Company’s common stock owned by Glaukos, Merger Sub or the Company or any direct or indirect, wholly owned subsidiary of the Company or Glaukos) will be converted into the right to receive 0.365 shares of Glaukos’ common stock. The Company currently expects the Merger to close in the fourth quarter of 2019, subject to customary closing conditions and regulatory approvals, including the approval of stockholders of the Company.

Liquidity

The Company has had recurring losses from operations since inception and has an accumulated deficit of $~~192~~201,~~231~~296 at ~~June~~September 30, 2019, and incurred net losses of $1524,~~781~~846 and $1318,~~135~~710 for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. Prior to the Company’s IPO, the Company had funded its operations principally from issuances of preferred stock, debt financings, and product and service sales. At ~~June~~September 30, 2019, the Company had $5752,~~838~~146 of unrestricted cash and cash equivalents. The Company expects the cash balance at ~~June~~September 30, 2019 will be sufficient to fund operations for a period of at least twelve months from the date the financial statements are issued.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant assumptions used in the financial statements are the underlying assumptions used in valuing share-based compensation including the fair value of the common stock, allowance for bad debts, the net realizable value of inventories, the valuation of variable transaction price in its contracts with customers, the determination of standalone selling price for contracts with customers, the value of the warrant liability, the value of embedded derivatives and the estimated useful lives of equipment and furniture. The Company bases estimates and assumptions on historical experience when available and on various factors that it determined to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates under different assumptions or conditions.

Fair Value Measurements

The carrying amounts reported in the Company’s financial statements for cash and cash equivalents, accounts receivable, net of allowance, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The fair value of the Company’s long-term debt (see Note 7, “Long-Term Debt”) is determined using Level 3 inputs using current applicable rates for similar instruments as of the balance sheet dates and assessment of the credit rating of the Company. The carrying value of the Company’s long-term debt approximates fair value because the Company’s interest rate yield is near current market rates. The Company’s warrant liability, derivative liability and long-term debt are considered Level 3 liabilities within the fair value hierarchy described below.

Fair value is defined as the price that would be received if selling 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. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates, and often are calculated based on the economic and competitive environment, the characteristics of the asset and liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

The Company’s financial assets are classified within the fair value hierarchy based on the lowest level of inputs that is significant to the fair value measurement. The three levels of the fair value hierarchy, and its applicability to the Company’s financial assets, are described as follows:

Level 1: Unadjusted quoted prices of identical, unrestricted assets in active markets that are accessible at the measurement date.

Level 2: Quoted prices for similar assets, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.

Level 3: Pricing inputs are unobservable for the assets, that is, inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the assets.

There were no transfers between Levels 1, 2, and 3 during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

The Company has liabilities classified as Level 3 that are measured by management at fair value on a quarterly basis as described in Note 7, “Long-Term Debt,” and Note 9, “Warrants,” respectively. See Note 5, “Fair Value Measurements,” for additional information.

Restricted Cash

The Company had restricted cash of $551 at ~~June~~September 30, 2019 and December 31, 2018. $351 of the balance at ~~June~~September 30, 2019 and December 31, 2018 related to two irrevocable standby letters of credit in relation to the Company’s office lease agreements. Each letter of credit names the lessor as the beneficiary and is required to fulfill lease requirements in the event the Company should default on office lease obligations. $200 of the balance at ~~June~~September 30, 2019 and December 31, 2018 was held to collateralize the Company’s credit card.

Concentration of Credit Risk and Significant Customers

Cash, cash equivalents and accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk.

At ~~June~~September 30, 2019 and December 31, 2018, the Company invested its excess cash in money market funds through a United States bank with high credit ratings. The Company is exposed to credit risk in the event of a default by the financial institution holding its cash and cash equivalents to the extent recorded on the balance sheet. The Company has no financial instruments with off-balance sheet risk of loss. The Company has not experienced any significant losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

The Company is also subject to credit risk from its accounts receivable. The Company sells its products through its direct sales organization in the United States and primarily through established distributors outside of the United States. To minimize credit risk, ongoing credit evaluations of customers’ financial condition are performed and upfront customer deposits are received prior to shipment whenever deemed necessary. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers.

During the ~~six~~three and nine months ended ~~June~~September 30, 2019 and 2018, the Company did not recognize revenue from any single customer over 10% of total revenues. At December 31, 2018, the Company had one customer with an accounts receivable balance greater than 10% of total accounts receivable. No such customer existed at ~~June~~September 30, 2019.

Convertible Preferred Stock

The Company recorded its convertible preferred stock at fair value on the dates of issuance, net of issuance costs. A deemed liquidation event will only occur upon a greater than 50% change in control or a sale of substantially all of the assets of the Company and will be a redemption event subject to election by the holders of at least 70% of the then outstanding shares of convertible preferred stock, voting together as a single class on an as-converted basis. As the redemption event is outside the control of the Company, all shares of convertible preferred stock have been presented outside of permanent equity. As of December 31, 2018, it was not probable that such redemption would occur. Upon the closing of the Company’s IPO on February 19, 2019, each share of convertible preferred stock automatically converted into shares of common stock at a conversion rate of one preferred share to one common share for each series of convertible preferred stock.

Revenue Recognition

The Company adopted ASC 606 on January 1, 2019 using the modified retrospective method for all contracts not completed as of the date of adoption. Under this method, the new guidance was applied to contracts that were not yet completed as of January 1, 2019 with the cumulative effect of initially applying the guidance recognized through accumulated deficit as the date of initial application. The reported results for 2019 reflect the application of ASC 606 guidance while the reported results for 2018 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as the "previous guidance.” The adoption of ASC 606 represents a change in accounting principle that will primarily impact how revenue is recognized for single dose pharmaceuticals sold in the United States and how the Company accounts for contract acquisition costs, such as commissions. See the “Financial Statement Impact of Adopting ASC 606” in Note 3 for further details. Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (the “transaction price”). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method, depending on the facts and circumstances relative to the contract. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

8When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of January 1, 2019 or September 30, 2019.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. The Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of January 1, 2019 or June 30, 2019.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

The Company has elected to account for the shipping and handling as an activity to fulfill the promise to transfer the product, and therefore will not evaluate whether shipping and handling activities are promised services to its customers.

The Company recognizes product revenue under the terms of each customer agreement upon transfer of control to the customer, which occurs at a point in time. Service warranty revenue is recognized over the service warranty period, which is typically one to two years.

The timing of revenue recognition, billings and cash collections results in accounts receivables and deferred revenue on the Company’s condensed balance sheets. All contract assets are presented as accounts receivable since the Company has an unconditional right to receive consideration when performance obligations are satisfied. Contract liabilities are presented as deferred revenue and represent consideration received or unconditionally due from customers prior to transferring goods or services to the customer under the terms of a contract.

U.S. Product Revenue

Through its direct sales force, the Company sells medical devices and related single dose pharmaceuticals directly to customers, which are typically physicians, clinics or hospitals. A contract is deemed to exist on an initial device and related single dose pharmaceuticals sale when a sales agreement and order form for the device and single dose pharmaceuticals is executed. A contract for purchases of subsequent single dose pharmaceuticals exists when a reorder form is received and accepted by the Company.

The performance obligations in the contracts for the delivery of these products may include medical devices, single dose pharmaceuticals, extended warranty service contracts and a customer option to purchase a single dose pharmaceutical in the future at a discount. The Company has, for a limited time, a program that offers a future discount on purchases subject to the customer meeting certain requirements, including one specifically related to the application for insurance reimbursement. The Company concluded the option to purchase a future dose at a discount is a material right and therefore constitutes a performance obligation. The Company provides a twelve month warranty on medical devices sold in the United States and warrants to the customer that such devices will be free from defects in materials and workmanship under normal use and conditions. The Company also warrants that single dose pharmaceuticals will be free from defects in materials and workmanship, for one use, during the period up to, but not beyond, the sterility expiration for such product. These standard warranty provisions are assurance warranties accounted for as a cost accrual and not a separate performance obligation.

The Company does not provide a right of return for any of its products; however, it may offer extended payment terms to its customers. For customers with extended payment terms, the Company determines if any of those amounts are variable and reduces the stated transaction price for the variable consideration.

The Company allocates the transaction price to each performance obligation based on its relative standalone selling price. The stand-alone selling price of single dose pharmaceuticals and extended warranty service contracts is determined based on the price at which the Company typically sells the performance obligation separately, and the standalone selling price of medical devices is estimated based on a cost plus a reasonable profit margin.

Revenue related to medical devices, single dose pharmaceuticals and the customers’ option to acquire additional single dose pharmaceuticals at a discount is generally recognized at a point in time upon transfer of control to the customer, which is generally at the time of shipment. Revenue related to extended warranty service contracts is recognized over the service warranty period, which is typically one to two years.

Outside the U.S. Product Revenue

The Company has established distributor agreements with various distributors throughout the world to sell the Company’s medical devices, related single dose pharmaceuticals and spare parts. The term of the distributor agreements is typically two years, with each option of renewal not exceeding one year. A contract is deemed to exist with a distributor when a purchase order is received and accepted by the Company.

The performance obligations in these contracts may include medical devices or single dose pharmaceuticals. The medical devices are generally covered by a warranty of fifteen months following shipment or twelve months following installation at the end-customer site, and single dose pharmaceuticals are shipped with a minimum shelf life remaining until their sterility expiration, which is generally six to twelve months. These standard warranty provisions are assurance warranties accounted for as a cost accrual and not a separate performance obligation. The Company does not offer extended warranty service contracts to its distributors as all devices are serviced directly by the distributor.

Distributors have no right of return or inventory swap-out provisions, and payments due under the contracts are not contingent upon the distributor’s sale of products to its customers and are invoiced upon shipment.

The Company allocates the transaction price to each performance obligation based on its relative standalone selling price. The standalone selling price of medical devices, single dose pharmaceuticals and spare parts sold outside of the United States is determined based on the price at which the Company typically sells the performance obligation separately.

Revenue related to medical devices and single dose pharmaceuticals is recognized at a point in time upon transfer of control to the customer, which is generally at the time of shipment.

Costs to Obtain or Fulfill a Customer Contract

The Company’s sales commission structure is based on achieving revenue targets. Outside the United States, commissions are driven by revenue derived from customer purchase orders. In the United States, commissions are driven by revenue from device sales agreements in addition to revenue from single dose pharmaceuticals reorders. All commissions costs are costs to obtain a contract since they are incremental and would not have occurred absent a customer contract.

Both the revenue derived from the single dose pharmaceuticals reorders and the revenue derived from purchase orders outside the United States are short term in nature. The renewal commissions are commensurate and therefore the amortization period is the contract duration; as such, the Company recognizes the incremental costs of obtaining these contracts as an expense when incurred.

The Company capitalizes commission costs related to device sales in the United States. These costs are deferred in other assets on the Company's condensed balance sheet, net of the short-term portion included in prepaid expenses and other current assets. Costs to obtain these contracts are amortized as sales and marketing expense on a straight-line basis over the expected period of benefit and are also periodically reviewed for impairment.

Product Warranty

Internationally, medical devices sold are covered by a standard warranty for the shorter of fifteen months following shipment or twelve months following installation. Medical devices sold within the United States are covered by a standard warranty for twelve months following installation. The Company records its estimated contractual obligations at the time of shipment since installations are generally within thirty days of shipment and returns are not accepted. The Company considers the twelve-month rolling average of actual warranty claims associated with its medical devices and related single dose pharmaceuticals when determining the warranty accrual estimate. The estimates and assumptions used in developing the accrual estimate as of ~~June~~September 30, 2019 were consistent with prior periods.

Changes in the product warranty accrual, included as part of accrued expenses, during the ~~six~~nine months ended ~~June~~September 30, 2019 consisted of the following:

Balance at December 31, 2018	$	158
Accruals for warranties issued during the period		1832
Settlements		(4963	)
Balance at June 30, 2019	$	127
Balance at September 30, 2019	$	127

Share-Based Compensation

The Company has a stock-based compensation plan which is more fully described in Note 10. The Company records stock-based compensation for share based awards granted to employees and to members of the board of directors for their services on the board of directors, based on the grant date fair value of awards issued, and the expense is recorded on a straight-line basis over the applicable service period, which is generally four years. For share based awards granted to employees with performance conditions, the Company utilizes the accelerated attribution method and does not recognize expense until the event is probable. The Company accounts for non-employee stock-based compensation arrangements based upon the fair value of the consideration received or the equity instruments issued, whichever is more reliably measurable. Prior to January 1, 2019, the measurement date for non-employee awards was generally the date that the performance of services required for the non-employee award is complete. Effective January 1, 2019, the Company adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” and now measures share-based payments to nonemployees at the grant date fair value. Stock-based compensation costs for non-employee awards is recognized as services are provided, which is generally the vesting period, on a straight-line basis.

The Company expenses performance based options and restricted stock awards based on the fair value of the award on the date of issuance, on an accelerated attribution basis over the associated service period of the award once it is probable that the performance condition will be met.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. The expected term was determined according to the simplified method, which is the average of the vesting tranche dates and the contractual term. Due to the lack of company specific historical and implied volatility data resulting from being a private company, the Company has based its estimate of expected volatility primarily on the historical volatility of a group of similar companies that are publicly traded. For these analyses, companies with comparable characteristics are selected, including enterprise value and position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of its stock-based awards. The risk-free interest rate is determined by reference to U.S. Treasury zero-coupon issues with remaining maturities similar to the expected term of the options. The Company has not paid, and does not anticipate paying, cash dividends on shares of preferred and common stock; therefore, the expected dividend yield is assumed to be zero.

Prior to the Company’s IPO, the fair value of the underlying common stock was determined by the Company’s board of directors, with input from its management and the assistance of a third-party valuation specialist, by determining the equity value of the Company and then allocating this value among the different classes of equity securities based on their respective rights and individual characteristics. The equity value was determined using three different methods, which includes back-solving overall equity value to the price paid by recent financing transactions, using a combination of the market-based approach and the income approach, and also utilizing a hybrid method, as discussed below. The fair value of the Company’s equity was then allocated to various securities within the Company’s capital structure by applying an option pricing method. The option pricing method estimates the fair value of each class of security based on the potential to profit from the upside of the business, while taking into account the unique characteristics of each class of security.

For the valuation of the Company’s common stock on December 31, 2018, the Company utilized the probability-weighted expected return method (“PWERM”), in combination with the option pricing method (“OPM”), as a hybrid method (“Hybrid Method”), which is an accepted valuation method under the AICPA Practice Guide, for determining the fair value of the Company’s common stock. The PWERM is a scenario-based analysis that estimates the value per share of common stock based on the probability-weighted present value of expected future equity values for the common stock, under various possible future liquidity event scenarios, in light of the rights and preferences of each class and series of stock, discounted for a lack of marketability.

Deferred Offering Costs

Deferred offering costs consist of fees and expenses directly attributable to equity offerings. Upon completion of an offering, these amounts are offset against the proceeds of the offering. During 2018, the Company deferred offering costs related to its IPO totaling $2,829, which were capitalized and classified within noncurrent assets on the balance sheet as of December 31, 2018. Unpaid amounts as of December 31, 2018 totaled $1,601. Upon consummation of the Company’s IPO in February 2019, $4,075 of deferred offering costs were offset against the IPO proceeds and reclassified into equity.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, convertible preferred stock, stock options and warrants considered to be potentially dilutive securities, but were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore basic and diluted net loss per share were the same for all periods presented.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASC 606”) which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers. Two adoption methods are permitted: retrospectively to all prior reporting periods presented, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. The adoption of this ASU included updates as provided under ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date;” ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);” ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The Company adopted the provisions of ASC 606 using the modified retrospective method effective January 1, 2019. See Notes 2 and 3 for further discussion of the effects of this standard on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted this standard as of January 1, 2019, and the adoption of this standard did not have a material impact on the Company’s financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash.” The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on a retrospective basis on January 1, 2018. The adoption resulted in an increase to cash, cash equivalents and restricted cash of $551 in the statement of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company has evaluated contractual arrangements that are or contain a lease and has identified two significant lease arrangements in which it is the lessee under ASU 2016-02. The two leases identified are the Company’s office building leases located in Waltham, Massachusetts and Burlington, Massachusetts, with a total remaining lease commitment of $4,707 as of September 30, 2019. The Company expects the leases will be classified as operating leases under ASU 2016-02. The Company expects to elect the optional transition method to apply the standard as of the effective date and therefore, does not expect to apply the standard to the comparative periods presented in the financial statements. The Company expects to elect the transition package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Further, the Company expects to elect a short-term lease exception policy, permitting the Company to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for office building leases. The Company is currently evaluating the ~~effect~~financial impact the adoption of ASU 2016-02 will have on its financial statements.

3. Revenue Recognition

Disaggregation of Revenue

When disaggregating revenue, the Company considered all of the economic factors that may affect its revenues. Because all of its revenues are from ophthalmologists, ~~and~~ other eye care professionals and distributors of these end users, there are no differences in the nature, timing and uncertainty of the Company’s revenues and cash flows from any of its product lines. However, given that the Company’s revenues are generated in different geographic regions, factors such as regulatory and geopolitical factors within those regions could impact the nature, timing and uncertainty of the Company’s revenues and cash flows.

The following tables disaggregate the Company’s revenue from contracts with customers by geographic region:

	Three Months Ended June 30,										Six Months Ended June 30,
	Three Months Ended September 30,										Nine Months Ended September 30,
	2019					2018					2019					2018
	Amount		% of Revenue			Amount		% of Revenue			Amount		% of Revenue			Amount		% of Revenue
	(in thousands, except percentages)										(in thousands, except percentages)
United States	$	89,~~196~~410		7985.72	%	$	45,~~034~~839		6472.18	%	$	1424,~~707~~117		7780.21	%	$	713,~~228~~067		6367.1	%
Asia		~~892~~666		86.70	%		~~1,064~~989		1612.93	%		12,~~752~~418		98.20	%		12,~~954~~943		1715.1	%
Europe		~~516~~204		51.08	%		~~468~~449		75.46	%		1,~~253~~457		64.69	%		1,~~091~~540		97.59	%
Americas (outside the United States)		~~271~~258		2.63	%		~~227~~219		32.67	%		~~496~~754		2.65	%		~~369~~588		3.21	%
Middle East		~~306~~389		3.05	%		~~355~~452		5.6	%		~~644~~1,033		3.4	%		~~549~~1,001		45.81	%
Other		~~108~~119		1.01	%		~~147~~70		21.40	%		~~210~~329		1.01	%		~~258~~328		21.37	%
Total revenues	$	1011,~~289~~046		100.0	%	$	68,~~295~~018		100.0	%	$	1930,~~062~~108		100.0	%	$	1119,~~449~~467		100.0	%

Contract Balances from Contracts with Customers

The following table provides information about receivables and deferred revenue from contracts with customers as of ~~June~~September 30, 2019:

			As of June 30,
			As of September 30,
			2019
Balances from contracts with customers only:
Accounts receivable			$	1112,~~603~~328
Deferred revenue				~~805~~820
	Three Months Ended June 30,		Six Months Ended June 30,
	Three Months Ended September 30,		Nine Months Ended September 30,
	2019		2019
Revenue recognized in the period relating to:
The beginning deferred revenue balance	$	~~410~~355	$	~~817~~1,172
Changes in pricing related to products or services satisfied in previous periods		—		—
Impairment losses on receivables		—		—

Transaction Price Allocated to Future Performance Obligations

The Company’s future performance obligations primarily relate to customers’ right to a future discount on single dose pharmaceutical purchases in the United States, and, to a lesser extent, extended warranty service contracts. At ~~June~~September 30, 2019, $~~634~~695 of transaction price was allocated to the customers’ right to a future discount and is expected to be recognized when the customer elects to utilize the discount, which is generally within a year, and $~~114~~102 was allocated to extended warranty service contracts, of which $3436 is expected to be recognized in greater than one year.

Costs to Obtain or Fulfill a Customer Contract

As of June 30, 2019, capitalized contract acquisition costs were $225, including a current balance of $146 and a non-current balance of $79. The Company recognized $51 and $99 of amortization of capitalized commission costs during the three and six months ended June 30, 2019, respectively. There were no impairments to capitalized costs to obtain a contract recorded during the period.

Costs to Obtain or Fulfill a Customer Contract

As of September 30, 2019, capitalized contract acquisition costs were $206, including a current balance of $132 and a non-current balance of $74. The Company recognized $51 and $150 of amortization of capitalized commission costs during the three and nine months ended September 30, 2019, respectively. There were no impairments to capitalized costs to obtain a contract recorded during the period.

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2019 was recorded as an adjustment to accumulated deficit as of the adoption date. The following table shows the adjustments made to accounts in the condensed balance sheet as of January 1, 2019 as a result of adopting the new guidance. The table also compares the reported condensed balance sheet accounts as of ~~June~~September 30, 2019 that were impacted by the new guidance to pro forma balance sheet amounts had the previous guidance been in effect.

	As Reported (1)			Adjustments (2)		As Adjusted			As Reported (3)			Adjustments			Pro forma (4)
	12/31/2018			1/1/2019		1/1/2019			69/30/2019			69/30/2019			69/30/2019
Assets
Accounts receivable (a)	$	4,725		$	5,481	$	10,206		$	1112,~~603~~328		$	—		$	1112,~~603~~328
Prepaid expenses and other current assets (b)		1,919			178		2,097			23,~~368~~264			(~~146~~132	)		23,~~222~~132
Total current assets		20,672			5,659		26,331			7672,~~731~~220			(~~146~~132	)		7672,~~585~~088
Other assets (b)		291			125		416			~~322~~218			(7974	)		~~243~~144
Total Assets	$	25,867		$	5,784	$	31,651		$	7874,~~952~~531		$	(~~225~~206	)	$	7874,~~727~~325
Liabilities and stockholders' equity (deficit)
Accrued expenses and other current liabilities		5,366			—		5,366			56,~~002~~322			3433			56,~~036~~355
Deferred revenue (c)		688			112		800			~~771~~784			~~242~~399			1,~~013~~183
Total current liabilities		8,430			112		8,542			78,~~747~~589			~~276~~432			89,~~023~~021
Accumulated deficit		(182,122	)		5,672		(176,450	)		(~~192~~201,~~231~~296	)		(~~501~~638	)		(~~192~~201,~~732~~934	)
Total stockholders' equity (deficit)		(73,588	)		5,672		(67,916	)		5044,~~041~~095			(~~501~~638	)		4943,~~540~~457
Total liabilities and stockholders' equity (deficit)	$	25,867		$	5,784	$	31,651		$	7874,~~952~~531		$	(~~225~~206	)	$	7874,~~727~~325

(1)	Financial statement amounts as reported in the Company's balance sheet as of December 31, 2018. Financial statement amounts that are not shown on the above table were not impacted by the adoption of ASC 606.

(2)	Adjustments made on January 1, 2019 to adopt ASC 606.

(3) Financial statement amounts as reported in the interim condensed balance sheet as of ~~June~~September 30, 2019. Financial statement amounts that are not shown on the above table were not impacted by the adoption of the adoption of ASC 606.

(4) Pro forma balance sheet amounts that would have been reported as of ~~June~~September 30, 2019 had the Company applied the previous guidance under ASC 605.

(a)	Single dose pharmaceutical amounts invoiced to customers under extended payment terms are included in the Company’s balance sheet for the amount that represents the transaction price consideration they will receive.

(b)	Other current and non-current assets include contract acquisition costs related to the sale of devices in the United States. These costs are amortized over the estimated period of benefit.

(c)	The Company recorded deferred revenue for a customers’ right to a future discount, and also for amounts invoiced under extended payment terms that were not yet due or paid.

The following summarizes the significant changes on the Company’s condensed statement of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 as a result of the adoption of ASC 606 on January 1, 2019 compared to if the Company had continued to recognize revenue under ASC 605:

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2019									2019
	As reported			Adjustments			Pro forma as if the previous accounting guidance was in effect			As reported			Adjustments			Pro forma as if the previous accounting guidance was in effect
Revenue (a)	$	1011,~~289~~046		$	~~2,343~~(155	)	$	1210,~~632~~891		$	1930,~~062~~108		$	54,~~126~~971		$	2435,~~188~~079
Gross profit		78,~~508~~642			~~2,343~~(155	)		98,~~851~~487			1322,~~997~~639			54,~~126~~971			1927,~~123~~610
Selling, general and administrative (b)		1012,~~467~~966			(1718	)		1012,~~450~~948			2033,~~688~~654			(4563	)		2033,~~643~~591
Total operating expenses		1416,~~368~~775			(1718	)		1416,~~351~~757			2845,~~874~~649			(4563	)		2845,~~829~~586
Loss from operations		(68,~~860~~133	)		~~2,360~~(137	)		(48,~~500~~270	)		(1423,~~877~~010	)		5,~~171~~034			(917,~~706~~976	)
Net loss	$	(79,~~428~~065	)	$	~~2,360~~(137	)	$	(59,~~068~~202	)	$	(1524,~~781~~846	)	$	5,~~171~~034		$	(1019,~~610~~812	)
Net loss per share of common stock, basic and diluted	$	(0.4352	)	$	(0.1301	)	$	(0.3053	)	$	(1.2474	)	$	0.4135		$	(01.8339	)

(a)	Single dose pharmaceutical revenue in the United States under ASC 606 includes the recognition of amounts invoiced under extended payment terms upon shipment if the Company does not believe it is probable that a significant reversal of revenue would occur upon settlement of the receivable.

(b)

ASC 606 resulted in the amortization of capitalized commission costs that were recorded as part of the cumulative effect adjustment upon adoption. Amortization of these capitalized costs to selling, general and administrative expenses, net of commission costs that were capitalized in the quarter, increased selling, general and administrative expenses in the quarter.

The following summarizes the significant changes on the Company’s condensed statement of cash flow for the ~~six~~nine months ended ~~June~~September 30, 2019 as a result of the adoption of ASC 606 on January 1, 2019 compared to if the Company had continued to recognize revenue under ASC 605:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2019
Statement of Cash Flows	As reported			Adjustments			Pro forma as if the previous accounting guidance was in effect
Net loss	$	(1524,~~781~~846	)	$	5,~~171~~034		$	(1019,~~610~~812	)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Accounts receivable		(12,~~361~~074	)		(5,481	)		(67,~~842~~555	)
Prepaid expenses and other current assets		(~~271~~1,167	)		(3246	)		(~~303~~1,213	)
Accounts payable and accrued expenses		1,~~120~~943			3433			1,~~154~~976
Deferred revenue		(78	)		~~354~~511			~~347~~519
Other non-current assets and liabilities		85188			(4651	)		39137
Net cash used in operating activities	$	(1319,~~825~~733	)	$	—		$	(1319,~~825~~733	)

The adoption of ASC 606 had no net impact on the Company’s cash used in or provided by operating, investing or financing activities.

4. Condensed Balance Sheet Components

Inventories

Inventories consisted of the following:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2019		2018
Raw materials	$	2,~~791~~507	$	2,688
Finished goods		21,~~131~~975		1,571
Total inventories	$	4,~~922~~482	$	4,259

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2019		2018
Prepaid suppliers	$	~~279~~769	$	503
Prepaid rent		~~112~~108		107
Prepaid insurance		~~684~~440		65
Prepaid prescription drug user fee		~~155~~651		465
Prepaid license fees		~~270~~326		226
Prepaid clinical studies		~~172~~333		154
Prepaid other expenses		~~696~~637		399
Total prepaid expenses and other current assets	$	23,~~368~~264	$	1,919

Equipment and Furniture, Net

Equipment and furniture, net consisted of the following:

	As of June 30,			As of December 31,
	As of September 30,			As of December 31,
	2019			2018
Machinery and lab equipment	$	1,~~616~~801		$	1,478
Medical devices used for internal purposes		~~922~~1,113			929
Computer software		238			215
Office furniture and equipment		~~424~~435			423
Computer hardware		373			361
Total equipment and furniture		3,~~573~~960			3,406
Less: accumulated depreciation		(2,~~225~~418	)		(1,882	)
Equipment and furniture, net	$	1,~~348~~542		$	1,524

Depreciation expense for the three months ended ~~June~~September 30, 2019 and 2018 was $~~169~~193 and $~~161~~168, respectively. Depreciation expense for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 was $~~343~~536 and $~~330~~498, respectively.

Accrued Expenses

Accrued expenses and other current liabilities consisted of the following:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2019		2018
Accrued compensation	$	24,~~850~~020	$	2,836
Accrued warranty		127		158
Accrued inventory		7439		33
Accrued professional services		~~413~~459		1,~~421~~375
Accrued reimbursement hub costs		~~486~~200		264
Accrued sales tax		68		75
Accrued clinical		396		46
Accrued other		984		579
Accrued employee stock purchase plan contributions		318		—
Total accrued expenses and other current liabilities	$	5,002	$	5,366
Accrued sales tax		96		75
Accrued other		667		579
Total accrued expenses and other current liabilities	$	6,322	$	5,366

5. Fair Value Measurements

The carrying amount reflected on the balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximated their fair values, due to the short-term nature of these instruments. The carrying value of the long-term debt approximates its fair value as the debt arrangement is based on interest rates the Company believes it could obtain for borrowings with similar terms.

Recurring Fair Value Measurements

The following tables set forth the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of ~~June~~September 30, 2019 and December 31, 2018:

Description	Total		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
June 30, 2019
September 30, 2019
Assets
Cash equivalents	$	5650,~~002~~556	$	5650,~~002~~556	$	—	$	—
	$	5650,~~002~~556	$	5650,~~002~~556	$	—	$	—
Liabilities
Derivative liability	$	~~393~~900		—		—		~~393~~900
	$	~~393~~900	$	—	$	—	$	~~393~~900
December 31, 2018
Assets
Cash equivalents	$	8,164	$	8,164	$	—	$	—
	$	8,164	$	8,164	$	—	$	—
Liabilities
Warrant liability	$	1,800	$	—	$	—	$	1,800
Derivative liability	$	406		—		—		406
	$	2,206	$	—	$	—	$	2,206

Cash Equivalents

Cash equivalents consist of money market funds with an original maturity of three months or less from the date of purchase. Cash equivalents are carried at cost, which approximates their fair value. At ~~June~~September 30, 2019 and December 31, 2018, the Company held $5650,~~002~~556 and $8,164 of cash equivalents, respectively, all of which were invested in money market funds.

Warrant Liability

The warrant liability represented the liability for warrants to purchase shares of Series AA convertible preferred stock issued in connection with the Company’s long-term debt (see Note 9, “Warrants”). The fair value of the Series AA convertible preferred stock warrants was determined using the Black-Scholes model, a form of an option pricing model. Upon the closing of the Company’s IPO on February 19, 2019, all warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase common stock, resulting in the reclassification of the related convertible preferred stock warrant liability to additional paid-in capital.

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the warrants were as follows:

	As of February 19,			As of December 31,
	2019			2018
Risk-free interest rate	2.5% - 2.6%			2.5% - 3.0%
Expected volatility	60.2% - 61.4%			57.6% - 62.4%
Expected term (in years)	5.6 - 8.1			5.7 - 9.0
Expected dividend yield		0.0	%		0.0	%

Risk-free Interest Rate. The Company estimated the risk-free interest rate in reference to yield on U.S. Treasury securities with a maturity date commensurate with the expected term of the associated warrant.

Expected Volatility. Due to the Company’s limited operating history and lack of company-specific historical or implied volatility, the expected volatility assumption is based on historical volatilities of a peer group of similar companies whose share prices are publicly available over a period commensurate with the warrant’s expected term. The peer group was developed based on companies in the biotechnology and medical device industries.

Expected Term. The expected term represents the period of time that warrants are expected to be outstanding.

Expected Dividend Yield. The expected dividend yield assumption is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.

Fair Value of Underlying Shares. The fair value of the underlying convertible preferred stock was determined by the board of directors, with input from management and the assistance of a third-party valuation specialist, by determining the equity value of the Company and then allocating this value among the different classes of equity securities based on their respective rights and individual characteristics. The equity value was determined using three different methods, which includes back-solving overall equity value to the price paid by recent financing transactions, a probability-weighted expected return method, and also using a combination of the market-based approach and the income approach. The fair value of the Company’s equity value was then allocated to various securities within the Company’s capital structure by applying an option pricing method. The option pricing method estimates the fair value of each class of security based on the potential to profit from the upside of the business, while taking into account the unique characteristics of each class of security.

For the valuation of our common stock on December 31, 2018, the Company utilized the probability-weighted expected return method, or (“PWERM,”) in combination with the option pricing method, or (“OPM,”) as a hybrid method, or (“Hybrid Method”), which is an accepted valuation method under the AICPA Practice Guide, for determining the fair value of our common stock. The PWERM is a scenario-based analysis that estimates the value per share of common stock based on the probability-weighted present value of expected future equity values for the common stock, under various possible future liquidity event scenarios, in light of the rights and preferences of each class and series of stock, discounted for a lack of marketability. The OPM values each equity class by creating a series of call options on the equity value, with exercise prices based on the liquidation preferences, participation rights and strike prices of derivatives. The Hybrid Method is appropriate for a company expecting a near term liquidity event, but where, due to market or other factors, the likelihood of completing the liquidity event is uncertain. The Hybrid Method considers a company’s going concern nature, stage of development and ability to forecast near and long-term future liquidity scenarios.

The fair value of the underlying common stock used to calculate the fair value of the converted warrants reclassified from liability to equity was determined by the close price of the common stock as of the conversion date of February 19, 2019.

Changes in the fair value of the warrant liability, for which fair value is determined using Level 3 inputs were as follows:

Balance at December 31, 2018	$	1,800
Change in fair value of warrant liability		35
Reclassification of a warrant liability to equity		(1,835	)
Balance at June 30, 2019	$	—
Balance at September 30, 2019	$	—

Derivative Liability

The derivative liability represents features bifurcated from the 2017 Credit Agreement liability and recorded at fair value. See Note 7, “Long-Term Debt.” Under certain change in control events, as defined in the 2017 Credit Agreement, a prepayment fee and the entire outstanding obligation may be due and payable. The Company concluded that these features, including (i) interest rate upon a non-creditworthy event of default; (ii) a put option upon an event of default; and (iii) a put option upon the lenders request of net casualty proceeds, are not clearly and closely related to the host instrument, and represent a single compound derivative and is required to be re-measured at fair value.

The estimated fair value of the derivative liability was determined using a probability-weighted discounted cash flow model that includes the principal, prepayment fees and interest payments under scenarios of a change in control, other than a qualified initial public offering prior to the debt maturity. The following inputs were estimated by management: (i) the probability of a change of control event; (ii) the timing of a change of control event; and (iii) the discount rate. At ~~June~~September 30, 2019, the Company assumed a 1713.5% discount rate, and a probability for a change in control event during the twelve months ending March 19, 2020 and 2021 ranging between 525% and 2060%.

Changes in the fair value of the derivative liability, for which fair value is determined using Level 3 inputs were as follows:

Balance at December 31, 2018	$	406
Change in fair value		~~(13~~494	)
Balance at June 30, 2019	$	393
Balance at September 30, 2019	$	900

6. Commitments and Contingencies

In the ordinary course of business, the Company may be subject to legal proceedings, claims and litigation as the Company operates in an industry susceptible to legal disputes. The Company accounts for estimated losses with respect to legal proceedings and claims when such losses are probable and estimable. Legal costs associated with these matters are expensed when incurred. ~~The~~As of September 30, 2019, the Company iswas not ~~currently~~ a party to any material legal proceedings.

In September 2019, the Company amended one of its facility leases to add additional office and lab space that will run conterminously with the original lease through February 2023. The amendment increased the Company’s total future lease commitment by $248.

7. Long-Term Debt

Long-term debt, ~~net,~~ is comprised of the following:

	As of June 30,			As of December 31,
	As of September 30,			As of December 31,
	2019			2018
Principal amount outstanding	$	20,000		$	20,000
PIK Interest		~~941~~1,069			657
Unamortized discount		(~~433~~400	)		(495	)
Unamortized issue costs		(~~195~~180	)		(223	)
Net carrying amount	$	20,~~313~~489		$	19,939

As of June 30, 2019 and December 31, 2018, the Company had borrowed and had outstanding $20,000 of debt under the 2017 Credit Agreement, maturing on March 20, 2022 (the “Maturity Date”). The 2017 Credit Agreement requires payment of interest only until maturity at the rate of 10% per annum (the “Applicable Margin”). Additional interest (“PIK”) accrues at the per annum rate equal to the higher of (i) the three-month LIBOR rate and (ii) 1.00%. Such PIK interest is added to the outstanding principal amount of the loans until the maturity date. The outstanding loan balance plus accrued PIK interest is due in one lump sum payment on the Maturity Date.

~~The~~As of September 30, 2019 and December 31, 2018, the Company’s ~~obligations~~had borrowed and had outstanding $20,000 of debt under the 2017 Credit Agreement, ~~are~~maturing ~~secured~~on byMarch 20, a2022 ~~security~~(the “Maturity Date”). The 2017 Credit Agreement requires payment of interest inonly ~~substantially~~until ~~all~~maturity at the rate of ~~its~~10% ~~assets.~~per ~~Other~~annum ~~than~~(the a“Applicable ~~minimum~~Margin”). ~~liquidity~~Additional ~~requirement~~interest of(“PIK”) ~~$3,000,~~accrues ~~there~~at ~~are~~the noper ~~financial~~annum ~~covenants~~rate ~~contained~~equal into the ~~2017~~higher ~~Credit~~of ~~Agreement~~(i) the three-month LIBOR rate and ~~the~~(ii) ~~Company~~1.00%. isSuch inPIK ~~compliance~~interest ~~with~~is ~~the~~added ~~affirmative~~to ~~and~~the ~~restrictive~~outstanding ~~covenants~~principal asamount of ~~June 30,~~the ~~2019~~loans until the maturity date. The outstanding loan balance plus accrued PIK interest is due in one lump sum payment on the Maturity Date.

The Company’s obligations under the 2017 Credit Agreement are secured by a security interest in substantially all of its assets. Other than a minimum liquidity requirement of $3,000, there are no financial covenants contained in the 2017 Credit Agreement and the Company is in compliance with the affirmative and restrictive covenants as of September 30, 2019.

8. Capitalization

On February 19, 2019, upon the closing of the IPO, all outstanding shares of convertible preferred stock were automatically converted into 10,635,894 shares of common stock. Also upon the closing of the IPO, the Company filed an amended and restated certificate of incorporation (the “Restated Certificate”) authorizing the Company to issue is a total of 210,000,000 shares, with 200,000,000 share designated as common stock and 10,000,000 shares designated as preferred stock, each having a par value of $0.00001.

The Company has reserved for future issuance the following number of shares of common stock on a fully diluted and as-converted basis:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2019		2018
Conversion of Series AA convertible preferred stock		—		7,161,719
Conversion of Series BB convertible preferred stock		—		1,332,708
Conversion of Series CC convertible preferred stock		—		2,141,467
Options to purchase common stock		32,~~183~~861,~~003~~520		2,490,767
Vesting of restricted stock units to common stock		~~306~~279,~~655~~780		18,522
Employee stock purchase plan		350,000		—
Remaining shares available for issuance		2,~~187~~228,~~062~~444		104,828
Warrants to purchase convertible preferred stock		—		174,032
Warrants to purchase common stock		~~193~~114,~~603~~881		28,949
Total		65,~~220~~834,~~323~~625		13,452,992

9. Warrants

Upon the closing of the Company’s IPO, all of the outstanding warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase shares of common stock.

The following represents a summary of the warrants outstanding at each of the dates identified:

				Outstanding at
	Issued	Classification	Exercisable for	~~June~~September 30, 2019
1	2015	Equity	Common stock		198,~~571~~264
2	2015	Equity	Common stock		~~67,415~~—
3	2017	Equity	Common stock		106,617

				Outstanding at
	Issued	Classification	Exercisable for	December 31, 2018
1	2015	Equity	Common stock		28,949
2	2015	Liability	Series AA convertible preferred stock		67,415
3	2017	Liability	Series AA convertible preferred stock		106,617

1	Exercisable through November 5, 2021 at $0.05 per share.

2	Exercisable through September 11, 2024, at $4.45 per share.

3	Exercisable through March 20, 2027, at $4.45 per share.

10. Share-Based Compensation

2019 Equity Incentive Plan

In January 2019, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on the effective date of the IPO, at which time the Company ceased making awards under the 2012 Plan.

Under the 2019 Plan, the Company may grant stock options qualifying as incentive stock options (“ISOs”) within the meaning of Section 422 of U.S. Internal Revenue Code of 1986, as amended, or the Code, to employees, and for the grant of nonstatutory stock options (“NSOs”) restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to employees, consultants and directors. The 2019 Plan also provides for the grant of performance cash awards to employees, consultants and directors. A total of 2,500,000 shares of common stock were initially reserved for issuance under the 2019 Plan. In addition, the number of shares available for issuance under the 2019 Plan will automatically increase on January 1 of each year, for a period of ten years, from January 1, 2020 continuing through January 1, 2029, by 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. The maximum number of shares that may be issued pursuant to the exercise of ISOs under the 2019 Plan is 2,500,000.

2019 Employee Stock Purchase Plan

In January 2019, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2019 Employee Stock Purchase Plan (the “2019 ESPP”). The 2019 ESPP became effective on the effective date of the IPO. The maximum number of shares of common stock that may be issued under the ESPP is 350,000 shares. Additionally, the number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2020 through January 1, 2029, by the lesser of (1) 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year and (2) 500,000 shares; provided, that prior to the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (1) and (2). The 2019 ESPP became active on June 14, 2019 upon approval by the plan administrator, the Company’s board of directors. Each offering has a two-year period (the “Offering Period”) and each Offering Period has four six-month purchase periods (the “Purchase Period”). The purchase price of the stock is equal to 85% of the lesser of the market value of such shares on the first day of the Plan Period or the last day of the Purchase Period.

Stock Options

The following table summarizes information related to stock options outstanding as of ~~June~~September 30, 2019:

	Number of Options		Average Exercise Price		Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Vested and expected to vest at June 30, 2019		3,183,003	$	5.56		8.6	$	1,265
Vested and expected to vest at September 30, 2019		2,861,520	$	5.91		8.1	$	48,307
Exercisable at June 30, 2019		1,404,531	$	3.06		8.0	$	1,024
Exercisable at September 30, 2019		1,414,019	$	3.79		7.2	$	27,017

Unrecognized compensation expense related to outstanding options was $65,~~508~~239 at ~~June~~September 30, 2019, which is expected to be recognized as expense over approximately 2.41 years.

Restricted Stock Units

Unrecognized compensation expense relating to restricted stock units was $5,~~955~~296 at ~~June~~September 30, 2019, which is expected to be recognized as expense over approximately 3.75 years.

Share-Based Compensation Expense

The following table shows stock-based compensation expense included in the Company’s statements of operations for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Stock-based compensation expense by type of award:
Restricted stock units	$	~~107~~563	$	—	$	~~146~~709	$	—
Stock options		~~986~~2,010		~~131~~225		24,~~197~~207		~~537~~762
Total stock-based compensation included in costs and expenses	$	1,093	$	131	$	2,343	$	537
Employee stock purchase plan		139		—		139		—
Total stock-based compensation expense	$	2,712	$	225	$	5,055	$	762
Stock-based compensation expense by line item:
Cost of goods sold	$	3272	$	107	$	65137	$	2330
Selling, general and administrative		~~874~~2,356		88172		14,~~884~~240		~~425~~597
Research and development		~~187~~284		3346		~~394~~678		89135
Total stock-based compensation included in costs and expenses	$	1,093	$	131	$	2,343	$	537
Total stock-based compensation expense	$	2,712	$	225	$	5,055	$	762

On August 6, 2019, two directors resigned from the Company’s board of directors. At the time each of the directors resigned, they collectively held an aggregate of 100,220 unvested stock options and 6,010 unvested restricted stock units. The board of directors made a determination to accelerate the vesting of these securities, such that all the securities then held by the two resigning directors were deemed fully vested upon their respective resignations from the board. The acceleration of the vesting for these awards was accounted for as a modification, which resulted in $1,213 of additional stock-based compensation expense being recognized upon acceleration.

11. Net Loss Per Share

The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted average shares outstanding because such securities have an antidilutive impact due to losses reported:

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2019		2018
Series AA convertible preferred stock		—		7,161,719
Series BB convertible preferred stock		—		1,332,708
Series CC convertible preferred stock		—		2,141,467
Outstanding stock options		32,~~183~~861,~~003~~520		2,490,767
Unvested restricted stock units		~~306~~279,~~655~~780		18,522
Outstanding Series AA convertible preferred stock warrants		—		174,032
Outstanding common stock warrants		~~193~~114,~~603~~881		28,949
Total		3,~~683~~256,~~261~~181		13,348,164

12. Related Party Transactions

The Company has a customer that is also a stockholder. During the three months ended ~~June~~September 30, 2019 and 2018, the Company recorded revenue related to this customer of $~~465~~368 and $~~404~~491, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, the Company recorded revenue related to this customer of $~~934~~1,302 and $~~902~~1,393, respectively. The accounts receivable balance from this customer as of ~~June~~September 30, 2019 and December 31, 2018 was $~~415~~367 and $561, respectively.

The Company has a customer that is also a stockholder and employee. During the three months ended ~~June~~September 30, 2019 and 2018, the Company recorded revenue related to this customer of $82111 and $1728, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, the Company recorded revenue related to this customer of $~~193~~304 and $3159, respectively. The accounts receivable balance from this customer as of ~~June~~September 30, 2019 and December 31, 2018 was $~~166~~184 and $12, respectively.

The Company also entered into a lending arrangement in March 2017 with a lender who is affiliated with a stockholder. See Note 7, “Long-term Debt” for further details.

13. Subsequent Event

Time (other than shares of the Company’s common stock owned by Glaukos, Merger Sub or the Company or any direct or indirect, wholly owned subsidiary of the Company or Glaukos) will be converted into the right to receive 013.~~365~~ Subsequent ~~shares~~Event of Glaukos common stock. The Company currently expects the Merger to close by the end of 2019, subject to customary closing conditions and regulatory approvals, including the approval of stockholders of the Company.

Between October 1, 2019 and October 31, 2019, two putative class action lawsuits (captioned Kent v. Avedro, Inc., et al., No. 1:19-cv-01845 (D. Del. filed Oct. 1, 2019) and Thompson v. Avedro, Inc. et al., No. 1:19-cv-02075 (D. Del. filed Oct. 31, 2019)) and two individual lawsuits (captioned Payne v. Avedro, Inc., et al, 1:19-cv-02019 (D. Del. filed Oct. 24, 2019) and Bushansky v. Avedro, Inc. et al, 1:19-cv-10015 (S.D.N.Y. filed Oct. 29, 2019)) were) were filed in federal court by alleged stockholders of the Company challenging the Merger described in Note 1. The Payne and Bushansky complaints name the Company and its board of directors as defendants. The Kent and Thompson complaints additionally name two of our former directors, Glaukos and the Merger Sub as defendants. The lawsuits assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder against the Company and the individual defendants, and assert violations of Section 20(a) of the Exchange Act against Glaukos and the individual defendants. The plaintiffs contend that the Registration Statement on Form S-4, filed with the SEC on September 17, 2019, and the Definitive Proxy Statement on Schedule 14A, filed with the SEC on October 17, 2019, omitted or misrepresented material information regarding the Merger. The complaints seek injunctive relief, rescission, or rescissory damages, dissemination of a registration statement that discloses certain information requested by the plaintiff, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. Given the unpredictability inherent in litigation, the Company cannot predict the outcome of this matter. The Company is unable to estimate possible losses or ranges of losses that may result from this matter, and therefore, the Company has not accrued any amounts in connection with this matter other than ongoing attorneys’ fees.

Item 2. Management’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 unaudited financial statements and the related notes thereto to those statements included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited financial information and the notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on March 21, 2019. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to our future financial and business performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part II, Item 1A. “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report.

Overview

We are a leading commercial-stage ophthalmic medical technology company focused on treating corneal ectatic disorders and improving vision to reduce dependency on eyeglasses or contact lenses. Our proprietary Avedro Corneal Remodeling Platform is designed to strengthen, stabilize and reshape the cornea utilizing corneal cross-linking in minimally invasive and non-invasive outpatient procedures to treat corneal ectatic disorders and correct refractive conditions, which are caused by changes in the shape of the eye that prevent light from focusing on the retina, causing blurred vision. Our Avedro Corneal Remodeling Platform is comprised of our KXL and Mosaic systems, each of which delivers ultraviolet A, or UVA, light, and a suite of proprietary single-use riboflavin drug formulations, which, when applied together to the cornea, induce a biochemical reaction called corneal collagen cross-linking, or corneal cross-linking. Our KXL system in combination with our Photrexa drug formulations, which we launched in the United States in September 2016, is the first and only minimally invasive product offering approved by the U.S. Food and Drug Administration, or the FDA, indicated for the treatment of progressive keratoconus and corneal ectasia following refractive surgery. Additionally, the FDA granted us orphan drug designations and we have orphan drug exclusivity until 2023 that covers our Photrexa formulations used with our KXL system for our approved indications. We have obtained a Conformité Européene, or CE, mark for our Mosaic system, which allows it to be marketed throughout the European Union. The Mosaic System is capable of performing vision correction procedures and treating corneal ectatic disorders and we began a targeted international launch in late 2017.

We sell our products primarily to ophthalmologists, hospitals and ambulatory surgery centers, or ASCs. The physicians primarily involved in corneal cross-linking are ophthalmologists who are either corneal specialists or trained in refractive procedures. According to Market Scope estimates, there are approximately 1,100 corneal refractive centers in the United States. ~~Of these centers, we estimate there are approximately 800 centers in which a majority of cataract and refractive surgeons, as well as corneal specialists who treat keratoconus, are located.~~ As of ~~June~~September 30, 2019, our KXL systems were placed in ~~332~~353 centers. If we are able to obtain FDA approval for our Mosaic system and its associated drug formulations for the treatment of presbyopia, we expect to leverage our existing sales force to cross-sell our KXL and Mosaic systems and their respective drug formulations, as they share the same target customers. In addition to the approximately 800 centers we are targeting for keratoconus, we expect to sell the Mosaic system and its associated drug formulations, if approved, to the remaining 300 corneal refractive centers that focus exclusively on refractive procedures. Outside the United States, we sell our products through a broad network of distribution partners located in markets where we see the greatest potential for corneal cross-linking procedures.

We have invested significantly in our research and development activities, including product development and clinical studies to demonstrate the safety and efficacy of our corneal cross-linking platform to support regulatory submissions. We intend to continue to make significant investments in research and development efforts to support our pivotal Phase 3 clinical trial of the Epi-On procedure using our KXL system, its associated drug formulations and our Boost Goggles for the treatment of progressive keratoconus and the Phase 2a clinical trial of our Mosaic system and its associated drug formulations for the treatment of presbyopia. We also intend to make significant investments in our commercial organization by increasing the number of sales personnel and reimbursement specialists to support the establishment of consistent and favorable payment policies. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require additional funding, which may include future equity and debt financings.

On February 19, 2019, we closed our initial public offering, or IPO, of common stock, which resulted in the issuance and sale of 5,000,000 shares of common stock at a public offering price of $14.00 per share, resulting in net proceeds of approximately $61.0 million after deducting underwriting discounts and other offering costs. To date, we have financed our operations primarily through sales of our convertible preferred stock, debt financings, sales of our proprietary Photrexa formulations and our KXL system, and proceeds received from our IPO. We have devoted substantially all of our resources to the research, development and engineering of our products, seeking regulatory approval of our products and the commercial launch of our KXL system and its associated drug formulations. For the ~~three~~nine months ended ~~June~~September 30, 2019 and 2018, we generated revenue of $~~10.3 million and $6.3 million, respectively. For the six months ended June~~ 30~~, 2019 and 2018, we generated revenue of $19~~.1 million and $1119.45 million, respectively~~. For the three months ended June 30~~, ~~2019~~ and ~~2018, we~~ had net losses of $724.~~4 million and $6.5 million, respectively. For the six months ended June 30, 2019 and 2018, we had net losses of $15.~~8 million and $1318.17 million, respectively. As of ~~June~~September 30, 2019, we had an accumulated deficit of $~~192~~201.23 million.

We believe that our existing cash and cash equivalents will enable us to fund our current projected operating expenses and capital expenditures for at least the next twelve months. We have based these estimates on assumptions that may prove to be imprecise, and we may use our available capital resources sooner than we currently expect. See “Liquidity and Capital Resources.” Adequate additional funds may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights as a shareholder. Any future debt financing or preferred equity or other financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interests of our shareholders.

Recent Developments

Merger Agreement

As previously announced, on August 7, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Glaukos Corporation, a Delaware corporation, or Glaukos, and Atlantic Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Glaukos, or Merger Sub. The Merger Agreement provides for the merger of Merger Sub with and into Avedro, with Avedro surviving the Merger as a wholly owned subsidiary of Glaukos.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, which has been approved by our board of directors and the board of directors of Glaukos, at the effective time of the Merger, or the Effective Time, each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time (other than shares of our common stock owned by Glaukos, Merger Sub or the Company or any direct or indirect, wholly owned subsidiary of the Company or Glaukos) will be converted into the right to receive 0.365 shares of Glaukos common stock. We currently expect the Merger to close by the end of 2019, subject to customary closing conditions and regulatory approvals, including the approval of our stockholders.

Reverse Stock Split

On January 31, 2019, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on the outstanding shares of our common stock and convertible preferred stock on a one-for-4.45 basis, which we refer to as the Reverse Stock Split, and (2) authorize us to issue up to 200,000,000 shares of common stock, $0.00001 par value per share and 10,815,632 shares of convertible preferred stock, $0.00001 par value per share, which we refer to collectively as the Charter Amendment. The par values of our common stock and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Charter Amendment was approved by our stockholders on January 31, 2019 and became effective upon the filing of the Charter Amendment with the State of Delaware on February 1, 2019. All issued and outstanding common stock and convertible preferred stock and related share and per share amounts contained in this Quarterly Report have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

Components of Our Results of Operations

Revenue

We generate revenue from sales of our single-use riboflavin drug formulations and our KXL and Mosaic systems. Recent revenue growth in single-use riboflavin drug formulations has been favorably impacted by increased patient and physician adoption of our products, increased private payor coverage and adoption of coverage and payment policies, and an increase in the average revenue per unit of single-use riboflavin drug formulations recognized upon shipment in 2019 due to our adoption of ASC 606. We expect our revenue growth may be impacted to the extent we are able to continue to support the establishment of consistent and favorable payment policies, increase patient and physician awareness of our products and continue to drive device placements in existing geographies and expansion of sales to additional corneal refractive centers in the United States. We intend to continue to expand our sales, reimbursement and marketing organization to help us drive and support revenue growth and further penetrate the market. The single-use riboflavin drug formulations represent disposable items that are used on a treatment-by-treatment basis. As we sell more devices, we expect the number of treatments performed by ophthalmologists and, correspondingly, sales of our single-use riboflavin drug formulations, to grow. As demand for new products can fluctuate significantly and delays in market adoption and healthcare reimbursement policies may occur, we anticipate that our revenue, expense and operating losses will be difficult to predict. Our revenue may also fluctuate on a quarterly basis in the future due to a variety of factors, including the impact of the buying patterns of our distributors.

Effective January 1, 2019, we adopted Accounting Standards Codification (ASC) 606, “Revenue Recognition – Revenue from Contracts with Customers” and its related amendments, or ASC 606. The adoption resulted in an increase in the average revenue per unit of single-use riboflavin drug formulations recognized upon shipment. See Note 2 to our unaudited financial statements included elsewhere in this Quarterly Report for more information.

Cost of Goods Sold and Gross Margin

We manufacture our KXL and Mosaic systems at our manufacturing facilities in Burlington, Massachusetts and Dublin, Ireland. We contract third-party manufacturers to produce our single-use riboflavin drug formulations. Cost of goods sold primarily consist of manufacturing overhead costs, material costs and direct labor. Our material costs include raw materials, reserves for expected warranty costs, scrap and inventory obsolescence. Our manufacturing overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment, operations supervision and management, depreciation expense for production equipment, amortization of leasehold improvements, shipping costs and royalty expense payable in connection with sales of certain products. Our labor costs include salaries, bonus, benefits and stock-based compensation.

We expect our overall gross margin, which is calculated as revenue less cost of goods sold for a given period divided by revenue, to improve in future periods as, and to the extent, sales of our single-use riboflavin drug formulations increase and as additional medical devices are purchased. Our gross margin has been, and we expect it will continue to be, affected by a variety of factors, including product and geographic sales mix, pricing, production volumes and manufacturing costs, production yields and scrap costs, and to a lesser extent the implementation of cost-reduction strategies. We sell our products in the United States at a higher price point than what we have received historically in the international markets and therefore, as we gain market share in the United States, we believe our gross margins may be positively impacted. We believe our gross margins may be further positively improved as, and to the extent, we increase drug production volume and scale our business.

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses are expensed as incurred and primarily consist of personnel-related expenses, including salaries, sales commissions, bonuses, fringe benefits and stock-based compensation for our executive, financial, marketing, sales and administrative functions. Other significant SG&A expenses include marketing programs, advertising, conferences and travel expenses, as well as the costs associated with obtaining and maintaining our patent portfolio and professional fees for accounting, auditing, consulting and legal services.

We expect SG&A expenses to continue to grow in the foreseeable future as we increase our sales and marketing infrastructure globally and our clinical education and general administration infrastructure in the United States. In addition, we expect our general and administrative expenses will ~~significantly~~ increase as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services. We also anticipate continued increased expenses related to audit, legal, and tax-related services, director and officer insurance premiums and investor relations costs associated with being a public company.

Research and Development Expenses

Research and development, or R&D, expenses are expensed as incurred and primarily consist of personnel-related expenses, including salaries, bonuses, fringe benefits and stock-based compensation for our R&D employees. Other significant R&D expenses include new product development projects and the cost of conducting our ongoing clinical trials, including the pivotal Phase 3 clinical trial of the Epi-On procedure ~~using our KXL system, its associated drug formulations and our Boost Goggles~~ for the treatment of progressive keratoconus, and also including the Phase 2a clinical trial ~~of our Mosaic system and its associated drug formulations~~ for the treatment of presbyopia, which may include payments to investigational sites and investigators, clinical research organizations, consultants and other outside technical services and the costs of materials, supplies and travel. We expect our R&D expenses to increase as we initiate and advance our development programs and clinical trials.

Other ~~expense~~Expense, ~~net~~Net

Other expense, net, consists primarily of (1) changes in fair value of our derivative and convertible preferred stock warrant liabilities, (2) interest expense, which includes cash and non-cash interest related to our outstanding debt owed to outside lenders associated with debt facilities including accretion of debt discount on the debt facilities and (3) interest income from interest earned on our cash equivalents. In connection with our IPO, our convertible preferred stock warrants converted into common stock warrants and were reclassified as additional paid-in capital.

Results of Operations

The following table shows our results of operations for the periods presented:

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2019			2018			$			%			2019			2018			$			%
	(in thousands, except percentages)
Revenue	$	1011,~~289~~046		$	68,~~295~~018		$	3,~~994~~028			6337.48	%	$	1930,~~062~~108		$	1119,~~449~~467		$	710,~~613~~641			6654.57	%
Cost of goods sold		2,~~781~~404			2,~~744~~861			37(457	)		1(16.30	%)		57,~~065~~469			58,~~362~~223			(~~297~~754	)		(59.52	%)
Gross profit		78,~~508~~642			35,~~551~~157			3,~~957~~485			~~111~~67.46	%		1322,~~997~~639			611,~~087~~244			711,~~910~~395			~~129~~101.93	%
Gross margin		7378.02	%		5664.43	%								7375.42	%		5357.28	%
Operating expenses:
Selling, general and administrative		1012,~~467~~966			67,~~528~~179			35,~~939~~787			6080.36	%		2033,~~688~~654			1118,~~816~~995			814,~~872~~659			7577.12	%
Research and development		3,~~901~~809			23,~~755~~117			~~1,146~~692			4122.62	%		811,~~186~~995			58,~~709~~826			23,~~477~~169			4335.49	%
Total operating expenses		1416,~~368~~775			910,~~283~~296			56,~~085~~479			5462.89	%		2845,~~874~~649			1727,~~525~~821			1117,~~349~~828			64.81	%
Loss from operations		(68,~~860~~133	)		(5,~~732~~139	)		(12,~~128~~994	)		1958.73	%		(1423,~~877~~010	)		(1116,~~438~~577	)		(36,~~439~~433	)		3038.18	%
Total other expense, net		(~~568~~932	)		(~~769~~436	)		~~201~~(496	)		~~(26~~113.18	%)		(~~904~~1,836	)		(12,~~697~~133	)		~~793~~297			(4613.79	%)
Net loss	$	(79,~~428~~065	)	$	(65,~~501~~575	)	$	(~~927~~3,490	)		1462.36	%	$	(1524,~~781~~846	)	$	(1318,~~135~~710	)	$	(26,~~646~~136	)		2032.18	%

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2019		2018		$			%			2019		2018		$			%
	(in thousands, except percentages)										(in thousands, except percentages)
United States	$	9,410	$	5,839	$	3,571			61.2	%	$	24,117	$	13,067	$	11,050			84.6	%
Asia		666		989		(323	)		(32.7	)%		2,418		2,943		(525	)		(17.8	)%
Europe		204		449		(245	)		(54.6	)%		1,457		1,540		(83	)		(5.4	)%
Americas (outside the United States)		258		219		39			17.8	%		754		588		166			28.2	%
Middle East		389		452		(63	)		(13.9	)%		1,033		1,001		32			3.2	%
Other		119		70		49			70.0	%		329		328		1			0.3	%
Total revenues	$	11,046	$	8,018	$	3,028			37.8	%	$	30,108	$	19,467	$	10,641			54.7	%

	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
	2019		2018		$			%			2019		2018		$			%
	(in thousands, except percentages)										(in thousands, except percentages)
United States	$	8,196	$	4,034	$	4,162			103.2	%	$	14,707	$	7,228	$	7,479			103.5	%
Asia		892		1,064		(172	)		(16.2	)%		1,752		1,954		(202	)		(10.3	)%
Europe		516		468		48			10.3	%		1,253		1,091		162			14.8	%
Americas (outside the United States)		271		227		44			19.4	%		496		369		127			34.4	%
Middle East		306		355		(49	)		(13.8	)%		644		549		95			17.3	%
Other		108		147		(39	)		(26.5	)%		210		258		(48	)		(18.6	)%
Total revenues	$	10,289	$	6,295	$	3,994			63.4	%	$	19,062	$	11,449	$	7,613			66.5	%

Revenue

Revenue for the three months ended ~~June~~September 30, 2019 increased by $43.0 million, or 6337.48%, to $1011.30 million as compared to $68.30 million for the three months ended ~~June~~September 30, 2018. The increase was the result of a $43.26 million, or ~~103~~61.2%, increase in sales in the United States, offset by a $0.26 million, or 724.49%, decrease in sales outside of the United States.

The increase in revenue within the United States was primarily attributable to a $4.3.7 million increase in drug revenue, partially offset by a $0.1 million decrease in device revenue. Of the $4.3.7 million increase in drug revenue, $21.54 million of the increase was due to an increase in the average revenue per unit of single-use riboflavin drug formulations recognized upon shipment in 2019 due to our adoption of ASC 606, and $12.83 million of the increase was related to an increase in the volume of single-use riboflavin drug formulations sold. The decrease in U.S. device revenue was primarily due to a decrease in volume of device sales. ~~We sold twelve KXL systems in the United States in the three months ended June 30, 2019 as compared to fourteen KXL systems in the three months ended June 30, 2018.~~

The decrease in revenue outside the United States for the three months ended ~~June~~September 30, 2019 was primarily attributable to a decrease in the volume of ~~single-use~~device ~~riboflavin drug formulations sold~~sales.

Revenue for the ~~six~~nine months ended ~~June~~September 30, 2019 increased by $710.76 million, or 6654.57%%, to $1930.1 million as compared to $1119.45 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase was the result of a $711.51 million, or ~~103~~84.56%, increase in sales in the United States, ~~and~~offset by a $0.25 million, or 36.24%, ~~increase~~decrease in sales outside of the United States.

The increase in revenue within the United States was primarily attributable to a $711.96 million increase in drug revenue, partially offset by a $0.45 million decrease in device revenue. Of the $711.96 million increase in drug revenue, $56.27 million of the increase was due to an increase in the average revenue per unit of single-use riboflavin drug formulations recognized upon shipment in 2019 due to our adoption of ASC 606, and $24.79 million of the increase was related to an increase in the volume of single-use riboflavin drug formulations sold. ~~The~~Of the $0.5 million decrease in U.S. device revenue, ~~was~~$0.4 ~~primarily~~million of the decrease was due to a decrease in ~~volume~~the ofaverage ~~device~~selling ~~sales.~~price Weof ~~sold~~the ~~twenty~~devices ~~KXL~~sold, ~~systems~~and in$0.1 ~~the~~million ~~United~~of ~~States in~~ the ~~six~~decrease ~~months~~was ~~ended~~due ~~June 30, 2019 as compared~~ to ~~twenty-five~~a ~~KXL~~decrease ~~systems~~ in ~~the~~volume ~~six~~of ~~months~~device ~~ended June 30, 2018~~sales.

The increase in revenue outside the United States for the six months ended June 30, 2019 was primarily attributable to an increase in the volume of single-use riboflavin drug formulations sold.

Cost of Goods Sold and Gross Margin

Our cost of goods sold for the three months ended June 30, 2019 increased by $0.1 million, or 1.3%, to $2.8 million as compared to $2.7 million for the three months ended June 30, 2018. The increase was primarily due to a decrease in scrap costs related to expired drug product. Gross profit for the three months ended June 30, 2019 increased $3.9 million as compared to the three months ended June 30, 2018, and gross margin increased from 56.4% during the three months ended June 30, 2018 to 73.0% during the three months ended June 30, 2019. This increase in gross margin was primarily due to an increase in the average revenue per unit of single-use riboflavin drug formulations, and, to a lesser extent, due to the scrap cost savings realized during the current period.

Our cost of goods sold for the six months ended June 30, 2019 decreased by $0.3 million, or 5.5%, to $5.1 million as compared to $5.4 million for the six months ended June 30, 2018. The decrease was primarily due to a decrease in scrap costs related to expired drug product. Gross profit for the six months ended June 30, 2019 increased $7.9 million as compared to the six months ended June 30, 2018, and gross margin increased from 53.2% during the six months ended June 30, 2018 to 73.4% during the six months ended June 30, 2019. This increase in gross margin was primarily due to an increase in the average revenue per unit of single-use riboflavin drug formulations, and, to a lesser extent, due to the scrap cost savings realized during the current period.

~~Selling~~The decrease in revenue outside the United States for the nine months ended September 30, ~~General~~2019 ~~and~~was ~~Administrative~~primarily ~~(“SG&A”)~~attributable ~~Expenses~~to a decrease in the volume of device sales.

~~SG&A~~Cost expenses for the three months ended June 30, 2019 increased by $4.0 million, or 60.3%, to $10.5 million as compared to $6.5 million for the three months ended June 30, 2018. The increase was driven primarily by increased employee-related costs and professional fees to support our growing business and increased commercial efforts. We incurred increased personnel and related costs of ~~$3.0 million,~~Goods ~~which~~Sold ~~includes a $0.8 million increase in stock-based compensation expense,~~ and ~~increased~~Gross ~~professional~~Margin ~~fees of $0.4 million for accounting, audit, legal and tax services. Additionally, U.S. reimbursement and payer support costs increased by $0.5 million for the quarter.~~

~~SG&A~~Our ~~expenses~~cost of goods sold for the ~~six~~three months ended ~~June~~September 30, 2019 ~~increased~~decreased by $80.95 million, or 7516.10%, to $202.74 million as compared to $112.89 million for the ~~six~~three months ended ~~June~~September 30, 2018. The ~~increase~~decrease was ~~driven~~ primarily bydue ~~increased~~to ~~employee-related~~a ~~costs~~decrease ~~and~~in ~~professional~~scrap ~~fees~~costs related to ~~support~~expired ~~our~~drug ~~growing~~product. ~~business~~Gross ~~and~~profit ~~increased~~for ~~commercial~~the ~~efforts.~~three Wemonths ~~incurred~~ended ~~increased~~September 30, ~~personnel~~2019 ~~and~~increased ~~related costs of~~ $53.65 million, ~~which~~as ~~includes~~compared ato ~~$1.5~~the ~~million~~three ~~increase~~months inended ~~stock-based~~September 30, ~~compensation expense~~2018, and ~~increased~~gross ~~professional~~margin ~~fees~~increased offrom $164.~~7 million~~3% ~~for~~during ~~accounting,~~the ~~audit,~~three ~~legal~~months ~~and~~ended ~~tax~~September 30, ~~services~~2018 to 78.2% ~~Additionally~~during the three months ended September 30, U2019.S. ~~reimbursement~~This ~~and~~increase ~~payer~~in ~~support~~gross ~~costs~~margin ~~increased~~was byprimarily ~~$1.4 million~~due ~~and~~to ~~marketing~~an ~~and~~increase ~~advertising~~in ~~costs~~the ~~increased~~average byrevenue ~~$0.1~~per ~~million~~unit ~~for~~of ~~the~~single-use ~~six~~riboflavin ~~months~~drug ~~ended~~formulations, ~~June 30~~and, ~~2019~~to a lesser extent, due to the scrap cost savings realized during the current period.

Our cost of goods sold for the nine months ended September 30, 2019 decreased by $0.8 million, or 9.2%, to $7.5 million as compared to $8.2 million for the nine months ended September 30, 2018. The decrease was primarily due to a decrease in scrap costs related to expired drug product. Gross profit for the nine months ended September 30, 2019 increased $11.4 million as compared to the nine months ended September 30, 2018, and gross margin increased from 57.8% during the nine months ended September 30, 2018 to 75.2% during the nine months ended September 30, 2019. This increase in gross margin was primarily due to an increase in the average revenue per unit of single-use riboflavin drug formulations, and, to a lesser extent, due to the scrap cost savings realized during the current period.

Selling, General and Administrative, or SG&A, Expenses

SG&A expenses for the three months ended September 30, 2019 increased by $5.8 million, or 80.6%, to $13.0 million as compared to $7.2 million for the three months ended September 30, 2018. The increase was driven primarily by increased employee-related costs and professional fees to support our growing business, and increased commercial efforts, as well as legal and acquisition-related costs associated with the proposed transaction with Glaukos Corporation, or Glaukos, which we refer to as the Merger. We incurred increased personnel and related costs of $3.9 million, which included a $2.2 million increase in stock-based compensation expense. Of the $2.2 million increase in stock-based compensation expense, $1.2 million was a non-recurring charge recognized due to the modification of equity awards granted to two of our board members. We incurred increased professional fees of $1.6 million for accounting, audit, legal and tax services primarily related to the Merger. Additionally, marketing and advertising costs increased by $0.3 million for the three months ended September 30, 2019.

SG&A expenses for the nine months ended September 30, 2019 increased by $14.7 million, or 77.2%, to $33.7 million as compared to $19.0 million for the nine months ended September 30, 2018. The increase was driven primarily by increased employee-related costs and professional fees to support our growing business and increased commercial efforts, as well as legal and acquisition-related costs associated with the Merger. We incurred increased personnel and related costs of $9.5 million, which included a $3.6 million increase in stock-based compensation expense. Of the $3.6 million increase in stock-based compensation expense, $1.2 million was a non-recurring charge recognized due to the modification of equity awards granted to two of our board members. We incurred increased professional fees of $3.2 million for accounting, audit, legal and tax services, of which $1.6 million was related to the Merger. Additionally, U.S. reimbursement and payer support costs increased by $1.4 million, marketing and advertising costs increased by $0.3 million, and non-income based taxes increased by $0.2 million for the nine months ended September 30, 2019.

We expect SG&A costs to increase as we increase our headcount and expand personnel and services to support public company corporate governance requirements and our commercial growth.

Research and Development, (“or R&D”), Expenses

R&D expenses for the three months ended ~~June~~September 30, 2019 increased by $10.17 million, or 4122.62%, to $3.98 million as compared to $23.81 million for the three months ended ~~June~~September 30, 2018. R&D headcount increased, which resulted in a $0.34 million increase in personnel and related expenses. The increase was also due to $0.82 million of increased product development and clinical research costs.

R&D expenses for the ~~six~~nine months ended ~~June~~September 30, 2019 increased by $23.52 million, or 4335.49%, to $812.20 million as compared to $58.78 million for the ~~six~~nine months ended ~~June~~September 30, 2018. R&D headcount increased, which resulted in a $01.93 million increase in personnel and related expenses. The increase was also due to $1.68 million of increased product development and clinical research costs.

Other Expense, Net

Other expense, net ~~decreased~~increased by $0.25 million for the three months ended ~~June~~September 30, 2019, or 26113.18%, as compared to the three months ended ~~June~~September 30, 2018. The ~~decrease~~ increase was primarily due to a $0.37 million increase in ~~interest income as a result of increased cash and cash equivalents from IPO proceeds received in February 2019, and a $0.2 million decrease in~~ expense related to the change in fair value of our ~~warrant~~derivative liability during the three months ended September 30, 2019, offset by a $0.32 million increase in ~~expense~~interest ~~related~~income toas ~~the~~a ~~change~~result inof ~~fair~~increased ~~value~~cash ofand ~~our~~cash ~~derivative~~equivalents ~~liability~~from ~~during~~IPO ~~the~~proceeds ~~three~~received ~~months~~in ~~ended~~February ~~June 30,~~ 2019.

Other expense, net decreased by $0.83 million for the ~~six~~nine months ended ~~June~~September 30, 2019, or 4613.79%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2018. The decrease was primarily due to a $0.57 million increase in interest income as a result of increased cash and cash equivalents from IPO proceeds received in February 2019, ~~and~~offset by a $0.34 million ~~decrease~~increase in expense related to the change in fair value of our derivative liability during the ~~six~~nine months ended ~~June~~September 30, 2019.

Liquidity and Capital Resources

As of ~~June~~September 30, 2019, our principal source of liquidity was cash and cash equivalents of $5752.81 million. We believe that the net proceeds from our IPO, along with our existing cash and cash equivalents, will be sufficient to fund our projected liquidity requirements for at least the next twelve months.

Historically, our sources of cash have included the sale of equity securities, debt financings and cash generated from operations, primarily from the collection of accounts receivable resulting from product sales. Our historical cash outflows have primarily been associated with cash payments to service our debt, in addition to cash used for operating activities, such as the purchase and growth of inventory, expansion of our sales, marketing, research and development activities, and other working capital needs; and expenditures related to equipment and improvements used to increase our manufacturing capacity, to improve our manufacturing efficiency, and for overall facility expansion. If our sources of cash are insufficient to satisfy our liquidity requirements, however, we may seek to sell additional equity or make additional borrowings under a new credit facility. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products.

Initial Public Offering

On February 19, 2019, we closed our IPO in which we sold 5,000,000 shares of common stock, at a public offering price of $14.00 per share, for aggregate gross proceeds of $70.0 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of $4.9 million and offering expenses of $4.1 million, were $61.0 million. See Note 1 to our unaudited financial statements included elsewhere in this Quarterly Report for more information.

Debt Facility

On March 20, 2017, we entered into a credit agreement, or the Credit Agreement, with OrbiMed Royalty Opportunities II, L.P., or OrbiMed, which is affiliated with OrbiMed Private Investments VI, LP, or OrbiMed Private Investments. The Credit Agreement made available to us two loans, one in the amount of $20.0 million, which we borrowed in March 2017, and the second in the amount of $10.0 million, which was available through December 31, 2017, based on a revenue milestone, but never drawn. Under the Credit Agreement, cash interest accrues until maturity at the rate of 10% per annum, or the Applicable Margin. Additional interest, or PIK interest, accrues at the per annum rate equal to the higher of (1) the three-month LIBOR rate and (2) 1.00%. Such PIK interest is added to the outstanding principal amounts outstanding under the Credit Agreement on the last day of each calendar quarter until the maturity date. Outstanding principal amounts plus all accrued and unpaid PIK interest are due in one lump sum payment on the loan maturity date, March 20, 2022.

The Credit Agreement includes affirmative and negative covenants and events of default, including the following events of default: payment defaults, breaches of representations and warranties, non-performance of certain covenants and obligations, cross-acceleration with debt, judgment defaults, change in control, bankruptcy, certain events with respect to key permits, regulatory events, recalls and certain actions and settlements with governmental entities, key person events, a material impairment in the perfection or priority of OrbiMed’s security interest or in the value of the collateral, a material adverse change in the business, operations or condition of us and our subsidiaries taken as a whole and a material impairment of the prospect of repayment of the loans.

Upon the occurrence of an event of default and continuing until such event of default is no longer continuing, the Applicable Margin will increase by 3.00% per annum.

If we repay all or a portion of the term loans prior to maturity, we will pay OrbiMed a prepayment fee as follows: for amounts repaid after March 20, 2019 but on or prior to March 20, 2020, 5% of the portion of principal repaid; and for amounts repaid after March 20, 2020 but on or prior to March 20, 2021, 3% of the portion of the principal repaid. No prepayment fee will be required for amounts repaid after March 20, 2021 but prior to March 20, 2022. Our obligations under the Credit Agreement are secured by a security interest in substantially all of our assets, including our intellectual property.

In connection with the Credit Agreement and the close of the first draw in March 2017, we issued to OrbiMed warrants to purchase 106,617 shares of Series AA convertible preferred stock at an exercise price of $4.45 per share. Each warrant is exercisable for a period of ten years from the date of issuance and may be exercised on a cashless basis in whole or in part. Upon the closing of our IPO, the OrbiMed warrants automatically converted into warrants to purchase common stock.

As of ~~June~~September 30, 2019, we have borrowed and have outstanding $20.0 million of debt under the Credit Agreement. As of ~~June~~September 30, 2019, we have recorded a long-term debt obligation of $20.35 million for the Credit Agreement, which includes borrowings outstanding of $20.0 million and accrued PIK interest of $01.91 million, net of debt discount of $0.6 million.

Historical Cash Flows

The following table shows a summary of our cash flows for the periods presented:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2019			2018
Net cash provided by / (used in):
Net cash (used in) / provided by:
Operating activities	$	(1319,~~825~~733	)	$	(1216,~~703~~383	)
Investing activities		(~~171~~353	)		(~~142~~256	)
Financing activities		62,~~065~~463			24,~~761~~721
Increase in cash, cash equivalents and restricted cash	$	4842,~~069~~377		$	118,~~916~~082

Operating Activities

Net cash used in operating activities was $1319.87 million for the ~~six~~nine months ended ~~June~~September 30, 2019, reflecting a net loss of $1524.8 million and net changes in operating assets and liabilities of $1.15 million, partially offset by non-cash charges of $36.06 million primarily for stock-based compensation expense. Net cash used in operating activities was $1216.74 million for the ~~six~~nine months ended ~~June~~September 30, 2018, reflecting a net loss of $1318.17 million ~~and net changes in operating assets and liabilities of $1.2 million~~, partially offset by non-cash charges of $12.60 million ~~related~~primarily tofor stock-based compensation expense and adepreciation ~~change~~and net changes in operating assets and liabilities ~~held~~of ~~at fair value~~$0.3 million

Investing Activities

Net cash used in investing activities was $0.24 million and $0.13 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, and resulted from the purchases of equipment and furniture.

Financing Activities

Net cash provided by financing activities totaling $62.15 million for the ~~six~~nine months ended ~~June~~September 30, 2019 was primarily due to $65.1 million of proceeds, net of underwriting discounts and commissions received from our IPO, offset by initial public offering costs of $2.8 million. Net cash provided by financing activities was $24.87 million for the ~~six~~nine months ended ~~June~~September 30, 2018, and was primarily due to proceeds from the issuance of Series CC convertible preferred stock.

Contractual Obligations and Commitments

There have been no significant changes in the contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 21, 2019., except for:

In September 2019, we amended one of our facility leases to add additional office and lab space that will run co-terminously with the original lease through February 2023. The amendment increased our total future lease commitment by $0.2 million.

Off-Balance Sheet Arrangements

During the periods presented, we did not and do not currently have any off-balance sheet arrangements as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. The most significant assumptions used in the financial statements are the underlying assumptions used in revenue recognition, product warranties, inventory valuation and valuing share-based compensation, including the fair value of our common stock in periods before our IPO. We base estimates and assumptions on historical experience when available and on various factors that it determined to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and significant estimates that involve a higher degree of judgment and complexity are described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in our Annual Report on Form 10‑K for the year ended December 31, 2018. There have been no material changes to our critical accounting policies and estimates as disclosed therein, with the exception of our adoption of recent accounting pronouncements, as discussed below.

Emerging Growth Company Status

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or (the “JOBS Act,”) we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

Item 4. Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~March 31~~September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~June~~September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended ~~June~~September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

~~From~~Between ~~time~~October to1, ~~time~~2019 and October 31, we2019, ~~may~~two ~~become~~putative ~~involved~~class inaction ~~legal~~lawsuits ~~proceedings~~(captioned orKent bev. ~~subject~~Avedro, toInc., ~~claims~~et ~~arising~~al., No. 1:19-cv-01845 (D. Del. filed Oct. 1, 2019) and Thompson v. Avedro, Inc. et al., No. 1:19-cv-02075 (D. Del. filed Oct. 31, 2019)) and two individual lawsuits (captioned Payne v. Avedro, Inc., et al, 1:19-cv-02019 (D. Del. filed Oct. 24, 2019) and Bushansky v. Avedro, Inc. et al, 1:19-cv-10015 (S.D.N.Y. filed Oct. 29, 2019)) were filed in ~~the~~federal ~~ordinary~~court ~~course~~by alleged Avedro stockholders challenging Glaukos’ proposed acquisition of us, which we refer to as the Merger. The Payne and Bushansky complaints name us and our ~~business~~board of directors as defendants. WeThe ~~are~~Kent ~~not~~and ~~currently~~Thompson acomplaints ~~party~~additionally toname ~~any~~two ~~material~~of ~~legal~~our ~~proceedings~~former directors, Glaukos Corporation, or Glaukos, and weAtlantic ~~are~~Merger ~~not~~Sub, ~~aware~~Inc., a wholly owned subsidiary of ~~any~~Glaukos, ~~pending~~as defendants. The lawsuits assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, or ~~threatened~~the ~~legal~~Exchange ~~proceeding~~Act, and Rule 14a-9 promulgated thereunder against us ~~that~~and wethe ~~believe~~individual ~~could~~defendants, ~~have~~and assert violations of Section 20(a) ~~material~~of ~~adverse~~the ~~effect~~Exchange Act against Glaukos and the individual defendants. The plaintiffs contend that the Registration Statement on ~~our~~Form ~~business~~S-4, ~~operating~~filed ~~results~~with the SEC on September 17, 2019, and the Definitive Proxy Statement on Schedule 14A, filed with the SEC on October 17, 2019, omitted or ~~financial~~misrepresented ~~condition~~material information regarding the Merger. The complaints seek injunctive relief, rescission, or rescissory damages, dissemination of a registration statement that discloses certain information requested by the plaintiff, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. Given the unpredictability inherent in litigation, we cannot predict the outcome of this matter. We are unable to estimate possible losses or ranges of losses that may result from this matter, and therefore we have not accrued any amounts in connection with this matter other than ongoing attorneys’ fees.

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors.

The matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances, over many of which we have little or no control. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, could cause our actual results to differ materially from those in these forward-looking statements. Other than the factors set forth below, there are no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

The announcement and pendency of our agreement to be acquired by Glaukos may have an adverse effect on our business, operating results and our stock price, and may result in the loss of employees, customers, suppliers and other business partners.

On August 7, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Glaukos Corporation, a Delaware corporation, or Glaukos, and Atlantic Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Glaukos, or Merger Sub. The Merger Agreement provides for the merger of Merger Sub with and into Avedro, or the Merger, with Avedro surviving the Merger as a wholly-owned subsidiary of Glaukos. We are subject to risks in connection with the announcement and pendency of the Merger, including, but not limited to, the following:

•

market reaction to the announcement of the Merger;

•

changes in our business, operating results, market price of common stock and prospects generally;

•

market assessments of the likelihood that the Merger will be consummated;

•

the amount of consideration offered per share will not be increased to account for positive changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations during the pendency of the Merger, including any successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

•

potential adverse effects on our relationships with our current customers, suppliers and other business partners, or those with which we are seeking to establish business relationships, due to uncertainties about the Merger;

•

we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and many of these fees and costs are payable by us regardless of whether the Merger is consummated;

•

we may incur unexpected costs, liabilities or delays in connection with or with respect to the Merger;

•

potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the Merger;

•

the pendency and outcome of any legal proceedings that may be instituted against us, our directors, executive officers and others relating to the transactions contemplated by the Merger Agreement;

•

the inherent risks, costs and uncertainties associated with integrating the businesses successfully and risks of not achieving all or any of the anticipated benefits of the Merger, or the risk that the anticipated benefits of the Merger may not be fully realized or take longer to realize than expected;

•

competitive pressures in the markets in which we and Glaukos operate;

•

the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; and

•

the possibility of disruption to our business, including increased costs and diversion of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to us.

While the Merger is pending, we are subject to contractual restrictions that could harm our business, operating results and our stock price.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our businesses in the ordinary course, consistent with past practice, and restricting us from taking certain specified actions absent Glaukos’ prior written consent. We may find that these and other obligations in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. These restrictions could adversely impact our business, operating results and our stock price and our perceived acquisition value, regardless of whether the Merger is completed.

actions absent Glaukos’ prior written consent. We may find that these and other obligations in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. These restrictions could adversely impact our business, operating results and our stock price and our perceived acquisition value, regardless of whether the Merger is completed.

The failure to complete the Merger may adversely affect our business and our stock price.

The Merger with Glaukos is subject to a number of conditions, including, among other things, (i) adoption of the Merger Agreement by the holders of a majority of our outstanding common stock, (ii) the absence of any legal restraints, such as a temporary restraining order or preliminary or permanent injunction, prohibiting the Merger, and the absence of any applicable laws of a governmental authority prohibiting or rendering illegal the consummation of the Merger, (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the acquisition of all pre-closing approvals or clearances required thereunder, (iv) the related proxy statement and Form S-4 registration statement which has been declared effective by the Securities and Exchange Commission, and remains in effect, (viv) the absence of any “material adverse effect” on us occurring after the date of the Merger Agreement that is continuing and (viv) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and our continued compliance with covenants and obligations (to be performed at or prior to the closing of the Merger). There can be no assurance that these conditions to the completion of the Merger will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe or at all. If the Merger is not completed, we may be subject to negative publicity or be negatively perceived by the investment or business communities and our stock price could fall to the extent that our current stock price reflects an assumption that the Merger will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business and results of our operations.

The Merger Agreement with Glaukos limits our ability to pursue alternative transactions which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, limit our ability to solicit, initiate, knowingly encourage or knowingly facilitate or engage or participate in any negotiations or discussions regarding, or furnish any nonpublic information in response to inquiries with respect to, an alternative transaction. It is possible that these or other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our outstanding common stock from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire our common stock than it might otherwise have proposed to pay.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against public companies following declines in the market prices of their securities. This risk is especially relevant for medical device companies and pharmaceutical companies, which have experienced significant stock price volatility in recent years that has often been unrelated or disproportionate to the operating performance of particular companies. Recently, two putative class action lawsuits (captioned Kent v. Avedro, Inc., et al., No. 1:19-cv-01845 (D. Del. filed Oct. 1, 2019) and Thompson v. Avedro, Inc. et al., No. 1:19-cv-02075 (D. Del. filed Oct. 31, 2019)) and two individual lawsuits (captioned Payne v. Avedro, Inc., et al, 1:19-cv-02019 (D. Del. filed Oct. 24, 2019) and Bushansky v. Avedro, Inc. et al, 1:19-cv-10015 (S.D.N.Y. filed Oct. 29, 2019)) were filed in federal court against us, by alleged Avedro stockholders challenging the Merger. The Payne and Bushansky complaints name us and our board of directors as defendants. The Kent and Thompson complaints additionally name two of our former directors, Glaukos and Merger Sub as defendants. The lawsuits assert violations of Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 14a-9 promulgated thereunder against us and the individual defendants, and assert violations of Section 20(a) of the Exchange Act against Glaukos and the individual defendants. The plaintiffs contend that the Registration Statement on Form S-4, filed with the SEC on September 17, 2019, and the Definitive Proxy Statement on Schedule 14A, filed with the SEC on October 17, 2019, omitted or misrepresented material information regarding the Merger. The complaints seek injunctive relief, rescission, or rescissory damages, dissemination of a registration statement that discloses certain information requested by the plaintiff, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. We believe that the allegations contained in the complaint are without merit and intend to defend the case vigorously. However, whether or not the plaintiff’s claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of our business. If we are ultimately required to pay significant defense costs, damages or settlement amounts, such payments could adversely affect our operations.

We may be the target of similar litigation in the future. Any future litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition. We maintain liability insurance; however, if any costs or expenses associated with this or any other litigation exceed our insurance coverage, we may be forced to bear some or all of these costs and expenses directly, which could be substantial.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Recent Sales of Unregistered Equity Securities

None.

(b) Use of Proceeds

On February 19, 2019, we closed our initial public offering, or IPO, pursuant to a registration statement on Form S-1 (File No. 333-229306), which the SEC declared effective on February 13, 2019. In the IPO, we issued and sold 5,000,000 shares of common stock at a public offering price of $14.00 per share, for aggregate gross proceeds to us of $70.0 million. The net offering proceeds to us, after deducting underwriting discounts and commissions of $4.9 million and estimated offering expenses of approximately $4.1 million, were approximately $61.0 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates. Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC acted as joint book-running managers of our IPO. Cowen and Company, LLC, Guggenheim Securities, LLC and SVB Leerink LLC acted as the co-managers for the IPO.

There has been no material change in the use of proceeds from our IPO from those disclosed in the final prospectus for our IPO dated February 13, 2019 and filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act on February 14, 2019.

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number

Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

3.1

Amended and Restated Certificate of Incorporation of the registrant.

8-K

000-32353

3.1

2/19/2019

2.1

Agreement and Plan of Merger by and among Glaukos Corporation, Atlantic Merger Sub, Inc. and Avedro, Inc., dated as of August 7, 2019.

425

001-38809

2.1

8/07/2019

3.2

Amended and Restated Bylaws of the registrant.

8-K

000-32353

3.2

2/19/2019

3.1

Amended and Restated Certificate of Incorporation of the registrant.

8-K

001-38809

3.1

2/19/2019

10.1

Form of Amended and Restated Executive Employment Agreement.

3.2

Amended and Restated Bylaws of the registrant.

8-K

001-38809

3.2

2/19/2019

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AVEDRO, INC.
Date: August 8, 2019	By:	/s/ Reza Zadno
Date: November 6, 2019	By:	/s/ Reza Zadno
		Reza Zadno
		President and Chief Executive Officer (Principal Executive Officer)
Date: August 8, 2019	By:	/s/ Thomas E. Griffin
Date: November 6, 2019	By:	/s/ Thomas E. Griffin
		Thomas E. Griffin
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Filing Compare · AVEDRO INC