The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements relate to future events or our future financial performance that involve risks, uncertainties and assumptions. Our actual results and timing of events may differ materially from those anticipated in these forward-looking statements as a 47
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result of many factors, including those discussed under "Item 1A. Risk Factors" and elsewhere in this report. Please see "Cautionary Information Regarding Forward-Looking Statements" at the beginning of this Form 10-K for additional information you should consider regarding forward-looking statements. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report, or to conform such statements to actual results or changes in our expectations.
Overview
We are a global ear, nose and throat ("ENT") medical technology leader dedicated to transforming patient care. OurU.S. Food and Drug Administration ("FDA") approved steroid releasing products are designed to provide mechanical spacing and deliver targeted therapy (mometasone furoate) to the site of disease. These products include our PROPEL® family of products (PROPEL®, PROPEL® Mini and PROPEL® Contour) and the SINUVA® (mometasone furoate) Sinus Implant. The PROPEL family of products are used in adult patients to reduce inflammation and maintain patency following sinus surgery primarily in hospitals and ambulatory surgery centers ("ASC") and has increasing applications in the physician office setting of care in conjunction with balloon dilation and following post-surgical debridement. SINUVA is a physician administered drug, designed to be used in the physician office setting of care to treat adult patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps. The PROPEL family of products are combination products regulated as devices approved under a Premarket Approval ("PMA") and SINUVA is a combination product regulated as a drug that was approved under a New Drug Application ("NDA"). The PROPEL family of products have also received CE Markings, permitting them to be marketed in the European Economic Area. InOctober 2020 , we acquired Fiagon AG Medical Technologies ("Fiagon"), a global leader of electromagnetic surgical navigation solutions with an expansive portfolio of ENT product offerings, including theVenSure sinus dilation platform ("VenSure") and CUBE Navigation System ("CUBE"), and instruments that complement our PROPEL and SINUVA sinus implants across all settings of care and extend our geographic reach. TheVenSure products received 510(k) clearance inAugust 2020 and the latest version of the CUBE Navigation System received 510(k) clearance inJuly 2021 . In addition, some of the Fiagon products are registered in other countries including inAsia Pacific andSouth America . While our primary commercial focus is theU.S. , we are also expanding the global reach of our products. Our commercialization strategy will consider several factors including regulatory requirements, reimbursement coverage for our products, and key opinion leader support. For the PROPEL family of products, our initial focus is onGermany and theUnited Kingdom , where we are working to build our capabilities and develop the market. Going forward, we will continue to assess our capability to penetrate additional markets inEurope ,Asia Pacific andJapan . Our PROPEL family of steroid releasing implants are clinically proven to improve outcomes for chronic rhinosinusitis ("CRS") patients following sinus surgery. PROPEL implants mechanically prop open the sinuses and release mometasone furoate, an advanced corticosteroid with anti-inflammatory properties, directly into the sinus lining, and then dissolve over time. PROPEL's safety and effectiveness is supported by Level 1a clinical evidence from multiple clinical trials, which demonstrates that PROPEL implants reduce inflammation and scarring after surgery, thereby reducing the need for postoperative oral steroids and repeat surgical interventions. Approximately 456,000 patients have been treated with PROPEL products through the end of 2021. Our primary PROPEL® products are as follows: •PROPEL, a self-expanding implant designed to conform to and hold open the surgically enlarged sinus while gradually releasing an anti-inflammatory steroid over a period of approximately 30 days and is absorbed into the body over a period of approximately six weeks. •PROPEL Mini, a smaller version of PROPEL which is approved for use in both the ethmoid and frontal sinuses. PROPEL Mini is used preferentially by physicians compared with PROPEL when treating smaller anatomies or following less extensive procedures. •PROPEL Contour, designed to facilitate treatment of the frontal and maxillary sinus ostia, or openings, of the dependent sinuses in procedures performed in both the operating room and in the physician office setting of care. PROPEL Contour's lower profile, hourglass shape and malleable delivery system are designed for use in the narrow and difficult to access sinus ostia. PROPEL Contour is approved for use in the frontal and maxillary sinus openings in theU.S. and for use in the frontal sinus opening in theEuropean Union ("EU"). The Straight Delivery System ("SDS") is an extension of the PROPEL family of implants. It is specifically engineered for delivery of the PROPEL Mini Implant into the ethmoid sinus. InFebruary 2021 , we announced theU.S. availability of the SDS packaged with the PROPEL Mini after the combined packaging received FDA approval. 48
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SINUVA, when placed during a routine physician office visit, expands into the sinus cavity and delivers an anti-inflammatory steroid directly to the site of polyp disease for approximately 90 days. SINUVA is currently approved for use in theU.S. Our PROPEL family of products are used primarily in the operating room of a hospital or ASC. These providers receive a facility fee for the sinus surgery procedure which is intended to pay for supplies used in this procedure, including the PROPEL family of products. SINUVA is a physician administered drug, used almost exclusively in the physician office setting of care.VenSure provides for dilation of the sinus ostia. The CUBE Navigation System supports surgery and balloon dilation in all settings of care. TheCenters for Medicare & Medicaid Services ("CMS") approved SINUVA for transitional pass-through payment status for reimbursement under the Hospital Outpatient Prospective Payment System ("OPPS") and ASC Payment System. Pass-Through status lasts for three years and allows us to place SINUVA in the ASC and hospital settings. We applied to CMS inSeptember 2020 and asked to separate the J7401 code from SINUVA and PROPEL. InJanuary 2021 , CMS approved a revised coding application for our PROPEL family of products and established a separate code for PROPEL, S1091 "Stent, non-coronary, temporary, with delivery system (propel)". CMS also made updates to the current SINUVA J-code to J7402 "Mometasone furoate sinus implant, (sinuva), 10 micrograms" and attached an average selling price ("ASP") to the code. The new PROPEL and SINUVA codes took effectApril 1, 2021 . We are also committed to expanding our market development efforts for PROPEL in the physician office setting of care as well as market access outside of theU.S. Our VenSure Navigable and Stand-alone balloon offerings are used to access and treat the frontal, recess sphenoid sinus ostia, maxillary ostia/ethmoid infundibula in adults using a trans-nasal approach. The VenSure Navigation balloon is intended for use in conjunction with the CUBE navigation system during sinus procedures when surgical navigation or image-guided surgery may be necessary to locate and displace bone, or cartilaginous tissue surrounding the drainage pathways of the frontal, maxillary, and sphenoid sinuses to facilitate dilation of the sinus ostia. Our CUBE Navigation System is an innovative virtual guidance platform for high precision ENT and ENT related skull-base surgeries. The system's unique photo registration technology, VirtuEye™, enhances the user's navigation experience and improves pre-surgery efficiency. This novel 4D-imaging technology mitigates common tactile tracing errors by collecting thousands of patient reference points in one camera shot. The entire photo registration process can be achieved in under 30 seconds without touching the patient. We also continue to perform research and development activities and clinical trials in order to expand our portfolio of products and improve our existing products. In the second quarter of 2021, we initiated the EXPAND study to assess the potential to improve frontal sinus ostia patency and other outcomes through localized drug delivery following balloon dilation utilizing PROPEL Contour and theVenSure balloon. In support of our focus on expanding our global reach, we plan to make clinical and regulatory investments in PROPEL inEurope .
Debt Financings
OnMay 11, 2020 , to finance our commercial activities as well as for general corporate purposes, we entered into a Facility Agreement (the "Facility Agreement") withDeerfield Partners, L.P. ("Deerfield"), as agent for itself and the lenders, providing for the issuance and sale by us to Deerfield of$65.0 million of principal amount of 4.0% unsecured senior convertible notes (the "Convertible Notes") upon the terms and conditions set forth in the Facility Agreement. The$65.0 million principal amount of the Convertible Notes is not payable until the maturity date ofMay 9, 2025 , unless earlier converted or redeemed. The Convertible Notes are convertible into shares of our common stock. OnJuly 22, 2021 , we entered into an additional agreement with Deerfield, providing for the issuance and sale by us to Deerfield of 7.5% senior secured loans of an aggregate principal of up to$60.0 million (the "Deerfield Loans"). The Deerfield Loans will mature onJuly 22, 2026 , unless earlier repaid or accelerated. The agreement provides for the disbursement of the Deerfield Loans in three tranches of$20.0 million , with the initial tranche disbursed on the closing date of the transaction, the second tranche to be disbursed at our option on the earlier of the date of any prepayment of the remaining Fiagon acquisition payments andSeptember 15, 2022 , and the third tranche to be disbursed at our option on the earlier of the date of any prepayment of the remaining Fiagon acquisition payments andSeptember 15, 2023 . As ofDecember 31, 2021 we had only borrowed the first$20.0 million under the Deerfield Loans. OnSeptember 25, 2021 , we entered into a financing arrangement with Medtronic (the "Medtronic Financing"), providing for 5.0% unsecured subordinated loans of an aggregate principal amount of up to$75.0 million to us upon the terms and conditions of the Medtronic Financing. The Medtronic Financing will mature 180 days following the earlier of (x) the maturity date of the Deerfield Loans and (y) the date on which the Deerfield Loans have been fully paid in cash and are terminated, unless earlier repaid or accelerated. As ofDecember 31, 2021 , borrowings on the Medtronic Financing had a net carrying amount of$30.0 million . 49
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See Note 11. Long-Term Debt of Notes to our consolidated financial statements for a further description of these loan arrangements.
Pending Acquisition
OnAugust 6, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withMedtronic, Inc. , aMinnesota Corporation and wholly-owned subsidiary of Medtronic public limited company ("Medtronic"), andProject Kraken Merger Sub, Inc. , aDelaware corporation and wholly-owned subsidiary of Medtronic ("Merger Sub"), providing for the merger of Merger Sub with and intoIntersect ENT (the "Merger"), withIntersect ENT surviving the Merger as a wholly-owned subsidiary of Medtronic. OnOctober 8, 2021 , our stockholders adopted the Merger Agreement at a special meeting of our stockholders. Under the terms of the Merger Agreement, Medtronic will acquire all outstanding shares of our common stock, including all vested and unvested awards, in exchange for consideration of$28.25 per share in cash. Vested and unvested stock options will be redeemed for the difference between$28.25 per option and the respective exercise price. The Merger Agreement contains representations and warranties customary for transactions of this type. The closing of the Merger is subject to the satisfaction or waiver of a number of closing conditions, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Merger Agreement provides Medtronic and us with certain termination rights and, under certain circumstances, may require that Medtronic or we pay a termination fee. In anticipation of the Merger, we have committed to a plan to divest of the recently acquired Fiagon business, which we expect to be contingent on and coterminous with the anticipated Merger. As ofDecember 31, 2021 , the assets and liabilities of the Fiagon business have been presented as held for sale on our consolidated balance sheets. The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and restricting us from taking certain specified actions absent Medtronic's prior written consent. Accordingly, our ability to advance our business during the pendency of the Merger is subject to these restrictions.
Impact of the COVID-19 Pandemic
Prior to the COVID-19 pandemic, our efforts to enhance commercial execution and improve market access infrastructure were beginning to yield benefits as sales until the end ofFebruary 2020 were consistent with our expectations. However, sales declined towards the end of the first quarter of 2020 and throughout the second quarter as the various COVID-19 restrictions were implemented and remained in effect. We began to see meaningful change in the business environment towards the end ofMay 2020 with increased procedure volumes as select areas of the country eased restrictions on elective medical procedures. This trend continued inJune 2020 and throughout the remainder of 2020 as well as throughout 2021 as we continued to see improvements in the elective procedure market. Our business has been and will be impacted by patients' decisions to undergo sinus surgeries and asENT ASC and office procedure volumes begin to recover. We continue to remain flexible in our approach to continuing our operations in light of developing laws and restrictions surrounding the COVID-19 pandemic. While the second half of 2020 and the full year of 2021 have provided an improving business environment, the COVID-19 pandemic may continue to create severe disruptions and volatility in global capital markets and increase economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe and may impact our operations and financial results.
Components of Our Results of Operations
Revenue
We have derived our revenue almost exclusively from the sales of our PROPEL family of products, with limited sales of SINUVA beginning inMarch 2018 , as well as sales of CUBE andVenSure products beginning in the fourth quarter of 2020 with the acquisition of Fiagon. While our business has been and may continue to be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits for an extended period of time, we anticipate continued revenue growth in 2022 based on the increased elective procedure volumes and enrollment trends towards the end of 2020 and throughout 2021. Once the disruption from the COVID-19 pandemic subsides, we expect our revenue to increase as we continue to expand our sales, marketing and reimbursement efforts in order to increase usage of our products. We also expect revenue from our PROPEL family of products to fluctuate from quarter to quarter due to seasonal variations in the volume of sinus surgery procedures performed, which has been impacted historically by factors including the status of patient healthcare insurance plan deductibles and the seasonal nature of allergies which can impact sinus-related symptoms. We recognize revenue from SINUVA net of estimated product sales discounts, rebates, returns and other allowances as a reduction of revenue in the same 50
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period we recognize revenue. We will adjust these estimates if actual allowances vary from our estimates, which would affect revenue in the period such variances become known. In addition to standalone sales of CUBE andVenSure products, from time to time, we enter into lease arrangements of CUBE navigation equipment with certain qualified customers in connection with commitments to purchaseVenSure and other consumable products to accompany the use of the equipment. Leases have terms that generally range from 24 to 48 months and are usually collateralized by a security interest in the underlying assets. Lease arrangements transfer the ownership or provide the customer with a right to purchase the equipment at the end of the lease term.
We have derived our revenue predominantly from within
Cost of Sales and Gross Profit
We manufacture our PROPEL family of products and SINUVA in our facility inMenlo Park, California . We manufacture CUBE navigation equipment and instruments in Hennigsdorf,Germany , and procureVenSure sinus dilation balloons from a third-party manufacturer located in theU.S. Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include compensation, including stock-based compensation and other operating expenses associated with the cost of quality assurance, material procurement, inventory control, facilities, information technology, equipment and operations supervision and manufacturing and warehouse management. Cost of sales also includes depreciation expense for production equipment, amortization of intangible assets associated with acquired product technologies and processes, maintenance of operational processes, and certain direct costs such as shipping costs. Once the disruption from the COVID-19 pandemic subsides, we expect cost of sales to increase in absolute dollars again primarily as, and to the extent, our revenue grows, or we make additional improvements in our manufacturing capabilities. Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing costs, production and sales volume, product mix, and average selling prices. Toward the end of the first quarter and throughout the second quarter of 2020, manufacturing costs were negatively impacted by the mandatory shelter-in-place order in effect inSan Mateo County, California , which prevented us from using our manufacturing facility, as well as our decision to suspend production until the third quarter of 2020. Production resumed during the third quarter of 2020, but below normal capacity, and was at normal capacity thereafter. We charge idle facility costs to cost of goods sold in the period incurred. Manufacturing cost will change as our production volume and product mix changes. The per unit allocation of our manufacturing overhead costs may increase and our gross margin may decline as, and to the extent, production volume decreases.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling, marketing, finance, market access, reimbursement, business development, legal and human resource functions as well as costs related to any post-market studies. Additional SG&A expenses include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit compliance expenses, insurance costs, amortization of intangible assets associated with acquired customer and distributor relationships, and general corporate expenses including allocated facilities and information technology expenses.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of compensation for personnel, including stock-based compensation, related to product development, regulatory affairs, clinical and medical affairs, and allocated facilities and information technology expenses. R&D expenses also may include expenses for clinical studies related to clinical trial design, site reimbursement, data management, travel expenses and the cost of manufacturing products for clinical trials. Finally, R&D expenses also include expenses related to the development of products and technologies such as consulting services and supplies. 51
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Impairment on Assets Held for Sale
In anticipation of the Merger with Medtronic, we have committed to a plan to divest of the recently acquired Fiagon business, and, as a result, have presented the assets and liabilities of the Fiagon business as held for sale on the consolidated balance sheets as ofDecember 31, 2021 . We recorded an impairment charge of$67.8 million in the consolidated statements of operations and comprehensive loss relating to goodwill, intangible assets, property equipment, right-of-use assets, and inventory, representing the difference between the carrying value of the assets and liabilities of the Fiagon business and the fair value less selling costs as ofDecember 31, 2021 . We believe there will be an additional loss of approximately$15.0 million to$20.0 million contingent upon completing the sale of these assets.
Interest Expense
Interest expense consists primarily of the interest expense, accretion expense of debt discounts, and amortization of debt issuance costs associated with debt facilities, as well as imputed interest on the carrying value of deferred acquisition related consideration.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on our cash and cash equivalents, changes in the fair value of embedded derivatives, transaction costs incurred outside the ordinary course of business related to business combinations and our capital structure, impairment charges on held for sale assets and liabilities, changes in the fair value of foreign currency forward contracts, and the effects of foreign exchange, including on the carrying value of our deferred acquisition related consideration.
Income Tax Benefit
Income tax benefit consists of an estimate of federal, state and foreign income taxes based on enacted federal, state and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law. Due to the level of historical losses, we maintain a valuation allowance againstU.S. federal, state, and foreign deferred tax assets as we have concluded it is more likely than not that these deferred tax assets will not be realized. Results of Operations Year Ended December 31, (in thousands, except percentages) 2021 2020 2019 Revenue$ 106,748 $ 80,554 $ 109,142 Cost of sales 30,012 30,306 21,773 Gross profit 76,736 50,248 87,369 Gross margin 71.9 % 62.4 % 80.1 % Operating expenses: Selling, general and administrative 122,068 98,550
108,480
Research and development 27,944 19,350
24,283
Impairment on assets held for sale 67,765 - - Total operating expenses 217,777 117,900 132,763 Loss from operations (141,041) (67,652) (45,394) Interest expense (6,437) (2,752) - Other income (expense), net (13,847) (2,331) 2,400 Loss before income taxes (161,325) (72,735) (42,994) Income tax (benefit) (1,690) (416) - Net loss$ (159,635) $ (72,319) $ (42,994) 52
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Comparison of Years Ended
Revenue
Change $ Change % (in thousands, except percentages) 2021 2020 2021 to 2020 2021 to 2020 PROPEL family of products$ 91,117 $ 74,335 $ 16,782 23 % SINUVA 9,074 5,315 3,759 71 % VenSure, CUBE, and accessories 6,557 904 5,653 625 %$ 106,748 $ 80,554 $ 26,194 33 % Revenue increased by$26.2 million , or 33%, to$106.7 million during the year endedDecember 31, 2021 , compared to$80.6 million during the year endedDecember 31, 2020 . The increase in revenue was due to a 23% increase in PROPEL sales, 71% increase in SINUVA sales, and a significant increase inVenSure , CUBE, and accessories sales. Higher PROPEL revenue resulted from a 22% increase in unit sales, while average selling price remained consistent year-over-year. The increase in unit sales for PROPEL was driven by a recovery in demand as certain areas ofthe United States resumed elective procedures following easing of COVID-19 pandemic restrictions. The increase in SINUVA sales was attributable to a 59% increase in unit sales during the year endedDecember 31, 2021 as well as an 8% increase in average selling price from the year endedDecember 31, 2020 . The increase in unit sales for SINUVA during the year endedDecember 31, 2021 was due to a recovery in demand from the comparative period following easing of COVID-19 pandemic restrictions, in addition to improvements in reimbursement, continued adoption of the technology, and the ongoing shift of procedures from hospitals and ASC to the physician office setting of care. SINUVA sales also benefited from the expansion of our market access infrastructure and the addition and expansion of our distributor relationships during the prior year. Furthermore, revenue for the year endedDecember 31, 2021 included the first full year of sales from the CUBE navigation equipment and instruments andVenSure sinus dilation balloons, while the prior year only reflected one quarter of sales. The increase in sales was also attributable to the formal launch of the CUBE 4D inJuly 2021 and a recovery in demand from the comparative period following easing of the COVID-19 pandemic restrictions. Based on current elective procedure volumes and enrollment trends, we expect revenue growth in 2022. While we cannot predict the extent or duration of the impact of the COVID-19 pandemic on our financial and operating results, we believe that a recovery in procedures will continue, and that most patients will return for treatment.
Cost of Sales and Gross Margin
Cost of sales decreased by$0.3 million , or 1%, to$30.0 million during the year endedDecember 31, 2021 , compared to$30.3 million during the year endedDecember 31, 2020 . The decrease in cost of sales in 2021 was primarily due to the favorable impact of lower per unit manufacturing costs as a result of higher production volumes due to a recovery in demand as elective surgeries resumed following easing of COVID-19 pandemic restrictions and to build additional safety stock. The decrease was offset by increased product sales resulting from a recovery in demand as elective procedures resumed following easing of COVID-19 pandemic restrictions, amortization of intangible assets, production and obsolescence related period costs, and project costs. Furthermore, during the prior year, there was approximately$6.9 million of charges incurred related to the impacts of COVID-19 which were not incurred during the current periods as production volumes returned to normal capacity. Gross margin for the year endedDecember 31, 2021 , increased to 71.9%, compared to 62.4% for the yearDecember 31, 2020 . The increase was attributable to the favorable impact of lower per unit manufacturing costs, in addition to approximately$6.9 million of charges related to the impacts of COVID-19 incurred in the prior period which were not incurred during the current period as production volumes returned to normal capacity, as well as production and obsolescence related period costs. The increase was offset in part by amortization of intangible assets, production and obsolescence related period costs, and project costs, collectively representing approximately 4% of revenue for the year endedDecember 31, 2021 . With the expected increase in demand and our operation at full capacity, we do not expect idle facility expense to be incurred in 2022. However, idle facility expense could be incurred in future periods until the current health crisis subsides. In addition, adequate safety stock levels were established by the end of 2021 and consequently, we expect per unit manufacturing costs and gross margins to normalize in future periods. We cannot reliably estimate the extent to which the COVID-19 pandemic will impact the cost of sales and gross margin for our products beyond the third quarter of 2022. 53
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Selling, General and Administrative Expenses
SG&A expenses increased by$23.5 million , or 24%, to$122.1 million during the year endedDecember 31, 2021 , compared to$98.6 million during the year endedDecember 31, 2020 . The increase in SG&A expenses was primarily due to increased commissions from increased sales, increases in headcount as compared to the prior period as a result of increased sales and marketing and other activities following the easing of COVID-19 pandemic related restrictions, the accrual of retention bonuses, and incremental SG&A expense as a result of the acquisition of Fiagon. Furthermore, the increase was due to$0.8 million of impairment expense related to certain property, equipment, and intangible assets, transaction costs associated with the proposed Merger, as well as costs associated with the integration of Fiagon of$2.1 million and the divestiture of Fiagon of$0.7 million , both of which consisted largely of professional fees.
We will continue to monitor our SG&A expenses in light of the uncertainties related to the COVID-19 pandemic; however, we will still continue to support our customers, physicians and patients.
Research and Development Expenses
R&D expenses increased by$8.6 million , or 44%, to$27.9 million during the year endedDecember 31, 2021 , compared to$19.4 million during the year endedDecember 31, 2020 . The increase in R&D expenses was primarily due to increased headcount and related expenses as a result of the acquisition of Fiagon and compared to the prior period as a result of cost reduction measures taken in the prior year in response to the pandemic, the accrual of retention bonuses, as well as professional fees pertaining to R&D projects in the current periods. We will continue to monitor our R&D expenses in light of the uncertainty related to the COVID-19 pandemic; however, we will continue to invest in our products through R&D projects.
Impairment on Assets Held for Sale
In anticipation of the Merger with Medtronic, we have committed to a plan to divest of the recently acquired Fiagon business. In recording the asset and liabilities of the Fiagon business as held for sale, which requires presenting them at fair value less selling costs as ofDecember 31, 2021 , we recorded an impairment charge of$67.8 million . There were no similar charges in the prior period. We believe there will be an additional loss of approximately$15.0 million to$20.0 million contingent upon completing the sale of these assets.
Interest Expense
Interest expense increased by$3.7 million to$6.4 million for the year endedDecember 31, 2021 , a significant increase compared to$2.8 million during the year endedDecember 31, 2020 . The increase was attributable to a full year of interest expense on the Convertible Notes entered into during the second quarter of 2020, a full year of imputed interest on deferred payments for the acquisition of Fiagon, and interest incurred on the Deerfield Loans and Medtronic Financing entered into in 2021.
Other Income (Expense), Net
Other expense, net, increased by$11.5 million to$(13.8) million during the year endedDecember 31, 2021 , a significant increase compared to$(2.3) million during the year endedDecember 31, 2020 . The increase in other expense, net, was attributable to a$13.1 million increase in the fair value of an embedded derivative liability associated with the Convertible Notes as the probability of triggering events providing an elective increase in share issuance to the note holder increased significantly due to the pending acquisition with Medtronic, and the overall effects of foreign exchange remeasurement.
Income Tax Benefit
Income tax benefit increased by$1.3 million to$1.7 million for the year endedDecember 31, 2021 , a significant increase compared to$0.4 million for the year endedDecember 31, 2020 , which was attributable to the foreign tax impact associated with the acquisition of Fiagon for a full year, compared to only one quarter of benefit in the prior year. Future tax benefits are not expected due to classification of the Fiagon business as held for sale as ofDecember 31, 2021 . 54
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Comparison of Years Ended
Revenue
Change $ Change % (in thousands, except percentages) 2020 2019 2020 to 2019 2020 to 2019 PROPEL family of products$ 74,335 $ 104,657 $ (30,322) (29) % SINUVA 5,315 4,485 830 19 % VenSure, CUBE, and accessories 904 - 904 N/A$ 80,554 $ 109,142 $ (28,588) (26) % Revenue decreased by$28.6 million , or 26%, to$80.6 million during the year endedDecember 31, 2020 , compared to$109.1 million during the year endedDecember 31, 2019 . The decrease in revenue was due to a 29% decline in PROPEL sales, partially offset by a 19% increase in SINUVA sales. Lower PROPEL revenue resulted from a 31% decrease in unit sales, slightly offset by a 2% increase in average selling price. The decrease in unit sales for PROPEL was driven by a reduction in demand due to the impact of the COVID-19 pandemic. The increase in SINUVA sales was attributable to a 13% increase in unit sales during the year endedDecember 31, 2020 as well as a 5% increase in net revenue per unit from the year endedDecember 31, 2019 . The increase in unit sales for SINUVA during the year endedDecember 31, 2020 was due to the improvement in reimbursement, continued adoption of the technology, and the ongoing shift of procedures from hospitals and ASC to the physician office setting of care. SINUVA sales also benefited from the expansion of our Market Access infrastructure and the addition and expansion of our distributor relationships during the year endedDecember 31, 2020 . Furthermore, revenue for the year endedDecember 31, 2020 also included$0.9 million from sales from the initiation of sales from the acquired products, the CUBE navigation equipment and instruments andVenSure sinus dilation balloons during the fourth quarter.
Cost of Sales and Gross Margin
Cost of sales increased by$8.5 million , or 39%, to$30.3 million during the year endedDecember 31, 2020 , compared to$21.8 million during the year endedDecember 31, 2019 . The increase in cost of sales in 2020 was primarily due to the unfavorable impact of higher per unit manufacturing costs and$6.1 million of idle facility costs partially offset by decreases in headcount as a result of cost reduction measures initiated in the first quarter of 2020. Also the increase was attributable to$0.8 million in additional charges related to excess and obsolete inventory in response to the estimated impact of the COVID-19 pandemic. The increases were partially offset by lower PROPEL unit sales. Gross margin for the year endedDecember 31, 2020 , decreased to 62.4%, compared to 80.1% for the yearDecember 31, 2019 . While the gross margin for our products through the end ofFebruary 2020 was relatively consistent with our expectations, the decrease in gross margin during the remainder of 2020 was attributable to the unfavorable impact of higher per unit manufacturing costs as well as the charges related to the impact of COVID-19. The amount of these charges was approximately$6.9 million , representing an effect on our gross margin of approximately 9 percentage-points for the year endedDecember 31, 2020 . Our gross margin recovered in the second half of the year as we resumed production and generated revenue.
Selling, General and Administrative Expenses
SG&A expenses decreased by$9.9 million , or 9%, to$98.6 million during the year endedDecember 31, 2020 , compared to$108.5 million during the year endedDecember 31, 2019 . The decrease in SG&A expenses was primarily due to decreases in headcount and related expenses as a result of cost reduction measures initiated in the first quarter of 2020, in addition to lower sales commissions from reduced sales, partially offset by transaction costs associated with the acquisition and integration of Fiagon of$4.0 million , which consisted largely of professional fees.
Research and Development Expenses
R&D expenses decreased by$4.9 million , or 20%, to$19.4 million during the year endedDecember 31, 2020 , compared to$24.3 million during the year endedDecember 31, 2019 . The decrease in R&D expenses was primarily due to decreases in headcount and related expenses as a result of cost reduction measures initiated in the first quarter of 2020, as well as a delay of clinical efforts. R&D projects include the development of the EXPAND study to be initiated in 2021, the PROPEL OPEN registry trial, and the ASCEND trial. 55
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Interest Expense
Interest expense of$2.8 million for the year endedDecember 31, 2020 was attributable to the Convertible Notes entered into during the second quarter of 2020 as well as imputed interest on deferred payments for the acquisition of Fiagon. There were no similar expenses in the prior year.
Other Income (Expense), Net
Other income (expense), net, decreased by$4.7 million to$(2.3) million during the year endedDecember 31, 2020 , compared to$2.4 million during the year endedDecember 31, 2019 . The decrease in other income (expense), net was attributable to a$1.2 million increase in fair value of our embedded derivative liability associated with the Convertible Notes, a net foreign exchange loss of$1.6 million on the revaluation of the Fiagon purchase liability and respective forward contracts, and the overall effects of foreign exchange remeasurement, as well as significantly lower interest rates earned on investments.
Income Tax Benefit
Income tax benefit of
Liquidity and Capital Resources
Overview
As ofDecember 31, 2021 , we had cash, cash equivalents, short-term investments, and restricted cash of$78.9 million , compared to cash, cash equivalents, short-term investments, and restricted cash of$105.5 million as ofDecember 31, 2020 . Cash Flows Year Ended December 31, (in thousands) 2021 2020 2019 Net cash (used in) provided by: Operating activities$ (59,467) $ (35,694) $ (27,251) Investing activities 49,180 (22,745) 18,891 Financing activities 36,588 68,744 19,548 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (390) 64 -
Reclassification to assets held for sale during the period
(648) - -
Net increase (decrease) in cash, cash equivalents, and restricted cash
$ 25,263
During the year endedDecember 31, 2021 , net cash used in operating activities was$59.5 million , consisting primarily of a net loss of$159.6 million and an increase in net operating assets of$7.1 million , partially offset by non-cash charges of$107.3 million . The cash used in operations was due primarily to the ongoing funding of our sales, marketing and product development activities in order to attain future growth. The non-cash charges primarily consisted of impairment on assets held for sale, stock-based compensation expense, depreciation and amortization, revaluation of embedded derivatives, foreign exchange impacts, and non-cash lease expense. The increase in net operating assets is primarily due to increases in accounts receivable as a result of increased sales, inventory as a result of building safety stock, and prepaid expenses and other assets. The increase in net operating assets was partially offset by increases in accounts payable and accrued compensation due to the accrual of annual and retention bonuses. During the year endedDecember 31, 2020 , net cash used in operating activities was$35.7 million , consisting primarily of a net loss of$72.3 million and a decrease in net operating assets of$13.0 million , partially offset by non-cash charges of$23.7 million . The cash used in operations was due primarily to the ongoing funding of our sales, marketing and product development activities in order to attain future growth. The non-cash charges primarily consisted of stock-based compensation expense, depreciation and amortization, revaluation of embedded derivatives, foreign exchange impacts, and non-cash lease expense. The decrease in net operating assets is primarily due to decreases in accounts receivable and inventory as well as increases in 56
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accounts payable and accrued compensation due to improved working capital management and lower production than the prior year.
During the year endedDecember 31, 2019 , net cash used in operating activities was$27.3 million , consisting primarily of a net loss of$43.0 million and an increase in net operating assets of$7.1 million , partially offset by non-cash charges of$22.8 million . The cash used in operations was due primarily to an increase in headcount and related expenses to support the ongoing commercialization of our PROPEL family of products and the launch of SINUVA inMarch 2018 . The non-cash charges primarily consisted of stock-based compensation expense. The increase in net operating assets is primarily due to an increase in inventory.
Net Cash Provided by (Used in) Investing Activities
During the year ended
During the year ended
During the year ended
Net Cash Provided by Financing Activities
During the year endedDecember 31, 2021 , net cash provided by financing activities was$36.6 million , consisting of net proceeds from the issuance of long-term debt of$49.6 million and$7.3 million from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan, partially offset by$20.3 million related to the payment of deferred acquisition related consideration. During the year endedDecember 31, 2020 , net cash provided by financing activities was$68.7 million , consisting of net proceeds from the issuance of convertible debt of$61.8 million and$6.9 million from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan. During the year endedDecember 31, 2019 , net cash provided by financing activities was$19.5 million , consisting of net proceeds from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan.
Liquidity
Based on our current expectations of the operating environment in 2022, as well as the Deerfield Loans obtained inJuly 2021 and the Medtronic Financing obtained inSeptember 2021 , we believe we have adequate cash and other resources to operate for at least twelve months as a standalone entity from the issuance of this Annual Report on Form 10-K, including funding our working capital needs, capital expenditures, payments associated with the Fiagon acquisition, interest payments on long-term debt, lease payments, and other known commitments and contingent liabilities. However, the extent to which the COVID-19 pandemic may continue to materially adversely impact our liquidity is uncertain.
Our cash requirements include the following contractual and other obligations:
Debt As ofDecember 31, 2021 , we had$115.0 million of long-term debt outstanding, inclusive of$65.0 million of Convertible Notes,$20.0 million of Deerfield Loans, and$30.0 million of Medtronic Financing. None of the principal on our long-term debt or the interest payments associated with the Medtronic Financing are current; however, accrued interest as ofDecember 31, 2021 in the amount of$1.0 million pertaining to the Convertible Notes and Deerfield Loans is due within the next twelve months. 57
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Our obligations under the Deerfield Loans are secured by substantially all of our assets, which includes springing control of our primary deposit and security accounts pursuant to a Deposit Account Control Agreement and Security Account Control Agreement. Deerfield has the ability to exercise exclusive control of these accounts by providing a Notice of Exclusive Control in response to an event of default. As ofDecember 31, 2021 , no such notice has been received. Deferred Purchase Acquisition Under the terms of the Purchase Agreement for the acquisition of Fiagon totaling €62.5 million, we made an initial €15.0 million ($17.6 million ) payment upon closing, a €15.0 million payment plus a €2.5 million purchase price adjustment inOctober 2021 , and will make two annual payments of €15.0 million in each ofOctober 2022 and 2023. In accordance with the terms of the Purchase Agreement, we were required to place$17.5 million (€15.0 million) in escrow with the seller as beneficiary. The amount placed in escrow is required to be adjusted to the equivalent of €15.0 million onJanuary 15th andJuly 15th of each year based on the end of the prior month's five-day trailing exchange rate.
Retention Bonuses
OnSeptember 1, 2021 , the Compensation Committee of our Board of Directors approved the implementation of a retention program that covers substantially all of our employees. The program provides for the payment of up to$15.0 million , payable in cash. The timing and amounts of the payments related to this program will depend on the timing of the anticipated Merger and employees remaining active through the earning dates. We are currently recognizing program costs in our consolidated financial statements ratably over the period of service fromSeptember 1, 2021 throughJuly 31, 2022 . During the year endedDecember 31, 2021 , total costs for the retention program were$7.9 million . As ofDecember 31, 2021 , accrued retention bonuses of$7.9 million are due within twelve months. Leases
We have lease arrangements for certain facilities, including corporate,
manufacturing, and warehouse space. As of
Purchase Obligations
Our purchase obligations primarily consist of non-cancellable obligations to
acquire inventory, professional services, software subscriptions, and other
goods and services. As of
If the proposed Merger with Medtronic is not executed and our current sources of liquidity are insufficient, we may seek to raise additional capital. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Any additional capital 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.
Critical Accounting Policies, Significant Judgments, and Use of Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. While our significant accounting policies are more fully described in Note 2 of our consolidated financial statements included in this Annual Report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments. 58
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Revenue Recognition
We recognize revenue when our customer obtains control of promised goods in an amount that reflects the consideration which we expect to receive in exchange for those goods. To determine revenue recognition for arrangements that we determine are within the scope of Accounting Standards Codification Topic 606: Revenue from Contracts with Customers ("Topic 606"), we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligations. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods promised within each contract and determine those that are performance obligations and assess whether each promised good is distinct. The contracts are typically in the form of a purchase order from the customer. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied. We must make assumptions regarding the future collectability of amounts receivable from customers to determine whether revenue recognition criteria have been met. The amount of variable consideration that is included in the net sales price may be constrained, and is included in the net sales price, or transaction price, only to the extent that we estimate it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We expense shipping and handling costs as incurred and include them in the cost of sales. In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenues. We expense any incremental costs of obtaining a contract as and when incurred as the expected amortization period of the incremental costs would have been less than one year. The PROPEL family of products are regulated by the FDA as medical devices. We recognize revenue through sales of our PROPEL family of products to hospitals and ASC located almost entirely inthe United States when control of the product is transferred to the customer, typically upon shipment of goods to the customer, satisfying our only performance obligation. The FDA has approved SINUVA as a drug and it is therefore regulated as such. We sell SINUVA to a limited number of specialty pharmacies and specialty distributors inthe United States , or Resellers. These Resellers subsequently sell SINUVA to health care providers. Revenue from SINUVA sales are recognized when control of the product is transferred to the Resellers, typically upon receipt of goods by the Reseller, satisfying our only performance obligation. We also recognize Reseller fees, prompt pay discounts, product sale discounts, rebates, returns and other allowances as a reduction of revenue in the same period the related revenue is recognized. In addition to the agreements with the Resellers, we enter into arrangements with governmental agencies that result in rebates, chargebacks and discounts with respect to the purchase of SINUVA. These amounts may include Medicaid and Tricare rebates, chargebacks related to Federal Supply Schedule of theGeneral Services Administration , Distribution and Pricing Agreement with theDepartment of Defense and 340B of thePublic Health Service Act as well as other allowances that may be offered within contracts between us and our direct or indirect customers relating to our sales of SINUVA, collectively referred to as "Discounts and Rebates." Discounts and Rebates are based on amounts owed or expected to be owed on the related sales. These estimates take into consideration our historical experience, the shelf life of the product, current contractual and statutory requirements, specific known market events and trends and industry data. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect revenue and earnings in the period such variances become known. On the consolidated balance sheets, such amounts are generally classified as reductions of accounts receivable if the amount is payable to the Resellers, or a current liability if the amount is payable to a party other than the Reseller.
Inventories
Inventories are valued at the lower of cost, computed on a first-in, first-out basis, or net realizable value. The allocation of production overhead to inventory costs is based on normal production capacity. Abnormal amounts of idle facility costs, freight, handling costs, and consumption are expensed as incurred, and not included in allocable overhead. In periods where the manufacturing is below normal capacity, we will record idle facility charges. We maintain provisions for excess and obsolete inventory based on our estimates of forecasted demand and, where applicable, product expiration. If actual future demand or market conditions are less favorable than we predict, additional inventory write-downs may be required, which could have a material effect on the results of our operations. 59
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Embedded Derivatives Related to Convertible Debt Instruments
The Convertible Notes due inMay 2025 have embedded features which were required to be bifurcated upon issuance and then periodically remeasured to fair value separately as embedded derivatives. These embedded features include additional make-whole interest payments which may become payable to the lender upon certain events, such as a change in control, upon optional redemption by our company, or a sale of all or substantially all of our assets. The embedded features also include additional shares depending on the time to maturity and the stock price which may be added to an early conversion upon certain events. We have utilized a convertible lattice model to determine the fair value of the embedded features, which utilizes inputs including the common stock price, volatility of common stock, credit rating, probability of certain triggering events and time to maturity. The embedded features are remeasured to fair value at each balance sheet date with a resulting gain or loss related to the change in the fair value being recorded to other income (expense), net in the consolidated statements of operations. As ofDecember 31, 2021 , the fair value of the embedded derivatives was$16.2 million and has been presented together with the Convertible Notes host instrument on the consolidated balance sheets. Changes in our assumptions used to value the embedded derivatives, such as our stock price and the estimated probability of triggering events, could result in material changes in the valuation in future periods. As ofDecember 31, 2021 , the maximum value of the liability if a triggering event had occurred would have been$18.6 million .
Assets Held for Sale
We consider assets to be held for sale when our management approves and commits to a plan to dispose of an asset or disposal group. Assets or disposal groups held for sale are recorded initially at the lower of carrying value or estimated fair value, less estimated costs to sell, and adjusted quarterly. Any initial loss and quarterly changes are limited to the carrying value at the date of held for sale classification and are reflected in impairment on assets held for sale in the consolidated statements of operations and comprehensive loss. Upon designation as an asset held for sale or disposal group, we stop recording depreciation and amortization expense on such assets. Costs to sell a disposal group include incremental direct costs to transact the sale and represent the costs that result directly from and are essential to a sale transaction that we would not have incurred had the decision to sell not been made. To the extent that there are losses in excess of the carrying value as of the date of held for sale classification of the assets or disposal group, the losses are recognized upon the date of sale. The various assets and liabilities of a disposal group are classified as held for sale and presented separately in the appropriate current asset and current liability sections of the consolidated balance sheets prior to the date of sale.
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities and is allocated to reporting units on a relative fair value basis. Acquired identifiable intangible assets include developed technology, distribution network, customer relationships, and trademarks. All of our acquired identifiable intangible assets have finite lives and are amortized over the period of estimated benefit on a straight-line basis, reflecting the pattern of economic benefits associated with these assets.Goodwill and acquired intangible assets with indefinite lives are not amortized, but are subject to an annual impairment review in the third quarter, or if circumstances indicate their carrying value may no longer be recoverable. The valuation and classification of goodwill and acquired intangible assets and the assignment of useful lives for purposes of amortization involves judgments and the use of estimates. The evaluation of goodwill and these intangible assets for impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions could potentially require future adjustments to the assumptions made. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts. If conditions are different from management's current estimates, material write-downs may be required, which would adversely affect our operations results. The annual goodwill impairment test and quarterly reviews of recoverability of intangible assets conducted in 2021 did not identify impairment associated with goodwill or acquired intangible assets; however, both goodwill and acquired intangible assets were subsequently fully impaired as result of the Fiagon business meeting the criteria for presentation as a held for sale disposal group and the expectation that a sale will be completed contingent on and coterminous with the Medtronic Merger. Business Combinations We record assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The excess of the fair value of the purchase consideration transferred over the fair value of net assets acquired is recorded as goodwill. Deferred acquisition related consideration incurred is recorded at its present value and is increased to the ultimate payment amount using the effective interest rate method. The liability is discounted at a market participant's borrowing rate for debt 60
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instruments with similar maturities, security, and other characteristics. Because the purchase consideration is denominated in Euros, it will be remeasured to US Dollars at each subsequent reporting period, with any foreign currency gains and losses recognized in other income (expense). When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to acquired intangible assets. We engaged a third-party specialist to assist with this determination. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, the discount rate used to determine the present value of these cash flows, and the determination of the assets' life cycles. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made. The deferred acquisition liability is payable in Euros and subject to foreign currency risk as it is remeasured at each balance sheet date. To mitigate these risks, we have entered into foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. Due to differing notional amounts and the timing of when the forward contracts are operable, the impacts of foreign exchange may not be fully offset. Stock-based Compensation We maintain an equity incentive plan to provide long-term incentive for employees and members of the Board of Directors. The plan allows for the issuance of non-statutory and incentive stock options and restricted stock units to employees and non-statutory stock options to consultants and non-employee directors. We are required to determine the fair value of equity incentive awards and recognize compensation expense for all equity incentive awards made to employees and directors. Stock-based compensation expense is recognized over the requisite service period in the consolidated statements of operations and comprehensive loss. We use the straight-line method for expense attribution for awards with service-based conditions only, and use an accelerated attribution method for awards with performance and market conditions. We have elected to account for forfeitures when they occur. The valuation model we use for calculating the fair value of awards for stock-based compensation expense, except for market-based awards, is the Black-Scholes option-pricing model, or the Black-Scholes model. For market-based awards, the Monte Carlo simulation model, or the Monte Carlo simulation, is used. Both the Black-Scholes model and Monte Carlo simulation require us to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted average period of time that the options granted are expected to be outstanding), the volatility of our common stock and an assumed risk-free interest rate. The fair market value of our common stock is determined based on the closing price of our common stock on the Nasdaq Global Market. Compensation expense for awards that include a combination of performance and market conditions is also reassessed quarterly taking into consideration the expected outcome of the performance component. Changes in these inputs could result in revised valuations of stock options and market-based awards, impacting our results of operations.
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial statements included in this Annual Report.
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