You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q and with our audited consolidated
financial statements and notes thereto for the year ended December 31, 2020
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2020 filed with the U.S. Securities and Exchange Commission (SEC) on March
1, 2021.
This report contains forward-looking statements that are based on management's
beliefs and assumptions and on information currently available to management. In
some cases, you can identify forward-looking statements by the following words:
"may," "will," "could," "would," "should," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "predict," "project," "potential,"
"continue," "ongoing" or the negative of these terms or other comparable
terminology, although not all forward-looking statements contain these words.
These statements involve risks, uncertainties and other factors that may cause
actual results, levels of activity, performance or achievements to be materially
different from the information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis for each
forward-looking statement contained in this report, we caution you that these
statements are based on a combination of facts and factors currently known by us
and our projections of the future, about which we cannot be certain. You should
refer to the "Risk Factors" section of this report for a discussion of important
factors that may cause actual results to differ materially from those expressed
or implied by the forward-looking statements. As a result of these factors, we
cannot assure you that the forward-looking statements in this report will prove
to be accurate. Furthermore, if the forward-looking statements prove to be
inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame, or at all. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
Overview
We are an ophthalmic medical technology and pharmaceutical company focused on
developing novel therapies for the treatment of glaucoma, corneal disorders, and
retinal disease. We developed Micro-Invasive Glaucoma Surgery (MIGS) to serve as
an alternative to the traditional glaucoma treatment paradigm and launched our
first MIGS device commercially in 2012. We have also developed a proprietary
bio-activated pharmaceutical therapy for the treatment of a corneal disorder,
keratoconus, that was approved by the U.S. Food and Drug Administration (FDA) in
2016 and we are developing a pipeline of surgical devices, sustained
pharmaceutical therapies, and implantable biosensors intended to treat glaucoma
progression, corneal disorders such as keratoconus, dry eye and refractive
vision correction, and retinal diseases such as neovascular age-related macular
degeneration and diabetic macular edema.
Impact of COVID-19 Pandemic and Current Economic Environment
While the COVID-19 pandemic and subsequent economic slowdown materially impacted
the global demand for our products starting March 2020 we began to see an early
recovery toward more normalized levels for cataract and keratoconus procedures
as early as May 2020, a trend that continued through the quarter ended March 31,
2021. The ultimate impact of the COVID-19 pandemic on our operations going
forward is unknown and will depend on future developments which are highly
uncertain and cannot be predicted with confidence, including the duration and
severity of the COVID-19 outbreak, the status of health and safety actions taken
to contain its spread, the severity and transmission rates of new variants of
COVID-19, the availability, distribution, and efficacy of vaccines for COVID-19,
any additional preventative and protective actions that governments, or we, may
take, any future surges of COVID-19 that may occur, the dynamics associated with
the rollout of the COVID-19 vaccines, and how quickly and to what extent
economic and operating conditions normalize within the markets in which we
operate. For additional information, see the section titled Risks Related to Our
Business within Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
We also continue to actively assess the impact of COVID-19 on our clinical
trials and other pipeline products. The closure of ophthalmic practices and
deferral of elective procedures beginning in the first quarter of 2020 in
response to COVID-19 disrupted new patient enrollment in our ongoing clinical
trials. This disruption has continued even as facilities have reopened as
doctors prioritize their standard procedures over clinical trial enrollment. In
particular, patient enrollment for our iDose clinical trials was impacted, which
delayed our estimated iDose approval timeline, where we now expect a potential
FDA approval of this product in 2023.
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We have taken a number of steps aimed at minimizing the spread of COVID-19 and
protecting our employees, including shifting the majority of our workforce to
remote operations, which continues through the date hereof. We have maintained
streamlined manufacturing and assembly processes in order to consistently
provide product to our customers who depend on us. In addition to other health
and safety protocols that follow applicable guidance and regulations, employees
involved in such operation-critical processes have been organized into a number
of small shifts designed to minimize the time any one individual is required to
be onsite. Further, in an effort to identify, and avoid further infection from,
asymptomatic cases, we have offered periodic voluntary COVID-19 viral testing to
on-site employees.
Financial Overview
Our net sales increased to $68.0 million for the three months ended March 31,
2021 from $55.3 million for the three months ended March 31, 2020. We incurred
net losses of $16.5 million and $54.1 million for the three months ended March
31, 2021 and March 31, 2020 respectively. As discussed above, the COVID-19
pandemic impacted our net sales for the three months ended March 31, 2021 and
March 31, 2020.
As of March 31, 2021, we had cash, cash equivalents, short-term investments, and
restricted cash of approximately $416.8 million, compared to $413.9 million as
of December 31, 2020. As of March 31, 2021, we had an accumulated deficit of
$332.1 million.
Material Changes and Transactions
Acquisition of Avedro, Inc.
On November 21, 2019, we acquired Avedro, Inc. (Avedro), a hybrid ophthalmic
pharmaceutical and medical technology company focused on developing therapies
designed to treat corneal diseases and disorders and correct refractive
conditions, in a stock-for-stock transaction (Avedro Merger). Avedro developed
novel bio-activated drug formulations used in combination with proprietary
systems for the treatment of progressive keratoconus and corneal ectasia
following refractive surgery. The therapy is the first and only minimally
invasive anterior segment product offering approved by the FDA shown to halt the
progression of keratoconus.
Factors Affecting Our Performance
In addition to the disruption resulting from COVID-19 as discussed above, the
full effects of which at this time are difficult to predict, our operations to
date have been, and we believe our future growth will be, impacted by the
following:
the rate at which we expand our global sales and marketing infrastructure, and
? the speed at which we can continue increasing awareness of our products to
patients and physicians;
our industry is highly competitive and subject to rapid and profound
? technological, market and product-related changes. Our success depends, in
part, upon our ability to maintain a competitive position in the development of
new products for the treatment of chronic eye diseases;
publications of clinical results by us, our competitors and other third parties
? can have a significant influence on whether, and the degree to which, our
products are used by physicians and the procedures and treatments those
physicians choose to administer to their patients;
the physicians who use our products may not perform procedures during certain
? times of the year, due to seasonality patterns typical for certain of our
procedures, or when they are away from their practices for various reasons;
? the coverage and reimbursement rates by third-party payors for the procedures
using our products; and
most of our sales outside of the U.S. are denominated in the local currency of
? the country in which we sell our products. As a result, our revenue from
international sales is impacted by fluctuations in foreign currency exchange
rates.
Further, we have made and expect to continue to make significant investments in
our global sales force, marketing programs, research and development activities,
clinical studies, and general and administrative infrastructure. FDA-approved
investigational device exemption (IDE) or investigational new drug (IND) studies
and new product development programs in our industry are expensive. We also
expect to incur additional construction costs related to our new facility in
Aliso Viejo, California.
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Additionally, the success of clinical trials of, and receipt of timely
regulatory approvals for, our and our partners' pipeline products could impact
our performance. For example, on April 9, 2021, Santen, Inc. announced the delay
of the FDA approval of the Santen Preserflo MicroShunt, for which we are
Santen's exclusive U.S. commercial partner. The MicroShunt is an ab-externo
device being developed for treatment of glaucoma where IOP is uncontrolled with
maximum tolerated medical therapy or where progression of the disease warrants
surgery. We will continue to monitor any developments associated with Santen's
ongoing discussions with the FDA.
We expect our 2021 revenues and near-term performance to reflect competitive
dynamics and the continuing impacts resulting from COVID-19, the full effects of
which at this time are difficult to predict, and which vary based upon the
specific COVID-19 dynamics in the geographies in which we operate.
Although we have been profitable for certain periods in our operating history,
there can be no assurance that we will be profitable or generate cash from
operations in the future.
Components of Results of Operations
Net Sales
We currently operate in one reportable segment and net sales are generated
primarily from sales of iStent products and sales of Photrexa and other
associated drug formulations, as well as our proprietary bioactivation systems,
to customers. Revenue is recognized when control of the promised goods or
services is transferred to the customer in an amount that reflects the
consideration to which we expect to be entitled in exchange for those products
or services.
We sell our products through a direct sales organization in the United States,
and outside the United States we sell our products primarily through direct
sales subsidiaries in sixteen countries and through independent distributors in
certain countries in which we do not have a direct presence or maintain a modest
commercial presence. The primary end-user customers for our products are surgery
centers, hospitals and physician private practices.
While net sales may increase as we expand our global sales and marketing
infrastructure and continue to increase awareness of our products by expanding
our sales base and increasing our marketing efforts, historically our net sales
within a fiscal year have been impacted seasonally, as demand for U.S.
ophthalmic procedures is typically softer in the first quarter and stronger in
the fourth quarter of a given year. However, we have not experienced the same
seasonality pattern in 2020 and 2021 due to the COVID-19 pandemic, and its
effect on our commercial performance may continue into future reporting periods.
Additionally, for several years we had commercialized our products in the U.S.
with few or no direct competitors. Other products have now become available in
the U.S. and globally, or are in development by third parties, that have entered
or could enter the market and which may affect adoption of or demand for our
products. These other products could achieve greater commercial acceptance or
demonstrate better safety or effectiveness, clinical results, ease of use or
lower costs than our products, which could adversely impact our net sales.
Cost of Sales
Cost of sales reflects the aggregate costs to manufacture our products and
includes raw material costs, labor costs, manufacturing overhead expenses and
the effect of changes in the balance of reserves for excess and obsolete
inventory.
We manufacture our iStent products at our current headquarters in San Clemente,
California using components manufactured by third parties. We manufacture our
KXL and Mosaic systems at our manufacturing facilities in Burlington,
Massachusetts, with some limited manufacturing operations in Dublin, Ireland,
and we contract with third-party manufacturers in the U.S. and Germany to
produce our Photrexa and other associated drug formulations.
Due to the relatively low production volumes of our iStent products and our KXL
and Mosaic systems compared to our potential capacity for those products, a
significant portion of our per unit costs is comprised of manufacturing overhead
expenses. These expenses include quality assurance, material procurement,
inventory control, facilities, equipment and operations supervision and
management.
Cost of sales includes a charge equal to a low single-digit percentage of
worldwide net sales of certain current and future products, including our iStent
products, with a required minimum annual payment of $0.5 million, which amount
became payable to the Regents of the University of California (the University)
in connection with our December 2014 agreement with the University (the UC
Agreement) related to a group of our U.S. patents (the Patent Rights). This
ongoing product payment obligation will change as patent coverage on certain
products being to lapse and will terminate entirely on the date the last of the
Patent Rights expires, which is currently expected to be in 2022.
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Beginning in the fourth quarter of 2019, cost of sales has included amortization
of the $252.2 million developed technology intangible asset recognized in
connection with the Avedro Merger. For the three months ended March 31, 2021 and
March 31, 2020, the amortization expense was $5.5 million. Additionally,
beginning in the fourth quarter of 2019, cost of sales has included amortization
of the fair market value inventory adjustment recorded in connection with the
Avedro Merger, which for the three months ended March 31, 2020 was $9.7 million
and was fully amortized as of December 31, 2020.
Our future gross profit as a percentage of net sales, or gross margin, will be
impacted by numerous factors including commencement of sales of products in our
pipeline, or any other future products, which may have higher product costs. Our
gross margin will also be affected by manufacturing inefficiencies that we may
experience as we attempt to manufacture our products on a larger scale,
manufacture new products and change our manufacturing capacity or output.
Additionally, our gross margin will continue to be affected by the
aforementioned expense related to the UC Agreement. The current COVID-19
pandemic may impact our gross profit margins given the potential impact to net
sales in future periods.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses 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; post-approval clinical studies;
conferences and congresses; travel expenses; costs associated with obtaining and
maintaining our patent portfolio; professional fees for accounting, auditing,
consulting and legal services; costs to implement our global enterprise systems;
and allocated overhead expenses.
We expect SG&A expenses to continue to grow as we increase our global sales and
marketing infrastructure and general administration infrastructure in the United
States. We also expect other nonemployee-related costs, including sales and
marketing program activities for new products, outside services and accounting
and general legal costs to increase as our overall operations grow. The timing
of these increased expenditures and their magnitude are primarily dependent on
the commercial success and sales growth of our products, as well as on the
timing of any new product launches and other potential business and operational
activities.
Research and Development
Our R&D activities primarily consist of new product development projects,
pre-clinical studies, IDE and IND studies, and other clinical trials. Our R&D
expenses primarily consist of personnel-related expenses, including salaries,
fringe benefits and stock-based compensation for our R&D employees; research
materials; supplies and services; and the costs of conducting clinical studies,
which 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 expense R&D costs as incurred.
We expect our R&D expenses to continue to increase as we initiate and advance
our development programs, including our expanding surgical, pharmaceutical and
IOP sensor development efforts and clinical trials across glaucoma, retinal
disease and corneal health.
Completion dates and costs for our clinical development programs include seeking
regulatory approvals and our research programs vary significantly for each
current and future product candidate and are difficult to predict. As a result,
while we expect our R&D costs to continue to increase for the foreseeable
future, we cannot estimate with any degree of certainty the costs we will incur
in connection with the development of our product candidates. We anticipate we
will make determinations as to which programs and product candidates to pursue
and how much funding to direct to each program and product candidate on an
ongoing basis in response to the scientific success of early research programs,
results of ongoing and future clinical trials, as well as ongoing assessments as
to each current or future product candidate's commercial potential and our
likelihood of obtaining necessary regulatory approvals. We are not currently
able to fully track expenses by product candidate.
Non-Operating Expense, Net
Non-operating expense, net primarily consists of interest expense associated
with our finance lease for our Aliso Viejo, California facility and for our
Convertible Notes, interest income derived from our short-term investments, and
unrealized gains and losses arising from exchange rate fluctuations on
transactions denominated in a currency other than the U.S. dollar, primarily
related to intercompany loans.
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Income Taxes
Our tax provision is comprised of state income and foreign income taxes. Our net
deferred tax liability of $8.3 million at March 31, 2021 represents the excess
of our indefinite-lived deferred tax liabilities over our indefinite-lived
deferred tax assets. We continue to provide a full valuation allowance against
our other net deferred tax assets.
We record reserves for uncertain tax positions where we believe the ability to
sustain the tax position does not reach the more likely than not threshold.
Results of Operations
Comparison of Three Months Ended March 31, 2021 and March 31, 2020 (in
thousands):
Three Months Ended
March 31, % Increase
(dollars in thousands) 2021 2020 (decrease)
Statements of operations data:
Net sales $ 67,968 $ 55,336 23 %
Cost of sales 16,633 32,529 (49) %
Gross profit 51,335 22,807 125 %
Operating expenses:
Selling, general and administrative 41,921 50,546 (17) %
Research and development
21,219 24,873 (15) %
Total operating expenses 63,140 75,419 (16) %
Loss from operations (11,805) (52,612) (78) %
Total non-operating expense, net (4,385) (1,896) 131 %
Income tax provision (benefit) 279 (450) NM
Net loss $ (16,469) $ (54,058) (70) %
NM = Not Meaningful
Net Sales
Net sales for the three months ended March 31, 2021 and March 31, 2020 were
$68.0 million and $55.3 million, respectively, reflecting an increase of $12.6
million or 23%.
Net sales of glaucoma products in the United States were $39.9 million and $32.6
million for the three months ended March 31, 2021 and March 31, 2020,
respectively, increasing by 22% primarily due to the demand for combined
cataract and glaucoma procedures increasing in the first quarter 2021 given the
dynamics associated with the rollout of the COVID-19 vaccines, and increasingly
normalized economic and operating conditions within certain markets in which we
operate as well as the launch of our next generation iStent inject product, the
iStent inject W, in the second half of 2020, which has largely supplanted iStent
inject. We believe competition had also increased entering into 2020, the impact
of which is difficult to assess given the COVID-19 dynamics.
International sales of glaucoma products for the three months ended March 31,
2021 and March 31, 2020 were $13.8 million and $11.6 million, respectively,
increasing by 20%. The increase in international sales reflects growing volume
demand in many key international geographies, favorable foreign exchange rates
compared to the prior year, offset by the ongoing and relative COVID-19 impact
in certain European and Latin American countries in particular and a one-time
catch-up provision associated with historical government rebates owed in France
following the establishment of a formal reimbursement program in late 2018.
Net sales of corneal health products were $14.3 million and $11.2 million for
the quarter ended March 31, 2021 and March 31, 2020 respectively, increasing by
27%. The $3.1 million increase in net sales generated from our corneal health
products was comprised of an increase of approximately $3.2 million in U.S.
sales, including an increase of $3.9 million of Photrexa net sales offset by
reductions of $0.6 million in U.S. capital equipment sales, using our direct
sales operations, and decreased by $0.2 million internationally where we utilize
distributors given we do not have a direct commercial presence. Sales of corneal
health products in 2021 and 2020 were negatively impacted by disruption
resulting from COVID-19.
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Cost of Sales
Cost of sales for the three months ended March 31, 2021 and March 31, 2020 were
$16.6 million and $32.5 million, respectively, reflecting a decrease of $15.9
million due to approximately $9.7 million related to the acquisition fair market
value inventory adjustment rollout during the first quarter of 2020 in
connection with the acquisition of Avedro that was fully amortized during 2020,
and $7.9 million related to inventory write-offs and COVID-related excess and
obsolete inventory reserves recorded during the first quarter of 2020 not
present in the first quarter of 2021. Our gross margin was 76% for the three
months ended March 31, 2021 and 41% for the three months ended March 31, 2020.
The increased gross margin resulted primarily from the impact of the
aforementioned accounting adjustments and, to a lesser extent, changes in
product mix, most notably the inclusion of modestly lower margin products
related to international market sales.
Selling, General and Administrative Expenses
SG&A expenses for the three months ended March 31, 2021 and March 31, 2020 were
$41.9 million and $50.5 million, respectively, reflecting a decrease of
approximately $8.6 million or 17%.
We incurred approximately $26.7 million of commercial personnel and
discretionary spending during the three months ended March 31, 2021 related
primarily to existing sales infrastructure in glaucoma and corneal health. We
also incurred approximately $15.2 million of general and administrative
personnel and discretionary spending associated with our ongoing administrative
functions and amortization of our right-of-use asset related to our long-term
lease in Aliso Viejo, California.
The above decrease in SG&A expenses for the three months ended March 31, 2021
primarily consisted of approximately $3.9 million in reduced stock-based
compensation from post-combination services associated with the value
attributable to the pre-combination services associated with replacement of all
Avedro outstanding and unexercised stock option awards and all unvested
restricted stock units, a decrease of $1.3 million in integration and
restructuring expenses related to our acquisition of Avedro and a decrease of
approximately $2.3 million related to our previously-disclosed patent
litigation.
Research and Development Expenses
R&D expenses for the three months ended March 31, 2021 and March 31, 2020 were
$21.2 million and $24.9 million, respectively, reflecting a decrease of $3.7
million or 15%.
We incurred $13.2 million in core R&D expenses and $8.0 million in clinical
expenses, comprised of $11.5 million in compensation and related employee
expenses with the remaining $9.7 million spent on the continued development of a
pharmaceutical therapeutic system for the treatment of keratoconus without the
removal of the epithelium (often referred to as "epi-on"), projects for
presbyopia and earlier stage technology and therapeutic investments, including
expenses associated with clinical studies, inventory and supplies for iDose and
future iStent product candidates.
The above decrease in R&D expenses for the three months ended March 31, 2021
primarily consisted of approximately $1.6 million in reduced stock-based
compensation from post-combination services associated with the value
attributable to the pre-combination services associated with replacement of all
Avedro outstanding and unexercised stock option awards and all unvested
restricted stock units and $2.1 million in reduced spend related to our
above-mentioned clinical studies.
Non-Operating Expense, Net
We had non-operating expense, net of $4.4 million and $1.9 million for the three
months ended March 31, 2021 and March 31, 2020, respectively. The increase in
non-operating expense, net primarily relates to interest expense recognized
related to the Convertible Notes and recognition of unrealized foreign currency
losses due to higher intercompany loan balances denominated in, and impacted by,
changes in foreign currency exchange rates.
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Income Tax Provision
Our effective tax rate for the first quarter of 2021 was (0.88)%. For the three
months ended March 31, 2021 and March 31, 2020, we recorded a
provision/(benefit) for income taxes of $0.3 million and $(0.5) million
respectively, which were primarily comprised of state and foreign income taxes
for the first quarter of 2021, and U.S. federal, state and foreign income taxes
for the first quarter of 2020, offset by a benefit related to the carryback of
federal NOLs under the CARES Act.
Liquidity and Capital Resources
For the three months ended March 31, 2021, we incurred a net loss of $16.5
million and generated cash from operations of $4.2 million. As of March 31,
2021, we had an accumulated deficit of approximately $332.1 million. We have
made and expect to continue to make significant investments in our global sales
force, marketing programs, research and development activities, clinical studies
and general and administrative infrastructure. FDA-approved IDE and IND studies
and new product development programs in our industry are expensive. We also
expect to incur additional construction costs related to our new facility in
Aliso Viejo, California.
Our Convertible Notes may be converted at the option of the holders at the times
and under the circumstances and at the conversion rate described in Note 9,
Convertible Senior Notes. As of March 31, 2021, one of the conditions allowing
holders of the Convertible Notes to convert had been met, as our trading price
remained above 130% of the conversion price for at least 20 trading days during
the 30 consecutive trading-day period ending on, and including, March 31, 2021.
Consequently, holders of the Convertible Notes have the right to convert their
Convertible Notes during the calendar quarter beginning April 1, 2021. Upon
conversion, we will pay or deliver, as the case may be, cash, shares of our
common stock or a combination of cash and shares of our common stock, at our
election, in the manner and subject to the terms and conditions provided in the
Indenture. Our current intent is to settle the principal amount of the
Convertible Notes in cash upon conversion, with any remaining conversion value
being delivered in shares of our common stock. Given satisfaction of the
aforementioned condition, the Convertible Notes are classified within current
liabilities on the condensed consolidated balance sheets.
We plan to fund our operations, capital funding and other liquidity needs using
existing cash and investments and, to the extent available, cash generated from
commercial operations. Our existing cash and investments include the remaining
net proceeds from the Convertible Notes issued in June 2020 (after payment for
the related capped call transactions), which we are using for working capital
and general corporate purposes. Although we have been profitable for certain
periods in our operating history, there can be no assurance that we will be
profitable or generate cash from operations. We may seek to obtain additional
financing in the future through other debt or equity financings. There can be no
assurance that we will be able to obtain additional financing on terms
acceptable to us, or at all. We believe that our available cash, cash
equivalents, investment balances and interest we earn on these balances and any
cash generated from commercial operations will be sufficient to fund our
operations and satisfy our liquidity requirements for at least the next 12
months from the date our condensed consolidated financial statements for the
three months ended March 31, 2021 are made publicly available.
The following table summarizes our cash and cash equivalents, short-term
investments and selected working capital data as of March 31, 2021 and December
31, 2020 (in thousands):
March 31, December 31,
2021 2020
Cash and cash equivalents $ 96,625 $ 96,596
Short-term investments 310,755 307,772
Accounts receivable, net 36,694 36,059
Inventory, net 15,271 15,809
Accounts payable 8,624 4,371
Accrued liabilities 47,944 45,331
Working capital (1) 138,735 419,740
(1) Working capital consists of total current assets less total current
liabilities.
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Cash Flows
Our historical cash outflows have primarily been associated with cash used for
operating activities such as the expansion of our sales, marketing and R&D
activities; purchase of and growth in inventory and other working capital needs;
the acquisition of intellectual property; and expenditures related to equipment
and improvements used to increase our manufacturing capacity, to improve our
manufacturing efficiency and for overall facility expansion.
The following table is a condensed summary of our cash flows for the periods
indicated:
Three Months Ended
March 31,
(in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 4,178 $ (13,099)
Investing activities (21,263) 628
Financing activities 17,414 4,220
Exchange rate changes (450) (565)
Net decrease in cash, cash equivalents and restricted cash $ (121) $ (8,816)
At March 31, 2021, our cash and cash equivalents were held for working capital
purposes. We do not enter into investments for trading or speculative purposes.
Our policy is to invest any cash in excess of our immediate requirements in
investments designed to preserve the principal balance and provide liquidity.
Operating Activities
In the three months ended March 31, 2021, our operating activities provided $4.2
million in net cash and in the three months ended March 31, 2020 our operating
activities used $13.1 million of net cash.
For the three months ended March 31, 2021, our net cash provided by operating
activities reflected our net loss of $16.5 million, adjusted for non-cash items
of $19.5 million, primarily consisting of stock-based compensation expense of
$8.7 million, depreciation of $1.2 million, amortization of intangible assets of
$6.2 million, and amortization of lease right-of-use assets of $1.2 million.
This was partially offset by changes in operating assets and liabilities of $1.1
million, which resulted primarily from increases in accounts receivable and
prepaid expenses and other current assets of $2.4 million, partially offset by
increases in accounts payable and accrued liabilities of $3.0 million and
decreases in inventory of $0.4 million.
For the three months ended March 31, 2020, our net cash used in operating
activities reflected our net loss of $54.1 million, adjusted for non-cash items
of $24.1 million, primarily consisting of stock-based compensation expense of
$17.2 million, depreciation of $1.1 million, amortization of intangibles of $6.2
million, amortization of lease right-of-use assets of $1.3 million, and the
change in the fair value of cash-settled stock options of $(3.2) million. This
was offset by changes in operating assets and liabilities of $16.8 million,
which resulted from decreases in accounts receivable and inventory of $23.8
million, offset by decreases in accounts payable and accrued liabilities of $4.8
million and increases in prepaid expenses and other current asset of $2.2
million.
Investing Activities
In the three months ended March 31, 2021 and March 31, 2020, our investing
activities used $21.3 million and provided $0.6 million of net cash,
respectively.
For the three months ended March 31, 2021, we used cash of approximately $54.0
million for purchases of short-term investments, approximately $17.2 million for
purchases of property and equipment, primarily related to our Aliso Facility,
and approximately $0.4 million related to investments in company-owned life
insurance, and we received cash of approximately $50.3 million from sales and
maturities of short-term investments.
For the three months ended March 31, 2020, we used cash of approximately $18.7
million for purchases of short-term investments, approximately $0.8 million for
purchases of property and equipment and approximately $0.4 million related to
investments in company-owned life insurance, which was partially offset by cash
received of approximately $19.7 million from sales and maturities of short-term
investments.
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We expect to continue our increased investment in property and equipment in the
future as we expand our manufacturing capacity for current and new products,
improve our manufacturing efficiency and for overall facility expansion, as
discussed above.
Financing Activities
In the three months ended March 31, 2021 and March 31, 2020, our financing
activities provided $17.4 million and $4.2 million of net cash, respectively.
For the three months ended March 31, 2021, we received $18.1 million from the
exercises of stock options and purchases of our common stock by employees
pursuant to our Employee Stock Purchase Plan and used $1.1 million for payment
of employee taxes related to restricted stock unit vestings. Additionally, we
received $0.6 million in proceeds from our tenant improvement allowances for our
Aliso Facility and paid $0.3 million in principal on our finance lease.
For the three months ended March 31, 2020, we received net cash proceeds of
approximately $5.7 million from the exercises of stock options and purchases of
our common stock by employees pursuant to our Employee Stock Purchase Plan and
used $1.5 million for payment of employee taxes related to restricted stock unit
vestings.
Commitments
There have been no material changes to our contractual obligations and
commitments as of March 31, 2021 from those disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1,
2021 for the year ended December 31, 2020.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements as defined in the rules and
regulations of the Securities and Exchange Commission. We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or for any other contractually narrow or limited purpose.
However, from time to time we enter into certain types of contracts that
contingently require us to indemnify parties against third-party claims
including in connection with certain real estate leases, supply purchase
agreements, and with directors and officers. The terms of such obligations vary
by contract and in most instances a maximum dollar amount is not explicitly
stated therein. Generally, amounts under these contracts cannot be reasonably
estimated until a specific claim is asserted, thus no liabilities have been
recorded for these obligations on our balance sheets for any of the periods
presented.
Critical accounting policies and significant estimates
Management's discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP). The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and related disclosure of contingent assets
and liabilities, revenue and expenses at the date of the condensed consolidated
financial statements. Generally, we base our estimates on historical experience
and on various other assumptions in accordance with GAAP that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions and such differences
could be material to our financial position and results of operations.
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 Significant Estimates" included in Part II, Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2020, filed with
the SEC on March 1, 2021. There have been no material changes to our critical
accounting policies and estimates as disclosed therein, during the three months
ended March 31, 2021, as compared with those disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1,
2021, with the exception of the adoption of Accounting Standards Update (ASU)
No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
(ASU 2020-06).
In August 2020, the Financial Accounting Standards Board (FASB) issued ASU
2020-06, which simplifies accounting for convertible instruments. The embedded
conversion features are no longer separated from the host
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contract for convertible instruments with conversion features that are not
required to be accounted for as derivatives under ASU 2020-06, or that do not
result in substantial premiums accounted for as paid-in capital. Consequently, a
convertible debt instrument will be accounted for as a single liability measured
at its amortized cost, as long as no other features require bifurcation and
recognition as derivatives. The new guidance also requires the if-converted
method to be applied for all convertible instruments. ASU 2020-06 is effective
for fiscal years beginning after December 15, 2021, with early adoption
permitted. Adoption of the standard requires using either a modified
retrospective or a full retrospective approach. Effective January 1, 2021, we
early adopted ASU 2020-06 using the modified retrospective adoption approach.
The cumulative effect of the change was recognized as an adjustment to the
opening balance of retained earnings at the date of adoption. The comparative
information has not been restated and continues to be presented according to
accounting standards in effect for those periods.
The adoption of ASU 2020-06 resulted in an increase to accumulated deficit of
$5.5 million, a decrease to additional paid-in capital of $81.6 million, a
decrease in the deferred tax liability of $2.2 million and an increase to
convertible notes, net of $89.2 million. Interest expense recognized in future
periods will be reduced as a result of accounting for the convertible debt
instrument as a single liability measured at its amortized cost. Lastly, the
Company derecognized deferred income taxes associated with the Convertible Notes
and adjusted the deferred tax liability associated with the embedded conversion
feature and corresponding change in the valuation allowance. See Note 2. Summary
of Significant Accounting Policies and Note 9. Convertible Senior Notes within
Part I, Item 1 of this Quarterly Report on Form 10-Q.
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