GLAUKOS CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Financial Data" and our audited consolidated financial statements and related notes included in Items 6 and 8, respectively, of this Annual Report on Form 10-K. This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements that reflect our current plans, expectations, estimates and beliefs that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events may differ materially from those discussed in these forward-looking statements. You should carefully read Item 1A - "Risk Factors" included in this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements
and Industry Data." 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 theU.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
InDecember 2019 , a novel strain of coronavirus (COVID-19) emerged inWuhan ,Hubei Province ,China . TheWorld Health Organization declared COVID-19 to be a "pandemic," spreading across the globe and impacting worldwide economic activity. In theU.S. , certain federal, state and local governmental authorities issued stay-at-home and other orders, proclamations and/or directives, including restrictions on elective procedures and therapies, aimed at minimizing the spread of COVID-19. Although some of these governmental restrictions have since been lifted or scaled back, recent surges of COVID-19 have in some cases led, and future surges could lead, to the reinstitution of stay-at-home or other orders and may further result in restrictions being re-implemented in response to efforts to reduce the spread of COVID-19. Even if stay-at-home or other orders are removed, potential patients may elect to stay at home voluntarily. The COVID-19 pandemic and subsequent economic slowdown has materially impacted the global demand for our products, which are used in procedures and therapies that are considered elective. This decrease in demand was most significantly felt in the latter part of the quarter endedMarch 31, 2020 and the earlier part of the quarter endedJune 30, 2020 . Beginning inMay 2020 , we began to see an early recovery toward more normalized levels for cataract and keratoconus procedures, a trend that continued through the quarter endedDecember 31, 2020 . 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 Annual Report on Form 10-K. 37 Table of Contents
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 remains impacted, which has delayed our estimated iDose approval timeline, where we now expect a potential FDA approval of this product in 2023. 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. We have also sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending and capital expenditures. These actions were designed to preserve jobs and core research and development programs. We also temporarily deferred a significant portion of our planned 2020 capital expenditures, particularly those related to facilities expansion and consolidation plans, although we have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments began to authorize re-openings. Further, inJune 2020 , we issued an aggregate principal amount of$287.5 million of 2.75% convertible notes due 2027 (the Convertible Notes), the net proceeds of which will be used for working capital and general corporate purposes. As ofDecember 31, 2020 , we had cash, cash equivalents, short-term investments, and restricted cash of approximately$413.9 million , compared to$183.3 million as ofDecember 31, 2019 . OnMarch 27, 2020 ,the United States enacted the Coronavirus Aid Relief, and Economic Security Act (CARES Act), an emergency economic stimulus package that includes spending and tax relief measures to strengthen theU.S. economy and help fund a nationwide effort to curtail the effects of the COVID-19 pandemic. Some of the more significant provisions which impact the Company include the employee retention credit and payroll tax deferral. We do not expect recentIRS guidance or the CARES Act to have a material impact on our results of operation. For additional information, see the section titled Notes to Consolidated Financial Statements, Note 11, Income Taxes.
Financial Overview
Our net sales were$225.0 million for the year endedDecember 31, 2020 , which was a decrease of$12.0 million from the year endedDecember 31, 2019 . Net sales for the years endedDecember 31, 2019 andDecember 31, 2018 were$237.0 million and$181.3 million , respectively. We incurred net losses of$120.3 million for the year endedDecember 31, 2020 , achieved net income of$15.4 million for the year endedDecember 31, 2019 and we incurred a net loss of$13.0 million for the year endedDecember 31, 2018 . The COVID-19 pandemic and measures intended to reduce its spread had a material impact on our net sales for the year endedDecember 31, 2020 .
As of
Material Changes and Transactions
Convertible Senior Notes
InJune 2020 , we issued$287.5 million in aggregate principal amount of 2.75% Convertible Senior Notes due in 2027 (Convertible Notes) pursuant to an indenture, datedJune 11, 2020 , between us andWells Fargo Bank, National Association , as trustee, in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. The Convertible Notes are senior unsecured obligations of ours and bear interest at a rate of 2.75% per year, payable semi-annually in arrears onJune 15 andDecember 15 of each year, beginning onDecember 15, 2020 . The Convertible Notes will mature onJune 15, 2027 , unless earlier converted, redeemed or 38
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repurchased in accordance with their terms. In connection with issuing the Convertible Notes, we received$242.2 million in proceeds, after deducting fees and offering expenses and paying the cost of certain capped call transactions. These proceeds will be used for working capital and general corporate purposes.
For additional information, see Note 9, Convertible Senior Notes to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Acquisition of
OnNovember 21, 2019 , we acquiredAvedro, 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. Total consideration for the Avedro Merger was$437.8 million . The consideration consisted ofGlaukos common stock valued at$406.8 million issued to replaceAvedro common stock,Glaukos shares valued at$0.2 million to replace certain vestedAvedro warrants, and$30.8 million of value attributable to the pre-combination services associated with replacement of allAvedro outstanding and unexercised stock option awards and all unvested restricted stock units (Replacement Awards). See Note 2, Note 4, Note 6 and Note 7 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our Avedro Merger.
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;
? our ability to successfully integrate the
and expand our sales into the corneal health market; and
most of our sales outside of the
? 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, subject to our temporary costs saving initiatives and spending deferrals due to COVID-19, 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 have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition ofAvedro , and we also expect to incur additional construction costs related to our new facility inAliso Viejo, California . 39
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We expect 2021 revenues and near-term performance to reflect competitive dynamics and the continuing disruption resulting from COVID-19, the full effects of which at this time are difficult to predict.
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
We currently operate in one reportable segment and net sales are generated primarily from sales of iStent products and, following the Avedro Merger onNovember 21, 2019 , 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 inthe United States , and outsidethe 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 forU.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 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 theU.S. with few or no direct competitors. Other products have now become available in theU.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 inSan Clemente, California using components manufactured by third parties. We manufacture our KXL and Mosaic systems at our manufacturing facilities inBurlington, Massachusetts , with some limited manufacturing operations inDublin, Ireland , and we contract with third-party manufacturers in theU.S. andGermany 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 theUniversity of California (the University) in connection with ourDecember 2014 agreement with the University (the UC Agreement) related to a group of ourU.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 terminate on the date the last of the Patent Rights expires, which is currently expected to be in 2022. Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the 2.3% federal medical device excise tax onU.S. sales of medical devices manufactured by us was suspended fromJanuary 1, 2016 toDecember 31 , 40
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2017, and, pursuant to HR 195 passed onJanuary 22, 2018 , was further suspended throughDecember 31, 2019 . The federal medical device excise tax was permanently repealed inDecember 2019 . 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 years endedDecember 31, 2020 andDecember 31, 2019 , the amortization expense was$22.1 million and$2.3 million , respectively. 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 years endedDecember 31, 2020 andDecember 31, 2019 was$24.7 million and$4.0 million , respectively. 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 and the acquisition fair market value inventory adjustment rollout related to the Avedro Merger. See Note 6, Business Combinations to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our Avedro Merger. 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. The Avedro Merger has resulted in additional integration expenses, restructuring expenses and personnel-related expenses during the year endedDecember 31, 2019 and additional personnel-related expenses, primarily stock-based compensation during the year endedDecember 31, 2020 . Additionally, SG&A will continue to be impacted by the amortization of certain finite-lived intangible assets acquired as a result of the Avedro Merger, along withAvedro's normal and recurring SG&A expenses. We expect SG&A expenses to continue to grow as a result of the Avedro Merger as we increase our global sales and marketing infrastructure and general administration infrastructure inthe United States ; however, as discussed above under "Impact of COVID-19 Pandemic and Current Economic Environment," we have sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending, including variable expense associated with salesperson commissions and marketing, capital expenditures, as well as a temporary salary reduction for many of our employees, which as of the date hereof, have all been reinstated. We have started to reinstitute our plans to move forward with the planned capital expenditures as state and local governments begin to authorize re-openings. 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
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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. However as previously noted we have sought to preserve our
cash position by instituting a number of cost saving initiatives, including
temporary reductions in discretionary spending associated with earlier stage
development programs many of which we have begun to allocate funding beginning
in the third quarter and throughout the fourth quarter of 2020.
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, subject to our temporary COVID-19 costs saving initiatives, 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.
Our in-process research and development (IPR&D) expenses relate to the acquisition ofDOSE Medical Corporation (DOSE) in which DOSE became a wholly-owned subsidiary of the Company. DOSE is developing multiple micro-invasive, sustained-released, bioerodible drug delivery platforms designed to be used in the treatment of various retinal diseases, including age-related macular degeneration and diabetic macular edema. Certain DOSE assets were in the development-stage at the time of purchase and were determined to have no alternative future use.
Non-Operating (Expense) Income, Net
Non-operating (expense) income, net primarily consists of interest expense
associated with our finance lease for our
Income Taxes
Our tax benefit is comprised ofU.S. federal and state income and franchise taxes as well as foreign income taxes. Our currentU.S. federal tax benefit results from the carryback of NOLs and R&D tax credits permitted by the CARES Act for the year endedDecember 31, 2020 . Our current state tax provision results from state minimum and franchise taxes for the year endedDecember 31, 2020 . Our current foreign tax provision results from foreign income taxes imposed on profitable operations in our foreign subsidiaries for the year endedDecember 31, 2020 . OurU.S. federal and state deferred tax benefit results from the deferred tax liability recorded in connection with the Convertible Notes which may be used as a source of future taxable income allowing us to record a tax benefit for a portion of our operating losses generated for the year endedDecember 31, 2020 . Our net deferred tax liability of$10.5 million atDecember 31, 2020 represents the excess of our indefinite-lived deferred tax liabilities over our indefinite-lived deferred tax assets, as well as deferred tax liabilities recorded to additional paid-in capital within the consolidated statement of stockholders' equity which were not available to offset our deferred tax assets. We continue to provide a 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.
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Results of Operations
Comparison of Years Ended
Year ended
December 31, % Increase
(in thousands) 2020 2019 (decrease)
Statements of operations data:
Net sales $ 224,959 $ 236,984 (5) %
Cost of sales 91,719 38,588 138 %
Gross profit 133,240 198,396 (33) %
Operating expenses:Selling, general and administrative 171,401 176,635 (3) % Research and development 85,392 68,308 25 % In-process research and development - 3,745
NM Total operating expenses 256,793 248,688 3 % Loss from operations (123,553) (50,292) 146 %
Non-operating (loss) income, net (8,761) 256
NM Income tax benefit (11,966) (65,460) (82) % Net (loss) income$ (120,348) $ 15,424 NM NM = Not Meaningful Net Sales
Net sales for the years ended
Net sales of glaucoma products inthe United States were$133.7 million and$187.7 million for the years endedDecember 31, 2020 andDecember 31, 2019 , respectively, decreasing by approximately 28% primarily due to the disruption resulting from COVID-19. We believe competition had also increased entering into 2020, the impact of which is difficult to assess given the COVID-19 disruption. International sales of glaucoma products for the years endedDecember 31, 2020 andDecember 31, 2019 were$45.6 million and$43.3 million , respectively, increasing by approximately 5%. The increase in net sales internationally was due to sales expansion in certain of our existing international markets, partially offset by the disruption resulting from COVID-19. Additionally, in the second half of 2020, we launched our next generation iStent inject product, the iStent inject W. Pricing of our glaucoma products inthe United States and internationally remained stable and did not provide a significant contribution to the results in 2020. As such, changes in unit volumes were the primary driver of the year over year change. Net sales of corneal health products were$45.6 million and$6.0 million for the years endedDecember 31, 2020 andDecember 31, 2019 , respectively, as a result of the full year operations ofAvedro during the year endedDecember 31, 2020 that were not in our operating results for the majority of 2019. The$39.6 million increase in net sales generated from our corneal health products was comprised of an increase of approximately$34.6 million inU.S. sales, including an increase of$31.3 million of Photrexa net sales, using our direct sales operations and an increase of approximately$5.0 million in net sales with distributors being used in certain international locations where we do not have a direct commercial presence. Sales of corneal health products in 2020 were negatively impacted by disruption resulting from COVID-19.
Cost of Sales
Cost of sales for the years endedDecember 31, 2020 andDecember 31, 2019 were$91.7 million and$38.6 million , respectively, reflecting an increase of approximately$53.1 million or 138%. The increase was primarily comprised of approximately$24.7 million , net related to the acquisition fair market value inventory adjustment rollout, and$22.1 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger. Our gross margin was approximately 59% for the year endedDecember 31, 2020 compared to 43
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approximately 84% for the year ended
Selling, General and Administrative Expenses
SG&A expenses for the years ended
We incurred approximately$98.2 million of commercial personnel and discretionary spending in the year endingDecember 31, 2020 related primarily to existing sales infrastructure in glaucoma, training samples and marketing associated with our global launch of iStent Inject W and expansion of our sales infrastructure and commercial activities inCorneal Health . We also incurred approximately$73.2 million of general and administrative personnel and discretionary spending associated with our ongoing administrative functions, previously disclosed patent litigation and global enterprise systems implementation, and amortization of our right-of-use asset related to our long-term lease inAliso Viejo, California . Our results for the year endingDecember 31, 2020 include approximately$24.6 million in additional SG&A expenses as a result of the full year operations ofAvedro that were not in our operating results for the majority of 2019. These expenses were primarily comprised of commercial personnel and discretionary spending of$16.7 million and general and administrative personnel and discretionary spending of$7.9 million . The above increase in expenses associated with the full year operations ofAvedro was offset by reductions in SG&A expenses for the year endedDecember 31, 2020 primarily consisting of a decrease of approximately$9.4 million in professional services and software systems costs related to our global enterprise systems implementation, decreases of$6.3 million and$3.2 million in transaction expenses and restructuring expenses, respectively, related to our acquisition ofAvedro and a decrease of approximately$3.1 million related to our previously disclosed patent litigation. The remaining decrease in expenses of approximately$7.8 million primarily relates to decreased sales and marketing expenses and broader SG&A cost savings related to the COVID-19 pandemic.
Research and Development Expenses
R&D expenses for the years ended
Our R&D expenses for the year endedDecember 31, 2020 primarily relate to compensation and related employee expenses and project spending associated with our emerging pipeline of product candidates, including the clinical and development costs associated with iDose TR, iStent Infinite, the continued development of a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as iLink epi-on), as well as earlier stage micro-surgical, pharmaceutical, and biosensor projects that span across glaucoma, dry eye, presbyopia, and common retina conditions such as neovascular age-related macular degeneration, diabetic macular edema, and retinal vein occlusion. Our results for the year endingDecember 31, 2020 include approximately$19.1 million in additional R&D expenses that were not in our operating results for the majority of 2019. These expenses were primarily comprised of$8.3 million of compensation and related employee expenses and approximately$10.8 million in other core R&D and clinical expenses spent on the continued development of iLink epi-on and other earlier stage technology and therapeutic investments. The above increase in expenses as a result of the full year operations ofAvedro was primarily offset by reductions of R&D spending related to the COVID-19 pandemic of approximately$1.3 million primarily related to decreased personnel and discretionary spending on our earlier stage programs. 44
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There were no IPR&D expenses for the year endedDecember 31, 2020 . IPR&D expenses for the year endedDecember 31, 2019 were$3.7 million , comprised of$2.2 million related to the purchase of certain DOSE assets and$1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus.
Non-Operating (Expense) Income, Net
We had non-operating expense, net of$8.8 million and$0.3 million of non-operating income, net for the years endedDecember 31, 2020 andDecember 31, 2019 , respectively. The increase in non-operating expense, net primarily relates to interest expense recognized related to the Convertible and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.
Income Tax (Benefit) Provision
Our effective tax rate for the year ended 2020 was not meaningful due to the large deferred tax benefit recorded in connection with the Convertible Notes relative to the amount of our net loss before taxes. For the year endedDecember 31, 2020 we recorded a (benefit) for income taxes of$(12.0) million which was primarily the result of the deferred tax liability recorded in conjunction with the Convertible Notes as a source of taxable income to benefit the current year losses, partially offset by currentU.S. state and foreign income taxes. For the year endedDecember 31, 2019 we recorded a (benefit) for income taxes of$(65.5) million that was primarily comprised of theU.S. federal and state deferred tax benefit recorded in connection with the Avedro Merger relative to the amount of net loss before taxes, partially offset by currentU.S. state and foreign income taxes.
Comparison of Years ended
Year ended
December 31, % Increase
(in thousands) 2019 2018 (decrease)
Statements of operations data:
Net sales $ 236,984 $ 181,278 31 %
Cost of sales 38,588 25,075 54 %
Gross profit 198,396 156,203 27 %
Operating expenses:Selling, general and administrative 176,635 119,529 48 % Research and development 68,308 49,676 38 % In-process research and development 3,745 -
NM Total operating expenses 248,688 169,205 47 % Loss from operations (50,292) (13,002) NM % Non-operating income, net 256 634 (60) %
Income tax (benefit) provision (65,460) 583
NM Net income (loss)$ 15,424 $ (12,951) NM NM = Not Meaningful Net Sales
Net sales for the years ended
The increase in net sales from our glaucoma products resulted primarily from expansion ofU.S. sales of our iStent inject, the withdrawal from the market of a competitive MIGS device in lateAugust 2018 , and direct sales operations in our existing international markets. Net sales of glaucoma products inthe United States were$187.7 million and$151.7 million for the years endedDecember 31, 2019 andDecember 31, 2018 , respectively, increasing by 24%. International sales for the years endedDecember 31, 2019 andDecember 31, 2018 were$43.3 million and$29.6 million , 45 Table of Contents respectively, increasing by 46%. Net sales at our subsidiaries inAustralia ,Germany ,Japan ,France and theUnited Kingdom accounted for the majority of the increase internationally.
The remaining
Pricing for our products was not a significant contributing factor to the
increase in net sales for the year ended
Cost of Sales
Cost of sales for the years endedDecember 31, 2019 andDecember 31, 2018 were$38.6 million and$25.1 million , respectively, reflecting an increase of approximately$13.5 million or 54%. The increase was driven by growing worldwide volume, with approximately$4.0 million related to the acquisition fair market value inventory adjustment rollout and$2.3 million related to amortization of certain finite-lived intangible assets acquired, both of which are related to the Avedro Merger; offset by a one-time federal medical device excise tax refund benefit of approximately$0.5 million . Our gross margin was approximately 84% for the year endedDecember 31, 2019 compared to approximately 86% for the year endedDecember 31, 2018 .
Selling, General and Administrative Expenses
SG&A expenses for the years ended
The acquisition ofAvedro represented an increase in SG&A expenses of$19.1 million that were not in our 2018 results. These expenses were primarily comprised of$7.6 million due to stock-based compensation resulting from post-combination services associated with the Replacement Awards,$7.1 million related to legal, financial advisory and other transaction costs associated with the acquisition, and amortization of finite-lived intangible assets acquired of approximately$0.3 million . In connection with theAvedro acquisition, we implemented a restructuring plan inDecember 2019 that includes an estimated headcount reduction of 40 employees and a reallocation of responsibilities primarily within the SG&A functions. As ofDecember 31, 2019 we have accrued$4.1 million of restructuring plan costs, and we expect to incur a total of approximately$5.6 million in restructuring charges upon completion of the plan, which we expect to be completed in 2021.
We incurred
Additionally, the increase in SG&A expenses for the year endedDecember 31, 2019 primarily consisted of approximately$5.7 million related to our previously-disclosed patent litigation, approximately$10.1 million in professional services and software systems costs related to our global enterprise systems implementation, and$8.3 million in additional compensation and related employee expenses was associated with our growing number of domestic and international employees.
The remaining increase in SG&A expenses was primarily comprised of expenses
incurred for training samples related to our
Research and Development Expenses
R&D expenses for the years endedDecember 31, 2019 andDecember 31, 2018 were$68.3 million and$49.7 million , respectively, reflecting an increase of$18.6 million or 38%. The increase in R&D expenses was primarily the result of approximately$4.8 million in additional compensation and related employee expenses as well as an overall increase of approximately$12.3 million in other core R&D and clinical expenses, including expenses associated with our iDose Travoprost Phase III clinical trials. The acquisition ofAvedro also represented an increase of approximately$1.5 million in R&D expenses that were not in
our
2018 results.
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IPR&D expenses for the year endedDecember 31, 2019 were$3.7 million , comprised of$2.2 million related to the purchase of certain DOSE assets and$1.5 million related to the upfront payment for our exclusive global licensing agreement with Intratus. There were no IPR&D expenses for the year endedDecember 31, 2018 .
Non-Operating Income, Net
We had non-operating income, net of$0.3 million and$0.6 million for the years endedDecember 31, 2019 andDecember 31, 2018 , respectively. These amounts primarily relate to interest expense associated with the financing lease for ourAliso Viejo, California facility and recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates offset by increases in interest income related to our short-term investments.
Income Tax (Benefit) Provision
Our effective tax rate for the year ended 2019 was not meaningful due to the large deferred tax benefit recorded in connection with the Avedro Merger relative to the amount of our net loss before taxes. For the year endedDecember 31, 2019 we recorded a (benefit) for income taxes of$(65.5) million which was primarily comprised of theU.S. federal and state deferred tax benefit related to the Avedro Merger. For the year endedDecember 31, 2018 we recorded a provision for income taxes of$0.6 million that was primarily comprised of currentU.S. state and foreign income taxes.
Liquidity and Capital Resources
For the year endedDecember 31, 2020 , we incurred a net loss of$120.3 million and used cash from operations of$23.0 million . As ofDecember 31, 2020 , we had an accumulated deficit of approximately$310.1 million . We fund our operations from cash generated from commercial operations and proceeds from exercises of stock options, in addition to utilizing funds from theJune 2020 issuance of the Convertible Notes. 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. However, due to the COVID-19 economic slowdown, as disclosed above under "Impact of COVID-19 Pandemic and Current Economic Environment", we have also sought to preserve our cash position by instituting a number of cost saving initiatives, including substantial reductions in discretionary spending and capital expenditures, as well as a temporary salary reduction for many of our employees, which were reinstated in the fourth quarter of 2020. We have incurred a significant increase in administrative costs since we began operating as a public company. Our operating expenses have increased significantly following our acquisition ofAvedro , and we also expect to incur additional construction costs related to our new facility inAliso 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 ofDecember 31, 2020 , none of the conditions allowing holders of the Convertible Notes to convert had been met. If our trading price remains 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 , holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginningApril 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. 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 includes the remaining net proceeds from the Convertible Notes issued inJune 2020 (after payment
for
the related capped call
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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 consolidated financial statements for the year endedDecember 31, 2020 are made publicly available.
The following table summarizes our cash and cash equivalents, short-term
investments and selected working capital data as of
December 31, December 31,
2020 2019
Cash and cash equivalents $ 96,596 $ 62,430
Short-term investments 307,772 111,553
Accounts receivable, net 36,059 38,417
Inventory, net 15,809 42,578
Accounts payable 4,371 5,781
Accrued liabilities 45,331 51,919
Working capital (1) 419,740 205,178
(1) Working capital consists of total current assets less total current
liabilities
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:
Year ended
December 31,
(in thousands) 2020 2019 2018
Net cash (used in) provided by:
Operating activities $ (22,988) $ (369) $ 18,864
Investing activities (205,060) 43,426 (26,400)
Financing activities 262,542 (9,645) 21,576
Exchange rate changes (88) (252) 48
Net increase in cash, cash equivalents and
restricted cash $ 34,406 $
33,160
At
Operating Activities
In the year endedDecember 31, 2020 andDecember 31, 2019 , our operating activities used$23.0 million and$0.4 million of net cash, respectively. In the year endedDecember 31, 2018 our operating activities generated$18.9 million of net cash. 48 Table of Contents For the year endedDecember 31, 2020 , included in net cash used in operating activities reflected our net loss of$120.3 million , adjusted for non-cash items of$100.6 million , primarily consisting of stock-based compensation expense of$46.5 million , depreciation and amortization of$29.4 million , amortization of the inventory fair value adjustment as a result of the Avedro Merger of$24.7 million , amortization of lease right-of-use assets of$5.2 million , the fair value of cash-settled stock options of$3.2 million and a deferred income tax benefit of$12.2 million . This was offset by changes in operating assets and liabilities of$3.2 million , which resulted from decreases in accounts receivable, inventory, and other assets partially offset by decreases in accounts payable and accrued liabilities and increases in prepaid expenses and other assets. For the year endedDecember 31, 2019 , included in net cash used in operating activities reflected our net income of$15.4 million , adjusted for non-cash items of$7.3 million , primarily consisting of stock-based compensation expense of$36.3 million , depreciation and amortization of$6.3 million , amortization of the inventory fair value adjustment as a result of the Avedro Merger of$4.0 million , amortization of lease right-of-use assets of$3.6 million , the fair value of cash-settled stock options of$3.1 million and a deferred income tax benefit of$66.3 million . This was offset by changes in operating assets and liabilities of$8.5 million , which resulted from increases in accounts receivable, prepaid expenses and other current assets and other assets totaling$9.3 million , offset by increases in accounts payable and accrued liabilities and inventory of$0.8 million . For the year endedDecember 31, 2018 , included in net cash provided by operating activities reflected our net loss of$13.0 million , adjusted for non-cash items of$35.4 million , primarily consisting of stock-based compensation expense of$25.7 million and depreciation and amortization of$6.3 million . This was partially offset by changes in operating assets and liabilities of$3.6 million , which resulted from increases in accounts receivable, inventory and prepaid expenses and other current assets totaling$6.3 million , offset by increases in accounts payable and accrued liabilities and other assets of$2.7 million .
Investing Activities
In the year endedDecember 31, 2020 net cash from investing activities used approximately$205.1 million . In the year endedDecember 31, 2019 , net cash from investing activities generated$43.4 million , and in the year endedDecember 31, 2018 , we used approximately$26.4 million . In the year endedDecember 31, 2020 , we used approximately$301.0 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of$104.7 million and used approximately$1.8 million related to investments in company-owned life insurance. In the year endedDecember 31, 2019 , we used approximately$80.4 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of$80.5 million and used approximately$1.6 million related to investments in company-owned life insurance. Additionally, theAvedro Merger resulted in an increase in cash from investing activities of$49.7 million . In the year endedDecember 31, 2018 , we used approximately$93.7 million for purchases of short-term investments, received proceeds from sales and maturities of short-term investments of$78.9 million and used approximately$1.2 million related to investments in company-owned life insurance.
Cash used for purchases of property and equipment was approximately
Subject to our near-term deferral of certain capital expenditures due to the
COVID-19 pandemic, we expect to increase our 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.
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Financing Activities
In the year ended December 31, 2020 and December 31, 2018 our financing
activities provided $262.5 million and $21.6 million of net cash, respectively,
whereas in the year ended December 31, 2019 , our financing activities used $9.6
million of net cash.
In the year ended December 31, 2020 , we received net cash proceeds of
approximately $287.5 million related to our Convertible Notes, used $9.6 million
for transaction costs related to the Convertible Notes and used $35.7 million on
payment of the capped call transaction related to the Convertible Notes. We
received net cash proceeds of approximately $24.2 million from the exercises of
stock options and purchases of our common stock by employees pursuant to our
Employee Stock Purchase Plan and used $3.9 million for payment of employee taxes
related to restricted stock unit vestings.
In the year ended December 31, 2019 , we used approximately $22.5 million for
payment of debt assumed related to the Avedro Merger, we received net cash
proceeds of approximately $18.5 million from the exercises of stock options and
purchases of our common stock by employees pursuant to our Employee Stock
Purchase Plan and used $5.6 million for payment of employee taxes related to
restricted stock unit vestings.
In the year ended December 31, 2018 , we received net cash proceeds of
approximately $22.2 million from the exercises of stock options and purchases of
our common stock by employees pursuant to our Employee Stock Purchase Plan and
used $0.6 million for payment of employee taxes related to restricted stockunit vestings. Contractual Obligations
The following table summarizes our known contractual obligations as of
Payments due by period
Contractual obligations Less than More than
(in thousands) Total 1 year 1 - 3 years 3 - 5 years 5 years
Operating and finance lease obligations $ 161,571 $ 2,788 $ 7,394 $ 15,372 $ 136,017
Firm purchase commitments (i) 20,292 20,097 128 67 -
Total contractual obligations $ 181,863 $ 22,885 $ 7,522$ 15,439 $ 136,017
(i) Of the above disclosed amounts, we had
commitments for our implementation of global enterprise systems and capital
expenditures, respectively, as of
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in the rules and regulations of theSecurities 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, and 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 by 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.
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Critical Accounting Policies and Significant Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (GAAP). The preparation of these 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 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. While our significant accounting policies are more fully described in the Notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical for fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We derive our revenue from sales of our products in
We concluded that one performance obligation exists for the majority of our contracts with customers which is to deliver products in accordance with our normal delivery times. Revenue is recognized when this performance obligation is satisfied, which is the point in time when we consider control of a product to have transferred to the customer. Revenue recognized reflects the consideration to which we expect to be entitled in exchange for those products or services. We have determined the transaction price to be the invoice price, net of adjustments, which includes estimates of variable consideration for certain product returns. We offer volume-based rebate agreements to certain customers and, in these instances, we provide a rebate (in the form of a credit memo) at the contract's conclusion, if earned by the customer. In such cases, the transaction price is allocated between our delivery of product and the issuance of a rebate at the contract's conclusion for the customer to utilize on prospective purchases. The performance obligation to issue a customer's rebate, if earned, is transferred over time and our method of measuring progress is the output method, whereby the progress is measured by the estimated rebate earned to date over the total rebate estimated to be earned over the contract period. The provision for volume-based rebates is estimated based on customers' contracted rebate programs and the customers' projected sales levels. We periodically monitor our customer rebate programs to ensure the rebate allowance is fairly stated. Our rebate allowance is included in accrued liabilities in the consolidated balance sheets and estimated rebates accrued were not material during the periods presented. Additionally, we have a performance obligation related to certain customers' right to a future discount on single dose pharmaceutical purchases in theU.S. , and that performance obligation is expected to be recognized when the customer elects to utilize the discount, which is generally within one year. Additionally, we have a performance obligation related to extended warranty agreements with customers related to our KXL systems. Customers are not granted specific rights of return; however, we may permit returns of certain products from customers if such product is returned in a timely manner and in good condition. We generally provide a warranty on our products for one year from the date of shipment, and offer an extended warranty for our KXL systems. Any product found to be defective or out of specification will be replaced or serviced at no charge during the warranty period. Estimated allowances for sales returns and warranty replacements are recorded at the time of sale of the product and are estimated based upon the historical patterns of product returns matched against sales, and an evaluation of specific factors that may increase the risk of product returns. Product returns and warranty replacements to date have been consistent with amounts reserved or accrued and have not been significant. If actual results in the future vary from our estimates, we will adjust these estimates which would affect net product revenue and earnings in the period such variances become known. 51 Table of Contents
Clinical Trial Expense Accruals
As part of our R&D expenses, we accrue at each balance sheet date the estimated costs of clinical study activities performed by third-party clinical sites with whom we have agreements providing for fees based upon the quantities of subjects enrolled and clinical evaluation visits that occur over the life of the study. The estimates are determined based upon a review of the agreements and data collected by internal and external clinical personnel as to the status of enrollment and subject visits, and are based upon the facts and circumstances known to us at each financial reporting date. If the actual timing of performance of activities varies from the assumptions used in the estimates, we adjust the accruals accordingly. There have been no material adjustments to our prior period accrued estimates for clinical trial activities throughDecember 31, 2020 . If we underestimate or overestimate the activity or fees associated with a study or service at a given point in time, adjustments to R&D expenses may be necessary in future periods. Subsequent changes in estimates may result in a material change in our accruals. Material nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
Intangible Assets
Intangible assets primarily consist of developed technology, customer relationships, and IPR&D assets related to the Avedro Merger, as well as the buyout of a royalty payment obligation.
Intangible assets with finite-lives include developed technology, customer relationships and the buyout of a royalty payment obligation, which are amortized on a straight-line basis over their estimated useful lives, which range from five to eleven years. We review finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. When such an event occurs, management determines whether there has been impairment by comparing the anticipated undiscounted future net cash flows to the related asset group's carrying value. Indefinite-lived intangible assets are comprised of IPR&D assets associated with other applications ofAvedro's corneal remodeling platform, which will not be amortized until technological feasibility is met, but will be assessed for impairment annually.
Please see Note 7, Intangible Assets and
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed.Goodwill is not amortized, but is tested for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate the carrying value may no longer be recoverable and that an impairment loss may have occurred. The Company operates as one segment, which is considered to be the sole reporting unit, and therefore goodwill is tested for impairment at the consolidated level. Please see Note 6, Business Combinations and Note 7, Intangible Assets andGoodwill to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for additional information on our goodwill.
Inventory Valuation
Except for inventory acquired in connection with the Avedro Merger, further
described in Note 6, Business Combinations to the consolidated financial
statements in Item 8 of this Annual Report on Form 10-K, we value inventory at
the lower of cost and net realizable value. Cost is determined by the first-in,
first-out method. This policy requires us to make estimates regarding the market
value of our inventory, including an assessment of excess or obsolete inventory.
We evaluate inventory for excess quantities and obsolescence based on an
estimate of the future demand for
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our product within a specified time horizon, and record an allowance to reduce the carrying value of inventory as determined necessary. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
Stock-Based Compensation Expense
Stock-based compensation expense for stock options is measured at the date of grant, based on the estimated fair value of the award using the Black-Scholes option pricing model.
Stock-based compensation expense for restricted stock units is also measured at the date of grant, based on the closing price of our common stock.
For awards subject to time-based vesting conditions, we recognize stock-based compensation expense over the requisite service period on a straight-line basis, net of estimated forfeitures. The estimation of the fair value of each stock-based option grant or issuance on the date of grant involves numerous assumptions by management. Although we calculate the fair value under the Black-Scholes option pricing model, which is a standard option pricing model, this model still requires the use of numerous assumptions, including, among others, the expected life (turnover), volatility of the underlying equity security, a risk free interest rate and expected dividends. Because we have a limited operating history as a public company, there is a lack of company-specific historical and implied volatility data, and therefore we have estimated stock price volatility based upon an index of the historical volatilities of a group of comparable publicly-traded medical device peer companies. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected term of our stock options using the "simplified" method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. The use of different values by management in connection with these assumptions in the Black-Scholes option pricing model could produce substantially different results.
Convertible Senior Notes
We evaluate embedded conversion features within convertible debt under ASC 815, Derivatives and Hedging to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options. The carrying amount of the liability component is calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the convertible notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (i.e., debt discount) will be amortized to interest expense over the term of the convertible notes. We may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of convertible debt. These costs may be paid in the form of cash or equity (such as warrants). These costs are allocated between debt and equity, with the portion allocated to debt amortized to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes
to our consolidated financial statements included in Part II, Item 8 of this
Annual Report on Form 10-K.
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