GLAUKOS CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
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 first developed Micro-Invasive Glaucoma Surgery (MIGS) as an alternative to the traditional glaucoma treatment paradigm, launching our first MIGS device commercially in 2012, and have since developed a portfolio of technologically distinct and leverageable platforms to support ongoing pharmaceutical and medical device innovations. Products or product candidates for each of these platforms are designed to advance the standard of care through better treatment options across the areas of glaucoma, corneal disorders such as keratoconus, dry eye and refractive vision correction, and retinal diseases such as neovascular age-related macular degeneration (AMD), diabetic macular edema (DME), and retinal vein occlusion (RVO).
Impact of the 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 in
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 has generally continued, with periodic volatility in certain geographies in which we operate, through December 31, 2021. Most recently the Omicron variant has led to a material increase in diagnosed cases worldwide, creating new government restrictions in select geographies and impacting elective procedures in hospital and ambulatory surgery center sites. Additionally, the COVID-19 pandemic has led to widespread staffing shortages, including in ambulatory surgery centers, which may also impact elective procedures. These trends accelerated at the end of December 2021and continued through the date herein. We 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. While we cannot predict the full impact of COVID-19 on the timing of completion of our clinical trials and the expected regulatory approvals for our pipeline products, our disclosed targeted approval dates anticipate, to our best estimate, such impact. Additionally, some of our vendors are continuing to experience supply challenges, both in the acquisition of raw materials as well as due to limited headcount resources, and we have experienced higher costs for certain raw materials. These challenges have led to delays and partial or unfulfilled deliveries of certain components needed for the manufacture of our products, in some cases requiring us to find second sources for materials. If these delays and partial or unfulfilled deliveries persist, they could impact our ability to ship some of our products to our customers, or bring some of our pipeline products to market, in a timely manner. We believe that much of these supply challenges stem from the ongoing obstacles presented by COVID-19. In 2020, when COVID had its greatest financial impact to date, we sought to preserve our cash position by instituting a number of cost saving initiatives, including temporary reductions in discretionary spending and capital expenditures. We temporarily deferred a significant portion of our planned 2020 capital expenditures, particularly those related to facilities expansion and consolidation plans, which were reinstituted as state and local governments
began to 37 Table of Contents authorize re-openings. Further, in
June 2020, we issued an aggregate principal amount of $287.5 millionof 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 of December 31, 2021, we had cash, cash equivalents, short-term investments, and restricted cash of approximately $423.5 million, compared to $413.9 millionas of December 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 such as the Delta and Omicron variants, 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. Financial Overview
The most important financial indicators we use to evaluate our business are net sales, gross margin, operating expenses and cash.
December 31, December 31, 2021 2020 Net sales
$ 294,011 $ 224,959Gross margin 77 % 59 % Operating expenses $
Cash, cash equivalents, short-term investments and restricted cash
Please see Results of Operations and Liquidity and Capital Resources below for a detailed analysis of each of the above items, including an analysis of year-over-year fluctuations.
We incurred net losses of
$49.6 millionand $120.3 millionfor the years ended December 31, 2021and December 31, 2020, respectively and as of December 31, 2021, we had an accumulated deficit of $365.2 million.
Material Changes and Transactions
The acquisition of
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). Avedrodeveloped 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. Recent Developments 2022 U.S. reimbursement rates On November 2, 2021, the United States (U.S.) Centers for Medicare & Medicaid Services(CMS) published its final rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility fee payment rates for services furnished in both the ambulatory surgery center and hospital outpatient settings (Final Rules). These Final Rules superseded the proposed rates that were issued by CMS in July 2021which were much lower than the rates issued in the Final Rules. Compared to the 2021 reimbursement rates, the Final Rules contained a new, significantly lower physician fee related to the implantation of trabecular bypass stents, such as our iStent family of products, in conjunction with cataract surgery. Conversely, the facility fee schedule related to surgeries that include implantation of trabecular bypass 38
stents, such as our iStent family of products, in conjunction with cataract surgery, slightly decreases reimbursements to an ambulatory surgery center and increases reimbursements to a hospital. We estimate that approximately 80% of procedures utilizing our trabecular micro-bypass technologies in the
U.S.are performed in the ambulatory surgery center setting and the remaining estimated 20% of procedures are performed in the hospital. Additionally, the Final Rules established facility fee payment rates that were lower than anticipated for standalone insertion of an aqueous drainage device in the ambulatory surgery center and hospital settings, which would be the procedure that such facilities would use with our iStent infinite product, which is not yet approved by the FDA. These CMS reimbursement rates contained in the Final Rules took effect January 1, 2022. U.S.glaucoma volumes were negatively impacted during the third and fourth quarter of 2021 as typical customer ordering patterns were disrupted and trialing of competitive products increased in anticipation of the potential 2022 CMS physician and facility fee reimbursement rate decreases becoming effective as originally proposed in July 2021. The physician fee reimbursement rate as issued in the Final Rules may continue to have an adverse impact on 2022 procedural iStent family product volumes, in conjunction with cataract surgery, as well as on our 2022 U.S. combo-cataract glaucoma revenues, gross profit, and net income, the full extent of which is not known at this time.
Attilaps License Agreement
September 20, 2021, we announced that we had entered into a licensing agreement (Attillaps License Agreement) with Attillaps Holdings, Inc.(Attillaps) under which Attillaps granted us a global exclusive license to Attillaps' proprietary library of investigational pharmaceutical compounds that target the eradication of Demodex mites, which are the root cause of Demodex blepharitis and often associated with meibomian gland dysfunction and related ophthalmic diseases. Under the Attillaps Licensing Agreement, we have the exclusive global right to research, develop, manufacture and commercialize products using certain acetylcholinesterase inhibitors for the treatment of ophthalmic diseases caused by Demodex mites. We paid $5.0 millionupon the signing of the Attillaps License Agreement and will have ongoing milestone and royalty payment obligations depending on the success of the development, approval and commercialization of the compounds.
Settlement of a patent dispute
September 14, 2021, we entered into a settlement agreement (Settlement Agreement) with Ivantis, Inc.( Ivantis), pursuant to which we and Ivantisagreed to terminate the patent infringement lawsuit we had filed against Ivantison April 14, 2018in the U.S. District Court for the Central District of California, Southern Division (the Lawsuit). In the Lawsuit, we alleged that Ivantis'Hydrus® Microstent device infringes our U.S.Patent Nos. 6,626,858 and 9,827,143. Pursuant to the terms of the Settlement Agreement, Ivantishas made cash payments totaling $60.0 million, $30.0 millionof which was paid to us during the year ended December 31, 2021, and $30.0 millionof which was paid to us in January 2022. Additionally, Ivantiswill make quarterly royalty payments to us in the amount of 10% of Ivantis'Hydrus Microstent U.S.sales and any international sales supplied out of the U.S.beginning in the fourth quarter of 2021 through April 26, 2025, subject to a per-unit minimum payment. We and Ivantishave dismissed with prejudice all of our claims against each other in the Lawsuit, which was scheduled for trial beginning on or around September 28, 2021, and in related lawsuits in other forums and jurisdictions. The parties also have agreed to mutual licenses and covenants not to sue the other party for patent infringement relating to Ivantis'Hydrus Microstent or our micro-stent devices.
Santen License Agreement
May 18, 2021, we announced that we entered into a new development and commercialization license agreement with Santen Pharmaceutical Co., Ltd. ( Santen) for the PreserFlo MicroShunt, superseding the previous collaboration and distribution agreements between the two parties. Under the new agreement, we obtain exclusive commercialization rights for the MicroShunt in the United States, Australia, New Zealand, Canada, Brazil, Mexicoand the remainder of Latin America. The new agreement also provides us with control over development activities for the MicroShunt in these same territories, including clinical development and regulatory affairs activities in the United Statesfollowing a transition period. Santensubmitted a premarket approval (PMA) application to the U.S. Food and Drug Administration(FDA) in June 2020and discussions with the FDA remain ongoing. We did not make any payment in connection with the execution of the license agreement; however, should we be successful in obtaining regulatory 39 Table of Contents
approval of the PreserFlo MicroShunt, we would be required to pay
Modification of the Intratus license
April 14, 2021, we announced that we had entered into an amended licensing agreement with Intratus, Inc.(Intratus) under which Intratus granted us a global exclusive license to research, develop, manufacture and commercialize Intratus' patented, non-invasive drug delivery platform for application in the treatment of presbyopia. The addition of presbyopia expands upon the existing agreement between us and Intratus announced on July 22, 2019. The amendment includes a mechanism to further expand the existing agreement to other indications, applying the active pharmaceutical ingredients being advanced by us in glaucoma, corneal disorders and presbyopia to new ophthalmic fields.
Factors affecting our performance
In addition to the disruption resulting from COVID-19 as discussed above, the full effects of which are difficult to predict at this time, our operations to date have been, and we believe our future growth will be, impacted by the following:
the rate at which we are expanding our global sales and marketing infrastructure, and
? how quickly we can continue to build awareness of our products to
patients and doctors;
? timely approval of new products by regulatory authorities and
indications for use;
our industry is highly competitive and subject to rapid and profound change
? technological, market and product developments. Our success depends on
hand, on 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 to what extent, our
products are used by physicians and the procedures and treatments those physicians choose to administer to their patients;
physicians who use our products may not perform procedures during certain
? times of the year, due to the seasonality patterns typical of some of our
procedures, or when they are absent from their practices for various reasons;
? the coverage and reimbursement rates set by CMS and third-party payers for
procedures for using our products;
our ability to achieve commercialized products from the licensing and
? distribution agreements and other partnerships in which we have entered into and
will enter in the future; and
the impact of exchange rate fluctuations, as most of our
? international sales are denominated in the local currency of the country
where we sell our products.
Further, we have made and expect to continue to make significant investments in our global sales force, marketing programs, research and development (R&D) 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. Our operating expenses have increased significantly following our acquisition of
Avedro, and we also have incurred additional construction costs related to our new facility in Aliso Viejo, California(Aliso Facility).
We expect 2022 near-term revenue and performance to reflect increasing competitive momentum, the impact of reduced physician fee reimbursement rates contained in the CMS Final Rules and the continued disruption resulting from COVID-19, the full effects of which are difficult to predict at this time. this time.
Although we have been profitable during certain periods of our operating history, there can be no assurance that we will be profitable or that we will generate operating cash flow in the future.
40 Table of Contents
Components of operating results
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 and royalty income. 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 the majority of our products through a direct sales organization in
the United States. Internationally, we sell our products primarily through direct sales subsidiaries in seventeen 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 2021 due in part to the COVID-19 pandemic and its effect on our commercial performance may continue into future reporting periods. We also believe the 2022 CMS physician fee and facility fee rate decreases, which were finalized in the fourth quarter 2021, have disrupted traditional customer ordering patterns and have resulted in our customers' trialing of competitive products, causing reduced U.S.Glaucoma sales volumes during our third and fourth quarter of 2021. 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 overall costs of manufacturing our products and includes raw material costs, labor costs, manufacturing overhead and the effect of changes in the reserve balance for excess and obsolete inventory. .
We manufacture our iStent products at our current headquarters in
San Clemente, Californiausing components manufactured by third parties. We manufacture our KXL systems at our manufacturing facilities in Burlington, Massachusetts, and we contract with third-party manufacturers in the U.S.and Germanyto produce our Photrexa and other associated drug formulations. Due to the relatively low production volumes of our iStent products and our KXL 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 2014agreement 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 the fourth quarter of 2022.
The cost of sales includes the amortization of
million. Additionally, cost of sales included amortization of the fair market value inventory adjustment recorded in connection with the Avedro Merger, which for the years ended
December 31, 2020and December 31, 2019was $24.7 millionand $4.0 million, respectively, 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 or supply chain 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 royalty expenses on current or future products associated with various licensing agreements. Other factors adversely affecting our net sales in future periods, including the impact of the COVID-19 pandemic and any related supply chain issues, and the impact of reductions by CMS in 2022 Medicare payment rates for certain of our products and related services, may also impact our gross profit margins in future periods.
Selling, general and administrative expenses
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 intraocular 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. 42
Our in-process research and development (IPR&D) expenses relate to the amendment of our exclusive licensing agreement with
Intratus, Inc.and our Attillaps License Agreement. Upfront payments of $5.0 millionwere made in connection with each of these agreements and were expensed to IPR&D as management determined there were no alternative future uses for the technology acquired.
Pursuant to the terms of the Settlement Agreement,
Ivantispaid us $30.0 millionduring the year ended December 31, 2021. The $30.0 millioncash payment received during the year ended December 31, 2021is included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.
Non-operating income (expenses), net
Non-operating (expense) income, net primarily consists of interest expense associated with our finance lease for our Aliso 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.
Our tax provision is primarily comprised of state and foreign income taxes. Our net deferred tax liability of
$7.3 millionat December 31, 2021represents 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 reservations for uncertain tax positions when we believe that the ability to maintain the tax position does not reach a more likely than not threshold.
For discussion related to the results of operations and changes in financial condition for the year ended
December 31, 2020compared to the year ended December 31, 2019refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our 2020 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commissionon March 1, 2021.
Comparison of completed exercises
Year ended December 31, % Increase (in thousands) 2021 2020 (decrease) Statements of operations data: Net sales
$ 294,011 $ 224,95931 % Cost of sales 66,627 91,719 (27) % Gross profit 227,384 133,240 71 % Operating expenses:
Selling, general and administrative 179,257 171,401 5 % Research and development 100,999 85,392 18 % In-process research and development 10,000 -
Litigation-related settlement (30,000) -
NM Total operating expenses 260,256 256,793 1 % Loss from operations (32,872) (123,553) (73) % Non-operating loss, net (16,395) (8,761) 87 %
Income tax provision (benefit) 326 (11,966)
NM Net loss
$ (49,593) $ (120,348)(59) % NM = Not Meaningful 43 Table of Contents Net Sales Our net sales are generated primarily from sales of iStent products to customers and sales of Photrexa and associated drug formulations as well as KXL systems to customers. Customers are primarily comprised of ambulatory surgery centers, hospitals and physician private practices, with distributors being used in certain international locations where we currently do not have a direct commercial presence.
Net sales for the years ended
Net sales of glaucoma products in the
U.S.were $170.8 millionand $133.7 millionfor the years ended December 31, 2021and December 31, 2020, respectively, increasing by approximately 28% primarily due to the demand for combined cataract and glaucoma procedures increasing during the year ended December 31, 2021as compared to the year ended December 31, 2020given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021, with periodic demand volatility in certain geographies in which we operate. We also believe the 2022 CMS physician fee and facility fee rate decreases that were proposed in July 2021disrupted traditional customer ordering patterns and resulted in our customers' trialing of competitive products. International sales of glaucoma products for the years ended December 31, 2021and December 31, 2020were $61.2 millionand $45.6 million, respectively, increasing by approximately 34%. The increase in international sales reflects growing demand in many key international markets for combined cataract and glaucoma procedures during the year ended December 31, 2021as compared to the year ended December 31, 2020given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021, with periodic demand volatility in certain international geographies in which we operate, and favorable foreign exchange rates compared to the prior year. Net sales of corneal health products were $62.0 millionand $45.6 millionfor the years ended December 31, 2021and December 31, 2020, respectively, increasing by 36%. The $16.4 millionincrease in net sales generated from our corneal health products was comprised of an increase of approximately $13.6 millionin U.S.sales using direct sales operations and an increase of $2.8 millioninternationally where we utilize distributors given we do not have a direct commercial presence, due to these distributors returning to their more stabilized pre-COVID ordering patterns. The $13.6 millionincrease in U.S.sales of corneal health products includes an increase of approximately $14.7 millionof Photrexa net sales, partially offset by reductions of approximately $1.1 millionin U.S.capital equipment sales. Sales of corneal health products in 2020 were negatively impacted by disruption resulting from COVID-19. Demand for corneal health products increased during the year ended December 31, 2021given a return to more normalized procedure levels following the rollout of the COVID-19 vaccines, a trend that generally continued throughout 2021. Additionally, corneal health sales for the year ended December 31, 2021were positively impacted by higher realized average sales and continued new account starts. Cost of Sales Cost of sales for the years ended December 31, 2021and December 31, 2020were $66.6 millionand $91.7 million, respectively, reflecting a decrease of approximately $25.1 millionor 27%. The decrease was primarily comprised of a decrease of approximately $24.7 millionrelated to the acquisition fair market value inventory adjustment rollout that was fully amortized as of December 31, 2020, and a decrease of approximately $2.3 million, net related to the acquisition fair market value inventory adjustment recorded in 2020 in connection with the Avedro Merger that was fully amortized as of December 31, 2020. These decreases were partially offset by normal increases in cost of sales due to higher net sales for the year ended December 31, 2021as compared to the year ended December 31, 2020. Our gross margin was approximately 77% for the year ended December 31, 2021compared to approximately 59% for the year ended December 31, 2020. The increased gross margin resulted primarily from the increased net sales during the year ended December 31, 2021as discussed above, the aforementioned fair market value inventory adjustment and, to a lesser extent, changes in product mix, most notably the inclusion of modestly lower margin products related to international market sales. 44
Selling, general and administrative expenses
General and administrative expenses for the years ended
Of the total
$179.3 million, approximately $102.6 millionwas comprised of compensation and related employee expenses, with the remaining $76.7 millionspent on our marketing programs, advertising, post-approval clinical studies, conferences and congresses, travel expenses, costs associated with obtaining and maintaining our patent portfolio, and professional fees for accounting, auditing, consulting and legal services. We incurred approximately $112.4 millionand $98.2 millionin commercial personnel and discretionary spending in the years ended December 31, 2021and December 31, 2020, respectively, related primarily to existing sales infrastructure in glaucoma and corneal health. We also incurred approximately $66.8 millionand $73.1 millionof general and administrative personnel and discretionary spending for the years ended December 31, 2021and December 31, 2020associated with our ongoing administrative functions and amortization of our right-of-use asset related to our long-term lease for the Aliso Facility. The above increase in SG&A expenses for the year ended December 31, 2021was due to a return toward more normalized levels of spending to support increased demand for glaucoma and keratoconus procedures in certain key geographic markets in which we operate, relative to the year ended December 31, 2020, when we incurred temporary reductions in compensation and related employee expenses for our executive team, senior leadership, and many others throughout the company, and reduced professional services expenses as part of cost-savings measures in response to the COVID-19 pandemic. These increases in SG&A expenses during the year ended December 31, 2021compared to the year ended December 31, 2020were partially offset by approximately $5.2 millionin decreased patent infringement expenses, $6.6 millionin decreased stock-based compensation associated with the various stock option and restricted stock awards we granted in connection with the Avedro Merger, $2.2 millionin decreased sales tax reserve and a decrease of approximately $1.5 millionfor costs incurred for restructuring and integration expenses related to the Avedro Merger.
Research and development costs
R&D expenses for the years ended
$66.6 millionin core R&D expenses and $34.4 millionin clinical expenses, comprised of $50.1 millionin compensation and related employee expenses with the remaining $50.9 millionspent on the continued research and development, clinical studies, regulatory activities, quality assurance, clinical inventory and supplies for surgical glaucoma product candidates and pharmaceutical projects, such as a pharmaceutical therapeutic system for the treatment of keratoconus without the removal of the epithelium (often referred to as "epi-on"), iDose and our earlier stage programs for dry eye, presbyopia, retina and other therapeutic investments.
IPR&D expenses for the year ended
December 31, 2021related to the amendment of our exclusive licensing agreement with Intratus and our Attillaps License Agreement. We paid $5.0 millionupon signing of each of these agreements. There were no IPR&D expenses during the year ended December 31, 2020.
$30.0 millioncash payment from the Settlement Agreement received during the year ended December 31, 2021is included in litigation-related settlement as a reduction of operating expenses on the consolidated statements of operations.
Non-operating income (expenses), net
We had non-operating expenses, net of
recognized related to the Convertible Notes and to the finance lease for our Aliso Facility, as well as recognition of unrealized foreign currency losses due to higher intercompany loan balances denominated in, and impacted by, changes in foreign currency exchange rates.
Provision for income tax (benefit)
Our effective tax rate for the year ended
December 31, 2021was not meaningful. For the year ended December 31, 2021and December 31, 2020, we recorded a provision/(benefit) for income taxes of $0.3 millionand $(12.0) million, respectively. For the year ended December 31, 2021, our tax provision was primarily comprised of state and foreign income taxes. For the year ended December 31, 2020, our tax benefit resulted from the issuance of the Convertible Notes partially offset by state and foreign income taxes.
Cash and capital resources
Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, cash generated from operating, financing and investing activities and proceeds from our senior convertible notes issuance. Our primary uses of cash have been for selling and marketing activities, research and development programs, and capital expenditures.
The following table summarizes our cash and cash equivalents, short-term investments and certain working capital data as at
December 31, December 31, 2021 2020 Cash and cash equivalents
$ 100,708 $ 96,596Short-term investments 313,343 307,772 Accounts receivable, net 33,438 36,059 Inventory 23,011 15,809 Accounts payable 7,333 4,371 Accrued liabilities 56,027 45,331 Working capital (1) 422,766 419,740
(1) Working capital corresponds to total current assets minus the total
liabilities Main Sources of Liquidity We plan to fund our operations, commitments for capital expenditures and other short and long-term known contractual and other obligations 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), and the $30.0 millionpayment by Ivantisduring the year ended December 31, 2021, which is being used for working capital and general corporate purposes. See above in the Material Changes and Transaction section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cash, cash equivalents, short-term investments and restricted cash
Our cash, cash equivalents and short-term investments totaled approximately
Operating cash flow
For the twelve months ended
46 Table of Contents Senior Convertible Notes
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 8 of the notes to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. As of
December 31, 2021, none of the conditions allowing holders of the Convertible Notes to convert had been met. These conditions are measured each quarter. For example, 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, 2022, holders of the Convertible Notes would have the right to convert their Convertible Notes during the calendar quarter beginning April 1, 2022. 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. Settling all or a portion of the conversion obligation in cash could adversely affect our liquidity. In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. 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 and 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.
Short-term liquidity requirements
Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our senior convertible notes, funding R&D projects, capital expenditures for the development of our facilities and office spaces as we continue our development of our Aliso Facility, and short-term material cash requirements as described below. As of
December 31, 2021, we had net working capital of $422.8 million, which indicates that our current assets are more than enough to cover our short-term liabilities.
Long-term liquidity requirements
Our long-term liquidity requirements primarily consist of interest and principal payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and long-term material cash requirements as described below. As demand grows for our products, we will continue to expand global operations to meet demand through investments in manufacturing and operations.
Material cash needs
The following table summarizes our material cash requirements, including commitments for capital expenditures and known contractual and other obligations as of
December 31, 2021, and the amount required to satisfy those requirements in future periods. Payments due by period Less than More than (in thousands) Total 1 year 1 - 3 years 3 - 5 years 5 years Operating and finance lease obligations $ 187,037 $ 3,365 $ 21,904 $ 17,473 $ 144,295Interest payments on Convertible Senior Notes 43,485 7,906 15,813 15,813 3,953 Firm purchase commitments 28,043 26,172 1,871 - - Total $ 258,565 $ 37,443 $ 39,588 $ 33,286 $ 148,248After funding the current operations of our commercial activities, the first planned use of our cash flow from operations is to provide capital funding for our R&D and clinical activities. In addition to investing in R&D and clinical activities, we expect to utilize cash for various capital expenditures including the expansion and enhancement of our 47
facilities. 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 believe that cash flows from operating, financing and investing activities, as well as our cash and investing balances, will be sufficient to meet ongoing operations, capital expenditures, commitments, working capital requirements and other known contractual and other obligations and to meet our liquidity needs for at least the next 12 months and the foreseeable future.
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) 2021 2020 Net cash provided by (used in): Operating activities
$ 24,708 $ (22,988)Investing activities (58,232) (205,060) Financing activities 39,260 262,542 Exchange rate changes (1,774) (88)
Net increase in cash, cash equivalents and restricted cash
In the year ended
For the year ended
December 31, 2021, our net cash provided by operating activities reflected our net loss of $49.6 million, adjusted for non-cash items of $70.7 million, primarily consisting of stock-based compensation expense of $30.1 million, depreciation and amortization of $29.7 million, amortization of lease right-of-use assets of $4.8 million, and amortization of debt issuance costs of $1.4 million. This was partially offset by changes in operating assets and liabilities of $3.6 million, which resulted from increases in accounts payable and accrued liabilities and decreases in accounts receivable, partially offset by increases in inventory and prepaids and other current assets. For the year ended December 31, 2020, our 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 millionand 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. 48 Table of Contents Investing Activities
In the year ended
In the year ended
December 31, 2021, we used approximately $215.3 millionfor purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $206.9 millionand used approximately $2.1 millionrelated to investments in company-owned life insurance. In the year ended December 31, 2020, we used approximately $301.0 millionfor purchases of short-term investments, received proceeds from sales and maturities of short-term investments of $104.7 millionand used approximately $1.8 millionrelated to investments in company-owned life insurance.
Cash used for the purchase of property, plant and equipment was approximately
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.
In the past years
In the year ended
December 31, 2021, we received $30.9 millionfrom the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.7 millionfor payment of employee taxes related to restricted stock unit vestings. Additionally, we received $12.7 millionin proceeds from our tenant improvement allowances of our Aliso Facility and paid $0.7 millionin principal on our finance lease. In the year ended December 31, 2020, we received net cash proceeds of approximately $287.5 millionrelated to our Convertible Notes, used $9.6 millionfor transaction costs related to the Convertible Notes and used $35.7 millionon payment of the capped call transaction related to the Convertible Notes. We received net cash proceeds of approximately $24.2 millionfrom the exercises of stock options and purchases of our common stock by employees pursuant to our Employee Stock Purchase Plan and used $3.9 millionfor payment of employee taxes related to restricted stock unit vestings.
In addition to the amounts included in the table above, there may be significant cash obligations associated with our convertible notes in the event that they become convertible and are converted.
We do not have any off-balance sheet arrangements or significant interests in variable interest entities.
Significant Accounting Policies and 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 with
U.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. 49
While our significant accounting policies are more fully described below and 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 the sale 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 only recognize revenue when it is probable that we will collect the consideration we are entitled to in exchange for the goods transferred to a customer. This requires management to perform an assessment related to the probability of collecting the consideration. The assessment can contain judgment when it is performed for customers with declining credit conditions or those with no history or a limited history of product sales with us. 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. 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.
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. 50
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. During the year ended
December 31, 2021the Company based the expected volatility on a weighted average of the historical volatility of its common stock and historical volatilities of a peer group of similar companies over the most recent period commensurate with the estimated expected term of the Company's stock options. During the years ended December 31, 2020and 2019, the expected volatility assumption was based on historical volatilities of a peer group of similar companies whose share prices were publicly available. The peer group was developed based on companies in the biotechnology industry. 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.
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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