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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark one)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2021
 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ______________.
 
Commission file number: 001-38241

 https://cdn.kscope.io/91ee5a9aa5153cd5ace922fcb9f841d9-optn-20210930_g1.jpg

OPTINOSE, INC.
(Exact name of registrant as specified in its charter)
 
Delaware42-1771610
(State of other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
 
1020 Stony Hill Road, Suite 300
Yardley, Pennsylvania 19067
(Address of principal executive offices, including zip code)
 
(267) 364-3500
(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.001 per shareOPTNNasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 
 
    




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

    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes    No 

The number of shares of the registrant's common stock outstanding at October 31, 2021 was 53,449,567 shares.



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_________________________

Unless the context otherwise requires, all references in this Form 10-Q to "Optinose," "Company," "we," "us," and "our" refer to OptiNose, Inc. and its subsidiaries.
_________________________
Trademark Notice
OPTINOSE® and XHANCE® are trademarks of ours in the United States. All other trademarks, trade names and service marks appearing in this Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies' trademarks, trade names or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.


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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements relating to:
the impact of, our plans regarding and the uncertainties caused by, the COVID-19 pandemic, including without limitation, our expectation that the COVID-19 pandemic will negatively impact XHANCE prescription and product revenue growth rates for the remainder of 2021 and into 2022;
the potential uses for and advantages of XHANCE®, our product candidates and Exhalation Delivery System (EDS) devices and technologies;
our planned product development activities, studies and clinical trials in pursuit of a follow-on indication for XHANCE for the treatment of chronic sinusitis;
the potential for XHANCE to be the first drug therapy approved by the U.S. Food and Drug Administration (FDA) for the treatment of chronic sinusitis;
the potential for XHANCE to be the standard of care for the treatment of chronic rhinosinusitis with and without nasal polyps;
the potential for continued XHANCE prescription and net revenue growth and potential drivers of such growth;
the potential for direct-to-consumer (DTC) advertising to be a future driver of XHANCE prescription growth;
the potential benefits of our patient affordability programs and their potential effect on XHANCE demand and financial results;
the potential for XHANCE prescriptions to be affected by the seasonality impact observed in the intranasal steroid (INS) market;
the potential for XHANCE prescriptions and average net revenue per prescription to be adversely impacted by the annual resetting of patient healthcare insurance plan deductibles and changes in individual patients' healthcare insurance coverage, both of which often occur in January;
our expectation that consolidated XHANCE net product revenues for the full year of 2021 will be between $71.0 and $75.0 million;
our expectation that average net product revenues per prescription for the full year of 2021 will exceed $210 and the factors supporting such growth;
our expectation that our total GAAP operating expenses in 2021 will be between $132.0 million and $137.0 million and that our non-cash stock-based compensation expense will be approximately $10.0 million;
our expectation that top-line results will be available from the first of our two ongoing Phase 3b chronic sinusitis clinical trials in the first quarter of 2022 and from the second clinical trial in the second quarter of 2022;
our belief that, based on the results of blinded interim analyses and our assumptions and estimates relating to the trial, the initial targeted statistical power will be achieved with the approximately 330 patients currently enrolled in our first chronic sinusitis trial and the approximately 210 patients currently enrolled in our second chronic sinusitis trial;
our belief that existing cash and cash equivalents will be sufficient to maintain the minimum cash balance required under the Note Purchase Agreement that we entered into with funds managed by Pharmakon Advisors, LP, the investment manager of the BioPharma Credit Funds (the Note Purchase Agreement) and to fund our operations for at least the next twelve months from the filing date of this Form 10-Q if, in the event of a default, the holders of the notes issued pursuant to the Note Purchase Agreement do not otherwise elect to accelerate repayment of all unpaid principal and accrued interest under the Note Purchase Agreement;
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our ability to continue as a going concern and maintain compliance with the financial covenants to achieve certain minimum trailing twelve-month consolidated XHANCE net product sales and royalties and other covenants under the Note Purchase Agreement and, if required, our ability to obtain a waiver or modification of such covenants;
our expectation that the research and development costs associated with the conduct of our current chronic sinusitis clinical trials will significantly decrease;
our ability to maintain sufficient inventory of XHANCE and for our manufacturers to timely supply XHANCE;
our development, timing of data and funding plans for OPN-019 and the potential benefits of OPN-019; and
the accuracy of our estimates regarding expenses, future revenue, capital requirements and need for additional financing;
as well as other statements relating to our future operations, financial performance and financial condition, prospects, strategies, objectives or other future events. Forward-looking statements appear primarily in the sections of this Form 10-Q entitled “Item 1. Financial Statements,” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by words such as “may,” “will,” “could,” “would,” “should,” “expect,” “confident,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “scheduled” and similar expressions, although not all forward-looking statements contain these identifying words.
Forward-looking statements are based upon our current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially and adversely from those expressed or implied by such statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (SEC), and in particular, the risks and uncertainties discussed therein under the caption “Risk Factors”. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. As a result, you should not place undue reliance on forward-looking statements.
Additionally, the forward-looking statements contained in this Form 10-Q represent our views only as of the date of this Form 10-Q (or any earlier date indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if new information becomes available in the future. However, you are advised to consult any further disclosures we make on related subjects in the reports that we file with the SEC.
The foregoing cautionary statements are intended to qualify all forward-looking statements wherever they may appear in this Form 10-Q. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
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MARKET, INDUSTRY AND OTHER DATA
This Form 10-Q contains estimates, projections, market research and other data generated by independent third parties, by third parties on our behalf and by us concerning markets for XHANCE, XHANCE market access, the INS market and prescription data. Information that is based on estimates, projections, market research or similar methodologies is inherently subject to uncertainties and actual results, events or circumstances may differ materially from results, events and circumstances reflected in this information. As a result, you are cautioned not to give undue weight to such information.


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PART I

ITEM 1. FINANCIAL STATEMENTS
OptiNose, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
 September 30, 2021December 31, 2020
 (unaudited)
Assets  
Current assets:  
Cash and cash equivalents$84,226 $144,156 
Accounts receivable, net24,088 23,394 
Inventory13,161 9,042 
Prepaid expenses and other current assets3,967 4,060 
Total current assets125,442 180,652 
Property and equipment, net1,515 2,028 
Other assets4,960 6,133 
Total assets$131,917 $188,813 
Liabilities and stockholders' equity (deficit)  
Current liabilities:  
Accounts payable$6,502 $5,489 
Accrued expenses and other current liabilities47,125 46,683 
Total current liabilities53,627 52,172 
Long-term debt, net126,542 125,202 
Other liabilities3,217 4,651 
Total liabilities183,386 182,025 
Stockholders' equity (deficit):  
Common stock, $0.001 par value; 200,000,000 shares authorized at September 30, 2021 and December 31, 2020; 53,449,567 and 52,945,865 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
53 53 
Additional paid-in capital542,996 534,585 
Accumulated deficit(594,437)(527,765)
Accumulated other comprehensive loss(81)(85)
Total stockholders' equity (deficit)(51,469)6,788 
Total liabilities and stockholders' equity (deficit)$131,917 $188,813 
See accompanying notes to unaudited interim consolidated financial statements
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OptiNose, Inc.
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2021 and 2020
(in thousands, except share and per share data)
(Unaudited) 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Revenues:
Net product revenues$21,826 $15,436 $51,143 $32,770 
Licensing revenues  1,000  
      Total revenues21,826 15,436 52,143 32,770 
Costs and expenses:
  Cost of product sales2,411 2,221 6,576 5,276 
Research and development6,654 6,524 20,058 16,930 
Selling, general and administrative25,801 24,575 80,293 77,332 
Total operating expenses34,866 33,320 106,927 99,538 
Loss from operations(13,040)(17,884)(54,784)(66,768)
Other (income) expense:
Interest income(9)(31)(42)(396)
Interest expense4,072 3,350 11,959 9,506 
Foreign currency (gains) losses14 11 38 44 
Gain on sale of equipment$ $ $(67)$ 
Net loss$(17,117)$(21,214)$(66,672)$(75,922)
Net loss per share of common stock, basic and diluted$(0.32)$(0.43)$(1.25)$(1.62)
Weighted average common shares outstanding, basic and diluted53,334,669 48,907,514 53,151,730 46,914,561 
See accompanying notes to unaudited interim consolidated financial statements

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OptiNose, Inc.
Consolidated Statements of Comprehensive Loss
For the Three and Nine Months Ended September 30, 2021 and 2020
(in thousands)
(Unaudited) 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Net loss$(17,117)$(21,214)$(66,672)$(75,922)
Other comprehensive loss:
Foreign currency translation adjustment2 13 4 (17)
Comprehensive loss$(17,115)$(21,201)$(66,668)$(75,939)
See accompanying notes to unaudited interim consolidated financial statements
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OptiNose, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(in thousands, except share data)
Nine Months Ended September 30, 2021
Stockholders' Equity (Deficit)
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity (Deficit)
SharesAmount
Balance at December 31, 202052,945,865 $53 $534,585 $(527,765)$(85)$6,788 
Stock compensation expense— — 2,596 — — 2,596 
Vesting of restricted stock units166,709 — — — — — 
Foreign currency translation adjustment— — — — 2 2 
Net loss— — — (26,053)— (26,053)
Balance at March 31, 202153,112,574 $53 $537,181 $(553,818)$(83)$(16,667)
Stock compensation expense— — 2,729 — — 2,729 
Vesting of restricted stock units37,034 — — — — — 
Issuance of common stock under employee stock purchase plan135,525 — 367 — — 367 
Foreign currency translation adjustment— — — —   
Net loss— — — (23,502)— (23,502)
Balance at June 30, 202153,285,133 $53 $540,277 $(577,320)$(83)$(37,073)
Stock compensation expense— — 2,680 — — 2,680 
Vesting of restricted stock units140,555 — — — — — 
Exercise of common stock options23,879 — 39 — — 39 
Foreign currency translation adjustment— — — — 2 2 
Net loss— — — (17,117)— (17,117)
Balance at September 30, 202153,449,567 $53 $542,996 $(594,437)$(81)$(51,469)

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Table of Contents
Nine Months Ended September 30, 2020
Stockholders' Equity (Deficit)
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity (Deficit)
SharesAmount
Balance at December 31, 201945,906,162 $46 $489,565 $(427,980)$(48)$61,583 
Stock compensation expense— — 2,429 — — 2,429 
Foreign currency translation adjustment— — — — (25)(25)
Net loss— — — (28,856)— (28,856)
Balance at March 31, 202045,906,162 $46 $491,994 $(456,836)$(73)$35,131 
Stock compensation expense— — 2,748 — — 2,748 
Exercise of common stock options15,806 — 71 — — 71 
Issuance of common stock under employee stock purchase plan70,305 — 516 — — 516 
Foreign currency translation adjustment— — — — (5)(5)
Net loss— — — (25,852)— (25,852)
Balance at June 30, 202045,992,273 $46 $495,329 $(482,688)$(78)$12,609 
Stock compensation expense— — 2,615 — — 2,615 
Exercise of common stock options43,636 — 5 — — 5 
Sale of common stock, net of issuance costs6,000,000 6 33,399 — — 33,405 
Issuance of common stock with Pharmakon Amendment44,643 — 250 — — 250 
Foreign currency translation adjustment— — — — 13 13 
Net loss— — — (21,214)— (21,214)
Balance at September 30, 202052,080,552 $52 $531,598 $(503,902)$(65)$27,683 

See accompanying notes to unaudited interim consolidated financial statements

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OptiNose, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2021 and 2020
(in thousands)
(Unaudited) 
 Nine Months Ended September 30,
 20212020
Operating activities: 
Net loss $(66,672)$(75,922)
Adjustments to reconcile net loss to cash used in operating activities: 
Depreciation and amortization478 1,036 
Stock-based compensation8,027 7,857 
Amortization of debt discount and issuance costs1,364 899 
Gain on sale of property and equipment(67) 
Changes in operating assets and liabilities:  
Accounts receivable(695)(3,881)
Prepaid expenses and other assets1,416 2,804 
Inventory(4,049)(5,773)
Accounts payable1,188 2,821 
Accrued expenses and other liabilities(1,209)3,109 
Cash used in operating activities(60,219)(67,050)
Investing activities:  
Purchases of property and equipment(143)(460)
Proceeds from sale of property and equipment105  
Cash used in investing activities(38)(460)
Financing activities:  
Proceeds from long-term debt 34,447 
Repayment of long-term debt (4,447)
Cash paid for financing costs(95)(690)
Proceeds from issuance of common stock under employee stock purchase plan367 516 
Proceeds from sale of common stock 33,600 
Proceeds from the exercise of stock options39 76 
Cash provided by financing activities311 63,502 
Effects of exchange rate changes on cash and cash equivalents2 (11)
Net decrease in cash, cash equivalents and restricted cash(59,944)(4,019)
Cash, cash equivalents and restricted cash at beginning of period144,179 147,165 
Cash, cash equivalents and restricted cash at end of period$84,235 $143,146 
Supplemental disclosure of noncash activities:  
Fixed asset purchases within accounts payable and accrued expenses$8 $55 
Recognition of right-of-use assets$157 $6,174 
Recognition of lease liabilities$157 $6,174 
See accompanying notes to unaudited interim consolidated financial statements
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Table of Contents
OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)


1. Organization and Description of Business
OptiNose, Inc. (the Company) was incorporated in Delaware in May 2010 (inception) and has facilities in Yardley, Pennsylvania, Ewing, New Jersey, and Oslo, Norway. The Company's predecessor entity, OptiNose AS, was formed under the laws of Norway in September 2000. In 2010, OptiNose AS became a wholly-owned subsidiary of the Company as part of an internal reorganization.
The Company is a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose and throat (ENT) and allergy specialists. The Company's first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 mcg, is a therapeutic utilizing its proprietary Exhalation Delivery System (EDS) device that delivers a topically-acting corticosteroid for the treatment of chronic rhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also referred to as chronic sinusitis). XHANCE was approved by the United States (US) Food and Drug Administration (FDA) in September 2017 for the treatment of nasal polyps in patients 18 years of age or older. XHANCE was made widely available through commercial channels in April 2018.
2. Liquidity
Since inception, the Company's operations have focused on organization and staffing, business planning, raising capital, establishing an intellectual property portfolio, conducting preclinical studies and clinical trials, pursuing regulatory approvals and most recently, commercializing XHANCE in the US. As of September 30, 2021, the Company had cash and cash equivalents of $84,226. For the nine months ended September 30, 2021, the Company had a net loss of $66,672 and negative cash from operations of $60,219. As of September 30, 2021, the Company had an accumulated deficit of $594,437.
The Company is subject to a number of risks similar to other life sciences companies, including, but not limited to, successful discovery, development and commercialization of its products and product candidates, raising additional capital, the development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company's products.
The Company's continuation as a going concern is dependent on its ability to continue to maintain compliance with its covenants under that certain Note Purchase Agreement, dated as of September 12, 2019, as amended pursuant to that certain letter agreement dated as of August 13, 2020 and as further amended by that certain first amendment to the Note Purchase Agreement dated as of March 2, 2021 (the Note Purchase Agreement) that the Company entered into with funds managed by Pharmakon Advisors, LP (Pharmakon), the investment manager of the BioPharma Credit Funds (BioPharma), including the minimum trailing twelve-month consolidated XHANCE net sales and royalties the Company is required to achieve each quarter and its ability to generate sufficient cash flows from operations to meet its obligations and/or obtain additional financing from its stockholders or other sources, as may be required. The Note Purchase Agreement includes events of default, in certain cases subject to customary periods to cure, following which Pharmakon may accelerate all amounts outstanding under the senior secured notes issued pursuant to the Note Purchase Agreement (Pharmakon Senior Secured Notes). The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
As of the filing of this quarterly report on Form 10-Q, the Company expects consolidated XHANCE net sales and royalties for the trailing twelve-month period ending December 31, 2021 to be between $71,000 and $75,000. If the Company is unable to achieve $80,000 of consolidated XHANCE net sales and royalties for the trailing twelve-month period ending December 31, 2021 and the Company is unable to obtain a waiver or modification to this financial covenant, the Company will be in breach of a financial covenant under the Note Purchase Agreement, which will constitute an event of default under the terms of the Note Purchase Agreement. If the holders of the Pharmakon Senior Secured Notes elect to accelerate the repayment of all unpaid principal and accrued interest under such holders’ Pharmakon Senior Secured Notes, the Company may need to delay or curtail its operations. These factors raise substantial doubt about the Company's ability to continue as a going concern.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

The Company will likely require additional capital in the future, secured through equity or debt financings, partnerships, collaborations, or other sources, in order to meet its debt service obligations under the Pharmakon Senior Secured Notes, including repayment, and to carry out the Company's planned development and commercial activities. Financial capital, secured through equity financings, partnerships, collaborations, or other sources, may not be available on a timely basis, on favorable terms, or at all, and such capital, if raised, may not be sufficient to meet the Company's debt service obligations, including repayment, or enable the Company to continue to implement its long-term business strategy. If additional capital is not secured, the Company may need to delay or curtail its operations until such funding is received. The terms of the Note Purchase Agreement, including applicable covenants, are described in Note 8.

3. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements have been prepared in conformity with US generally accepted accounting principles (GAAP). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB).
In the opinion of management, the accompanying unaudited interim financial statements include all normal and recurring adjustments (which consist primarily of accruals and estimates that impact the financial statements) considered necessary to present fairly the Company's financial position as of September 30, 2021 and its results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The unaudited interim financial statements, presented herein, do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2020 contained in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.
Use of estimates
The preparation of the unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and reported amounts of expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited interim consolidated financial statements, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined to be necessary.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and accounts receivable. The Company generally invests its cash in deposits with high credit quality financial institutions. Additionally, the Company performs periodic evaluations of the relative credit standing of these financial institutions.
Customer and supplier concentration
XHANCE is sold to wholesale pharmaceutical distributors and Preferred Pharmacy Network (PPN) partners, who, in turn, sell XHANCE to pharmacies, hospitals and other customers. Five customers represented approximately 39% of the Company's accounts receivable at September 30, 2021 and five customers represented
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
approximately 33% and 32% of the Company's net product sales for the three and nine months ended September 30, 2021, respectively.
The Company currently purchases XHANCE and its components from several third-party suppliers and manufacturing partners, certain of which are available through a single source. The Company has initiated the process of qualifying alternate third-party suppliers for select components of XHANCE. Alternate third party suppliers of XHANCE components are subject to qualification and approval from the FDA.
Fair value of financial instruments
At September 30, 2021 and December 31, 2020, the Company's financial instruments included cash and cash equivalents, accounts receivable, grants receivable, accounts payable and accrued expenses. The carrying amounts reported in the Company's financial statements for these instruments approximate their respective fair values because of the short-term nature of these instruments. In addition, the Company believes that at September 30, 2021, the carrying value of long-term debt approximated fair value as the interest rates are reflective of the rate the Company could obtain on debt with similar terms and conditions. At September 30, 2021 and December 31, 2020, there were no financial assets or liabilities measured at fair value on a recurring basis.
Restricted cash
As of September 30, 2021 and December 31, 2020, the restricted cash balance included in prepaid expenses and other assets was $9 and $23, respectively.
Net product revenues
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC 606), which the Company adopted on January 1, 2018. The Company recognizes revenue from XHANCE sales at the point customers obtain control of the product, which generally occurs upon delivery. The transaction price that is recognized as revenue for products includes an estimate of variable consideration. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available. The components of the Company’s variable consideration include the following:
Provider Chargebacks and Discounts. Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable.
Trade Discounts and Allowances. The Company generally provides customers with discounts that include incentive fees which are explicitly stated in the Company’s contracts. These discounts are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is recognized.
Product Returns. Consistent with industry practice, the Company has a product returns policy that provides customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The Company estimates the amount of its product that may be returned and presents this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a liability. The Company considers several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, prescription trends and other relevant factors.
Government Rebates. The Company is subject to discount obligations under state Medicaid programs and Medicare. Reserves related to these discount obligations are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The Company’s
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product that has been recognized as revenue but remains in the distribution channel inventories at the end of the reporting period.
Payor Rebates. The Company contracts with certain third-party payors, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the plan or the organization with which it contracts. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Patient Assistance. Other programs that the Company offers include voluntary co-pay patient assistance programs intended to provide financial assistance to eligible patients with prescription drug co-payments required by payors and coupon programs for cash payors. The calculation of the current liability for this assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period.
Licensing revenues
The Company has license agreements with Inexia Limited (Inexia) and Currax Pharmaceuticals LLC (Currax). These license agreements provide for exclusive licensed rights to certain intellectual property, a non-refundable up-front payment, potential milestone payment(s) and potential royalty payment(s). The Company analyzed the performance obligations under the license agreements, the consideration received to date and the consideration the Company could receive in the future as part of its analysis related to ASC 606. The Company recognized $1,000 as licensing revenue from Currax during the nine months ended September 30, 2021 and is not eligible to receive any further payments under the Currax license agreement other than reimbursement for certain expenses.
Net income (loss) per common share
Basic net income (loss) per common share is determined by dividing net income (loss) applicable to Company common stock (Common Stock) holders by the weighted average common shares outstanding during the period. For the three and nine months ended September 30, 2021 and 2020, the outstanding Common Stock options, Common Stock warrants and shares to be issued under the Company's 2017 Employee Stock Purchase Plan have been excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted net loss per share are the same.
Diluted net loss per common share for the periods presented do not reflect the following potential common shares, as the effect would be antidilutive:
 September 30,
 20212020
Stock options7,928,817 8,157,752 
Restricted stock units2,013,934 1,499,456 
Common stock warrants810,357 2,677,188 
Employee stock purchase plan123,754 62,699 
Total10,876,862 12,397,095 
Income taxes
In accordance with ASC 270, Interim Reporting, and ASC 740, Income Taxes, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. For the three and nine months ended September 30, 2021 and 2020, the Company recorded no tax expense or benefit due to the expected current year loss and its historical losses. As of September 30, 2021 and December 31, 2020, the Company concluded that a full valuation allowance would be necessary for all of its net deferred tax assets. The Company had no amounts recorded for uncertain tax positions, interest or penalties in the accompanying consolidated financial statements.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements (Continued)
(in thousands, except share and per share data)
Recent accounting pronouncements
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors—Certain leases with variable payments. ASU No. 2021-05 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its results of operations, financial position and cash flows and related disclosures.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU No. 2021-04 requires that issuers clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its results of operations, financial position and cash flows and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminated certain exceptions and changed guidance on other matters. The exceptions relate to the allocation of income taxes in separate company financial statements, tax accounting for equity method investments and accounting for income taxes when the interim period year-to-date loss exceeds the anticipated full year loss. Changes relate to the accounting for franchise taxes that are income-based and non-income-based, determining if a step up in tax basis is part of a business combination or if it is a separate transaction, when enacted tax law changes should be included in the annual effective tax rate computation, and the allocation of taxes in separate company financial statements to a legal entity that is not subject to income tax. The Company has adopted ASU 2019-12 in the first quarter of 2021, and there was no significant impact.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-03, in conjunction with ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022 for companies deemed to be smaller reporting companies as of November 15, 2019, with early adoption permitted. The Company has adopted ASU 2016-13 and there was no significant impact.
4. Inventory
Inventory consisted of the following:
September 30, 2021December 31, 2020
Raw materials$3,330 $2,669 
Work-in-process4,456 2,676 
Finished goods5,375 3,697 
  Total inventory$13,161 $9,042 
Inventories are stated at the lower of cost or net realizable value, as determined on a first-in, first-out, basis.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

5. Property and Equipment
Property and equipment, net, consisted of the following:
 September 30, 2021December 31, 2020
Computer equipment and software$1,157 $1,128 
Furniture and fixtures366 366 
Machinery and equipment3,266 3,440 
Leasehold improvements609 609 
Construction in process216 271 
5,614 5,814 
Less: accumulated depreciation(4,099)(3,786)
$1,515 $2,028 
Depreciation expense was $153 and $473 for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense was $476 and $1,035 for the nine months ended September 30, 2021 and 2020, respectively. In addition, depreciation expense of $551 and $13 was charged to inventory and prepaid expenses and other assets, respectively, as of September 30, 2021, which represents depreciation expense related to equipment involved in the manufacturing process.
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of:
 September 30, 2021December 31, 2020
Accrued expenses:
   Selling, general and administrative expenses$6,997 $7,385 
   Research and development expenses6,208 5,202 
   Payroll expenses7,119 9,063 
   Product revenue allowances21,833 20,917 
   Other2,859 2,008 
      Total accrued expenses45,016 44,575 
Other current liabilities:
   Lease liability2,109 2,108 
      Total other current liabilities2,109 2,108 
      Total accrued expenses and other current liabilities$47,125 $46,683 

7. Licensing Revenue
Currax License Agreement
On September 25, 2019, OptiNose AS entered into a license agreement (the Currax License Agreement) with Currax pursuant to which the Company granted Currax a license to certain intellectual property for the commercialization of Onzetra Xsail® in the US, Canada and Mexico.
Under the terms of the Currax License Agreement, Currax paid the Company an upfront payment of $3,730, which was recognized as license revenue during the year ended December 31, 2019. On December 29, 2020, the Company received an additional $750 upon the expiration of the escrow that was established for a limited period to cover potential indemnification obligations. In addition, in January 2021 the Company received a $1,000 milestone payment in connection with the achievement of a specified regulatory milestone. The Company does not expect to receive any further payments from Currax under the terms of the Currax License Agreement other than reimbursement for certain expenses.

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Table of Contents
OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

8. Long-term Debt
On September 12, 2019 (the Closing Date), the Company entered into the Note Purchase Agreement with funds managed by Pharmakon, the investment manager of BioPharma. The Note Purchase Agreement provided the Company with $130,000 in debt financing, of which $80,000 was issued on the Closing Date, $30,000 was issued on February 13, 2020 (the First Delayed Draw Notes) after achieving the $9,000 consolidated XHANCE net sales and royalties threshold for the quarter ended December 31, 2019 and $20,000 was issued on December 1, 2020 after achieving the $14,500 consolidated XHANCE net sales and royalties threshold for the quarter ended September 30, 2020.
On August 13, 2020, the Company entered into a letter agreement (the Pharmakon Letter Agreement) to the Note Purchase Agreement. The Pharmakon Letter Agreement provided the Company with the option to issue additional Pharmakon Senior Secured Notes, subject to the Company achieving specified consolidated XHANCE net sales and royalties for the quarter ended June 30, 2021 and certain other conditions. As consideration for the Pharmakon Letter Agreement, the Company issued 44,643 shares of Common Stock to Pharmakon. The aggregate fair value of $250 was recorded as debt issuance costs and is being amortized to interest expense over the five-year term of the Pharmakon Senior Secured Notes. The Company was no longer eligible for the additional Pharmakon Senior Secured Notes as the requisite conditions were not satisfied as of June 30, 2021.
On March 2, 2021, the Company entered into the first amendment (the First Amendment) to the Note Purchase Agreement. The amendment revised certain minimum trailing twelve-month consolidated XHANCE net sales and royalties the Company is required to achieve. As consideration for the amendment, the Company will pay an amendment fee of $1,300 upon the earlier of the prepayment of the Pharmakon Senior Secured Notes and the Maturity Date (defined below). The amendment fee was recorded as debt issuance costs and is being amortized to interest expense over the term of the Pharmakon Senior Secured Notes.
The Pharmakon Senior Secured Notes bear interest at a fixed per annum rate of 10.75% and are scheduled to mature on September 12, 2024 (the Maturity Date). The Company is required to make quarterly interest payments until the Maturity Date. The Company is also required to make principal payments, which are payable in eight equal quarterly installments beginning on December 15, 2022 and continuing until the Maturity Date; provided that the Company may, at its election, postpone any such principal payment until the Maturity Date if, as of the applicable payment date, certain minimum trailing four-quarter consolidated XHANCE net sales and royalties thresholds have been achieved.
In conjunction with the Pharmakon Senior Secured Notes, the Company paid an upfront fee of $1,125 on the Closing Date and issued warrants to purchase an aggregate of 810,357 shares of Common Stock at an exercise price equal to $6.72 per share, which expire on September 12, 2022. The upfront fees were recorded as debt discount at issuance and are being amortized to interest expense over the five-year term of the Pharmakon Senior Secured Notes. The Company also incurred $6,514 in debt issuance costs, including $2,404 related to the fair value of the warrants which are also being amortized to interest expense over the term of the Pharmakon Senior Secured Notes.
The Company is required to repay the Pharmakon Senior Secured Notes in full upon the occurrence of a change of control (as defined in the Note Purchase Agreement). In addition, the Company may make voluntary prepayments in whole or in part. All mandatory and voluntary prepayments are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs prior to the third anniversary of the Closing Date, an amount equal to 2% of the principal prepaid, (ii) if prepayment occurs on or after the third anniversary of the Closing Date but prior to the fourth anniversary of the Closing Date, an amount equal to 1% of the principal prepaid, and (iii) if prepayment occurs on or after the fourth anniversary of the Closing Date, no prepayment premium is required. The Company is also required to pay a "make-whole" amount in respect of any principal prepayments (whether mandatory or voluntary) made prior to the 30-month anniversary of the issuance of the applicable Pharmakon Senior Secured Note, in an amount equal to the interest that would have accrued through the 30-month anniversary in respect of such note but for such principal prepayment.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

The Pharmakon Senior Secured Notes are secured by a pledge of substantially all of the Company's assets and the Note Purchase Agreement contains affirmative and negative covenants customary for financings of this type, including limitations on the Company’s and its subsidiaries’ ability, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, repay junior indebtedness and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the Note Purchase Agreement contains financial covenants requiring the Company to maintain at all times certain minimum trailing twelve-month consolidated XHANCE net sales and royalties, tested on a quarterly basis, and at least $30,000 of cash and cash equivalents. As of September 30, 2021, the Company was in compliance with the covenants. The Note Purchase Agreement also includes events of default customary for financings of this type, in certain cases subject to customary periods to cure, following which BioPharma may accelerate all amounts outstanding under the Pharmakon Senior Secured Notes.
The Company recorded interest expense of $4,072 and $3,350 during the three months ended September 30, 2021 and 2020, respectively, and $11,959 and $9,506 during the nine months ended September 30, 2021 and 2020, respectively. Interest expense included total coupon interest and the amortization of debt issuance costs.
The long-term debt balance is comprised of the following:
September 30, 2021December 31, 2020
Face amount$130,000 $130,000 
Front end fees(701)(855)
Debt issuance costs(4,057)(3,943)
Back end fees1,300  
Long-term debt, net$126,542 $125,202 

9. Employee Benefit Plans
For US employees, the Company maintains a defined contribution 401(k) retirement plan. As of September 30, 2021, $151 was recorded in accrued liabilities related to the Company match. The Company's contributions are made in cash.
For foreign employees, the Company maintains defined contribution pension plans which meet the statutory requirements of those jurisdictions. The Company incurred costs related to the pension plans of $1 and $5 for the three months ended September 30, 2021 and 2020, respectively, and $5 and $15 for the nine months ended September 30, 2021 and 2020, respectively.

10. Stockholders' Equity
As of September 30, 2021, the Company had the following warrants outstanding to purchase shares of Common Stock:
Number of SharesExercise Price Per ShareExpiration Date
810,357 $6.72 September 12, 2022


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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

11. Stock-based Compensation
The Company recorded stock-based compensation expense related to stock options and shares issued under the Company's 2017 Employee Stock Purchase Plan (2017 Plan) in the following expense categories of its accompanying consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Cost of product sales$20 $25 $38 $113 
Research and development298 334 865 922 
General and administrative2,366 2,267 7,124 6,822 
$2,684 $2,626 $8,027 $7,857 
In addition, stock-based compensation expense of $87 and $1 was charged to inventory and prepaid expenses and other assets, respectively, during the nine months ended September 30, 2021, which represents the total stock-based compensation expense incurred related to employees involved in the manufacturing process of finished goods and samples during the period.
Stock Options
The Company issues stock-based awards pursuant to its 2010 Stock Incentive Plan. Effective as of October 12, 2017, the Company's 2010 Stock Incentive Plan was amended and restated (A&R Plan).The Company has issued service-based and performance-based stock options that generally have a contractual life of up to 10 years and may be exercisable in cash or as otherwise determined by the Company's board of directors or committee thereof. Vesting generally occurs over a period of not greater than four years. Performance-based options may vest upon the achievement of certain milestones in connection with the Company's development programs. Additionally, the Company has issued stock options in excess of the fair market value of Common Stock on the issuance date that were only exercisable upon a change in control or upon or after an initial public offering. As of September 30, 2021, all of the performance conditions related to performance-based stock options issued by the Company had been achieved.
The following table summarizes the activity related to stock option grants to employees and non-employees for the nine months ended September 30, 2021:
 SharesWeighted
average
exercise price
per share
Weighted
average
remaining
contractual life
Outstanding at December 31, 20206,852,733 $10.34 6.84
Granted1,615,696 3.48 
Exercised(23,879)1.63 
Expired(307,892)12.30 
Forfeited(207,841)6.46
Outstanding at September 30, 20217,928,817 $8.97 6.72
Exercisable at September 30, 20215,029,197 $11.19 5.54
Vested and expected to vest at September 30, 20217,928,817 $8.97 6.72
During the nine months ended September 30, 2021, stock options to purchase 1,615,696 shares of Common Stock were granted to employees and generally vest over four years. The stock options had an estimated weighted average grant date fair value of $2.26. During the nine months ended September 30, 2020, stock options to purchase 1,303,210 shares of Common Stock were granted to employees that generally vest over four years. The stock options had an estimated weighted average grant date fair value of $3.44.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

Included in the table above are 200,000 of options granted outside the A&R Plan. The grants were made pursuant to the NASDAQ inducement grant exception in accordance with NASDAQ Listing Rule 5635(c)(4).
The grant date fair value of each stock option grant was estimated at the time of grant using the Black-Scholes option-pricing model using the following weighted average assumptions:
Nine Months Ended September 30,
20212020
Risk free interest rate1.00 %0.71 %
Expected term (in years)6.086.03
Expected volatility74.18 %68.77 %
Annual dividend yield0.00 %0.00 %
Fair value of common stock$3.48 $5.64 
At September 30, 2021, the unrecognized compensation cost related to unvested stock options expected to vest was $8,570. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.31 years.
Restricted Stock Units
The Company has issued service-based and performance-based restricted stock units (RSUs). Vesting generally occurs over a period not greater than four years. Vesting of the performance-based RSUs is subject to the achievement of certain milestones in connection with the Company's development programs.
The following table summarizes the activity related to RSUs granted to employees for the nine months ended September 30, 2021:
 Shares
Balance at December 31, 20201,491,589 
Granted957,990 
Vested and settled(344,298)
Expired/forfeited/canceled(91,347)
Balance at September 30, 20212,013,934 
Expected to vest at September 30, 20212,013,934 
In March 2021, the Company granted 957,990 RSUs at a grant date fair value of $3.51, all of which were service-based RSUs. No performance-based RSUs were granted in 2021. As of September 30, 2021, the milestones associated with previously granted performance based-RSUs were not probable of achievement, and accordingly, no stock based compensation expense has been recognized for these awards. At September 30, 2021, the unrecognized compensation cost related to unvested service-based RSUs expected to vest was $5,432, to be recognized over an estimated weighted-average amortization period of 2.81 years. The unrecognized compensation cost related to unvested performance-based RSUs was $3,095, which will be recognized commencing in the period in which the performance condition is deemed probable of achievement over the remaining service period.
Included in the table above are 60,000 RSUs granted outside the A&R Plan. The grants were made pursuant to the Nasdaq inducement grant exception in accordance with Nasdaq Listing Rule 5635(c)(4).
2017 Employee Stock Purchase Plan
Under the 2017 Plan, shares of Common Stock may be purchased by eligible employees who elect to participate in the 2017 Plan at 85% of the lower of the fair market value of Common Stock on the first or last day of designated offering periods. The Company recognized stock-based compensation expense of $65 and $102 during the three months ended September 30, 2021 and 2020, respectively, and $264 and $389 during the nine months ended September 30, 2021 and 2020, respectively, related to the 2017 Plan.
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OptiNose, Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(in thousands, except share and per share data)

The Company calculated the fair value of each option grant and the shares issued under the 2017 Plan on the respective dates of grant using the following weighted average assumptions:
Nine Months Ended September 30,
20212020
Risk free interest rate0.07 %0.96 %
Expected term (in years)0.50.5
Expected volatility65.43 %84.55 %
Annual dividend yield0.00 %0.00 %

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this section in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I. Item 1 of this Form 10-Q and our audited consolidated financial statements and related notes thereto and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (SEC) on March 3, 2021. In addition to historical information, some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by such forward-looking statements. Please refer to the "Note Regarding Forward-Looking Statements" section of this Form 10-Q for additional information.
Company Overview
We are a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose and throat (ENT) and allergy specialists. Our first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 micrograms (mcg), is a therapeutic utilizing our proprietary Exhalation Delivery System (EDS) device that delivers a topically-acting corticosteroid for the treatment of chronic rhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also referred to as chronic sinusitis). Chronic rhinosinusitis is a serious nasal inflammatory disease that is treated using therapies, such as intranasal steroids (INS), which have significant limitations. We believe XHANCE has a differentiated clinical profile with the potential to become part of the standard of care for this disease because it is able to deliver medication to the primary site of inflammation high and deep in the nasal passages in regions not adequately reached by conventional INS.
In September 2017, the United States Food and Drug Administration (FDA) approved XHANCE for the treatment of nasal polyps in patients 18 years of age or older. XHANCE was made widely available through commercial channels in April 2018.
Business Updates in Response to the COVID-19 Pandemic
The COVID-19 pandemic has caused business and economic disruption, and the duration and impact of that disruption is uncertain at this time.
In mid-March 2020, we transitioned to a full-time, virtual work environment in which all employees, including sales representatives (whom we refer to as territory managers), were encouraged to work from their place of residence. Our decision was based on actions taken by federal, state and local governments to contain the spread of severe acute respiratory coronavirus 2 (SARS-CoV-2) and the related Coronavirus Disease 2019 (COVID-19), as well as the impact of “social distancing” efforts and various mitigation actions implemented by healthcare practices across the United States. Shortly after our transition to a full-time, virtual work environment, our territory managers began virtual details of XHANCE to target audience physicians.
We have been monitoring, and will continue to monitor, federal, state, and local government requirements and guidances. In certain instances, the various mitigation efforts have been updated to facilitate a return to a working environment with fewer restrictions. Where permitted by governmental requirements and the policies of physician offices, our territory managers began to return to in-person detailing of physicians in May and June 2020. Given the localized nature of the restrictions that are in place and the potential for restrictions to return, we have equipped our territory managers to operate in an environment that will include a mix of virtual and in-person physician detailing with dependencies on geography and time.
Federal, state and local government requirements and guidances have impacted virtually all of the physicians' offices in which our territory managers detail XHANCE. These impacts include reduced patient visits, temporary halt of territory managers' visits, restrictions imposed on territory managers' visits and temporary closings of physicians' offices.
Late in the first quarter of 2020 we began to observe an adverse impact of the COVID-19 pandemic on XHANCE prescription growth and, as a result XHANCE net revenue. Based on third-party prescription data as well as data from Preferred Pharmacy Network (PPN) partners, XHANCE prescriptions increased 11% from first quarter 2020 to second quarter 2020, increased 11% from second quarter 2020 to third quarter 2020, increased 7% from third quarter 2020 to fourth quarter 2020, decreased 2% from fourth quarter 2020
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to first quarter 2021, increased 14% from first quarter 2021 to second quarter 2021, and increased 4% from second quarter 2021 to third quarter 2021. Although XHANCE prescriptions and XHANCE net revenue have grown during this COVID-19 period, the rate of growth was below our pre-pandemic expectations. Additionally, the duration and magnitude of the impact of the COVID-19 pandemic on XHANCE prescriptions and XHANCE net revenue remains uncertain and it has, and is likely continue to affect our ability to remain in compliance with our financial covenants under that certain Note Purchase Agreement dated as of September 12, 2019, as amended pursuant to that certain letter agreement dated as of August 13, 2020 and as further amended by that certain First Amendment to Note Purchase Agreement dated as of March 2, 2021 (the Note Purchase Agreement) that we entered into with funds managed by Pharmakon Advisors, LP (Pharmakon), the investment manager of the BioPharma Credit Funds (BioPharma).
Due to the impacts of the COVID-19 pandemic, one of our contract manufacturers implemented a reduced work schedule and additional precautions which resulted in delays in the manufacture of XHANCE in second quarter 2020 but did not result in an interruption to commercial or clinical supply. We believe we are maintaining appropriate levels of finished product inventories in the event of future supply disruption; however, the duration and magnitude of a future negative impact from the COVID-19 pandemic could constrain our supply of XHANCE.
Previous guidance related to the expected timing of results from our two ongoing chronic sinusitis clinical trials indicated that top-line results from both trials would be available in the second half of 2021. Pauses in patient enrollment due to factors related to the COVID-19 pandemic have had, and may continue to have, varying effects in different geographies and over time have led to a change in our projected timeline for initial data availability and may lead to additional changes in the future. We completed enrollment in the first of our ongoing chronic sinusitis clinical trials in July 2021 and expect top-line results in the first quarter of 2022. We completed enrollment of subjects in our second clinical trial for chronic sinusitis in October of 2021 and expect top-line results in the second quarter of 2022. For those subjects currently participating in these studies, procedures to facilitate ongoing treatment and capture of data during periods of in-person care restrictions have been put in place.
The full impact of the COVID-19 pandemic, including the potential for and emergence of different strains of the virus, on our business is still unknown. The COVID-19 pandemic is likely to continue to have adverse impacts on XHANCE prescription growth and XHANCE net revenues growth for the remainder of 2021 and into 20222 as result of fewer patients visiting physician offices and restrictions and limitations imposed by physicians' offices on territory manager visits, continued high unemployment adversely affecting demand and payor mix, and on the availability and cost of capital for us to fund our business operations and service our debt. We will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to our operations as necessary.

XHANCE Business Update
We track and report metrics that we believe are an important part of assessing our progress in key strategic areas including:
XHANCE Prescriptions and Market Share. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE prescriptions in the third quarter of 2021 was 86,300, which represents 25% growth for prescriptions when compared to estimated third quarter 2020 prescriptions of 69,000. The INS prescription market increased 4% from third quarter 2020 to third quarter 2021 based on third-party prescription data. In addition, the total estimated number of XHANCE prescriptions was 73,900 in the fourth quarter of 2020, 72,600 in the first quarter of 2021 and 82,900 in the second quarter of 2021.
A seasonal effect has historically been observed in the INS prescription market in which market volume generally peaks near the middle of the second quarter and declines into the early part of the third quarter of each calendar year. As the result of the COVID-19 pandemic, the market volume peak and subsequent declines did not follow the normal trends in 2020. Based on third-party prescription data, INS market prescriptions increased 7% from the fourth quarter of 2019 to the first quarter of 2020, decreased 16% from the first quarter of 2020 to the second quarter of 2020, decreased 6% from the second quarter of 2020 to the third quarter of 2020, increased 3% from the third quarter of 2020 to the fourth quarter of 2020, decreased 4% from fourth quarter 2020 to the first quarter of 2021, increased 14% from the first quarter of 2021 to the second quarter of 2021, and decreased 4% from the second quarter of 2021 to the third quarter of 2021.
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Although the underlying disease that we are treating is chronic and causes symptoms year-round, we believe the variation in patient flow through the offices of relevant physician specialists, and seasonality in disease flare-ups, has an impact on the number of patients that present themselves and who are therefore available to receive a new prescription for XHANCE. Demand has historically been, and we expect will continue to be, impacted by the INS market seasonality and the seasonal variation in patient visits with their doctor, resulting in reduced XHANCE prescription demand in the third quarter.
Additionally, we believe that first quarter prescription demand and average net revenue per prescription for XHANCE is adversely impacted by the annual resetting of patient healthcare insurance plan deductibles and changes in individual patients' healthcare insurance coverage, both of which often occur in January.
We track the market share of XHANCE within our current target audience. For this purpose, we calculate market share as the proportion of XHANCE prescriptions to the number of prescriptions written for other INS within our current target audience of approximately 18,000 physicians. Our target physician audience includes all ENT and allergy specialist physicians who, based on third-party data, write intranasal steroid spray prescriptions. In addition, our current target audience includes specialty-like primary care physicians called on by our territory managers or kaléo sales representatives. Prior to the fourth quarter 2020 initiation of XHANCE co-promotion by kaléo, our target audience included approximately 10,000 physicians called on by Optinose sales territory managers. We have mutually agreed to terminate our co-promotion agreement with kaléo as of December 31, 2021.
We believe market share, in addition to XHANCE prescription volume, provides important information regarding XHANCE utilization because market share normalizes XHANCE prescriptions for market effects including the INS market seasonality, seasonal variation in patient visits with their doctor, annual deductible resets and annual changes in individual patient's healthcare insurance coverage referenced above. Based on third-party prescription data as well as data from PPN partners, we estimate XHANCE had a market share in our current target audience of 18,000 physicians of 4.9% in the third quarter of 2020, 5.1% in the fourth quarter of 2020, 5.4% in the first quarter of 2021, 5.4% in the second quarter of 2021 and 6.0% in the third quarter of 2021. Note that most of the INS prescriptions written within our target physician audience are for chronic sinusitis, allergic rhinitis and other conditions outside of our nasal polyp indication. Our target physician audience is subject to revision each quarter to account for changes such as revised sales target prioritization, and physician retirements. Changes to the target physician audience can contribute to some of the quarter-over-quarter change in market share.
XHANCE New Prescriptions and Refill Prescriptions. The underlying disease that we are treating is chronic and, as a result, many patients may fill multiple prescriptions per year. We monitor new prescriptions as they create the potential for future refill prescriptions. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE new prescriptions in the third quarter of 2021 was 27,900, which represents 22% growth for new prescriptions when compared to estimated third quarter 2020 new prescriptions of 23,000. In addition, the total estimated number of XHANCE new prescriptions was 24,600 in the fourth quarter of 2020, 25,900 in the first quarter of 2021 and 29,000 in the second quarter of 2021. Based on third-party prescription data, the INS market for new prescriptions increased 9% from the third quarter of 2020 to the third quarter of 2021 and decreased 4% from the second quarter of 2021 to the third quarter of 2021.
We track refill prescriptions and provide patient assistance to support refill programs that are administered by our PPN partners. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE refill prescriptions in the third quarter of 2021 was 58,400, which represents 27% growth for refill prescriptions when compared to estimated third quarter 2020 refill prescriptions of 46,100. In addition, the total estimated number of XHANCE refill prescriptions was 49,300 in the fourth quarter of 2020, 46,700 in the first quarter of 2021 and 53,900 in the second quarter of 2021.
Prescribing Breadth and Depth. We track the number of physicians who prescribe XHANCE in a time period to evaluate the breadth of prescribing. Based on third-party prescription data as well as data from PPN partners, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE in the third quarter of 2021 was 7,196, which represents 12% growth when compared to the estimated 6,443 physicians who had at least one patient fill a prescription for XHANCE in the third quarter of 2020. In addition, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE was 6,708 in the fourth quarter of 2020, 6,920 in the first quarter of 2021 and 7,188 in the second quarter of 2021.
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We also track the number of prescriptions filled by a prescribing physician's patients in a time period to evaluate depth of prescribing. Based on third-party prescription data as well as data from PPN partners, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients in the third quarter of 2021 was 1,459, which represents 27% growth when compared to the estimated 1,153 physicians who had more than 15 XHANCE prescriptions filled by their patients in the third quarter of 2020. In addition, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients was 1,275 in the fourth quarter of 2020, 1,285 in the first quarter of 2021 and 1,414 in the second quarter of 2021.
XHANCE Net Product Revenues per Prescription. We calculate average net product revenues per prescription, one metric that we use to gauge the profitability of XHANCE, by dividing net product revenues for the quarter by the estimated number of XHANCE prescriptions dispensed during the quarter. Average XHANCE net product revenues per prescription were $253 in the third quarter of 2021 which represents an approximately 13% increase when compared to the $224 average XHANCE net product revenues per prescription in the third quarter of 2020. In addition, average XHANCE net revenues per prescription were $211 in the fourth quarter of 2020, $151 in the first quarter of 2021 and $221 in the second quarter of 2021.
Sales, Marketing & Distribution
We have established a commercial infrastructure designed to drive adoption and sales of XHANCE with healthcare professionals who treat patients with nasal polyps. We believe that approximately 15,000 physicians treat an estimated 3.5 million chronic rhinosinusitis patients, an estimated 1.2 million of whom have chronic rhinosinusitis with nasal polyps.
Customer Model.  We have a sales force of approximately 100 territory managers who target over 10,000 ENTs, allergists and “specialty-like” primary care physicians, and we target additional physicians through digital and non-personal promotion in areas where we do and do not have territory managers. In addition, we initiated a co-promotion agreement with kaléo in October 2020 to promote XHANCE to an audience of up to 6,000 prescribers, about half of whom are outside of our current called-on universe. Our sales team, and the sales team of our co-promotion partner, are equipped with educational materials demonstrating the benefit and safety profile of XHANCE. We have mutually agreed to terminate our co-promotion agreement with kaléo as of December 31, 2021. We believe that in the long term, direct-to-consumer (DTC) advertising could be an effective way to increase XHANCE prescription growth.
XHANCE Co-Pay Savings Program. We believe our co-pay savings program provides an affordability solution for patients that physicians will support. This program provides patient co-pay assistance including a first prescription for as little as no out-of-pocket cost ($0 co-pay) to eligible commercially insured patients and low subsequent co-pays for refills ranging from $0 to $50 per XHANCE unit.
Market Access.  Based on currently available third-party data and our internal analyses as of September 30, 2021, we believe that greater than 75% of commercially insured lives are currently in a plan that covers XHANCE. However, payors may change coverage levels for XHANCE, positively or negatively, at any time. Additionally, payors generally impose restrictions on access to or usage of XHANCE, such as by requiring prior authorizations or "step-edits". For example, insurers may require that a patient first use a generic INS prior to becoming eligible for coverage for XHANCE. Some healthcare providers may not complete the administrative process required to demonstrate or document that the patients for whom XHANCE has been prescribed meet the payors’ utilization management criteria (i.e., prior authorizations or step-edits) and, as a result, patients may not gain access to XHANCE treatment. In our contract negotiations with payors we seek to balance patient access and affordability, breadth of coverage, payor utilization management and rebates levels. We have also contracted with the Centers for Medicare and Medicaid Services for coverage of certain government insured lives and continue to expand XHANCE market access for other government-insured populations.
Trade and Distribution We currently sell XHANCE primarily to PPN partners. We established this channel to offer patients the option of filling prescriptions through a network of preferred pharmacies that may be able to better serve the needs of patients through services including delivery of XHANCE by mail and performing certain patient services such as patient insurance benefit verification. We also sell XHANCE to wholesale pharmaceutical distributors, who, in turn, sell XHANCE to retail pharmacies, hospitals and other customers. We have contracted with a third-party logistics provider for key services related to logistics, warehousing and inventory management, and distribution. Further, our third-party logistics provider provides customer order fulfillment services and accounts receivable management.
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XHANCE Development
In addition to XHANCE’s existing indication for the treatment of nasal polyps, in order to broaden our U.S. market opportunity, we initiated a clinical trial program in pursuit of a follow-on indication for the treatment of chronic sinusitis. We believe XHANCE has the potential to be the first drug therapy approved by the FDA for the treatment of chronic sinusitis. We expect the program will be comprised of two Phase 3b clinical trials, the first of which was initiated in the fourth quarter of 2018 and completed enrollment of approximately 330 subjects in July of 2021, and the second of which was initiated in the second quarter of 2019 and completed enrollment of approximately 210 subjects in October of 2021.
In April 2021, we completed a previously planned, blinded interim analysis to assess the variance in one of the two co-primary endpoints (change in Composite Score of Nasal Symptoms from baseline to week 4) in our first clinical trial for chronic sinusitis. The analysis was performed on blinded interim data from approximately half of the initial estimated enrollment of 378 patients. The result of this interim analysis was that the observed variance in this endpoint was lower than the variance assumed when we estimated sample size for statistical powering during the initial design of the trial.
In June 2021, we completed a previously planned, blinded interim analysis to assess the variance in the other co-primary endpoint (change in average percent opacification of volume by CT scan from baseline to week 24) in this trial. The analysis was performed on blinded interim data from approximately one-third of the initial estimated enrollment of 378 patients for whom 6-month CT scan data was available. The result of this interim analysis was that the observed variance in this endpoint was also lower than the variance assumed when we estimated sample size for statistical powering during the initial design of the study. Based on the results of these two interim analyses, and our assumptions and estimates relating to the trial, we anticipate that the initial targeted statistical power will be achieved with the approximately 330 patients currently enrolled in the trial.

In third quarter 2021, we completed previously planned, blinded interim analysis to assess the variance in the two co-primary endpoints in our second clinical trial for chronic sinusitis. The analysis was performed on blinded interim data from patients for whom data was available. For the Composite Score of Nasal Symptoms data was available for approximately one-half of the initial estimated enrollment of 399 patients and for the change in average percent opacification of volume by CT scan data was available for approximately one-third of the initial estimated enrollment of 399 patients. The result of these interim analyses was that the observed variance in these endpoints is lower than the variance assumed when we estimated sample size for statistical powering during the initial design of the study. Based on the results of these two interim analyses, and our assumptions and estimates relating to the trial, we anticipate that the initial targeted statistical power will be achieved with the approximately 210 patients currently enrolled in the trial.

For clarity, all of these interim analyses were blinded to treatment group and therefore could not evaluate the magnitude of difference, if any, between treatment groups. Accordingly, these interim analyses were not designed to, and do not, provide evidence regarding possible superiority of active treatment over placebo or success of the trials.

We expect top-line results from the first of our two ongoing Phase 3b chronic sinusitis clinical trials in the first quarter of 2022 and from the second clinical trial in the second quarter of 2022.

OPN-019 Development Update
In June 2020, we announced the initiation of development of a new product candidate, OPN-019, which combines our proprietary intranasal Exhalation Delivery System (EDS) device with an antiseptic.

We have performed in vitro testing against SARS-CoV-2 with a candidate formulation in which a 4-log reduction (a 99.99% reduction) in virus count was produced. In addition, we performed tests against other pathogens. For most pathogens tested, 3-log to 6-log reductions (99.9% to 99.9999% reductions) in virus count were observed.

In July 2021, we received approval from regulatory authorities in Mexico to conduct a randomized, proof-of-concept trial in Mexico in subjects who have tested positive for SARS-CoV-2 infection, who were recently infected, and who have mild or no symptoms. The trial is intended to evaluate both the magnitude and duration of viral load reduction after a single dose of OPN-019. Recruitment in this trial is currently paused while specimen-handling and laboratory procedures in Mexico undergo further evaluation.
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Should proof-of-concept data suggest benefits, we expect to use the data to support pursuit of grants, partnerships, and/or other sources of capital that would be necessary to fund future development of OPN-019.

Financial Operations Overview
The following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items.
Net product revenues
Sales of XHANCE generated $21.8 million and $15.4 million in net product revenues for the three months ended September 30, 2021 and 2020, respectively, and $51.1 million and $32.8 million for the nine months ended September 30, 2021 and 2020, respectively. In accordance with GAAP, we determine net product revenues for XHANCE, with specific assumptions for variable consideration components including but not limited to trade discounts and allowances, co-pay assistance programs and payor rebates.
Based on available XHANCE prescription data purchased from third parties and data from our PPN partners, who collectively dispensed more than 85% of our total prescriptions (TRxs) in the period, our average net product revenues per prescription for the second quarter of 2021 was $253, an increase compared to average net product revenues per prescription of $221 in second quarter of 2021 and an increase compared to $224 in the third quarter of 2020.
The increase in average net product revenues per prescription from the second quarter of 2021 to the third quarter of 2021 is a consequence of reduced co-pay support under our assistance programs as the result of patients' meeting their out-of-pocket expense thresholds and the effect of reduced rebate rates, including a one-time refund of disputed rebates.
The increase in average net product revenues per prescription from the third quarter of 2020 to the third quarter of 2021 is driven largely by changes in 2021 to our co-pay assistance plan that were intended to increase revenues per prescription by reducing the rate of growth in prescription fills by commercially insured patients in plans that do not cover XHANCE, while sustaining growth in covered plans, as well as the absence of a one-time co-pay assistance program that was available to new patients in the second quarter of 2020.
We calculate average net product revenues per prescription, one metric that we use to gauge the profitability of XHANCE, by dividing net product revenues for the quarter by the estimated number of XHANCE prescriptions dispensed during the quarter. As a result, average net product revenues per prescription is subject to variability. That variability is impacted by factors that do not necessarily reflect a change in the price that is paid for an individual unit of XHANCE, including but not limited to ordering patterns and inventory levels for our wholesale customers and PPN partners, patient utilization rates of affordability programs and the proportion of patients acquiring XHANCE through an insurance benefit. There is also the potential for variability that results from changes in estimation methodology by the third parties that we rely upon to provide prescription data which may lead to revisions of historical estimates of prescription volumes and our calculated average net product revenues per prescription.
We expect full year 2021 net product revenues to be $71.0 to $75.0 million. Previously, we expected full year 2021 net product revenues to be at least $80 million. The reduction in our net product revenue expectations for 2021 is primarily the result of the continuing adverse impact of the COVID-19 pandemic on XHANCE prescription and XHANCE net product revenue growth rates.
We expect average net product revenues per prescription for the full year of 2021 will exceed $210. Previously, we expected full year 2021 net product revenues per prescription to be greater than $200. Factors supporting this expected growth include patients meeting their out-of-pocket expense thresholds, expected improvements in insurance coverage and continued strength in the proportion of prescription refills.





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The duration and magnitude of the negative impact from the COVID-19 pandemic has, and is likely to continue to, affect our ability to remain in compliance with certain of the financial covenants in the Note Purchase Agreement, including the requirement to achieve at least $80.0 million in consolidated XHANCE net product sales and royalties for the trailing twelve-month period ending December 31, 2021. If we do not achieve $80.0 million in consolidated XHANCE net product sales and royalties for the trailing twelve-month period ending December 31, 2021 and we are unable to obtain a waiver or modification to this financial covenant, we will be in breach of a financial covenant of the Note Purchase Agreement, which will constitute an event of default under the terms of the Note Purchase Agreement. If the holders of the notes issued pursuant to the Note Purchase Agreement (the Pharmakon Senior Secured Notes) elect to accelerate the repayment of all unpaid principal and accrued interest under such holders’ Pharmakon Senior Secured Notes, we may need to delay or curtail our operations. Our assets or cash flow may not be sufficient to fully repay our obligations under the Note Purchase Agreement if the obligations thereunder are accelerated upon any events of default.
Licensing revenues
In September 2019, OptiNose AS, a wholly owned subsidiary of the Company, entered into the Currax License Agreement. Under the terms of the Currax License Agreement, Currax paid us a $3.7 million upfront payment in 2019, an additional $0.8 million in December 2020 upon expiration of the escrow that was established for a limited period to cover potential indemnification obligations, and an additional $1.0 million milestone payment in January 2021 upon the achievement of a specified regulatory milestone. We are not eligible to receive any further payments from Currax under the terms of the Currax License Agreement other than reimbursement for certain expenses.
Costs of product sales
Costs of product sales includes the cost of inventory sold, which includes direct and indirect manufacturing and supply chain costs.
Research and development expense
Research and development expense consists primarily of expenses incurred to prepare for, initiate and conduct our planned clinical trials, ongoing research efforts of new products and device improvements. We expense research and development costs as incurred. These expenses include:
personnel expenses, including salaries, benefits and stock-based compensation expense;
costs of funding clinical development performed by third parties, including pursuant to agreements with contract research organizations (CROs), as well as investigative sites and consultants that conduct or support our nonclinical studies and clinical trials;
expenses associated with the continued development of our EDS devices;
expenses incurred under agreements with contract manufacturing organizations (CMOs), including manufacturing scale-up expenses prior to regulatory approval of products for commercial sale and the cost of acquiring and manufacturing preclinical study and clinical trial materials;
consultant fees and expenses associated with outsourced professional scientific development services;
expenses for regulatory activities, including filing fees paid to regulatory agencies and costs incurred to compile and respond to filings with the FDA prior to regulatory approval of products for commercial sale; and
allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.
We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates.
We plan to incur research and development expenses as we continue the development of XHANCE for the treatment of chronic sinusitis and our other product candidates. Clinical trial costs associated with our chronic sinusitis program represent a substantial portion of our total research and development expenses. While we would expect to continue to incur regulatory and other development expenses after the conclusion of our chronic sinusitis clinical program, we expect the costs associated with the conduct of clinical trials to significantly decrease. Due to the inherently unpredictable nature of clinical development, compounded by the uncertainty introduced by the COVID-19 pandemic, the rate of subject enrollment, number of subjects required, and trial duration and outcome,
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there is uncertainty as to the exact timing of when we expect our research and development costs related to the clinical development of XHANCE to significantly decrease.
Selling, general and administrative expense
General and administrative expense consists primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees in executive, finance, accounting, business development, information technology, legal and human resource functions. General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as regulatory fees and professional fees for legal, patent, accounting and other consulting services.
Sales and marketing expenses include our sales team and supporting promotional materials, digital promotion, peer-to-peer education, congresses / conventions, samples, and marketing activities targeted towards health care providers, payors and patients/consumers, including initiatives and fees related to our co-promotion efforts. Additionally, sales and marketing-related expenses include fees paid to our PPN partners for services unrelated to traditional distribution functions, such as data fees, benefit claims adjudication and other enhanced services performed as part of our PPN.
Interest (income) expense
Interest (income) expense consists of interest earned on our cash and cash equivalents held with institutional banks and interest expense is primarily related to the Note Purchase Agreement.
Other (income) expense
Other (income) expense consists primarily of foreign currency (income) losses due to exchange rate fluctuations on transactions denominated in a currency other than our functional currency.
Consolidated Results of Operations
Comparison of three months ended September 30, 2021 and 2020
The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands):
 Three Months Ended September 30,
 20212020
Revenues:
Net product revenues$21,826 $15,436 
Licensing revenues— — 
   Total revenues21,826 15,436 
Costs and expenses:  
Cost of product sales2,411 2,221 
Research and development6,654 6,524 
Selling, general and administrative25,801 24,575 
Total operating expenses34,866 33,320 
Loss from operations(13,040)(17,884)
Other (income) expense: 
Interest (income) expense4,063 3,319 
Other (income) expense14 11 
Total other (income) expense4,077 3,330 
Net loss$(17,117)$(21,214)
Net product revenues
Net product revenues related to sales of XHANCE were $21.8 million and $15.4 million for the three months ended September 30, 2021 and 2020, respectively. Revenue growth is attributable primarily to an increase in units sold to customers as a result of a greater number of XHANCE prescriptions dispensed as well as an increase in our average net selling price during the three months ended September 30, 2021.
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Cost of product sales
Cost of product sales related to XHANCE were $2.4 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively, with the increase attributed primarily to an increase in units sold to customers during the period.
Research and development expense
Research and development expense was $6.7 million and $6.5 million for the three months ended September 30, 2021 and 2020, respectively. The $0.2 million increase was attributable primarily to a $0.6 million increase in clinical expenses related to the conduct of our clinical trials of XHANCE for the treatment of chronic sinusitis. This increase was offset by a $0.4 million decrease in device development costs associated with our OPN-019 development program.
Selling, general and administrative expense
Selling, general and administrative expense was $25.8 million and $24.6 million for the three months ended September 30, 2021 and 2020, respectively. The $1.2 million increase was due primarily to:
a $0.7 million increase in travel and meeting expenses as a result of COVID-19 restrictions starting to lift in 2021;
a $0.6 million increase in marketing and co-promotion costs; and
a $0.5 million increase in legal and professional fees, including D&O insurance.
This increase was offset by a decrease of $0.6 million in payroll and related costs.
Interest (income) expense, net
Interest (income) expense, net, was $4.1 million and $3.3 million for the three months ended September 30, 2021 and 2020, respectively, which was primarily comprised of interest expense on the Pharmakon Senior Secured Notes during both periods. The increase was related to increased principal balance of the Pharmakon Senior Secured Notes.
Comparison of nine months ended September 30, 2021 and 2020
The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands):
 Nine Months Ended September 30,
 20212020
Revenues:
Net product revenues$51,143 $32,770 
Licensing revenues1,000 — 
   Total revenues52,143 32,770 
Costs and expenses:  
Cost of product sales6,576 5,276 
Research and development20,058 16,930 
Selling, general and administrative80,293 77,332 
Total operating expenses106,927 99,538 
Loss from operations(54,784)(66,768)
Other (income) expense: 
Interest (income) expense11,917 9,110 
Other (income) expense(29)44 
Total other (income) expense11,888 9,154 
Net loss$(66,672)$(75,922)
Net product revenues
Net product revenues related to sales of XHANCE were $51.1 million and $32.8 million for the nine months ended September 30, 2021 and 2020, respectively. Revenue growth is attributable primarily to an increase in units sold to
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customers as a result of a greater number of XHANCE prescriptions dispensed as well as an increase in our average net selling price during the nine months ended September 30, 2021.
Licensing revenues
Licensing revenues were $1.0 million for the nine months ended September 30, 2021 as a result of the milestone payment received under the terms of the Currax License Agreement. No licensing revenue was recognized during the nine months ended September 30, 2020.
Cost of product sales
Cost of product sales related to XHANCE were $6.6 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively, with the increase attributed primarily to an increase in units sold to customers during the period.
Research and development expense
Research and development expense was $20.1 million and $16.9 million for the nine months ended September 30, 2021 and 2020, respectively. The $3.2 million increase was attributable primarily to a $4.0 million increase in clinical expenses related to the conduct of our clinical trials of XHANCE for the treatment of chronic sinusitis. This increase was offset by a $0.8 million decrease in personnel costs and device development costs associated with our OPN-019 development program.
Selling, general and administrative expense
Selling, general and administrative expense was $80.3 million and $77.3 million for the nine months ended September 30, 2021 and 2020, respectively. The $3.0 million increase was due primarily to:
a $1.7 million increase in marketing, travel and meeting expenses as a result of COVID-19 restrictions starting to lift in 2021;
a $1.6 million increase in volume-based PPN administrative fees and co-promotion costs; and
a $1.0 million increase in legal and professional fees, including D&O insurance.
This increase was offset by a $1.3 million decrease in personnel expenses.
Interest (income) expense, net
Interest (income) expense, net, was $11.9 million and $9.1 million for the nine months ended September 30, 2021 and 2020, respectively, which was primarily comprised of interest expense on the Pharmakon Senior Secured Notes during both periods. The increase was primarily related to increased principal balance of the Pharmakon Senior Secured Notes as well as a decrease in interest income earned on cash deposits.
Liquidity and Capital Resources
Since inception, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future. We incurred net losses of $66.7 million and $75.9 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $594.4 million. We have funded our operations primarily through the sale and issuance of stock and debt, as well as through licensing revenues. As of September 30, 2021, we had $84.2 million in cash and cash equivalents.
The following table shows a summary of our cash flows for the periods indicated (in thousands):
 Nine Months Ended September 30,
 20212020
Net cash used in operating activities$(60,219)$(67,050)
Net cash used in investing activities(38)(460)
Net cash provided by financing activities310 63,502 
Effects of exchange rates on cash and cash equivalents(11)
Net decrease in cash, cash equivalents and restricted cash$(59,945)$(4,019)
Operating activities
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Cash used in operating activities decreased by $6.9 million, from $67.1 million for the nine months ended September 30, 2020 to $60.2 million for the nine months ended September 30, 2021. The decrease in cash used in operating activities was attributable to an increase in revenue, offset by an increase in expenses and net working capital. The increase in expenses was primarily attributable to an increase in clinical trial-related expenses in pursuit of a follow-on indication for XHANCE for the treatment of chronic sinusitis, and the increase in net working capital was due to an increase in inventory production during the nine months ended September 30, 2021.
Investing activities
Cash used in investing activities decreased by $0.4 million from the nine months ended September 30, 2020 to the nine months ended September 30, 2021. Purchases of equipment during the nine months ended September 30, 2020 of $0.5 million decreased in the nine months ended September 30, 2021 to $0.2 million, which was offset by $0.1 million of proceeds from the sale of manufacturing equipment.
Financing activities
Cash provided by financing activities was $0.3 million for the nine months ended September 30, 2021. Cash provided by financing activities was $63.5 million for the nine months ended September 30, 2020. Cash provided by financing activities for the nine months ended September 30, 2020 was primarily driven by the receipt of $30.0 million from the issuance of the First Delayed Draw Notes under the Pharmakon Senior Secured Notes and $33.6 million from the sale of common stock . Cash provided by financing activities for the nine months ended September 30, 2021 was driven by proceeds from the issuance of common stock under the 2017 Plan.
Senior Secured Note Purchase Agreement
On September 12, 2019 (the Closing Date), we entered into the Note Purchase Agreement (the Note Purchase Agreement) with funds managed by Pharmakon, the investment manager of BioPharma. The Note Purchase Agreement provided us with $130.0 million in debt financing, of which $80.0 million was issued on the Closing Date, $30.0 million was issued on February 13, 2020 and $20.0 million was issued on December 1, 2020.

On August 13, 2020, we entered into a letter agreement (the Pharmakon Letter Agreement) to the Note Purchase Agreement. The Pharmakon Letter Agreement provided us with the option to issue additional Pharmakon Senior Secured Notes, subject to us achieving specified consolidated XHANCE net sales and royalties for the quarter ended June 30, 2021 and certain other conditions. As consideration for the Pharmakon Letter Agreement, we issued 44,643 shares of Common Stock to Pharmakon. The aggregate fair value of $250,000 was recorded as debt issuance costs and is being amortized to interest expense over the five-year term of the Pharmakon Senior Secured Notes. We are no longer eligible for the additional Pharmakon Senior Secured Notes as the requisite conditions were not satisfied as of June 30, 2021.
On March 2, 2021, we entered into the first amendment (the First Amendment) to the Note Purchase Agreement. The First Amendment revised certain minimum trailing twelve-month consolidated XHANCE net sales and royalties we are required to achieve. As consideration for the First Amendment, we will pay an amendment fee of $1.3 million upon the earlier of the prepayment of the Pharmakon Senior Secured Notes and September 12, 2024.
The Pharmakon Senior Secured Notes bear interest at a fixed per annum rate of 10.75% and are scheduled to mature on September 12, 2024 (the Maturity Date). We are required to make quarterly interest payments until the Maturity Date. We are also required to make principal payments, which are payable in eight equal quarterly installments beginning on December 15, 2022 and continuing until the Maturity Date; provided that we may, at our election, postpone any such principal payment until the Maturity Date if, as of the applicable payment date, certain minimum trailing four-quarter consolidated XHANCE net sales and royalties thresholds have been achieved.

We are required to repay the Pharmakon Senior Secured Notes in full upon the occurrence of a change of control (as defined in the Note Purchase Agreement). In addition, we may make voluntary prepayments in whole or in part. All mandatory and voluntary prepayments are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs prior to the third anniversary of the Closing Date, an amount equal to 2% of the principal prepaid, (ii) if prepayment occurs on or after the third anniversary of the Closing Date but prior to the fourth anniversary of the Closing Date, an amount equal to 1% of the principal prepaid; and (iii) if prepayment occurs on or after the fourth anniversary of the Closing Date, no prepayment premium is required. We are also required to pay a "make-whole" amount in respect of any principal prepayments (whether mandatory or voluntary) made prior to the 30-month anniversary of the issuance of the applicable Pharmakon Senior Secured Note, in an amount equal to the interest that would have accrued through the 30-month anniversary in respect of such note but for such principal prepayment.
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The Pharmakon Senior Secured Notes are secured by a pledge of substantially all of our assets and the Note Purchase Agreement contains affirmative and negative covenants customary for financings of this type, including limitations on our and our subsidiaries’ ability, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, grant certain license rights to our products, technologies and other intellectual property rights; pay dividends and distributions, repay junior indebtedness and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the Note Purchase Agreement contains financial covenants requiring us to maintain at least $30.0 million of cash and cash equivalents.
The Note Purchase Agreement also includes events of default customary for financings of this type, in certain cases subject to customary periods to cure, following which BioPharma may accelerate all amounts outstanding under the Pharmakon Senior Secured Notes.
Projected 2021 operating expenses
We expect that our total GAAP operating expenses (consisting of selling, general & administrative expenses and research & development expenses) for 2021 will be between $132.0 million and $137.0 million, of which approximately $10.0 million is expected to be non-cash stock-based compensation expense. As a result, total GAAP operating expenses, excluding non-cash stock-based compensation expense, are expected to be between $122.0 million and $127.0 million. An increase in expenses from 2020 to 2021 is anticipated due primarily to an increase in fees paid to our PPN partners associated with higher projected XHANCE prescription volumes and an increase in research and development expenses related to our clinical trial program in pursuit of a follow-on indication for XHANCE for the treatment of chronic sinusitis.
Future funding requirements
We expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we:
maintain our sales force and the commercial infrastructure to support the sales and marketing for XHANCE;
continue advertising and other promotional activities to support the commercialization of XHANCE;
continue to provide co-pay and other patient affordability programs;
continue clinical development activities for XHANCE, including an FDA-mandated post-marketing pediatric study and clinical trials for a follow-on indication for the treatment of chronic sinusitis;
continue research and development activities for additional product candidates, including OPN-019;
continue to contract to manufacture XHANCE and our other product candidates;
maintain, expand and protect our patent portfolio;
service our debt obligations under the Pharmakon Senior Secured Notes issued in September 2019, February 2020 and December 2020, including in connection with any potential events of default and subsequent acceleration of payment in full;
maintain infrastructure necessary to operate as a publicly-traded, FDA-regulated commercial-stage company; and
hire additional staff and add operational, financial and information systems to execute our business plan.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
duration and impact of COVID-19 pandemic on our business;
the success of our commercialization of XHANCE for the treatment of nasal polyps including, among other things, patient and physician acceptance of XHANCE and our ability to maintain adequate insurance coverage and reimbursement for XHANCE;
the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales;
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net product revenues received from sales of XHANCE;
the costs of maintaining our sales force;
the level of co-pay assistance and other patient affordability programs offered for XHANCE;
our clinical development plans for XHANCE, including the outcome, timing and cost of an FDA-mandated post-marketing pediatric study and clinical trials for the supplemental indication for the treatment of chronic sinusitis;
the outcome, timing and cost of the regulatory approval process of XHANCE for chronic sinusitis by the FDA, including the potential for the FDA to require that we perform more studies and clinical trials than those that we currently expect;
the costs involved in preparing, filing and prosecuting patent applications and annuity fees relating to issued patents;
the cost of maintaining and enforcing our intellectual property rights, as well as the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
the initiation, progress, timing, costs and results of clinical trials and other research and development related to additional product candidates, including OPN-019;
the extent to which we in-license, acquire or otherwise partner in development or commercialization of other products, product candidates or technologies; and
maintain infrastructure necessary to operate as a publicly-traded, FDA-regulated commercial-stage company.
Although it is difficult to predict our future liquidity requirements, we will likely require additional capital in the future secured through equity or debt financings, partnerships, collaborations, or other sources in order to meet the debt service obligations under our outstanding Pharmakon Senior Secured Notes, including repayment, and to carry out our planned development and commercial activities. We believe that our existing cash and cash equivalents will be sufficient to maintain the minimum cash balance required under the Note Purchase Agreement and to fund our operations for at least twelve months from the filing date of this Quarterly Report on Form 10-Q if, in the event of a default, the holders of the Pharmakon Senior Secured Notes do not elect to accelerate repayment of all unpaid principal and accrued interest under the Note Purchase Agreement; however, we will likely require additional capital to fund operations beyond twelve months and to continue to service our debt obligations under the Note Purchase Agreement. Financial capital, secured through equity financings, partnerships, collaborations, or other sources, may not be available on a timely basis, on favorable terms, or at all, and such capital, if raised, may not be sufficient to meet our debt service obligations, including repayment, or enable us to continue to implement our long-term business strategy. Furthermore, if we do not achieve $80 million of consolidated XHANCE net sales and royalties for the trailing twelve-month period ending December 31, 2021 and we are unable to obtain a waiver or modification to this financial covenant, we will be in breach of a financial covenant under the Note Purchase Agreement, which will constitute an event of default under the terms of the Note Purchase Agreement. If the holders of the Pharmakon Senior Secured Notes elect to accelerate the repayment of all unpaid principal and accrued interest under such holders’ Pharmakon Senior Secured Notes we may need to delay or curtail our operations. These factors raise substantial doubt about our ability to continue as a going concern. Additionally, we may fail to satisfy our financial covenants in the future, may never become profitable, or if we do, may not be able to sustain profitability on a recurring basis.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
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Contractual obligations and commitments
The following table summarizes our contractual obligations at September 30, 2021:
TotalLess than 1 year1-3 years3-5 yearsMore than 5 years
(in thousands)
Operating leases(1)
$2,747 $1,080 $1,667 $— $— 
Long-term debt(2)
161,395 14,169 145,926 1,300 — 
  Total$164,142 $15,249 $147,593 $1,300 $— 
(1) Reflects obligations pursuant to our office leases in Yardley, Pennsylvania, Ewing, New Jersey and Oslo, Norway and leases of certain other equipment.

(2) Reflects principal, interest obligations and exit fees pursuant to the Note Purchase Agreement entered into on September 12, 2019 (the Closing Date). The Pharmakon Senior Secured Notes bear interest at 10.75% and are scheduled to mature on September 12, 2024 (the Maturity Date). We are required to make quarterly interest payments until the Maturity Date. Principal payments are payable in eight equal quarterly installments beginning on December 15, 2022 and continuing until the Maturity Date; provided that we may, at our election and upon achieving certain minimum trailing four-quarter consolidated XHANCE net sales and royalties, postpone any such amortization payment until the Maturity Date. The Note Purchase Agreement includes events of default customary for financings of this type (including, among others, failure to comply with affirmative, negative and financial covenants), in certain cases subject to customary periods to cure, following which BioPharma may accelerate all amounts outstanding under the Pharmakon Senior Secured Notes.

We are also party to a manufacturing services agreement with one of our suppliers pursuant to which we are obligated to purchase a minimum number of products per month or potentially be subject to a payment of $5,000 per week for any month in which we do not purchase such minimum number of products.
Critical accounting policies
The Critical Accounting Policies and Significant Judgments and Estimates included in our annual report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 3, 2021, have not materially changed.
Recent accounting pronouncements
See Note 3 to our unaudited interim consolidated financial statements of this Form 10-Q for a description of recent accounting pronouncements applicable to our consolidated financial statements.
JOBS Act
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (Exchange Act) refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS