Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a commercial-stage medical device company focused on developing, manufacturing and commercializing innovative and minimally invasive neuromodulation solutions for patients with cardiovascular disease. Our proprietary platform technology, Barostim, is designed to leverage the power of the brain and nervous system to address the imbalance of the Autonomic Nervous System, which causes HF with reduced Ejection Fraction (“ HFrEF”) and other cardiovascular diseases. Our second-generation product, Barostim, is the first and only commercially available neuromodulation device indicated to improve symptoms for patients with HFrEF. Barostim provides Baroreflex Activation Therapy by sending imperceptible and persistent electrical pulses to baroreceptors located in the wall of the carotid artery to signal the brain to modulate cardiovascular function. Barostim is currently approved by the U.S. Food and Drug Administration (the “ FDA”) to improve the symptoms of patients with HFrEF and is CE Marked for HFrEF and resistant hypertension.
Since our inception we have generated minimal revenue, as our activities have consisted primarily of developing Barostim Therapy, conducting our BeAT-HF pre-market and post-market pivotal studies in the U.S. and filing for regulatory approvals. Our ability to generate revenue from product sales and become profitable will depend on our ability to successfully commercialize Barostim and any product enhancements we may advance in the future. We expect to derive future revenue by expanding our own dedicated salesforce and increasing awareness of Barostim among payors, physicians and patients.
Our sales and marketing efforts are directed at electrophysiologists, HF specialists, general cardiologists and vascular surgeons because they are the primary users of our technology. However, we consider hospitals, where the procedures are performed primarily in an outpatient setting, to be our customers, as they are the purchasing entities of Barostim in the U.S. We intend to continue making significant investments building our U.S. commercial infrastructure by expanding and training our U.S. sales force. We have dedicated significant resources to educate physicians who treat HFrEF about the advantages of Barostim and train them on the implant procedure.
The costs for the device and implantation procedure are reimbursed through various third-party payors, such as government agencies and commercial payors. In the U.S., we estimate that 67% of our target patient population is Medicare-eligible based on the age demographic of the HFrEF patient population indicated for
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Barostim. As a result, we have prioritized coverage by the Centers for Medicare and Medicaid Services (“ CMS”) while simultaneously developing processes to engage commercial payors. All Medicare Administrative Contractors have retired automatic coverage denial policies for our Current Procedural Terminology codes, thereby allowing hospitals to be paid for the Barostim procedure. Our reimbursement strategy involves continuing to broaden our current coverage and build our in-house market access team to assist patients and physicians in obtaining appropriate prior authorization approvals in advance of treatment on a case-by-case basis where positive coverage policies currently do not exist. Outside the U.S., reimbursement levels vary by country and within some countries by region. Barostim is eligible for reimbursement in certain countries in the European Union (“EU”), such as Germany, where annual healthcare budgets for the hospital generally determine the number of patients to be treated and the prices to be paid for the related devices that may be purchased.
We manage all aspects of manufacturing operations and product supply of Barostim, which include final assembly, testing and packaging of our implantable pulse generator (“IPG”) and stimulation lead, at our headquarters in Minneapolis, Minnesota. We utilize components or various subassemblies manufactured by third-party suppliers, some of which have significant lead times. Many of these components are from a limited number of suppliers. We believe that our component manufacturers are recognized in their field for their competency to manufacture the respective portions of Barostim and have quality systems established that meet FDA requirements. We seek to maintain higher levels of inventory to protect ourselves from supply interruptions and continue to seek to broaden and strengthen our supply chain through additional sourcing channels.
From our inception until the IPO, we financed our operations primarily through preferred stock financings, and additionally, from sales of our Barostim products and amounts borrowed under our past credit facilities. We have devoted substantially all of our resources to research and development activities related to Barostim Therapy, including clinical and regulatory initiatives to obtain marketing approval and sales and marketing activities.
We intend to use a portion of the IPO proceeds to continue funding the expansion of our direct sales force and commercial organization related to Barostim in the U.S. We also intend to continue investing in research and development in the near term to improve clinical outcomes, optimize patient adoption and comfort, increase patient access and enhance the physician and patient experience. Longer term, we plan to explore Barostim’s potential to expand its indications for use to other cardiovascular diseases. As a result of these investments and our commercialization efforts, we expect to continue to incur net losses for the next several years, which may require additional funding and could include future equity and debt financings.
Recent developments
Since it was reported to have surfaced in December 2019, a novel strain of coronavirus (“COVID-19”) has spread across the world and has been declared a pandemic by the World Health Organization. Efforts to contain the spread of COVID-19 have been significant and governments around the world, including in the U.S., have implemented severe travel restrictions, social distancing requirements, quarantines, stay-at-home orders and other significant restrictions. As a result, the current COVID-19 pandemic has presented a substantial public health and economic challenge and is affecting hospitals, physicians, patients, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S. and world economy and in financial markets.
The COVID-19 pandemic has negatively impacted our business, financial condition and results of operations by decreasing and delaying procedures performed to implant Barostim, and we expect the pandemic will continue to negatively impact our business, financial condition and results of operations. Beginning in March 2020, our revenue was negatively impacted by COVID-19 as healthcare facilities and clinics began restricting in-person access to their clinicians, reducing patient consultations and treatments or temporarily closing their facilities. As a result, substantially all of our then-scheduled procedures were postponed, and numerous other cases could not be scheduled. During May 2020, the widespread shutdown resulted in key
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physician-society conferences being moved to a virtual setting, which directly impacted our planned commercial launch in the U.S.
In response to the COVID-19 pandemic, we have implemented a variety of measures intended to help us manage its impact while maintaining business continuity to support our customers and patients. These measures include:
● Establishing safety protocols, facility enhancements and work-from-home strategies to protect our employees;
● Ensuring that our manufacturing and supply chain operations remain intact and operational;
● Keeping our workforce intact, including our experienced and specialized U.S. sales and clinical support team;
● Implementing virtual physician education programs to support opening new accounts with minimal in person interaction; and
● Increasing our capital resources through the completion of the IPO, which resulted in net proceeds of $133.2 million.
Our hospital customers in the U.S. and Europe began to gradually perform elective procedures again during the fourth quarter of 2020. We believe the recovery of our business in the fourth quarter of 2020 and through most of fiscal year 2021 is an encouraging sign for when remaining shelter-in-place and hospital limitations are lifted. As the pandemic eased throughout 2021, we experienced the following positive trends:
● Strong physician participation in our virtual educational events;
● Expansion into new accounts; and
● Hospitals accepting patients for elective procedures at closer to pre-pandemic levels in the U.S.
However, procedure volumes were again negatively impacted by the Delta and Omicron variants of COVID-19 in the third and fourth quarters of 2021 and continuing into the first quarter of 2022. By March 2022, implant centers resumed procedures at more normal levels. We believe the challenges resulting from COVID-19 will likely continue for the duration of the pandemic. The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and spread of COVID-19 and its variants and the actions to contain the spread of COVID-19 and its variants or treat its impact.
Factors affecting our performance
We believe there are several important factors that have impacted and that we expect will continue to impact our business and results of operations. These factors include:
● Growing and supporting our U.S. commercial organization;
● Promoting awareness among physicians, hospitals and patients to accelerate adoption of Barostim;
● Raising awareness among payors to build upon reimbursement for Barostim;
● Investing in research and development to foster innovation and further simplify the Barostim procedure; and
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● Leveraging our manufacturing capacity to further improve our gross margins.
Components of results of operations
Revenue
Our U.S. sales have increased since the pre-market approval of Barostim by the FDA in August 2019, and the subsequent reimbursement changes in 2020. We expect to continue to drive increases in revenue through our efforts to increase awareness of Barostim among physicians, patients and payors and by the expansion of our U.S. sales force. As a result, we expect that U.S. sales will continue to account for the majority of our revenue going forward.
We derive a portion of our revenue from the sale of Barostim to hospitals in Germany and other select countries in Europe. Revenue from sales of Barostim in Europe fluctuates based on the average selling price of Barostim as determined by location of sale and channel mix, each of which may vary significantly from country to country. Our revenue from international sales can also be significantly impacted by fluctuations in foreign currency exchange rates.
Cost of goods sold and gross margin
Cost of goods sold consists primarily of acquisition costs of the components and subassemblies of Barostim, allocated manufacturing overhead and scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows. Gross margin may also vary based on regional differences in rebates and incentives negotiated with certain customers.
We calculate gross margin as revenue less cost of goods sold divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, but is primarily driven by the average sale price of our product, the percentage of products sold that include a full system (i.e., an IPG and a stimulation lead), as compared to individual IPG sales, and the allocated manufacturing overhead. Although we sell the majority of our devices directly to hospitals, the impact of the average selling price on gross margin is driven by the percentage of products we sold to distributors as compared to those sold directly to hospitals, as our average selling price is typically higher on products we sell directly. The full system sales typically have a lower gross margin as they include the cost of an IPG and a stimulation lead whereas individual IPG sales only include the cost of an IPG. The manufacturing overhead costs of Barostim are directly aligned to our production volume and therefore the cost per product is reduced if production levels increase. While we expect our gross margin to be positively affected over time to the extent we are successful in selling more product through our direct sales force and by increasing our production volumes, it will likely fluctuate from period to period as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and development expenses
Research and development (“R&D”) expenses consist primarily of personnel costs, including salaries, bonuses, employee benefits and stock-based compensation expenses for our R&D employees. R&D expenses also include costs associated with product design efforts, development prototypes, testing, clinical trial programs and regulatory activities, contractors and consultants, equipment and software to support our development, facilities and information technology. We expense research and development costs as they are incurred. We expect R&D expenses to increase in absolute dollars as we continue to develop enhancements to Barostim. Our R&D expenses may fluctuate from period to period due to the timing and extent of our product development and clinical trial expenses related to Barostim in HFrEF.
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Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs, including base salaries, bonuses, employee benefits and stock-based compensation expense for our sales and marketing personnel, including sales commissions, and for administrative personnel that support our general operations such as executive management, financial accounting, information technology and human resources personnel. SG&A expenses also include costs attributable to marketing, as well as travel, legal fees, financial audit fees, insurance, fees for other consulting services, depreciation and facilities. We expense commissions at the time of the sale.
We expect SG&A expenses to increase in absolute dollars as we continue to expand our direct sales force and commercial organization in the U.S. In addition, we will continue to increase our international presence and to develop and assist our channel partners. We also expect our administrative expenses will increase as we increase our headcount and information technology to support our operations as a public company. Additionally, we anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company. However, we expect our SG&A expenses to decrease as a percentage of revenue as our revenue grows.
Interest expense
Interest expense consists of interest on our debt and amortization of associated debt discount.
Other expense, net
Other expense, net consists primarily of the fair value adjustments related to our formerly outstanding convertible preferred stock warrants, which were accounted for as a liability and marked-to-market at each reporting period. The final fair value adjustment of the warrant liability was recorded upon the closing of the IPO in connection with the conversion of the warrants to common stock warrants. Other items include losses on the extinguishment of debt, interest income earned on our cash and cash equivalents and the effect of exchange rates on our foreign currency-denominated asset and liability balances.
Provision for income taxes
Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for deferred tax assets including NOL carryforwards, R&D credits and other tax credits.
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Results of operations
Consolidated results of operations for the three months ended March 31, 2022, compared to the three months ended March 31, 2021
Three months ended
March 31,
Change
(unaudited and in thousands)
2022
2021
$
%
Revenue
$
4,076
$
2,860
$
1,216
43
%
Cost of goods sold
949
867
82
9
%
Gross profit
3,127
1,993
1,134
57
%
Gross margin
77
%
70
%
Operating Expenses:
Research and development
2,258
1,750
508
29
%
Selling, general and administrative
10,777
4,460
6,317
142
%
Total operating expenses
13,035
6,210
6,825
110
%
Loss from operations
(9,908)
(4,217)
(5,691)
135
%
Interest expense
—
(601)
601
NM
Other expense, net
(57)
(3,792)
3,735
(98)
%
Loss before income taxes
(9,965)
(8,610)
(1,355)
16
%
Provision for income taxes
(26)
(17)
(9)
53
%
Net loss
$
(9,991)
$
(8,627)
$
(1,364)
16
%
NM – Not meaningful
Revenue
Revenue by Geography
Three months ended
March 31,
Change
(unaudited and in thousands)
2022
2021
$
%
United States
$
3,058
$
1,612
$
1,446
90
%
Europe
1,018
1,248
(230)
(18)
%
Total Revenue
$
4,076
$
2,860
$
1,216
43
%
Revenue was $4.1 million for the three months ended March 31, 2022, an increase of $1.2 million, or 43%, over the three months ended March 31, 2021.
Revenue generated in the U.S. was $3.1 million for the three months ended March 31, 2022, an increase of $1.4 million, or 90%, over the three months ended March 31, 2021. Total HF revenue units in the U.S. totaled 99 and 44 for the three months ended March 31, 2022 and 2021, respectively.
HF revenue in the U.S. totaled $2.9 million and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. The increase was primarily driven by continued growth as a result of the expansion into new sales territories, new accounts and increased physician and patient awareness of Barostim.
As of March 31, 2022, we had a total of 56 active implanting centers, as compared to 19 as of March 31, 2021. Active implanting centers are customers that have completed at least one commercial HF implant in the last 12 months. As of March 31, 2022, we had a total of 17 sales territories as compared to 6 as of March 31, 2021.
Revenue generated in Europe was $1.0 million for the three months ended March 31, 2022, a decrease of $0.2 million, or 18%, over the three months ended March 31, 2021. Total revenue units in Europe were 50 for the three months ended March 31, 2022 as compared to 52 in the prior year period. The decrease is due to reduced procedure volumes attributable to the impact of COVID-19. As of March 31, 2022, the Company had a total of six sales territories in Europe.
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Cost of goods sold and gross margin
Cost of goods sold increased $0.1 million, or 9%, to $0.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This increase was primarily due to higher sales of Barostim.
Gross profit was $3.1 million for the three months ended March 31, 2022, an increase of $1.1 million, or 57%, over the three months ended March 31, 2021. Gross margin increased to 77% for the three months ended March 31, 2022, compared to 70% for the three months ended March 31, 2021. Gross margin for the three months ended March 31, 2022 was higher due to a decrease in the cost per unit and an increase in the average selling price. This was partially offset by a larger percentage of our revenue units coming from full systems versus battery replacements. New patients receive a full system that includes an IPG and a stimulation lead, which has a lower gross margin than a stand-alone IPG used for a battery replacement.
Research and development expenses
R&D expenses increased $0.5 million, or 29%, to $2.3 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This change was primarily driven by a $0.3 million increase in compensation expenses, mainly as a result of increased headcount, a $0.3 million increase in clinical study expenses, and a $0.1 million increase in non-cash stock-based compensation expense, partially offset by a $0.2 million decrease in consulting expenses.
Selling, general and administrative expenses
SG&A expenses increased $6.3 million, or 142%, to $10.8 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This was primarily driven by a $3.2 million increase in compensation expenses, mainly as a result of increased headcount, a $0.7 million increase in travel expenses, a $0.7 million increase in insurance costs incurred as a result of becoming a public company, a $0.6 million increase in marketing and advertising expenses associated with the commercialization of Barostim in the U.S., a $0.6 million increase in non-cash stock-based compensation expense, a $0.3 million increase in consulting expenses, and a $0.2 million increase in professional fees.
Interest expense
Interest expense decreased $0.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This decrease was driven by the repayment of the outstanding debt under the loan agreement with Horizon Technology Finance Corporation (the “Horizon loan agreement”) in November 2021.
Other expense, net
Other expense, net was $0.1 million for the three months ended March 31, 2022, compared to $3.8 million for the three months ended March 31, 2021. The expense in the first quarter of 2021 was primarily driven by the increase in fair value of the convertible preferred stock warrant liability from December 31, 2020 to March 31, 2021. As these preferred stock warrants converted to common stock warrants upon the IPO, there is no longer a change in fair value recorded into other expense, net.
Provision for income taxes
Provision for income taxes was nominal for each of the three months ended March 31, 2022 and March 31, 2021.
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Liquidity, capital resources and plan of operations
We have incurred significant operating losses and negative cash flows from operations since our inception, and we anticipate that we will incur significant losses for at least the next several years. As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $131.2 million and $142.1 million, respectively. For the three months ended March 31, 2022 and 2021, our net losses were $10.0 million and $8.6 million, respectively. Our net cash used in operating activities for the three months ended March 31, 2022 and 2021 were $10.6 million and $5.0 million, respectively.
Prior to the IPO, our operations were financed primarily by aggregate net proceeds from the sale of our convertible preferred stock of $383.1 million, as well as debt financings. In September 2019, we entered into the Horizon loan agreement to borrow $20.0 million, which was fully repaid on November 3, 2021. In July 2020, we completed an equity financing pursuant to which we issued 62,500,000 shares of Series G convertible preferred stock at a price of $0.80 per share, for net proceeds of $49.8 million after deducting offering expenses. On July 2, 2021, we closed our IPO for net proceeds from the offering, after deducting the underwriting discount and other offering expenses payable by us, of $133.2 million.
Our future liquidity and capital funding requirements will depend on numerous factors, including:
● our investment in our U.S. commercial infrastructure and sales forces;
● the degree and rate of market acceptance of Barostim and the ability for our customers to obtain appropriate levels of reimbursement;
● the costs of commercialization activities, including product sales, marketing, manufacturing and distribution;
● our R&D activities for product enhancements and to expand our indications;
● the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
● our need to implement additional infrastructure and internal systems;
● our ability to hire additional personnel to support our operations as a public company; and
● the emergence of competing technologies or other adverse market developments.
We believe that our existing cash resources together with revenue will be sufficient to meet our forecasted requirements for operating liquidity, capital expenditures and debt services for at least the next three years. If these sources are insufficient to satisfy our liquidity requirements, however, we may seek to sell additional equity or enter into a loan agreement. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants further restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.
Additional financing may not be available at all, or may only be available in amounts or on terms that we do not deem to be favorable. If we are unable to obtain additional financing when needed to satisfy our liquidity requirements, we may be required to delay the commercialization and marketing of Barostim.
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Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods indicated below:
Three months ended
March 31
(unaudited)
(in thousands)
2022
2021
Net cash (used in) provided by:
Operating activities
$
(10,644)
$
(5,038)
Investing activities
(293)
(101)
Financing activities
48
2
Effect of exchange rate changes on cash and cash equivalents
(6)
(4)
Net change in cash and cash equivalents
$
(10,895)
$
(5,141)
Cash used in operating activities
Net cash used in operating activities for the three months ended March 31, 2022 was $10.6 million and consisted primarily of a net loss of $10.0 million and a decrease in net operating assets of $1.5 million, partially offset by a non-cash charge of $0.8 million related to stock-based compensation expense. Net operating assets consisted primarily of inventory, accounts receivable, prepaid expenses, accounts payable and accrued expenses to support the growth of our operations.
Net cash used in operating activities for the three months ended March 31, 2021 was $5.0 million and consisted primarily of a net loss of $8.6 million and a decrease in net operating assets of $0.3 million, partially offset by non-cash charges of $3.7 million related to the fair value adjustment to our convertible preferred stock warrants. Net operating assets consisted primarily of inventory, accounts receivable, prepaid expenses, accounts payable and accrued expenses to support the growth of our operations.
Cash used in investing activities:
Cash used in investing activities was $0.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, and consisted of purchases of property and equipment.
Cash provided by financing activities:
Net cash provided by financing activities were nominal for the three months ended March 31, 2022 and 2021, and were entirely attributed to the proceeds from the exercise of common stock options.
Contractual obligations and commitments
There have been no material changes to our contractual obligations as of March 31, 2022, as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical accounting policies and estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and judgments that affect the amounts reported in our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and supportable under the circumstances. The results of this evaluation then form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and such differences may be material to our condensed consolidated financial statements.
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While our significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.
Stock-based compensation
We maintain an equity incentive plan that was adopted in 2001 to provide long-term incentives for employees, consultants, and members of the Board of Directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employee directors. In connection with the IPO, we adopted the 2021 Plan under which we may grant equity incentive awards to eligible employees (including our named executive officers), non-employee directors and consultants in order to enable us to obtain and retain services of these individuals, which we deem as essential to our long-term success.
We recognize equity-based compensation expense for awards of equity instruments to employees and non-employees based on the grant date fair value of those awards in accordance with ASC 718. ASC 718 requires all equity-based compensation awards to employees and non-employee directors, including grants of restricted shares and stock options, to be recognized as expense in the condensed consolidated statements of operations and comprehensive loss based on their grant date fair values. We estimate the grant date fair value of stock options using the Black-Scholes option pricing model. We use an estimate of the value of our common stock, with the assistance of an independent appraiser, to determine the fair value of options.
The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the fair value of common stock, (ii) the expected share price volatility, (iii) the expected term of the award, (iv) the risk-free interest rate and (v) the expected dividend yield.
● Fair value of common stock — Given the absence of a public trading market for our common stock prior to the IPO, the fair value of our common stock was determined by our Board of Directors with the assistance of an unrelated third-party valuation firm. The valuation was determined in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. For the valuation as of the date of pricing of the IPO, the fair value of our common stock was determined by our Board of Directors to be the public offering price of the shares of common stock issued in the IPO. For valuations after the completion of the IPO, our Board of Directors will determine the fair value of each share of common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
● Expected share price volatility — Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar (guideline) companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of guideline companies have characteristics similar to us, including stage of product development and focus on the life science industry.
● Expected term of an award — Determined based on our analysis of historical exercise behavior while taking into consideration various participant demographics and option characteristics. We utilize the simplified method to develop the estimate of the expected term.
● Risk-free interest rate — Based on a treasury instrument whose term is consistent with the expected term of the stock options.
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● Expected dividend yield — We assume an expected dividend yield of zero, as we have never paid dividends and have no current plans to pay any dividends on our common stock.
We account for forfeitures as they occur. We expense the fair value of our equity-based compensation awards granted to employees on a straight-line basis over the associated service period, which is generally the period in which the related services are received.
JOBS Act accounting election
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 elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make comparison of our financials to those of other public companies more difficult.
Recent accounting pronouncements
A discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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