OptiNose, Inc.
Annual Report 2018

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ýAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018OR oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ______________. Commission file number: 001-38241OPTINOSE, INC.(Exact name of registrant as specified in its charter) Delaware 42-1771610(State of other jurisdiction ofincorporation or organization) (I.R.S. Employer Identification Number) 1020 Stony Hill Road, Suite 300Yardley, 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 ClassName of each exchange on which registeredCommon Stock, $0.001 par valueThe Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ýIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ýIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuantto 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 requiredto submit such files). Yes ý No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. ý Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany, 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 oAccelerated filer ýNon-accelerated filer o (Do not check if a smaller reporting company)Smaller reporting company ý Emerging growth company ý If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No ý As of June 29, 2018 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market valueof the registrant's common stock held by non-affiliates was approximately $682.4 million based on the last reported sale price of the registrant'scommon stock on June 30, 2018.The number of shares of common stock outstanding at March 1, 2019 was 41,264,422 shares.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2019 annual meeting of stockholders are incorporated by reference into Part III of thisForm 10-K where indicated. Such definitive proxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days afterthe year ended December 31, 2018. Table of Contents NOTE REGARDING FORWARD-LOOKING STATEMENTS 1 MARKET, INDUSTRY AND OTHER DATA 2 PART I ITEM 1.BUSINESS 3ITEM 1A.RISK FACTORS 40ITEM 1B.UNRESOLVED STAFF COMMENTS 84ITEM 2.PROPERTIES 84ITEM 3.LEGAL PROCEEDINGS 84ITEM 4.MINE SAFETY DISCLOSURE 84 PART II ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 84ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA 85ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 85ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 97ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 97ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 97ITEM 9A.CONTROLS AND PROCEDURES 97ITEM 9B.OTHER INFORMATION 99 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 99ITEM 11.EXECUTIVE COMPENSATION 99ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS 99ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 99ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES 99 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 99 SIGNATURE PAGE EXHIBIT INDEX _________________________Unless the context otherwise requires, all references in this Form 10-K to "Optinose," "Company," "we," "us," and "our" refer to OptiNose, Inc. andits subsidiaries._________________________Trademark NoticeOPTINOSE® and XHANCE® are registered trademarks of Optinose in the United States. This Form 10-K contains references to our trademarksand to trademarks belonging to other entities. All other trademarks, trade names and service marks appearing in this Form 10-K are the property oftheir respective owners. We do not intend our use or display of other companies' trade names or trademarks to imply a relationship with, orendorsement or sponsorship of us by, any other companies.Table of ContentsNOTE REGARDING FORWARD-LOOKING STATEMENTSThis Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Thesestatements include, among others, statements relating to:▪the potential advantages of XHANCE®, our product candidates and Exhalation Delivery System (EDS) devices and technologies;▪our plan to internalize our contract sales team and deploy an additional 20 territory managers in “XHANCE naive” geographies to expandour reach among the ear, nose and throat and allergy specialist universe, and our expectation that doing so will grow the target audiencefor our sales team by approximately 25% to approximately 9,500 healthcare providers;▪our expectation to continue to secure broader market access over time, and our intention to eventually increase the size of our sales forceto approximately 120 territory managers based upon an expanded target audience of approximately 14,000 specialists or “specialty-like”primary care physicians;▪our expectation to target additional physicians through digital and non-personal promotion in areas where we do and do not have territorymanagers;▪our analyses suggesting that XHANCE will have a comparatively low pharmacy budget impact;▪our clinical trial data suggesting that XHANCE may produce an offsetting benefit by helping reduce other healthcare resource utilization;▪our belief that the cost of XHANCE to insurance plans will likely be significantly less than the projected costs of monoclonal antibodiesthat are currently in development for the treatment of nasal polyps;▪our believe that the current practice of postoperative intranasal steroid use could support XHANCE’s adoption as a maintenance therapy toimprove outcomes following sinus surgery;▪planned product development activities, studies and clinical trials, including our plans to initiate a second phase 3b clinical trial ofXHANCE in 2019 in pursuit of a follow-on indication for chronic sinusitis;▪our intention to execute a branded, multi-channel direct to consumer pilot in three cities targeting diagnosed and undiagnosed nasal polyppatients in 2019, and our anticipation to broaden the direct to consumer pilot to a national campaign in 2020 if the 2019 campaign issuccessful;▪our expectation that our GAAP operating expenses in 2019 will be between $135 - $142 million and that our non-cash stock-basedcompensation expense will be between $10 - $12 million;▪our expectation that our existing cash and cash equivalents will be sufficient to meet our debt service obligations under our SeniorSecured Notes, and to carry out our planned development and commercial activities into the fourth quarter of 2020;▪our expectation that the average net revenue per prescription for XHANCE in the first quarter of 2019 will be between $155 - $175 and ourexpectation that the average net revenue per prescription will improve though 2019 and that the full-year 2019 average net revenue perprescription will be between $185 - $205;▪the size and growth potential of the markets for XHANCE and our product candidates, and our ability to service those markets;▪the rate and degree of market acceptance of XHANCE and our product candidates;▪our ability to maintain regulatory approval of XHANCE and our product candidates;▪our ability to attract collaborators with development, regulatory and commercialization expertise;▪regulatory developments in the United States (U.S.) and foreign countries;▪our ability to operate our business without infringing the intellectual property rights of others;▪the scope and duration of patent protection and other barriers to entry that we expect to benefit XHANCE and our product candidates;1Table of Contents▪the performance of our third-party suppliers, manufacturers and contract sales organizations;▪the success of competing products that are or become available;▪our expectations regarding our ability to obtain and adequately maintain sufficient intellectual property protection for XHANCE and ourother product candidates and to avoid claims of infringement;▪our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act; 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 orother future events. Forward-looking statements appear primarily in the sections of this Form 10-K entitled "Item 1 - Business," "Item 1A - RiskFactors," "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 7 - Quantitative andQualitative Disclosures About Market Risk." In some cases, you can identify forward-looking statements by words such as "may,” "will,” "could,""would," "should," "expect," "intend," "plan," "anticipate," "target," "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 suchstatements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under section "Item 1A -Risk Factors" of this Form 10-K. As a result, you should not place undue reliance on forward-looking statements.Additionally, the forward-looking statements contained in this Form 10-K represent our views only as of the date of this Form 10-K (or any earlierdate indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim anyobligation to do so, even if new information becomes available in the future. However, you are advised to consult any further disclosures we makeon 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-K. For allforward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities LitigationReform Act of 1995.MARKET, INDUSTRY AND OTHER DATAThis Form 10-K contains estimates, projections, market research and other information concerning our industry, our business, markets forXHANCE and our product candidates and the size of those markets, the prevalence of certain medical conditions, XHANCE market access andbrand awareness, the perceptions and preferences of patients and physicians regarding certain therapies and other prescription, physician, patientand payor data. Unless otherwise expressly stated, we obtain this information from reports, research surveys, studies and similar data prepared bymarket research firms and other third parties, industry, medical and general publications, government data and similar sources as well as from ourown internal estimates and research and from publications, research, surveys and studies conducted by third parties on our behalf. Informationthat is based on estimates, projections, market research or similar methodologies is inherently subject to uncertainties and actual events orcircumstances may differ materially from events and circumstances that are reflected in this information. As a result, you are cautioned not to giveundue weight to such information.2Table of ContentsPART IITEM 1. BUSINESSOverviewOur CompanyWe are a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose andthroat (ENT) and allergy specialists. Our first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 mcg, is a therapeuticutilizing our proprietary Optinose Exhalation Delivery System (EDS) that delivers a topically-acting corticosteroid for the treatment of chronicrhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also known as chronic sinusitis). Chronicrhinosinusitis is a serious nasal inflammatory disease that is currently treated using therapies, such as intranasal steroids (INS), which havesignificant limitations. We believe XHANCE has a differentiated clinical profile with the potential to become part of the standard of care for thisdisease because it is able to deliver medication to the primary site of inflammation high and deep in the nasal passages in regions not adequatelyreached by current INS.On September 18, 2017, the U.S. Food and Drug Administration (FDA) approved XHANCE for the treatment of nasal polyps in patients 18 years ofage or older. XHANCE was made widely available through retail channels in April 2018.Since the FDA approval of XHANCE, we have focused on executing our integrated launch plan and have made progress in each of these keystrategic areas:•Customer Model. We have defined a sales force footprint of approximately 120 territories targeting approximately 14,000 ENTs, allergistsand “specialty-like” primary care physicians and have deployed a hybrid sales model that combines an internal sales leadership team witha fully-dedicated contract sales force to call on our target health care provider (HCP) customer universe. We prioritized approximately 80territories within our sales force footprint to deploy in 2018 based upon pre-launch expectations regarding where we could achieve anestimated 65% commercial market access within each territory. The initial 80 territory managers were deployed in March 2018, activelyengaging approximately 7,600 ENTs, allergists and "specialty like" primary care physician targets to promote XHANCE for the treatmentof nasal polyps. During the first half of 2019, we plan to internalize our contract sales team and deploy an additional 20 territory managersin “XHANCE naive” geographies to expand our reach among our target physician audience. This is expected to grow the target audiencefor our sales team by approximately 25% to approximately 9,500 HCPs. We intend to eventually increase the size of our sales force toapproximately 120 territory managers to expand our called on target audience to approximately 14,000 ENT, allergists and specialty-likeprimary care physicians. Additionally, we expect to target additional physicians through digital and non-personal promotion in areas wherewe do and do not have territory managers.•XHANCE Patient Affordability Programs. In late August 2018, we implemented our current co-pay savings program. We believe thisprogram, with an indefinite duration, provides an affordability solution for patients that physicians will support. The current programprovides patient co-pay assistance including a first prescription at no out-of-pocket cost to patients ($0 co-pay) to commercially insuredpatients and low subsequent co-pays for refills. Our data suggests these programs are playing a role in building demand for XHANCE,particularly as they become more widely understood in the prescribing community.•Market Access. In meeting with pharmacy benefit managers (PBMs) and health insurers/potential payors, we share what we believe is acompelling economic value proposition. Our analyses suggest that XHANCE will have a comparatively low pharmacy budget impact andour clinical trial data suggest that XHANCE may produce an offsetting benefit by helping reduce other healthcare resource utilization, mostnotablythe rate of endoscopic surgery and, therefore, surgery-related costs. For an insurance plan, this could represent potential for overall costreduction in the population of patients with nasal polyps, as the overall cost of XHANCE could be less than the offsetting costs related tothe reduction in surgeries. During clinical trials, XHANCE was also associated with an improvement in reported work productivity in treatedpatients, which should be valued by employers and patients. Further, we believe the cost of XHANCE to insurance plans will likely besignificantly less than the projected costs of monoclonal antibodies that are currently in development for the treatment of nasal polyps,including dupilumab, for which the submission of an Supplemental Biologics License Application (sBLA) was recently publicly announced.3Table of ContentsBased on currently available third-party data and our internal analyses, we believe that greater than 75% of commercially insured lives arecurrently in a plan in which XHANCE is covered in a Tier 3 formulary position, and approximately 60% of commercially insured lives are ina plan that covers XHANCE in a “low hassle factor” position. However, payors may change coverage levels for XHANCE or controls suchas step edits and prior authorization (PAs), positively or negatively, at any time. We use the term “hassle factor” to characterize the levelof difficulty that physicians and patients must overcome to prescribe and fill XHANCE. We define a low “hassle factor” as Tier 3unrestricted, Tier 3 single step edit, or Tier 3 with a simple PA requiring, for example, only the prior use of an over-the-counter or genericINS - although we acknowledge that any step edit or PA involves a level of burden for physicians and patients that could negativelyimpact XHANCE utilization. Our initial goal was for 75% of commercially insured lives to have access to XHANCE in a Tier 3 formularyposition with a “low hassle factor" by the end of 2018. While at approximately 60% "low hassle factor" at December 31, 2018 we did notmeet this goal, it remains an important concept for us as we seek to expand overall coverage for XHANCE.We have also contracted with the Centers for Medicare and Medicaid Services for coverage of certain government insured lives andcontinue to expand XHANCE market access for other government-insured populations. As noted above, we have in place a co-payassistance program for patients covered by commercial insurers and plan to continue to analyze affordability issues and assess patientaffordability programs to appropriately support patient access to XHANCE for government insured patients.•Infrastructure. We continue to develop our internal capabilities in a manner commensurate with having become a fully integrated andpublicly traded commercial-stage specialty pharmaceutical company. We have implemented an enterprise resource planning system toexpand our operational and commercial finance capabilities. We have also implemented a robust healthcare compliance program to guideour staff’s and our partners' compliance with rules and regulations regarding pharmaceutical sales. In managing our growth, we haveremained focused on fostering our One Mission culture.•XHANCE Prescriptions. Based on third-party prescription data as well as data from preferred pharmacy network partners, the totalestimated number of XHANCE prescriptions in the second quarter, third quarter and fourth quarter 2018 were 8,611, 9,427, and 14,106,respectively, which represents 50% growth for prescriptions when comparing fourth quarter to third quarter. Estimated XHANCEprescriptions in December 2018 and January 2019 were 4,570 and 6,292, respectively, which represents 38% month-over-month growth. Inaddition, XHANCE prescriptions for the 4-week periods ended January 25 and February 22, 2019 were 5,156 and 7,186, respectively,which represents period-over-period growth of 39%.XHANCE Development UpdateIn addition to XHANCE’s existing indication for the treatment of nasal polyps, in order to broaden our U.S. market opportunity we initiated a clinicalresearch program in pursuit of a follow-on indication for the treatment of chronic sinusitis in the U.S. The program will comprise two phase 3bclinical trials, the first of which was initiated in the fourth quarter of 2018. We expect to initiate the second trial in 2019.The Unmet NeedChronic rhinosinusitis is a serious nasal inflammatory disease characterized by chronic inflammation affecting tissues high and deep in the nasalpassages, including the area where the openings from the sinuses normally ventilate and drain. This disease significantly impacts the quality oflife and daily functioning of an estimated 30 million adults in the U.S. The U.S. healthcare system spends approximately $60 billion annually indirect costs treating patients with chronic rhinosinusitis and its associated symptoms, including an estimated $5 billion on sinus surgeries. In theU.S., physicians perform over 500,000 sinus surgeries each year, and we estimate that over seven million adults have undergone sinus surgery totreat chronic rhinosinusitis with and without nasal polyps.In medical literature and medical practice, chronic rhinosinusitis is commonly divided into two subgroups: chronic rhinosinusitis with nasal polypsand chronic rhinosinusitis without nasal polyps. Chronic rhinosinusitis patients with and without nasal polyps suffer from chronic inflammation ofthe lining of the deep nasal passages and sinuses. Patients with chronic rhinosinusitis with nasal polyps also develop non-cancerous polyps onthese chronically inflamed surfaces, typically originating in the deep crevices or sinus cavities on both sides of the nose. We estimate that up to10 million adults in the U.S. have chronic rhinosinusitis with nasal polyps.Both subgroups of chronic rhinosinusitis share the same four defining diagnostic symptoms: nasal congestion/obstruction; facial pain andpressure; purulent runny nose and postnasal drip; and loss of sense of smell and taste.4Table of ContentsAdditional symptoms may include headaches, chronic sleep problems, fatigue, frequent episodes of acute rhinosinusitis and mood disorders.There is evidence suggesting that the harm to a sufferer's quality of life from chronic rhinosinusitis, as measured in multiple domains, such asbodily pain, social functioning and mental health, is comparable to or worse than other serious diseases, including chronic obstructive pulmonarydisease, congestive heart failure and angina. As a result, many patients eventually seek surgery for symptom relief.Although the term chronic rhinosinusitis is often used in medical literature and medical practice, the FDA does not recognize chronic rhinosinusitisas a single indication for drug development purposes. Instead, the FDA recognizes chronic sinusitis, defined as inflammation of the sinuses with aduration longer than eight weeks, and nasal polyps, defined as non-cancerous polyps on the inflamed tissue of the nasal passages and sinuses,as separate indications for drug development purposes. For purposes of this 10-K, we use the terms chronic sinusitis and nasal polyps whenreferring to FDA treatment indications and our clinical trials and use the term chronic rhinosinusitis with and without nasal polyps when referring todisease and economic data reported in the medical literature, medical practice and our estimates of XHANCE's market opportunity.Current Treatment LimitationsMultiple current clinical practice guidelines specify the use of INS early in the treatment algorithm for chronic rhinosinusitis with and without nasalpolyps. Steroids are generally pharmacologically effective at treating inflammation. However, conventional INS, including nasal sprays and nasalaerosols, are topically-acting and unable to effectively and consistently place the steroids onto the primary site of inflammation and nasal polyporigin, high and deep in the nasal passages. These products deposit a majority of the drug in the front of the nose or on the floor of the nasalpassages, reducing their effectiveness and leaving many patients without sufficient symptomatic relief. These recognized limitations cause somephysicians to seek out alternative treatment regimens such as high-volume steroid nasal rinses. This approach, however, has not been wellstudied, is difficult to administer, can be costly and may risk systemic side effects. Physicians may also prescribe oral steroids on an episodicbasis to patients who have not received sufficient symptomatic relief from INS. Oral steroids, which are often effective in reducing inflammationand nasal polyps, offer only temporary benefit and are limited by the risk of significant systemic side effects associated with both short- and long-term use.In cases where patients remain symptomatic despite medical management, physicians often recommend various forms of sinus surgery to helprestore normal sinus ventilation or drainage. The effectiveness of sinus surgery can vary significantly, many patients experience persistent orrecurrent symptoms, and surgery may not address the underlying cause of inflammation. In patients with nasal polyps, regrowth of the nasalpolyps has been reported in as high as 60% of cases within four years. In addition, it has been reported that up to 80% of patients continue tohave symptoms within two years of surgery. Because sinus surgery is often not curative and may not address the underlying cause of theinflammation, many patients continue to receive short- and long-term courses of INS after surgery.Our SolutionXHANCE combines an Optinose EDS with a liquid formulation of fluticasone propionate, a well-characterized, second-generation corticosteroid.XHANCE is designed to deliver medication into the high and deep regions of the nasal passages where both nasal polyps and inflamed andswollen membranes can obstruct normal sinus ventilation and drainage. In multiple studies utilizing advanced imaging, an Optinose EDS produceda differentiated pattern of drug delivery in healthy subjects with significant drug deposited in the high and deep regions of the nasal passages,areas not well accessed by conventional INS delivery mechanisms. We believe XHANCE has the potential to become part of the standard of carefor the treatment of patients with chronic rhinosinusitis before they progress to more costly treatment alternatives. We also believe that the currenttreatment practice of postoperative INS use could support XHANCE's adoption as a maintenance therapy to improve outcomes following sinussurgery.We conducted five clinical trials evaluating over 1,500 adult patients, including two randomized, double-blinded, placebo-controlled Phase 3 pivotalclinical trials in adults with nasal polyps and two supportive open-label Phase 3 clinical trials in adults with symptoms of chronic sinusitis with orwithout nasal polyps. In both Phase 3 pivotal clinical trials, patients treated with XHANCE experienced statistically significant reductions of bothnasal congestion/obstruction symptoms and total polyp grade, which were the co-primary endpoints. Treatment benefits were also observed in allfour defining symptoms of chronic rhinosinusitis, as well as in polyp elimination (polyp grade 0), quality of life measures, need for sinus surgeryand patient global impression of change. In addition, the magnitude of improvement for patients treated by XHANCE in our Phase 3 pivotal clinicaltrials, as measured by the Sinonasal Outcome Test-22, a validated clinical outcome assessment, was comparable to the reported benefits in third-party studies of endoscopic sinus surgery (ESS) and balloon sinus dilation. In our supportive open-label Phase 3 clinical5Table of Contentstrials, which evaluated approximately 900 patients with symptoms of chronic sinusitis with and without nasal polyps for a period of up to one year,XHANCE was generally well tolerated and produced results on efficacy endpoints similar to those observed in our Phase 3 pivotal clinical trials. Inthese supportive trials, we observed comparable symptom improvements in patients with and without nasal polyps and continuing incrementalpolyp reduction and symptom improvement through 12 months. XHANCE had an adverse event profile generally comparable to the profile reportedin similarly designed trials with conventional INS.We believe XHANCE offers a cost-effective treatment solution to payors who are increasingly being asked to pay for multiple high-cost therapiesfor a variety of diseases priced at tens of thousands of dollars per year. We priced XHANCE comparable to the only other branded INS that iscurrently approved to treat nasal polyps, but at a price higher than generic INS products. We expect XHANCE to be adopted by physicians at anatural point in the care pathway for use in patients with chronic rhinosinusitis with or without nasal polyps before they progress to costly surgicalinterventions or biologic monoclonal antibodies in development for nasal polyps. Sinus surgery costs on average $13,500 per procedure, and weexpect that biologic monoclonal antibodies for the treatment of nasal polyps will cost approximately $37,000 per year based on the doses beingstudied in nasal polyps and the current costs per dose in other indications. We believe XHANCE will offer a cost-effective clinical benefit to payorsthat will reduce the perceived need for multiple step-edits and prior authorizations.U.S. Market OpportunityOur initial target market for XHANCE consists of ENT physicians, allergists and primary care physicians in the U.S. that most frequently prescribeINS. This group of approximately 5,000 primary care physicians, which we refer to as "specialty-like" primary care physicians, account forapproximately 25% of all INS prescriptions written by primary care physicians. We refer to these ENT physicians, allergists and high-decile INS-prescribing primary care physicians collectively as the specialty segment of our target market. We believe the approximately 15,000 physicians inthis specialty segment together treat an estimated 3.5 million U.S. patients with chronic rhinosinusitis, an estimated 1.2 million of whom havechronic rhinosinusitis with nasal polyps. We believe the total annual U.S. market opportunity for XHANCE in this specialty segment is over$3.4 billion, of which approximately one-third consists of patients with chronic rhinosinusitis with nasal polyps. If we are able to obtain approval forthe follow-on indication of chronic sinusitis, we intend to broaden our commercialization efforts to target additional primary care physicians that webelieve treat an additional estimated 6.25 million U.S. patients with chronic rhinosinusitis, an estimated one-third of whom have chronicrhinosinusitis with nasal polyps. We refer to these additional primary care physicians as the primary care segment of our target market. We believethe total additional annual U.S. market opportunity for XHANCE in this primary care segment is over $6.0 billion, of which approximately one-thirdconsists of patients with chronic rhinosinusitis with nasal polyps. Therefore, we estimate the total annual U.S. market opportunity for the combinedspecialty and primary care segments is over $9.5 billion, of which approximately one-third consists of patients with chronic rhinosinusitis withnasal polyps.Intellectual Property and Barriers to EntryXHANCE benefits from substantial intellectual property and other technical barriers to entry, including regulatory and drug delivery complexities.Our XHANCE U.S. patent portfolio consists of 13 issued device and method of use patents expiring through 2034, three issued design patentsexpiring through 2030 and 10 patent applications that, if granted, would expire through 2034. The 13 issued device and method of use patents arepublished in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book.We believe the unique features of an Optinose EDS, as well as its delivery of a topically-acting drug, will present generic and 505(b)(2) NDAcompetitors of XHANCE with human factors engineering challenges specific to drug-device combination products and chemistry, manufacturingand controls challenges unique to suspension and respiratory products. We also believe that any future substitutable generic competitors would berequired to conduct, among other things, non-inferiority clinical trials demonstrating equivalent efficacy and safety outcomes to establish clinicalbioequivalence to XHANCE. We believe these clinical trials would require a significant amount of time and capital investment and present clinicaldevelopment uncertainties.Our Management TeamWe are led by a management team with an average of over 20 years of experience developing and commercializing products at large, multinationalpharmaceutical and medical device companies, such as Johnson & Johnson, Sanofi-Aventis, Bristol Myers-Squibb, Takeda and Novartis. Ourmanagement team's experience is complemented by its expertise at growing emerging healthcare companies, such as Cephalon, NuPathe andTake Care Health System. Our team previously developed our first product using an Optinose Exhalation Delivery System, Onzetra®6Table of ContentsXsail®. We believe the experience of our management team and our broad network of relationships with leaders within the industry and the medicalcommunity provide us with insight into product development and identification of product opportunities that benefit patients and physicians in theENT and allergy specialty segments.Our Growth StrategyOur goal is to become a leading specialty pharmaceutical company dedicated to developing proprietary products that become a part of thestandard of care for diseases in the ENT and allergy segments. We also plan to expand the use of Optinose EDS devices into additionalindications with significant unmet needs, including potential nose-to-brain drug delivery for central nervous system disorders. The key elements ofour strategy are to:▪Commercialize XHANCE in the ENT and allergy specialty segments in the U.S. When we launched XHANCE in 2018, we initiallydeployed a specialty sales force of approximately 80 territory managers to call on a defined prescriber base of approximately 6,000 ENTand allergy specialists, as well as approximately 1,500 "specialty-like" primary care physicians, and filled territories were based on regionswhere we predicted comparatively favorable early market access. Based on results showing growth in prescription volume in the called-onaudience and considering increases in market access during 2018 and planned efforts to further increase market access for XHANCE in2019, we intend to incrementally increase the size of our sales force. In the first half of 2019 we expect to field territory managers inapproximately 20 additional territories, increasing coverage to 100 of the approximately 120 territory nationwide structure that was initiallyestablished. The 120-territory structure was based on a target audience of approximately 14,000 specialists or "specialty-like" primary carephysicians. Additionally, we expect to continue to target physicians through digital and non-personal promotion in areas where we do anddo not have territory managers. We believe that approximately 15,000 targeted physicians treat an estimated 3.5 million chronicrhinosinusitis patients, an estimated 1.2 million of whom have chronic rhinosinusitis with nasal polyps. With data suggesting thatprescribing continues to be suitably responsive to promotion and as market access improves, we may continue to increase the size of ourdeployed sales team. In addition, in 2019 we intend to execute a branded direct-to-consumer pilot in three cities targeting diagnosed andundiagnosed nasal polyp patients.▪Pursue pipeline development of XHANCE for chronic sinusitis to broaden our market opportunity. We plan to seek a follow-onindication for XHANCE for the treatment of chronic sinusitis. We met with FDA and, in the fourth quarter of 2018, we initiated a Phase 3bclinical trial program in pursuit of that indication. We believe XHANCE would be the first drug therapy product approved for the treatment ofchronic sinusitis. In the future, as appropriate, we plan to broaden our marketing to additional primary care physicians that we believe treatan additional estimated 6.25 million patients in the U.S. with chronic rhinosinusitis, an estimated one-third of whom have chronicrhinosinusitis with nasal polyps. In addition, at some point in the future, we intend to consider directing promotional resources to anadditional estimated 20 million adult chronic rhinosinusitis sufferers who are not regularly under the care of physicians for this diseaseusing programs such as direct-to-consumer and direct-to-patient promotion.▪Develop a pipeline of additional products focused on the ENT and allergy specialty segments. We are evaluating the use of theOptinose EDS to deliver other proprietary drugs or drug combinations to treat diseases primarily managed by ENT and allergy specialists.We also intend to explore complementary drug, diagnostic or device technologies or products to make effective use of our commercialinfrastructure. We plan to evaluate strategic licensing, acquisition, development and commercial partnerships that could increase ourcommercial efficiencies.▪Explore business development activities for Optinose EDS outside of the ENT and allergy segments. We are exploring thepossibility of the use of an Optinose EDS to support development of central nervous system treatments, particularly those enabled bynose-to-brain drug delivery. We have engaged in early stage clinical development activities for OPN-300, which combines an OptinoseEDS with oxytocin with potential applications including treatment of Prader-Willi syndrome and autism spectrum disorder. We havecompleted planned internal development activities for OPN-300 and may pursue external partnerships in the future for further development.In addition, in January 2019, we completed a licensing arrangement with Inexia Limited whereby we granted Inexia an exclusive license toour EDS devices and other intellectual property for the research, development and commercialization of products containing orexinreceptor agonist and/or orexin receptor positive modulator molecules. Inexia has announced that specific target indications will bedetermined as the program advances, and is expected to include narcolepsy, a rare sleep disorder. The Inexia License Agreement has thepotential to create value7Table of Contentsin the form of milestones payments and royalties. We may evaluate other business development activities to capture additional valuethrough the development of Optinose EDS devices outside of ENT and allergy.▪Expand XHANCE into international markets. We have engaged in initial assessment of potential development and commercialization ofXHANCE in markets outside the U.S. and currently intend to remain opportunistic in pursuit of select international options. Upon receipt ofadditional data in the chronic sinusitis indication, we intend to more aggressively explore strategic collaboration opportunities in Europeand the rest of the world in order to maximize the commercial potential and the availability of XHANCE to patients.Chronic Rhinosinusitis and Market OpportunityChronic RhinosinusitisChronic rhinosinusitis is a serious nasal inflammatory disease significantly impacting patients' quality of life and daily functioning. Chronicrhinosinusitis, unlike allergic rhinitis, is characterized by chronic inflammation affecting tissues high and deep in the nasal passages, including thearea where the openings from the sinuses normally ventilate and drain, causing symptoms that persist for a period of 8 to 12 weeks or longer.Chronic rhinosinusitis patients typically suffer from these symptoms four to six months a year, with symptoms often persisting for many years.In medical literature and medical practice, chronic rhinosinusitis is commonly divided into two subgroups: chronic rhinosinusitis with nasal polypsand chronic rhinosinusitis without nasal polyps. Chronic rhinosinusitis patients with and without nasal polyps suffer from chronic inflammation ofthe lining of the deep nasal passages and sinuses. Patients with chronic rhinosinusitis with nasal polyps also develop non-cancerous polyps onthese chronically inflamed surfaces, typically originating in the deep crevices or sinus cavities on both sides of the nose. We estimate that up to10 million adults in the U.S. have chronic rhinosinusitis with nasal polyps. Both subgroups of chronic rhinosinusitis share the same four definingdiagnostic symptoms: nasal congestion/obstruction; facial pain and pressure; purulent runny nose, and postnasal drip; and loss of sense of smelland taste. Additional symptoms may include headaches, chronic sleep problems, fatigue, frequent episodes of acute rhinosinusitis and mooddisorders. There is evidence suggesting that the harm to a sufferer's quality of life from chronic rhinosinusitis, as measured in multiple domains,such as bodily pain, social functioning and mental health, is comparable to or worse than other serious diseases, including chronic obstructivepulmonary disease, congestive heart failure and angina. As a result, many patients eventually seek surgery for symptom relief.Although the term chronic rhinosinusitis is often used in medical literature and medical practice, the FDA does not recognize chronic rhinosinusitisas a single indication for drug development purposes. Instead, the FDA recognizes chronic sinusitis, defined as inflammation of the sinuses with aduration longer than eight weeks, and nasal polyps defined as non-cancerous polyps on the inflamed tissue of the nasal passages and sinuses, asseparate indications for drug development purposes.The American Academy of Otolaryngology-Head and Neck Surgery estimates that approximately 30 million adults in the U.S. have chronicrhinosinusitis, and it is estimated that up to 10 million adults have chronic rhinosinusitis with nasal polyps. Chronic rhinosinusitis imposes asignificant healthcare burden on insurers and employers. It has been reported that the U.S. healthcare system spends approximately $60 billionannually in direct costs treating patients with chronic rhinosinusitis and its associated symptoms, including an estimated $5 billion on sinussurgeries. In the U.S., physicians perform over 500,000 sinus surgeries each year, and we estimate that over seven million adults have undergonesinus surgery to treat chronic rhinosinusitis with and without nasal polyps. Chronic rhinosinusitis has been reported to account for an aggregate of73 million restricted activity days per year. Additionally, people with chronic rhinosinusitis have been reported to be absent from work because ofthis disease 6.5% of the time and to suffer a 38% loss of productivity.U.S. Market OpportunityWe estimate that approximately 9.75 million chronic rhinosinusitis patients are currently being treated in physician offices in the U.S. We derivedthis estimate from a large patient claims database that reflects actual treatment patterns of chronic rhinosinusitis over a two-year period from 2010to 2012. We also estimate that approximately 10,000 ENT and allergy specialists, as well as approximately 5,000 "specialty-like" primary carephysicians, treat approximately 36% of all chronic rhinosinusitis patients in the U.S., or approximately 3.5 million patients, an estimated 1.2 millionof whom have chronic rhinosinusitis with nasal polyps. In accordance with multiple published clinical practice guidelines, physicians typicallymedically manage chronic rhinosinusitis patients by prescribing INS despite the fact that there are no FDA-approved products for the treatment ofchronic sinusitis without nasal polyps. We have defined a sales force footprint of approximately 120 territories targeting approximately 14,000ENTs,8Table of Contentsallergists and “specialty-like” primary care physicians. If we obtain FDA approval for the follow-on indication for chronic sinusitis, we intend tobroaden our marketing outreach to additional primary care physicians that treat an additional estimated 6.25 million U.S. patients with chronicrhinosinusitis, an estimated one-third of whom have chronic rhinosinusitis with nasal polyps. We may also direct promotional resources to anadditional estimated 20 million chronic rhinosinusitis sufferers who are not regularly under the care of physicians for this disease using programssuch as direct-to-consumer and direct-to-patient promotion.Based on internal estimates, we believe the total annual U.S. market opportunity for XHANCE in the specialty segment is over $3.4 billion, ofwhich approximately one-third consists of patients with chronic rhinosinusitis with nasal polyps. Based on these same estimates, we believe thetotal additional annual U.S. market opportunity for XHANCE in the primary care segment is over $6.0 billion, of which approximately one-thirdconsists of patients with chronic rhinosinusitis with nasal polyps. Therefore, we estimate the total annual U.S. market opportunity for the combinedspecialty and primary care segments is over $9.5 billion, of which approximately one-third consists of patients with chronic rhinosinusitis withnasal polyps.Treatment LandscapeThe treatment of chronic rhinosinusitis with and without nasal polyps typically begins with medical management. In cases where patients remainsymptomatic despite medical management, physicians often recommend various forms of sinus surgery to help restore normal sinus ventilationand drainage. The following is a brief description of the current and potential future treatment landscape for chronic rhinosinusitis with and withoutnasal polyps:Current Therapies▪Intranasal Steroids. Multiple published clinical practice guidelines generally recommend topically-acting INS as the first line ofprescription therapy for the treatment of chronic rhinosinusitis with and without polyps. As a result, physicians typically prescribe INSnasal sprays or nasal aerosols despite the fact that there are no FDA-approved products for the treatment of chronic sinusitis withoutnasal polyps. Therefore, the majority of chronic rhinosinusitis sufferers being treated have tried INS. We estimate that physicians in theU.S. prescribe approximately 17 million INS prescriptions each year for the treatment of chronic rhinosinusitis, which includes, amongother INS products, a generic fluticasone propionate nasal spray. Nasonex, or mometasone furoate nasal spray, is currently the only otherbranded INS approved by the FDA for the treatment of nasal polyps. A generic version of Nasonex, mometasone furoate monohydrate,was approved by the FDA for, among other indications, the treatment of nasal polyps and launched in 2016. Physicians not only prescribeINS as a standalone therapy, but also typically prescribe INS following sinus surgery as some third-party clinical trials suggest that INStreatment can improve symptoms and delay symptom recurrence. In lieu of prescription INS nasal sprays, physicians may recommenduse of over-the-counter INS nasal sprays.▪Oral steroids. Physicians may prescribe oral steroids on an episodic basis to patients who have not received sufficient symptomaticrelief from INS. Oral steroids are often effective at treating the underlying inflammation associated with the disease and reducingpostoperative scarring, but the benefit is temporary. As inflammation returns, many patients resume INS therapy.▪Other medical management. Physicians commonly employ a variety of other non-surgical treatments in the medical management ofchronic rhinosinusitis, including nasal saline rinses, multi-week courses of antibiotics, leukotriene antagonists, decongestants, aspirindesensitization and antifungals. The recognized limitations of drug deposition with current INS cause some physicians to seek outalternative treatment regimens, such as high doses of locally compounded liquid budesonide in high-volume nasal rinses. Chronicrhinosinusitis is one of the most common reasons for adult outpatient antibiotic use in the U.S., comprised of approximately 37 millionprescriptions per year.▪Sinus surgery and other procedures. Physicians generally recommend surgical treatment of chronic rhinosinusitis with and withoutnasal polyps only after patients fail medical management. The primary surgical alternative is ESS, which attempts to open the sinusdrainage pathways while preserving as much bone and sinus tissue lining as possible. The physician typically uses rigid steel instrumentsand powered cutting tools to remove inflamed tissue, including any nasal polyps, and underlying bone and cartilage to create a largerpassage through the nasal anatomy to the sinuses. At the conclusion of the procedure, patients often have their nasal passages packedwith a material that acts as a spacer to prevent surgical adhesions and control bleeding. Patients typically require one or more follow-updebridement treatments in9Table of Contentswhich the physician may remove more tissue, crusting, scabs or scar tissue at the area of surgery in order to keep the sinus drainagepathway open and promote proper healing.Several companies have developed less invasive technologies for the treatment of chronic rhinosinusitis since the introduction of ESS,such as balloon sinus dilation devices and steroid-releasing sinus implants. Balloon sinus dilation employs a high pressure inflated balloonto open blocked sinus pathways to increase ventilation and mucus drainage. Steroid-releasing sinus implants are used to hold open thesurgically enlarged sinus, while releasing a steroid over a period of time in order to reduce postoperative sinus inflammation and scarring.In addition, SINUVATM is a commercially available corticosteroid-eluting implant indicated for the treatment of nasal polyps in adultpatients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90 days. Inthe SINUVA clinical studies, patients were advised to use nasal steroid sprays and sinus rinses for the duration of the study.Potential Future TherapiesSeveral biologic monoclonal antibodies, some of which are already approved for other indications, are being developed for the treatment ofnasal polyps, and are believed to inhibit specific pathways of inflammation present in nasal polyps. These biologic monoclonal antibodiesinclude omalizumab, reslizumab, mepolizumab and dupilumab.In addition, there are new small molecules, including fevipiprant, being developed for the treatment of nasal polyps, that are also believed toinhibit specific pathways of inflammation present in nasal polyps.Limitations of TherapiesThe current and potential future therapies to treat patients suffering from chronic rhinosinusitis with and without nasal polyps have a number oflimitations, including:▪Limited efficacy of INS treatments using traditional nasal sprays and nasal aerosols. Although steroids are generallypharmacologically effective, conventional INS, including nasal sprays and nasal aerosols, are unable to effectively and consistently placethe steroids onto the primary site of inflammation and nasal polyp origin, high and deep in the nasal passages. These products deposit amajority of the drug in the front of the nose or on the floor of the nasal passages, reducing their effectiveness and leaving many patientswithout sufficient symptomatic relief.▪Short-term benefits of oral steroids outweighed by significant side effects. Oral steroids offer only temporary benefit and are limitedby the risk of significant systemic side effects associated with both short- and long-term use. These side effects include, among others,weight gain; increased risk of infections; loss of bone mineral density; death of bone tissue; cataract formation; glaucoma; adrenalsuppression; and psychiatric complications, including mania, depression, and psychosis.▪Varying degrees of efficacy with other medical management. Other non-surgical treatments have varying degrees of supporting dataand efficacy. In addition, high-volume steroid nasal rinses are difficult to administer, can be costly, may risk systemic side effects due tothe absorption of the steroid into the body, can be associated with fluid draining from the nose after the procedure and are difficult forpatients to comply with over prolonged courses of outpatient therapy.▪Sinus surgery and other procedures are costly and may not be a complete solution. The effectiveness of sinus surgery variessignificantly and many patients experience persistent or recurrent symptoms. Reports indicate that nasal polyp regrowth following surgeryoccurs in as high as 60% of cases within four years. In addition, it has been reported that up to 80% of patients continued to havesymptoms within two years of surgery. Because sinus surgery is often not curative and may not address the underlying cause of theinflammation, many patients receive short- and long-term courses of INS after surgery and approximately 20% of patients elect surgicalrevisions. Postoperative scarring and persistent inflammation are common and can compromise symptom outcomes and also negativelyimpact the ability of the sinuses to heal. Sinus surgery is also a costly procedure, with estimated costs on average $13,500 per procedure.While balloon sinus dilation has the ability to open sinuses in a less invasive manner, it also may not address the underlying cause of theinflammation associated with chronic rhinosinusitis and is costly. Similarly, steroid-releasing sinus implants have limited duration of anti-inflammatory effect, are costly and face reimbursement challenges.10Table of Contents▪Potential future biologic monoclonal antibodies treatment may be costly, difficult to administer or have negative side effects. Therisks and benefits associated with the use of biologic monoclonal antibodies for the treatment of nasal polyps are not yet fully established.We expect the use of biologic monoclonal antibodies for the treatment of nasal polyps to be costly, with estimated costs of approximately$37,000 per year based on the doses being studied in nasal polyps and the current costs per dose in other indications. These drugs alsorequire subcutaneous injections or intravenous administration that require frequent physician office visits. We believe the systemic natureof these treatments, which target components of the immune response, may result in more adverse side effects than treatments withtopically-acting steroids.Our SolutionXHANCEXHANCE combines an Optinose EDS with a liquid formulation of fluticasone propionate, a potent, well-characterized, second-generation anti-inflammatory corticosteroid for the treatment of serious nasal diseases characterized by chronic inflammation, such as chronic rhinosinusitis.XHANCE is designed to deliver fluticasone propionate into the high and deep regions of the nasal passages where nasal polyps or inflamed andswollen membranes can obstruct normal sinus ventilation and drainage. On September 18, 2017, the FDA approved our NDA for XHANCE for thetreatment of nasal polyps in patients 18 years of age or older. We initiated a phase 3b clinical trial of XHANCE in the fourth quarter of 2018 for afollow-on indication for the treatment of chronic sinusitis and expect to initiate a second phase 3b trial in 2019. Similar to our NDA for XHANCE forthe treatment of nasal polyps, we believe we will be able to use the FDA's Section 505(b)(2) regulatory pathway for potential U.S. approval forXHANCE for the treatment of chronic sinusitis.We believe XHANCE could become a part of the standard of care for the treatment of patients with chronic rhinosinusitis with and without nasalpolyps before they progress to more costly treatment alternatives and could also be adopted as a maintenance therapy to improve outcomesfollowing sinus surgery. We believe the following factors could contribute to the potential success of XHANCE:▪High patient dissatisfaction with current INS treatments. In a market research study that we commissioned, we surveyed 438 patientswith chronic sinusitis with and without nasal polyps. In this study, approximately 80% of the patients reported being frustrated with thesymptom relief offered from their current INS medication and approximately 90% of the patients reported they would be interested in usinga new product if it would improve symptom relief.▪Strong physician interest in XHANCE product profile. We surveyed approximately 700 physicians, consisting of 400 ENT and allergyspecialists and 300 primary care physicians that currently treat patients with chronic sinusitis with and without nasal polyps.Approximately 75% of these physicians, including both specialists and primary care physicians, agreed, in part, that INS medications donot work well in patients with chronic sinusitis due to their belief that conventional INS do not sufficiently reach the high and deep regionsof the nasal passages where inflammation occurs. In addition, 70% to 80% of these physicians reported that they would "definitely" or"probably" prescribe their patients a product with a clinical profile similar to XHANCE. As of February 8, 2019, 4,920 healthcareprofessionals have prescribed XHANCE as a result of our direct selling efforts targeting approximately 7,500 physicians and indirectpromotional efforts.▪Fluticasone propionate is the most widely-prescribed INS in the U.S. XHANCE contains fluticasone propionate, a potent, well-characterized, second-generation, anti-inflammatory corticosteroid with a low bioavailability, meaning that only a small percentage of thedrug is absorbed into the body. Corticosteroids provide multiple anti-inflammatory mechanisms of action and are used in forms such aspills, creams, inhalers and nasal sprays, to treat many sites of inflammation.▪XHANCE was designed to overcome the limitations of current INS therapies by delivering medication high and deep in the nasalpassages. In multiple studies utilizing advanced imaging, an Optinose EDS produced a differentiated pattern of drug delivery withsignificant drug deposited at the primary site of inflammation high and deep in the nasal passages where nasal polyps or inflamed andswollen membranes produce nasal symptoms and can obstruct normal sinus ventilation and drainage.▪Strong clinical data demonstrating safety and efficacy. In two randomized, double-blinded, placebo-controlled Phase 3 pivotal clinicaltrials evaluating adult patients with nasal polyps, we met our co-primary endpoints of statistically significant reductions of nasalcongestion/obstruction symptoms and total polyp grade. XHANCE also produced treatment benefits in all four defining symptoms ofchronic rhinosinusitis, as11Table of Contentswell as in polyp elimination (polyp grade 0), quality of life measures, need for sinus surgery and patient global impression of change. In twosupportive open-label Phase 3 clinical trials evaluating approximately 900 patients with symptoms of chronic sinusitis with and withoutnasal polyps for a period of up to one year, XHANCE was generally well tolerated. In these supportive trials, we observed comparablesymptom improvements in patients with and without nasal polyps and continuing incremental polyp reduction and symptom improvementthrough 12 months.▪XHANCE is easy to use. In a market study that we commissioned, 98% of patients reported that XHANCE was easy to use after fourweeks of use and 93% stated the ease of use was comparable to other INS.▪Potential for broad payor access. Prior to the XHANCE launch in 2018, we commissioned a market research study that surveyed 26health insurance plans representing over 150 million covered lives. Most payors reacted positively to a profile of XHANCE with respect toits product design, mechanism of action and efficacy results based upon our clinical data. This research further suggested that marketaccess for XHANCE would be dependent on XHANCE's pricing. A majority of payors surveyed in our study indicated that they do notintend to actively manage INS products priced below a certain dollar threshold and many surveyed payors indicated that they wouldprovide access without prior authorization to INS products priced within a certain dollar range. The surveyed payors reported the followingpotential coverage based on the XHANCE profile: (i) no step edits on plans covering approximately 27% of commercial lives, meaning thatpayors would not require patients to use generic INS before seeking reimbursement for XHANCE, (ii) a single step edit on plans coveringapproximately 48% of commercial lives, (iii) a prior authorization requirement on plans covering approximately 10% of commercial livesand (iv) no coverage by plans covering approximately 15% of commercial lives.Informed by the above study and formal pricing research, at launch XHANCE was priced comparable to the only other branded intranasalsteroid indicated for the treatment of nasal polyps, at their nasal polyp dose. We are actively engaging payors to secure broad marketaccess for XHANCE in the commercial segment by targeting Tier 3 payor coverage, single step edit with no prior authorization. This levelof coverage indicates that payors would require patients to use a generic INS as a first step in treating their disease prior to the payorcovering XHANCE. However, such coverage would not require the prior authorization of the payor. Tier 3 payor coverage requires a patientco-pay that is higher than that required for generics or drugs within a payor's formulary. Greater than 75% of commercial plans coverXHANCE as of December 31, 2018. We believe we are on track to achieve similar levels of commercial market access as indicated fromour pre-launch payor market research. We intend to contract with Commercial, Medicare Part D plans and Medicaid to acceleratephysician adoption of XHANCE.▪Cost-Effective Solution. We launched XHANCE with a price comparably to the only other branded INS that is approved to treat nasalpolyps, but at a price higher than generic INS products. We believe XHANCE offers a cost-effective, clinical benefit to payors whencompared to surgery and expensive monoclonal antibodies and that this benefit will reduce the perceived need for multiple step-edits andprior authorizations, which we believe will increase the likelihood of successful commercial adoption of XHANCE.Optinose EDSOur Optinose EDS devices enable the development of drug-device combination products intended for self-administration. We have developed botha liquid delivery system and a powder delivery system utilizing natural functional behaviors of the upper nasal airways to offer better drugdeposition. These systems are designed to overcome many limitations inherent in conventional nasal spray and nasal aerosol delivery systems,most notably, enabling higher and deeper intranasal drug delivery.Liquid EDSThe liquid EDS depicted below, which is the EDS used in XHANCE, consists of the primary drug container for the liquid drug formulation, an amberglass vial sealed by a crimp-fitted metering spray pump, enclosed within a proprietary liquid delivery subassembly. The nasal spray applicator,which is a component of the subassembly, is attached to the pump and extends to the top of the nosepiece of the liquid delivery subassembly.The EDS includes a flexible mouthpiece and an asymmetrically-shaped nosepiece as part of a mechanism that uses the patient's exhaled breathto naturally seal closed the soft palate and to facilitate delivery of drug to the nasal passages through the sealing nosepiece. The nosepiece isdesigned to create a seal with the nostril and also to expand and stent the upper part of the nasal valve, which is an important anatomical structurethat is the narrowest part of the12Table of Contentsentire respiratory tract and a barrier that causes most medication delivered by conventional INS to deposit in the front part of the nose.Powder EDSThe powder EDS depicted below, which is the EDS used in Onzetra Xsail, consists of a reusable device body incorporating a flexible mouthpieceto adjust to individual anatomic variations, and a white button piercing assembly to pierce the medication capsule. Disposable nosepieces areprovided in a foil pouch to be inserted into the drug delivery device body. Each pre-filled nosepiece section contains a medication capsulecontaining a dry powder formulation and a clear release tab. The capsule is pierced by pressing and releasing the white button piercing assembly.The flexible mouthpiece and an asymmetrically-shaped nosepiece are part of the mechanism that uses the patient's exhaled breath to naturallyseal closed the soft palate and to facilitate delivery of drug to the nasal passages through the sealing nosepiece. The medication capsule isintended for single dose administration and is not refillable or removable from the nosepiece.Following drug administration, the disposable nosepiece, including the dose-expended medication capsule, is then removed and discarded.13Table of ContentsHow an Optinose EDS worksWhen exhaling into an EDS, the soft palate automatically elevates and creates an air-tight seal separating the nasal cavity from the throat andlungs. This natural action is the same as that which prevents air from escaping from the nose when trying to blow up a balloon or blow a trumpet.The exhaled air is then routed through the EDS which introduces medication into the air flow and then directs the air and medication through thesealing nosepiece. The positive air pressure, which is the opposite of the negative pressure produced by sniffing with ordinary nasal sprays, actsto dynamically expand the nasal valve and the narrowed nasal passages, helping to deliver the drug around obstructing anatomic barriers and fillone side of the nasal cavity. This enables high and deep deposition of medication in the nasal passages. The positive air pressure, proportional tothe pressure on the other side of the soft palate, helps to open a passage between the two sides of the nasal cavity, behind the back edge of thenasal septum. The picture below illustrates this action, which allows the exhaled air pressure to escape from the opposite nostril.The drug delivery mechanism of an Optinose EDS is designed to overcome the drug deposition shortcomings of conventional nasal sprays andnasal aerosols. In conventional nasal sprays and nasal aerosols, the medication is inhaled or sniffed into the nose creating negative pressurewithin the nasal passages, which does not facilitate the14Table of Contentsexpansion of the nasal valve or the nasal passages and may obstruct the drug from reaching deep into the nose where most nasal polyps andinflamed and swollen sinus membranes exist.The pattern of drug deposition produced by conventional nasal sprays and an Optinose EDS has been evaluated in multiple studies using acombination of advanced imaging modalities to depict the regions of the nasal passages where drug is deposited after administration in healthyhuman volunteers. In an open label, crossover study conducted by a third party in nine patients with allergic rhinitis, investigators examined thenasal deposition of radio-labeled materials that allow for traceability following use of Qnasl (HFA-beclomethasone, nasal aerosol), Flonase(fluticasone propionate, nasal spray) and Nasonex (mometasone furoate monohydrate, nasal spray). In this study, gamma cameras were used tocapture emitted radiation from these tracers to create two-dimensional images in a similar process to the capture of x-ray images. These gammaimages were merged with magnetic resonance images (MRI) to quantify regional deposition within the nasal passages. The images below illustratehow the pattern of drug deposition in the nasal passages produced by Qnasl, Flonase and Nasonex was concentrated in the front and lowerregions of the nasal passages, as opposed to the high and deep regions of the nasal passages targeted in the treatment of chronic rhinosinusitis.Reprinted with permission from JOURNAL OF AEROSOL MEDICINE & PULMONARY DRUG DELIVERY 28/8, 2015, by Leach et al, published by Mary AnnLiebert, Inc., New Rochelle, NY.We conducted six deposition studies evaluating 53 healthy subjects that produced approximately 250 images. As depicted in the representativefigures below, an Optinose EDS produced a differentiated pattern of drug delivery with significantly more drug deposited in the high and deepregions of the nasal passages.The pictures above use gamma camera image information, which was then superimposed on the corresponding MRI section. These images representdeposition in healthy subjects two minutes after delivery using a traditional liquid nasal spray and a version of our liquid EDS device. Deposition with traditionalliquid nasal spray was greatest in the front parts of the nose, whereas deposition with an Optinose EDS was greatest in the high and deep regions of the nose.The pictures below illustrate how an Optinose EDS (with exhalation) places medication higher and deeper in the nasal passages than aconventional nasal spray (without sniffing) in nasal cast models. As depicted below, although conventional nasal spray systems can reach, andtherefore treat, large nasal polyps, they are not15Table of Contentsgenerally suitable for reaching nasal polyps or inflammation in the higher and deeper regions where obstruction of the sinus openings occurs.An Optinose EDS is also designed to address user dissatisfaction with standard nasal delivery by reducing drug drip-out from the front and back ofthe nose and the bad taste that often accompanies drug entering the throat. By reducing the loss of drug to non-targeted sites, such as thegastrointestinal tract by swallowing, or lungs, an Optinose EDS has the potential to improve the efficiency of drug activity and to improvetolerability by reducing off-target effects.Our PipelineXHANCE for Chronic SinusitisWe initiated a Phase 3b clinical trial program for XHANCE in the fourth quarter of 2018 to pursue a follow-on indication for the treatment of chronicsinusitis. We believe XHANCE would be the first drug therapy product approved for the treatment of chronic sinusitis. In the future, as appropriate,we intend to broaden our commercialization efforts to additional primary care physicians that we believe treat an additional estimated 6.25 millionU.S. patients with chronic rhinosinusitis, an estimated one-third of whom have chronic rhinosinusitis with nasal polyps. In addition, at some point inthe future, we intend to consider directing promotional resources to16Table of Contentsan additional estimated 20 million adults who are not regularly under the care of physicians for this disease using programs such as direct-to-consumer and direct-to-patient promotion.Other Product CandidatesAlthough our initial focus is to prioritize the successful commercialization and continued development of XHANCE for the ENT and allergyspecialty segments, we have applied an Optinose EDS to other product candidates in our pipeline across a broad range of disease areas. Byplacing drug high and deep in the nose, in regions where cranial nerves connect directly with the brain, we believe it may be possible to delivermedications directly into the brain and avoid the difficulties of getting drug past the blood-brain barrier. This may enable treatment of braindiseases using small or large molecules that otherwise do not readily enter the nervous system.OPN-300We have engaged in early clinical development activities for OPN-300, which combines an Optinose EDS with oxytocin. Oxytocin is a small,naturally occurring peptide currently used to stimulate lactation in breastfeeding women. Oxytocin acts as a neurotransmitter in the brain and hasrecently been considered a potential novel treatment alternative in several brain disorders due to a growing body of evidence of its critical role insocial cognition and behavior. Because oxytocin is a peptide with poor oral bioavailability, nasal administration with an Optinose EDS may allowfor improved delivery. With standard liquid nasal spray delivery, only a small amount of the drug reaches systemic circulation. It is estimated thatless than 0.01% of oxytocin in the blood enters the brain across the blood-brain barrier.OPN-300 has been developed to target two orphan indications: Prader-Willi syndrome, a rare genetic disorder that is the leading genetic cause ofobesity; and autism spectrum disorder. We conducted a Phase 1 clinical trial in late 2013 using OPN-300 in healthy volunteers. In that trial, a lowdose of oxytocin delivered using an Optinose EDS produced a statistically significantly greater social-cognitive effect as measured with functionalmagnetic resonance imaging, performance on cognitive tests, and physiological markers, than intravenous administration of the same activeingredient that produced blood levels that were not statistically different. We believe this clinical trial supports the possibility of direct nose-to-brainactivity of medication delivered using an Optinose EDS. In a second pilot clinical trial of OPN-300 in adult male patients with autism spectrumdisorder, adult men with autism spectrum disorder receiving nasal oxytocin showed statistically significant differences in interpretation of facialexpressions. We have completed planned internal development activities and in the future may pursue external partnerships for furtherdevelopment.OtherWe are evaluating the use of the Optinose EDS to deliver other drugs or drug combinations to treat diseases primarily managed by ENT andallergy specialists, and we opportunistically evaluate opportunities to develop product candidates using our EDS intellectual property for indicationsand markets outside of our ENT and allergy focus through business development and partnering activities.Our Commercial StrategyWe are implementing our commercial strategy for XHANCE to focus on the following four phases of penetrating the chronic rhinosinusitis marketsand becoming part of the standard of care treatment:▪Efficient entry in the ENT and Allergy specialty segments: In 2018 we deployed an efficient, go-to-market commercialization model,including the build-out of our commercial team and organization. Our fully-dedicated specialty sales force of approximately 80 territorymanagers initiated promotion of XHANCE in March 2018 to a defined prescriber base of approximately 6,000 ENT and allergy specialists,as well as approximately 1,500 "specialty-like" primary care physicians. During the first half of 2019, we plan to internalize our contractsales team and deploy an additional 20 territory managers in “XHANCE naive” geographies to expand our reach among the ENT andallergy specialty universe. This is expected to grow the target audience for our sales team by approximately 25% to approximately 9,500healthcare providers. Because we expect to continue to secure broader market access over time, we intend to eventually increase thesize of our sales force to approximately 120 territory managers based upon an expanded target audience of approximately 14,000specialists or "specialty-like" primary care physicians. Additionally, we expect to target additional physicians through digital and non-personal promotion in areas where we do and do not have territory managers. We believe that approximately 15,000 physicians treat anestimated 3.5 million chronic rhinosinusitis patients, an estimated 1.2 million of whom have chronic rhinosinusitis with nasal polyps.17Table of Contents▪Targeted patient demand generation: In 2019, we intend to execute a branded, multi-channel direct to consumer (DTC) pilot in threecities targeting diagnosed and undiagnosed nasal polyp patients. Based upon extensive patient research, we believe a high level offrustration exists among nasal polyp patients and these patients are motivated to seek new treatments to relieve their suffering. Ifsuccessful, we anticipate broadening the DTC pilot to a national campaign in 2020.▪Facilitate broader adoption: We are pursing a follow-on indication for XHANCE for the treatment of chronic sinusitis. If approved for thefollow-on indication, we intend to broaden our commercialization efforts to target primary care physicians that we believe treat an additionalestimated 6.25 million U.S. patients with chronic rhinosinusitis, an estimated one-third of whom have chronic rhinosinusitis with nasalpolyps. We may target these physicians through a commercial partnership.▪Activate broad patient demand: At some point in the future, we intend to consider directing promotional resources to an additionalestimated 20 million chronic rhinosinusitis sufferers who are not regularly under the care of physicians for this disease using programssuch as direct-to-consumer and direct-to-patient promotion.We are efficiently commercializing XHANCE into the ENT and allergy specialty segments by utilizing the following strategies:▪Define a clear patient type for XHANCE. We are focusing on moderate-to-severely symptomatic nasal polyp patients who have notachieved satisfactory results with currently available INS.▪Establish a compelling brand position in the medical continuum of care. In an effort to establish our brand position within thecontinuum of care, we are, among other things, educating physicians, payors and patients on XHANCE's unique mechanism of action anddifferentiated efficacy profile.▪Develop a meaningful payor and patient-friendly value proposition. We are establishing a meaningful value proposition forphysicians, payors and patients by highlighting the potential for XHANCE to reduce or delay the need for surgical intervention, reduceantibiotic prescribing and increase patient satisfaction with treatment outcomes. We believe the health economic data related to XHANCEare compelling. Our analyses show that XHANCE will have a comparatively low pharmacy budget impact and our clinical trial data suggestthat XHANCE may produce an offsetting benefit by helping reduce the rate of surgery and its related costs. For an insurance plan, thiscould represent a potential overall cost reduction for the population of patients with chronic rhinosinusitis with nasal polyps, as the overallcost of XHANCE would be less than the offsetting costs related to the reduction in surgeries. During clinical studies, XHANCE was alsoassociated with an improvement in reported work productivity in treated patients, which should be valued by employers and patients. Inaddition, we believe the cost of XHANCE to insurance plans will likely be significantly less than the projected costs of monoclonalantibodies that are currently in development for the treatment of nasal polyps. Furthermore, we developed and implemented a patientaffordability program that reduces the real and perceived economic barriers for patients to experience the potential benefits of XHANCE.In addition to our affordability program we offer patients the option of filling prescriptions through a network of preferred pharmacies thatmay be able to better serve the needs of patients through services including delivery of XHANCE by mail.▪Drive awareness, adoption and access. We are engaging with physicians and payors to educate both constituencies about XHANCEand its benefits, with the goal of securing broad market access for XHANCE through specialty and retail pharmacies.◦Physicians: In early March 2018, we trained and deployed a dedicated sales force of 80 territory managers to promote XHANCEto our target audience of ENTs, allergists and "specialty-like" primary care physicians. The focus of the sales team is to (i)highlight the unmet medical need and limitations of current treatments, (ii) define the target nasal polyp patient type for XHANCE,(iii) differentiate EDS and highlight the strong data supporting the efficacy of XHANCE and, (iv) ensure HCP awareness andappreciation of the XHANCE patient affordability program. In April 2019, we plan to increase our sales force by 20 territorymanagers and expand our reach within our target physician audience by approximately 25%.18Table of Contents◦Payors: We continue to engage with payors with the objective of securing broad market access in the commercial segment bytargeting Tier 3 payor coverage, single step edit with no prior authorization. Specifically, we are targeting pharmaceutical benefitmanagers, national plans and regional plans representing, in the aggregate, up to approximately 160 million of the estimated180 million U.S. covered commercial lives. We also intend to contract for Medicare Part D and Medicaid lives.◦Patients: We have completed the build-out of a patient and physician support ecosystem in an effort to accelerate physicianadoption and reduce the risk of patient abandonment during the fulfillment process. This ecosystem includes (i) patient samples,(ii) a co-pay assistance program for patients who have commercial coverage, (iii) savings cards for cash payors,(iv) reimbursement support programs for the retail channel, (v) a supplemental distribution channel through preferred pharmacynetwork partners to assist patients with the complexities of the payor landscape, and (vi) a patient assistance program to provideaccess to XHANCE to people who have no or inadequate insurance.Since FDA approval on September 18, 2017, the commercial team has been executing a launch plan to drive awareness and appreciation of theclinical differentiation of XHANCE, designing and implementing our customer model to drive physician trial and adoption, and building marketaccess for XHANCE to facilitate adoption and fulfillment through specialty and retail pharmacies. Our progress across each of these key strategicareas is described below:▪Drive product awareness and appreciation of the clinical differentiation of XHANCE◦Executed broad multi-channel awareness campaign leveraging digital, non-personal promotion, journal advertising, and an 85person nurse educator team calling on a universe of about 7,000 ENT and allergists and achieved 87% aided branded awarenessof XHANCE among the ENT and allergy specialist universe prior to launch.◦Finalized XHANCE core marketing strategies and launch tactic including a compliant, value optimizing and cost-effectivepromotion mix to appropriately engage our target audience◦During the early launch phase of XHANCE, we introduced the XHANCE Xperience program to offer physicians and their patientsan opportunity to gain initial experience with XHANCE. As part of this program, patients received up to two XHANCE prescriptionsat no out-of-pocket cost to them ($0 co-pay). In order to receive the second prescription, patients were required to complete a briefsurvey regarding their use of XHANCE. The survey results were encouraging and also provided physicians an opportunity toreceive individual feedback on early patient responses to treatment. As planned, we closed the Xperience program to newenrollments at the end of June 2018. From March 2018 through June 2018, over 11,000 patients were prescribed XHANCEthrough the XHANCE Xperience program by over 3,000 physicians.◦Based upon a quantitative Awareness, Trial and Usage (ATU) market research study that we commissioned in January 2019, amajority of ENT and allergy specialists in our target audience, believed that XHANCE performed better on several efficacymeasures than traditional intranasal steroids (e.g. Flonase) including improvement of four core symptoms of CRS with nasalpolyps (congestion, rhinorrhea, facial pain and pressure and loss of sense of taste/smell), reduction in nasal polyp grade, polypelimination, and improvement in quality of life.▪Design and deploy our customer facing model to drive physician trial and adoption◦Designed hybrid sales model that leverages a fully dedicated contract sales organization reporting into an Optinose SalesLeadership Team◦Defined footprint of approximately 120 territories that will ultimately target approximately about 14,000 ENTs, allergists and“specialty like” primary care physicians◦Recruited, hired and trained 11 Optinose Regional Business Directors with an average of approximately 11 years of salesleadership experience◦In partnership with our contract sales organization, approximately 80 territory managers were recruited, hired and trained. Theterritory managers have an average of 13 years of pharmaceutical sales experience and over 70% have experience in therespiratory therapeutic category. The19Table of Contentsterritory managers were deployed in early March 2018 in geographies where we expected to have greater than 65% coverage ofcommercial lives during launch.◦In April 2019, we plan to expand our sales force by 20 territory managers to call on an incremental 1,800 "XHANCE naive"physicians. We also intend to internalize the contract sales force in April 2019.▪Engage commercial payors with the objective of securing tier 3 commercial coverage◦Developed compelling economic value proposition◦Created value pack, budget impact model, supporting health economics and outcomes research (HEOR) payor messages andpayor partnership models◦Completed pricing study to inform pricing decision and contracting strategy and launched with a Wholesaler Acquisition Cost(WAC) of $425 per unit of XHANCE. As of January 1, 2019, the WAC price for XHANCE was $468.12 per unit.◦Created HEOR-related communication tools for use with payors◦Completed development of our clinical and economic evidence of pharmaceuticals in support of formulary consideration using theAcademy of Managed Care Pharmacy (AMCP) Dossier format◦Engaged with approximately 40 plans representing approximately 85% of commercial lives◦Introduced co-pay assistance program and other patient affordability programs to appropriately support patient access to XHANCE◦Based on currently available third-party data and our internal analyses as of December 31, 2018, we believe greater than 75% ofcommercially insured lives in the U.S. are plans that cover XHANCE in a tier 3 positionXHANCE Clinical DevelopmentOverviewWe evaluated XHANCE in the following five clinical trials comprised of over 1,500 patients:▪two randomized, double-blinded, placebo-controlled Phase 3 pivotal clinical trials designed to compare the safety and efficacy of XHANCEto a placebo EDS in adults with bilateral nasal polyps, which we refer to as NAVIGATE I and NAVIGATE II or collectively, our pivotalclinical trials;▪two open-label Phase 3 clinical trials to evaluate the safety of XHANCE in adults with symptoms of chronic sinusitis with or without nasalpolyps, which we refer to as EXHANCE-3 and EXHANCE-12 or collectively, our supportive clinical trials; and▪one Phase 1, open-label, randomized, single-dose, bioavailability study to compare the bioavailability of fluticasone propionate fromXHANCE to Flonase and Flovent HFA in healthy patients and patients with mild-to-moderate asthma.Clinical Trial HighlightsOur Phase 3 clinical development program included a population of patients generally reflective of our intended patient population, withapproximately 90% having previously tried INS therapy and almost one-third having previously undergone sinus surgery. Key results from ourPhase 3 clinical trial program include:▪In our pivotal clinical trials, XHANCE produced statistically significant benefits on both of the co-primary endpoints: a reduction of nasalcongestion/obstruction symptoms at week 4 and a reduction in total polyp grade at week 16.▪Patients with nasal polyps generally experienced greater improvements in symptoms and reductions in polyp grade with longer duration ofuse.▪In our pivotal clinical trials, approximately 16% of patients treated with XHANCE had nasal polyps eliminated (polyp grade 0) in at leastone nostril after 16 weeks of treatment, and approximately 27% had nasal polyps eliminated in at least one nostril after an additional eightweeks of treatment. In our supportive20Table of Contentsclinical trials, we observed complete response rates in at least one nostril of 48% of patients in EXHANCE-3 and 47.1% of patients inEXHANCE-12.▪In our pivotal clinical trials, XHANCE produced improvement across all four defining symptoms of chronic rhinosinusitis.▪Over 85% of patients receiving XHANCE across our pivotal clinical trials reported improvement, and approximately two-thirds reportedbeing "much" or "very much" improved, compared to approximately one-third of patients in the placebo EDS group. In our supportiveclinical trials, approximately 70% of patients with symptoms of chronic sinusitis, both with and without nasal polyps, reported that theywere "much" or "very much" improved after treatment with XHANCE.▪On a Sinonasal Outcome Test-22, the improvement with the 186- and 372-microgram (mcg) doses of XHANCE was superior to theplacebo EDS in both NAVIGATE I and NAVIGATE II. The magnitude of improvement associated with treatment with XHANCE wasapproximately 20 points. Although cross-trial comparisons have significant limitations and must be interpreted with caution, in a previousthird-party study evaluating a large cohort (n=1468) of patients who were underwent sinus surgery, the degree of change on this outcomemeasure was approximately 18 points.▪After 12 months of treatment with XHANCE in our supportive clinical trials, at least 50% of patients had a Sinonasal Outcome Test-22score that was at or below 9.3, which is the average score that has been reported for healthy individuals.▪XHANCE was well tolerated and had an adverse event profile generally similar to that observed in several comparably designed third partystudies, including those of mometasone furoate in nasal polyps patients and of fluticasone propionate formulations in nasal polyp andallergic rhinitis patients.Phase 3 Pivotal Clinical Trials (NAVIGATE I and NAVIGATE II)We have conducted two independent but comparable randomized double-blinded, placebo controlled Phase 3 clinical trials to examine the safetyand efficacy of XHANCE versus a placebo EDS in adults with bilateral nasal polyps and moderate nasal congestion/obstruction. These clinicaltrials, which we refer to as NAVIGATE I and NAVIGATE II, also provided dose-ranging information to support the selection of clinically appropriatedose(s) for commercialization of XHANCE and served as pivotal clinical trials in our NDA for the treatment of adults with nasal polyps. Thesepivotal clinical trials were conducted in the U.S., Canada, South Africa and several European countries.Study DesignEach pivotal clinical trial included a single-blind EDS-placebo lead-in and a placebo EDS control group, a multi-center, multi-national studypopulation to increase generalizability, an assessment of the efficacy of multiple doses (93, 186 or 372 mcg twice daily) over a 16-week period andexperts in nasal endoscopy to assess objective efficacy outcomes and adverse events (AEs) in all patients. Patients who completed the double-blinded phase of the pivotal clinical trials were allowed to continue in an open-label extension phase in which all patients received 372 mcg ofXHANCE twice daily for up to eight additional weeks. All patients and investigators remained blinded to the original treatment during the open-labelphase, allowing for a comparison of as-randomized initial treatments through the end of the open-label extension phase at week 24. We treated atotal of 646 adults across both pivotal clinical trials with 568 adults completing the open-label extension phase.Each of NAVIGATE I and NAVIGATE II had co-primary endpoints of (i) change in subjective nasal congestion/obstruction symptoms frombaseline to week 4 and (ii) change in objectively-measured total (bilateral) nasal polyp grade from baseline to week 16. The severity of nasalsymptoms was recorded by patients in an electronic diary immediately before dosing in the morning (AM) and evening (PM), and was measuredusing 7-day average instantaneous AM diary scores. Total (bilateral) nasal polyp grading was assessed with nasoendoscopy and is based onpolyp protrusion past certain anatomical landmarks. These grading assessments were performed at screening (baseline) and at weeks 4, 8, 12, 16(which was the end of the double-blinded phase) and 24 (which was the end of the open-label phase) using a 0 to 3 point scale for each nostril, with0 representing no polyps and 3 representing severe polyposis. The scores for each nostril were summed to yield a range of 0 to 6 for both nostrils.These trials also evaluated several secondary endpoints, including the impact of XHANCE treatment on surgical eligibility and changes in theSinonasal Outcome Test-22 score, which considers the core defining signs and symptoms of nasal polyps and the impact on functioning, qualityof life and sleep. We also conducted a complete21Table of Contentsresponse analysis to evaluate the percentage of patients with a recorded nasal polyp grade of zero on at least one side of the nasal cavity.Efficacy ResultsThe 186- and 372-mcg treatment groups achieved statistically significant reductions in the primary assessments of congestion severity at week 4and reductions in polyp grade at week 16 relative to a placebo EDS. In NAVIGATE I, the differences from the placebo EDS generally increasedwith each increasing dose of XHANCE for both co-primary endpoints, meaning that administering higher doses to a patient led to a greaterdecrease in nasal congestion/obstruction symptoms and bilateral nasal polyp grade. In NAVIGATE II, the 186-mcg group achieved the largestnumerical reduction in the primary assessment of congestion symptom severity, and the 372-mcg group achieved the largest numerical reductionin the primary assessment of polyp grade. On average, patients in both pivotal clinical trials had moderate nasal polyps (with an average bilateralscore of approximately 3.9) at baseline. Patients treated with 372 mcg had the largest mean change in polyp grade in each pivotal clinical trial,with decreases in grade after 16 weeks of 1.1 and 1.4 in NAVIGATE I and NAVIGATE II, respectively. There was also a consistent decrease inaverage polyp grade over time through 24 weeks.The following table summarizes the mean change in congestion scores in each of the pivotal clinical trials:Mean Changes from Baseline in AM Congestion Score After 4 Weeks of Treatment inAdult Patients with Nasal Polyps Difference from Placebo EDSTreatment N Baseline Score(StandardDeviation) Mean (StandardError) Changefrom Baseline Mean 95%confidenceinterval p-value(1)NAVIGATE I XHANCE 372 mcg 79 2.29 (0.44) –0.62 (0.08) –0.38 –0.57, –0.19 <0.001XHANCE 186 mcg 80 2.24 (0.42) –0.54 (0.08) –0.30 –0.48, –0.11 0.002Placebo EDS 82 2.31 (0.41) –0.24 (0.07) NAVIGATE II XHANCE 372 mcg 82 2.25 (0.42) –0.62 (0.07) –0.38 –0.58, –0.18 <0.001XHANCE 186 mcg 80 2.20 (0.37) –0.68 (0.07) –0.45 –0.65, –0.25 <0.001Placebo EDS 79 2.29 (0.43) –0.24 (0.07) ________________________________________________________________________________________________________________________(1) The p-value (probability value) is a measure of statistical significance reflecting the likelihood that an observed result occurred by chance.The following charts summarize the mean change in bilateral nasal polyps score in each of the pivotal clinical trials: In addition to the co-primary efficacy endpoints described above, we also assessed a number of secondary endpoints in the pivotal clinical trials,including the following:22Table of Contents▪Sinonasal Outcome Test-22. In a Sinonasal Outcome Test-22, which broadly assesses the impact of nasal polyps on certain outcomes,including the symptoms of nasal polyps, functioning and quality of life, the change observed with the 186- and 372-mcg doses of XHANCEwas superior to the placebo EDS in both of the pivotal clinical trials. The magnitude of improvement associated with treatment withXHANCE was approximately 20 points.▪Quality of Sleep. A positive impact of XHANCE on sleep was shown for the 372-mcg dose in both pivotal clinical trials through the"Sleep" sub-scale of the Sinonasal Outcome Test-22 and, in NAVIGATE II, a positive effect was further shown across a number of thesub-scales of the MOS-Sleep-R, a validated set of measures commonly used in clinical studies to assess changes in sleep quality.▪Defining Symptoms. The 186- and 372-mcg treatment groups, in pooled data for NAVIGATE I and NAVIGATE II, achieved statisticallysignificant improvement in all four of the core defining symptoms of nasal polyps at the end of the double-blinded phase.▪Patient Global Impression of Change. Patient global impression of change is a summary measure of treatment benefit from theperspective of the patient measuring their perception of improvement or worsening of their condition. At the end of the double-blindedphase, the percentage of patients who were improved was substantially higher with XHANCE compared with the placebo EDS. Of thepatients receiving 186 or 372 mcg of XHANCE, 86% reported improvement combined across both pivotal clinical trials, and 65.9%reported being "much" or "very much" improved. A post-hoc analysis of a subgroup of patients in the NAVIGATE I and II trials who wereusing a marketed INS at the time of study entry showed similar results, with 65% of patients treated with 186 or 372 mcg of XHANCEreporting being "much" or "very much improved" after 16 weeks of treatment compared with 28% of patients treated with the placebo EDS.▪Need for Surgery. Surgical eligibility was assessed using study-defined criteria. Surgery was not necessarily planned or pending for thesepatients. The proportion of patients meeting the study-defined surgical eligibility criteria among the 186-mcg and 372-mcg dose groupscombined across both pivotal trials was reduced by 54% after 16 weeks of treatment with XHANCE versus 36% with the EDS-placebogroup and was reduced by approximately 64% after the additional eight weeks of active treatment with the 372-mcg dose.▪Complete Response Analysis. The polyp grading scale is neither linear nor a direct measure of polyp mass, making it difficult to interpretmean change scores. Therefore, we also performed a complete response analysis to evaluate the percentage of patients who had nasalpolyps eliminated (polyp grade 0) on at least one side of the nasal passages. The percentage of patients who had nasal polyps eliminatedon at least one side of the nasal passages at the end of the double-blinded phase was 14.1% in the 186- and 372-mcg dose groupscombined across both pivotal clinical trials, compared to 7.8% of placebo EDS recipients. By the end of 24 weeks, after all patientsreceived up to an additional eight weeks of active treatment with the 372-mcg dose, the complete response rate was 17.3% in patientspreviously treated with the placebo EDS compared to 26.2% in patients who previously received XHANCE across the 186- and 372-mcgdose groups in both pivotal clinical trials.Safety ResultsXHANCE was generally well tolerated across the 186- and 372-mcg dose groups in NAVIGATE I and NAVIGATE II. The most commonly reportedAEs in the active treatment groups in the pivotal clinical trials, which are shown in the table below, were associated with local effects at the site ofadministration in the nasal passages or associated with the underlying disease. Most local AEs were not spontaneously reported but wereidentified as a result of active monitoring of all patients at scheduled intervals by endoscopic nasal examination at each visit. The majority ofthese AEs were reported to be mild and were observed to resolve with continued use of XHANCE. A total of six patients in the pivotal clinical trialsexperienced a total of seven serious adverse events (SAEs) only one of which, in a patient in the placebo group, was determined to be treatment-related. 5.0% of subjects treated with XHANCE 186 mcg twice daily and 1.2% of subjects treated with 372 mcg twice daily discontinued from theclinical trials prior to the open-label extension phase based of adverse reactions compared to 4.3% of subjects treated with placebo.23Table of ContentsSummary of Adverse Events with XHANCE Reported in ≥ 3% of Patients with Nasal Polyps and More Common Than Placebo EDS inPhase 3 Pivotal Clinical Trials XHANCEAdverse EventPlacebo EDS(N = 161)n (%)186 mcg bid(N = 160)n (%)372 mcg bid(N = 161)n (%)Epistaxis14 (2.5)19 (11.9)16 (9.9)Nasopharyngitis8 (5.0)3 (1.9)12 (7.5)Nasal septal ulceration23 (1.9)11 (6.9)12 (7.5)Nasal congestion6 (3.7)7 (4.4)9 (5.6)Acute sinusitis6 (3.7)7 (4.4)8 (5.0)Headache5 (3.1)8 (5.0)6 (3.7)Pharyngitis2 (1.2)2 (1.3)5 (3.1)Nasal mucosal ulceration22 (1.2)6 (3.8)4 (2.5)Nasal mucosal erythema6 (3.7)9 (5.6)8 (5.0)Nasal septal erythema3 (1.9)6 (3.8)7 (4.3)________________________________________________________________________________________________________________________bid = twice daily.N = number of patients; n = number of patients in subset.1 Includes spontaneous adverse reaction reports.2 Includes ulcerations and erosionsPhase 3 Open-Label Clinical Trials (EXHANCE-3 and EXHANCE-12)We also conducted two supportive, open-label Phase 3 clinical trials in adults with symptoms of chronic sinusitis with or without nasal polyps. Thesupportive clinical trials, which we refer to as EXHANCE-3 and EXHANCE-12, were conducted in the U.S. with a primary objective to assess thesafety of twice-daily intranasal administration of the 372 mcg dose of XHANCE in an expanded number of patients and over an extended period oftime. We also assessed a variety of objective and subjective efficacy parameters, including an assessment of each patient's symptoms andfunctioning and qualification for surgical intervention based on study-defined surgical eligibility criteria.Study DesignEligibility for enrollment, endpoint and study design were similar in EXHANCE-3 and EXHANCE-12 with the exception of duration (3 months in thecase of EXHANCE-3 and 12 months in the case of EXHANCE-12). Across both supportive clinical trials, a total of 898 adults were treated,including 762 adults with chronic sinusitis without nasal polyps and 136 adults with symptoms of chronic sinusitis with nasal polyps.Safety ResultsXHANCE was generally well tolerated. As shown in the table below, 59.2% of patients in the supportive clinical trials experienced at least onetreatment-emergent AE, with the most common being similar to those in the XHANCE treatment groups of the pivotal clinical trials. The mostcommon AEs were local (in the nose) and not systemic. Most AEs were mild and resolved with continued use of XHANCE. A total of 12 patientsexperienced a total of 14 SAEs in the supportive clinical trials, none of which were deemed treatment-related. Approximately 80% of patientscompleted the supportive clinical trials, with approximately 5% discontinuing due to an AE and 1% discontinuing for lack of efficacy.24Table of ContentsSummary of Adverse Events Reported in ≥3% of Patients in EXHANCE 3 AND EXHANCE 12________________________________________________________________________________________________________________________ Adverse EventXHANCE372 mcg(N = 898)n (%)Patients with at least 1 Adverse Event532 (59.2)Epistaxis173 (8.1)Nasal mucosal disorder (erythema or ulceration not at the nasal septum)109 (12.1)Nasal septum disorder (erythema)71 (7.9)Nasal septum ulceration53 (5.9)Acute sinusitis48 (5.3)Upper respiratory tract infection46 (5.1)Headache44 (4.9)Nasal congestion34 (3.8)Cough27 (3.0)________________________________________________________________________________________________________________________1 Includes spontaneous adverse reaction reports.Efficacy ResultsEfficacy was also measured in EXHANCE-3 and EXHANCE-12. Key efficacy results from EXHANCE-3 and EXHANCE-12 included:▪On the Lund-Mackay scale, which is an endoscopic objective assessment of disease in the nasal passages, scores for edema, nasaldischarge and nasal polyps decreased through up to 12 months of treatment, with similar benefits observed in patients who did or did nothave nasal polyps at baseline. Among those patients entering the clinical trials with endoscopic evidence of edema within the nasalcavity, approximately 35% with polyps and 53% without polyps in EXHANCE-3 and 50% with polyps and 56% without polyps inEXHANCE-12 no longer had observable edema by the end of the study.▪Patients with nasal polyps experienced improvement in nasal polyp grades. As observed in the pivotal clinical trials, mean nasal polypgrading scale scores improved more with longer durations of treatment. In addition, the percentage of nasal polyp patients with a polypgrade of 0 on at least one side of the nose was 47.1% in EXHANCE-12 and 48.0% in EXHANCE-3 by the end of their participation in thestudy.▪Mean total Sinonasal Outcome Test-22 scores improved throughout both supportive clinical trials. After 12 months of treatment withXHANCE in our supportive clinical trials, at least 50% of patients had a score that was at or below 9.3, which is the average score thathas been reported for healthy individuals.Phase 1 Bioavailability Clinical TrialWe performed a Phase 1, open-label, randomized, single-dose, bioavailability clinical trial of XHANCE and Flonase in healthy patients andXHANCE and Flovent HFA in patients with mild-to-moderate asthma. We conducted the Phase 1 clinical trial to establish a bridge betweenXHANCE, which consists of our fluticasone propionate formulation combined with an Optinose EDS, and Flonase and Flovent HFA, the referencelisted drugs for our NDA. We chose fluticasone propionate in part because it has limited absorption into the body. In our NDA, we relied in part onthe FDA's previous findings of safety for Flonase and Flovent HFA, including non-clinical toxicology findings and findings of systemic safety risksrelated to hypothalamic-pituitary-adrenal (HPA) axis suppression, which is a known side effect of corticosteroids. To do so, we were required toestablish that the systemic exposure, or the amount of drug absorbed into the body, to fluticasone propionate following use of XHANCE did notexceed the exposure produced by Flovent HFA.25Table of ContentsStudy DesignPart one of the clinical trial was a three-way, three-treatment, three-sequence crossover study in healthy patients in which patients wererandomized to a sequence containing the following treatments: 186 mcg (1 × 93 mcg to each nostril) of XHANCE; 372 mcg (2 × 93 mcg to eachnostril) of XHANCE; and 400 mcg (4 × 50 mcg to each nostril) of Flonase. The primary objective of part one was to assess and compare thesystemic exposure of a single dose of 186 mcg and 372 mcg of XHANCE with 400 mcg of Flonase in healthy patients. If one or both of the testdoses resulted in a systemic exposure that was at least 125% of that of Flonase, then part two was to be conducted. Part two of the clinical trialwas a two-way, two-treatment, two-sequence crossover study in mild-to-moderate asthmatic patients in which patients were randomized to asequence containing the following: 372 mcg (4 × 93 mcg) of XHANCE and 440 mcg (2 × 220 mcg) of Flovent HFA. The primary objective of parttwo was to assess and compare the systemic exposure produced by a single dose of 372 mcg of XHANCE with 440 mcg of Flovent HFA in mild-to-moderate asthmatic patients. A total of 112 adults were examined across both parts of the clinical trial.ResultsIn part one of the clinical trial, peak and total exposure to fluticasone propionate was higher following 372 mcg of XHANCE compared to 400 mcgof Flonase. Peak exposure to fluticasone propionate was also higher for 186 mcg of XHANCE than 400 mcg of Flonase, but total exposure washigher for 400 mcg of Flonase than 186 mcg of XHANCE. In part two of the clinical trial, doses of 372 mcg of XHANCE produced systemicexposure substantially lower than that of 440 mcg of Flovent HFA. In particular, peak plasma of the drug (Cmax) and the total amount ofabsorption, known as the area under the curve from time 0 to infinity (AUC0-∞) were approximately 37% and 50% lower following administration of372 mcg of XHANCE relative to 440 mcg of Flovent HFA, respectively. We believe these results supported our use of Flonase and Flovent HFAas referenced listed drugs in our NDA for XHANCE.Regulatory Exclusivity and Barriers to EntryXHANCE benefits from substantial intellectual property and regulatory barriers to entry, including the following:▪Strong patent protection. Our XHANCE U.S. patent portfolio consists of 13 issued device and method of use patents expiring through2034, three issued design patents expiring through 2030 and U.S. patent applications that, if granted, would expire through 2034. We relyprimarily on the protections afforded by device and method of use patents. Our issued U.S. patents and patent applications for XHANCEare based on an Optinose EDS, including the combination of this technology with fluticasone propionate.▪Complex drug-delivery system. We believe the unique features of an Optinose EDS, as well as its delivery of a topical-actingcorticosteroid, affords us significant protection against generic competition, as well as against a potential 505(b)(2) NDA, that seeks toreference XHANCE in order to obtain approval for a therapeutically equivalent, substitutable competitor product. XHANCE, utilizing ourproprietary EDS, presents human factors engineering complexities for drug-device combination products and chemistry, manufacturingand controls challenges unique to suspension and respiratory products. Any future substitutable generic entrant will need to haveconsiderable combination product know-how to develop and validate a substitutable drug delivery device or technology to compete with anOptinose EDS.▪Clinical and regulatory complexity. We have conducted a clinical development program comprised of over 1,500 patients to support ourNDA for XHANCE to treat nasal polyps, including human factors studies and Phase 3 clinical trial assessments evaluating and validatingthe use of an Optinose EDS. As with other drugs that primarily have local activity, we believe the regulatory pathway for products seekingapproval as substitutable generic equivalents to XHANCE will be more complex and costly than the pharmacokinetic studies generallyrequired for systemically-acting medications. We believe current FDA guidance for substitutable INS generally requires the demonstrationof "clinical bioequivalence," which has caused developers to conduct non-inferiority clinical trials. Clinical trials in nasal polyps aredifferent from those that have been performed to support approval of generic INS for allergic rhinitis. We believe potential genericcompetitors to XHANCE must not only demonstrate efficacy versus placebo, but must also show equivalent efficacy and safety outcomesto establish clinical bioequivalence to XHANCE, requiring a significant amount of time and capital investment and presenting clinicaldevelopment uncertainties.▪Three-year regulatory exclusivity. The FDA has granted XHANCE a three-year period of regulatory exclusivity that will end inSeptember 2020. This exclusivity means that we are afforded at least three years in which to market our product free of generic or 505(b)(2) competition post-NDA approval.26Table of ContentsIntellectual PropertyWe strive to protect our proprietary technology that we believe is important to our business, including seeking and maintaining patents intended tocover our product candidates and technologies that are important to the development of our business. We also rely on trade secrets to protectaspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection, as well as know-how, trademarks,continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We internally developed ourintellectual property related to the Optinose EDS, AVP-825, XHANCE and our product candidates. We have sought and intend to continue to seekappropriate patent protection for our product candidates, as well as other proprietary technologies and their uses by filing patent applications in theU.S. and selected other countries.PatentsAs of February 28, 2019, we owned a total of 47 U.S. patents and 27 pending U.S. patent applications. These U.S. patents will expire between2020 and 2034. These U.S. patent applications, subject to issuance, would be projected to expire between 2020 and 2039, with potential patentterm adjustments that would extend the patent term. In addition to our U.S. intellectual property, we also own 207 foreign issued patents, which willexpire between 2020 and 2033 and 77 foreign patent applications, which will expire between 2020 and 2035, subject to issuance.Our XHANCE U.S. patent portfolio consists of 13 issued device and method of use patents, three issued design patents and 10 pending patentapplications. The 13 device and method of use patents expire between 2020 and 2034, the three design patents expire between 2029 and 2030and the 10 pending patent applications would be projected to expire, subject to issuance, between 2022 and 2034, with potential patent termadjustments that would extend the patent term. The 13 device and method of use patents are published in the FDA's Approved Drug Products withTherapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potentialgeneric competitors in support of approval of an abbreviated NDA (ANDA), or a 505(b)(2) NDA. If any of these potential generic competitors claimthat their product will not infringe XHANCE's listed patents, or that such patents are invalid, then they must send notice to us once the ANDA or505(b)(2) NDA has been accepted for filing by the FDA. We may then initiate a patent infringement lawsuit in response to the notice of theParagraph IV certification, which would automatically prevent the FDA from approving the ANDA or 505(b)(2) NDA until the earlier of 30 months,expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA or 505(b)(2) NDA applicant.The rest of our patent portfolio largely relates to patents and applications owned by us and directed to AVP-825 and other product candidates,including OPN-300, and our EDS devices and related technologies.Trade Secrets and Other Proprietary InformationWe seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees, consultants andother advisors to execute confidentiality agreements upon the commencement of their employment or engagement. These agreements generallyprovide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not bedisclosed to third parties except in specific circumstances. In the case of our employees, the agreements also typically provide that all inventionsresulting from work performed for us, utilizing our property or relating to our business and conceived or completed during employment shall be ourexclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically contain similarassignment of invention provisions. Further, we generally require confidentiality agreements from business partners and other third parties thatreceive our confidential information.TrademarksWe also rely on trademarks and trade designs to develop and maintain our competitive position. OPTINOSE® and XHANCE® are registeredtrademarks of ours in the U.S.License AgreementsAVP-825 License AgreementIn July 2013, we, through our wholly-owned subsidiary, OptiNose AS, entered into a license agreement (the AVP-825 License Agreement) withAvanir pursuant to which we granted an exclusive license to Avanir to further develop and commercialize AVP-825, a combination of an OptinoseEDS with a lose-dose sumatriptan powder, for the acute treatment of migraines in adults, in the U.S., Canada and Mexico. AVP-825 was approvedby the FDA in27Table of ContentsJanuary 2016 for the acute treatment of migraines in adults and became commercially available in May 2016 under the brand name Onzetra Xsail.We have received $70.0 million in aggregate licensing revenues to date, consisting of an up-front payment of $20.0 million received in 2013, a$2.5 million payment received in June 2014 upon the achievement of a development milestone and a $47.5 million payment received in February2016 upon FDA approval of AVP-825.On December 10, 2018, we received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result, the AVP-825 License Agreement is expected to terminate on March 10, 2019. Upon termination, we may elect to continue to commercialize Onzetra Xsailourselves or through a new licensee, from which we may be required to pay Avanir a low double digit royalty until net sales reach a specifiedamount. We do not expect to receive any additional proceeds from the AVP-825 License Agreement.InexiaOn January 31, 2019, we entered into a License Agreement (Inexia License Agreement), with Inexia Limited (Inexia). Under the terms of the InexiaLicense Agreement, we granted Inexia an exclusive, royalty-bearing, worldwide, non-transferable, sublicensable license to our EDS and otherintellectual property for the use, sale, import and manufacture of products containing orexin receptor agonist and/or orexin receptor positivemodulator molecule(s) as the sole active pharmaceutical ingredient(s) for the treatment, diagnosis or prevention of human diseases or conditionsassociated primarily with orexin receptor agonism and orexin receptor positive modulation. The license excludes the treatment of any disease orcondition affecting the ear, nose or throat, or the treatment of any disease or condition associated primarily with another receptor, other than theOrexin 1 and Orexin 2 receptors. Inexia is solely responsible for all costs and activities related to its identification, development andcommercialization of products under the Inexia License Agreement.Under the terms of the Inexia License Agreement, we received a $0.5 million upfront payment. For each product developed under the InexiaLicense Agreement, we are eligible to receive up to $8.0 million of development milestone payments and up to $37.0 million of sales milestonepayments. In addition, we are eligible to receive tiered, low-to-mid single digit royalties based on net sales of any products successfully developedand commercialized under the Inexia License Agreement. Other than the upfront payment, we do not anticipate the receipt of any milestone orroyalty payments from Inexia in the near term.As a result of the Inexia License Agreement, we have discontinued our preclinical OPN-021 program, which combined our EDS with orexin agonistmolecules for the treatment of narcolepsy and symptoms of other diseases potentially amenable to the same pharmacologic activity, such asParkinson's disease.Manufacturing and DistributionManufacturingWe currently contract with third parties for the manufacture, testing and storage of our product candidates. In our experience, contractmanufacturers (CMOs) are generally cost-efficient and reliable and therefore we currently have no plans to build our own clinical or commercialmanufacturing capabilities. Because we rely on CMOs, we employ personnel with extensive technical, manufacturing, analytical and qualityexperience to oversee contract manufacturing and testing activities, and to compile manufacturing and quality information for our regulatorysubmissions. Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, and which governrecord-keeping, manufacturing processes and controls, personnel, quality control and quality assurance, among other activities. Our systems andour contractors are required to comply with these regulations, and we assess this compliance regularly through monitoring of performance and aformal audit program.We have entered into the following key supply agreements for the commercial manufacture and supply of XHANCE:▪A supply agreement with Hovione Inter Ltd (Hovione) for the supply of fluticasone propionate, the active pharmaceutical ingredientincluded in the liquid suspension formulation. This agreement has a term of five years from commercial launch of XHANCE, subject toearlier termination or extension in accordance with the terms of the agreement. Either we or Hovione may terminate the agreement prior tothat date for uncured material breach or insolvency of the other party. We may also terminate the agreement in the event Hovione, amongother things, (i) loses any required FDA approval rendering it unable to fulfill its contractual obligations, (ii) is engaged in felonious orfraudulent activities or (iii) does not submit a Corrective and28Table of ContentsPreventive Action plan to the FDA within a specified period of time of being notified of deficiencies in Hovione's facility.▪A manufacture and supply agreement with Contract Pharmaceuticals Limited Canada (CPL) for the formulation and assembly of thefinished drug product during the fill/pack operation. This agreement terminates in September 2022, subject to earlier termination orextension in accordance with the terms of the agreement. Either we or CPL may terminate the agreement prior to that date by mutualconsent or for uncured material breach by or insolvency of the other party. We may also terminate the agreement if, among other things,any intellectual property of any third party is reasonably alleged by a third party to be infringed, misappropriated or otherwise violated bythe manufacture, import, use, sale or distribution of XHANCE or if any regulatory authority requires us to cease production of the sale ofXHANCE.•A manufacturing services agreement with Advance Mold & Manufacturing, Inc. (Flex) for the manufacture of the liquid delivery sub-assembly, which consists of injection molded parts and other purchased components. The initial term of the agreement expires onOctober 24, 2021 but will automatically renew for successive one-year terms unless either party provides at least ninety days prior writtennotice to the other that it does not intend to renew the agreement. We have certain rights to terminate the agreement, including uponadvance notice to Flex, if Flex fails an inspection or suffers a disciplinary action by a governmental authority and fails to cure such issuewithin a specified period of time, or if Flex fails to gain recommendation for approval by the FDA to manufacture the liquid deliverysubassembly component to be manufactured pursuant to the agreement. Either party may terminate the Agreement for uncured materialbreaches or insolvency of the other party. We believe our third-party manufacturers have adequate capacity to manufacture sufficient quantities of XHANCE to meet anticipated commercialdemands.DistributionWe sell XHANCE to wholesale pharmaceutical distributors, who, in turn, sell XHANCE to pharmacies, hospitals and other customers. We havealso established relationship with preferred pharmacy network partners into which we sell XHANCE. We established this channel to offer patientsthe option of filling prescriptions through a network of preferred pharmacies that may be able to better serve the needs of patients through servicesincluding delivery of XHANCE by mail. We have contracted with a third-party logistics provider for key services related to logistics, warehousingand inventory management, and distribution. Further, our third-party logistics provider provides customer order fulfillment services and accountsreceivable management.CustomersApproximately 42% of our XHANCE net revenues during the fiscal year ended December 31, 2018 were to the three largest pharmaceuticalwholesalers, Cardinal Health, McKesson Corporation, and AmerisourceBergen Drug Corporation. Additionally, approximately 57% of our XHANCEnet revenues during the fiscal year ended December 31, 2018 were to preferred pharmacy network partners, the majority of which were toFoundation Care LLC. The remaining 1% of our XHANCE net sales were to regional pharmaceutical distributors.CompetitionOur industry is highly competitive and subject to rapid and significant technological change as research provides a deeper understanding of thepathology of diseases and new technologies and treatments are developed. We believe our scientific knowledge, technology, and developmentcapabilities provide us with substantial competitive advantages, but we face potential competition from multiple sources, including largepharmaceutical, biotechnology, specialty pharmaceutical and, to a lesser degree, medical device companies.XHANCE competes primarily with INS, oral steroids and other medical management products, including locally compounded liquid budesonide inhigh-volume nasal rinses. XHANCE also competes with surgical procedures, balloon sinus dilation products and steroid-releasing sinus implants.Key competitive factors affecting the commercial success of XHANCE and any other product candidates we may develop are likely to be efficacy,safety and tolerability profile, reliability, convenience of administration, price and reimbursement.The only other branded INS on the market indicated for the treatment of nasal polyps is Nasonex, which is marketed by Merck & Co., Inc. Ageneric version of Nasonex, mometasone furoate monohydrate, was approved by the FDA for, among other indications, the treatment of nasalpolyps and launched in 2016. In addition, Beconase AQ, which is an INS marketed by GlaxoSmithKline, is indicated for the prophylaxis of nasalpolyps after surgical29Table of Contentsresection. In addition, SINUVATM is a commercially available corticosteroid-eluting implant indicated for the treatment of nasal polyps in adultpatients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90 days. In theSINUVA clinical studies, patients were advised to use nasal steroid sprays and sinus rinses for the duration of the study.There are no products approved for the treatment of chronic sinusitis without nasal polyps. There are two categories of INS: first-generation INSproducts, which include Rhinocort, Nasacort AQ and Qnasl; and second-generation INS products, which include Flonase, Veramyst, Omnaris andZetonna. The primary difference between first- and second-generation INS products is that first-generation INS are absorbed into the blood to agreater extent than second-generation INS, with systemic bioavailability ranging from 10% to 50% compared to a systemic bioavailability withfluticasone propionate, a second-generation INS, of less than 2%. Many of the most widely-prescribed INS products are available in generic formand some, such as Flonase (which contains the same active pharmaceutical ingredient as XHANCE), are available over-the-counter.Several companies are also currently developing biologic monoclonal antibodies for the treatment of nasal polyps. These biologic monoclonalantibodies, which inhibit specific pathways of inflammation present in nasal polyps, include omalizumab, reslizumab, mepolizumab and dupilumab.Omalizumab has been studied in investigator-initiated Phase 2 clinical trials. GlaxoSmithKline has studied mepolizumab in a sponsor-initiatedPhase 2 clinical trial and has initiated patient enrollment in a Phase 3 clinical trial with study completion anticipated in 2019. If these biologicmonoclonal antibodies are successfully developed and approved for marketing, they could represent significant competition for XHANCE. Inaddition, there are new small molecules, including fevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibitspecific pathways of inflammation present in nasal polyps.Government RegulationWe are subject to extensive regulation by the FDA and other federal, state, and local regulatory agencies. The Federal Food, Drug and CosmeticAct (the FD&C Act) and FDA's implementing regulations set forth, among other things, requirements for the testing, development, manufacture,quality control, safety, effectiveness, approval, labeling, storage, record-keeping, reporting, distribution, import, export, advertising and promotionof our products and product candidates. Although the discussion below focuses on regulation in the U.S., because that is currently our primaryfocus, we anticipate seeking approval for, and marketing, our products in other countries in the future. Generally, our activities in other countrieswill be subject to regulation that is similar in nature and scope as that imposed in the U.S., although there can be important differences.Development and ApprovalUnder the FD&C Act, FDA approval of an NDA is required before any new drug can be marketed in the U.S. NDAs require extensive studies andsubmission of a large amount of data by the applicant.Preclinical Testing. Before testing any compound in human patients in the U.S., a company must generate extensive preclinical data. Preclinicaltesting generally includes laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological studies inseveral animal species to assess the quality and safety of the product. Certain animal studies must be performed in compliance with the FDA'sGood Laboratory Practice (GLP) regulations and the U.S. Department of Agriculture's Animal Welfare Act.IND Application. Human clinical trials in the U.S. cannot commence until an investigational new drug (IND) application is submitted and becomeseffective. A company must submit preclinical testing results to the FDA as part of the IND, and the FDA must evaluate whether there is anadequate basis for testing the drug in initial clinical studies in human volunteers. Unless the FDA raises concerns, the IND becomes effective30 days following its receipt by the FDA. Once human clinical trials have commenced, the FDA may stop a clinical trial by placing it on "clinicalhold" because of concerns about the safety of the product being tested, or for other reasons.Clinical Trials. Clinical trials involve the administration of a drug to healthy human volunteers or to patients, under the supervision of a qualifiedinvestigator. The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA's bioresearch monitoringregulations and Good Clinical Practice (GCP) requirements, which establish standards for conducting, recording data from, and reporting theresults of, clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, andwell-being of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters formonitoring safety, and the efficacy criteria, if any, to be evaluated. Each protocol is reviewed by the FDA as part of the IND. In addition, eachclinical trial must be reviewed and approved by, and conducted under the auspices of, an Institutional Review Board (IRB). Companies sponsoringthe clinical trials,30Table of Contentsinvestigators, and IRBs also must comply with, as applicable, regulations and guidelines for obtaining informed consent from the study patients,following the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting of AEs. Foreign studies conductedunder an IND must meet the same requirements that apply to studies being conducted in the U.S. Data from a foreign study not conducted underan IND may be submitted in support of an NDA if the study was conducted in accordance with GCP and the FDA is able to validate the data.A study sponsor is required to publicly post specified details about certain clinical trials and clinical trial results on government or independentwebsites (e.g., http://clinicaltrials.gov). Human clinical trials typically are conducted in three sequential phases, although the phases may overlapwith one another:▪Phase 1 clinical trials involve the initial administration of the investigational drug to humans, typically to a small group of healthy humanpatients, but occasionally to a group of patients with the targeted disease or disorder. Phase 1 clinical trials generally are intended todetermine the metabolism and pharmacologic actions of the drug, the side effects associated with increasing doses, and, if possible, togain early evidence of effectiveness.▪Phase 2 clinical trials generally are controlled studies that involve a relatively small sample of the intended patient population, and aredesigned to develop initial data regarding the product's effectiveness, to determine dose response and the optimal dose range, and togather additional information relating to safety and potential AEs.▪Phase 3 clinical trials are conducted after preliminary evidence of effectiveness has been obtained, and are intended to gather theadditional information about safety and effectiveness necessary to evaluate the drug's overall risk-benefit profile, and to provide a basis forphysician labeling. Generally, Phase 3 clinical development programs consist of expanded, large-scale studies of patients with the targetdisease or disorder to obtain statistical evidence of the efficacy and safety of the drug at the proposed dosing regimen.The sponsoring company, the FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that thepatients are being exposed to an unacceptable health risk. Further, success in early-stage clinical trials does not assure success in later-stageclinical trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay,limit or prevent regulatory approval.NDA Submission and Review. The FD&C Act provides two pathways for the approval of new drugs through an NDA. An NDA underSection 505(b)(1) of the FD&C Act is a comprehensive application to support approval of a product candidate that includes, among other things,data and information to demonstrate that the proposed drug is safe and effective for its proposed uses, that production methods are adequate toensure its identity, strength, quality, and purity of the drug, and that proposed labeling is appropriate and contains all necessary information. A505(b)(1) NDA contains results of the full set of preclinical studies and clinical trials conducted by or on behalf of the applicant to characterize andevaluate the product candidate.Section 505(b)(2) of the FD&C Act provides an alternate regulatory pathway to obtain FDA approval for new formulations or new uses of previouslyapproved drug products. Specifically, Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approvalcomes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may relyto some extent upon the FDA's findings of safety and effectiveness for an approved product that acts as the reference listed drug (RLD) andsubmit its own product-specific data — which may include data from preclinical studies or clinical trials conducted by or on behalf of theapplicant — to address differences between the product candidate and the RLD. We obtained FDA approval of XHANCE through theSection 505(b)(2) regulatory approval pathway, with Flonase and Flovent HFA as the RLDs. Flonase and Flovent HFA contain fluticasonepropionate, which is also used in XHANCE.The submission of an NDA under either Section 505(b)(1) or Section 505(b)(2) generally requires payment of a substantial user fee to the FDA. TheFDA reviews applications to determine, among other things, whether a product is safe and effective for its intended use and whether themanufacturing controls are adequate to assure and preserve the product's identity, strength, quality, and purity. For some NDAs, the FDA mayconvene an advisory committee to seek insights and recommendations on issues relevant to approval of the application. Although the FDA is notbound by the recommendation of an advisory committee, the agency usually has followed such recommendations.31Table of ContentsOur product and product candidates include products that combine drug and device components in a manner that the FDA considers to meet thedefinition of a "combination product" under FDA regulations. The FDA exercises significant discretion over the regulation of combination products,including the discretion to require separate marketing applications for the drug and device components in a combination product. For XHANCE,FDA's Center for Drug Evaluation and Research (CDER) had primary jurisdiction for review of the NDA, and both the drug and device werereviewed under one marketing application. However, for a drug-device combination product CDER typically consults with the Center for Devicesand Radiological Health in the NDA review process.The FDA may determine that a Risk Evaluation and Mitigation Strategy (REMS) is necessary to ensure that the benefits of a new productoutweigh its risks, and the product can therefore be approved. A REMS may include various elements, ranging from a medication guide or patientpackage insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of thedrug. Under the Pediatric Research Equity Act, certain applications for approval must also include an assessment, generally based on clinicalstudy data, of the safety and effectiveness of the subject drug in relevant pediatric populations. Before approving an NDA, the FDA will inspect thefacility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturingprocesses and facilities are in compliance with current Good Manufacturing Practice (cGMP) requirements and adequate to assure consistentproduction of the product within required specifications.Once the FDA accepts an NDA submission — which occurs, if at all, within 60 days after submission of the NDA — the FDA's goal for a non-priority review of an NDA is ten months. The review process can be and often is significantly extended, however, by FDA requests for additionalinformation, studies, or clarification. After review of an NDA, the FDA may decide to not approve the application or may issue a complete responseletter outlining the deficiencies in the submission. The complete response letter also may request additional information, including additionalpreclinical or clinical data. Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet thestandards for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor.Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number offactors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated inclinical trials. Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug orrequire post-approval commitments, including the completion within a specified time period of additional clinical studies, which often are referred toas "Phase 4" or "post-marketing" studies. For example, the FDA originally required us to conduct a randomized, double-blind, placebo controlled,parallel group clinical study in children and adolescents 6 to 17 years of age with bilateral nasal polyps associated with nasal congestion to assessthe safety, efficacy, pharmacokinetics, and pharmacodynamics of XHANCE in improving nasal polyp grade and symptoms (nasalcongestion/obstruction, sense of smell, rhinorrhea and facial pain or pressure). On October 30, 2017, the FDA notified us that in response to ourrequest it had modified the required age range to 12 to 17 years of age. We submitted our final protocol to the FDA with respect to the pediatricstudy by January 2018 as required, and we have since contracted with various clinical trial sites and begun patient enrollment. We are required tocomplete the study by January 2022 and submit a final report with respect to the study by July 2022.Post-approval modifications to the drug, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsorto develop additional data or conduct additional preclinical studies or clinical trials, to be submitted in a new or supplemental NDA, which wouldrequire FDA approval.Post-Approval RegulationOnce approved, products are subject to continuing regulation by the FDA. If ongoing regulatory requirements are not met or if safety problemsoccur after the product reaches the market, the FDA may at any time withdraw product approval or take actions that would limit or suspendmarketing. Additionally, the FDA may require post-marketing studies or clinical trials if there are new safety information developments.Good Manufacturing Practices. Companies engaged in manufacturing drug products or their components must comply with applicable cGMPrequirements and product-specific regulations enforced by the FDA and other regulatory agencies. Compliance with cGMP includes adhering torequirements relating to organization and training of personnel, buildings and facilities, equipment, control of components and drug productcontainers and closures, production and process controls, quality control and quality assurance, packaging and labeling controls, holding anddistribution, laboratory controls, and records and reports. The FDA regulates and inspects equipment, facilities, and processes used inmanufacturing pharmaceutical products prior to approval. If, after receiving approval, a company32Table of Contentsmakes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA), additionalregulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processesfollowing the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead theFDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal ofFDA approval, seizure or recall of products, and criminal prosecution. Although we periodically monitor the FDA compliance of our third-partymanufacturers, we cannot be certain that our present or future third-party manufacturers will consistently comply with cGMP and other applicableFDA regulatory requirements.It is also likely that we will need to comply with some of FDA's manufacturing regulations for devices. FDA has discretion in determining post-approval compliance requirements for products that combine a drug product with a delivery system device. In addition to cGMP, FDA may requirethat our drug-device combination product, if approved, comply with the Quality System Regulation (QSR), which sets forth the FDA'smanufacturing quality standards for medical devices.Advertising and Promotion. The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs through,among other things, standards and regulations for direct-to-consumer advertising, advertising and promotion to healthcare professionals,communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving theInternet. A product cannot be commercially promoted before it is approved. After approval, product promotion can include only those claimsrelating to safety and effectiveness that are consistent with the labeling approved by the FDA. Healthcare providers are permitted to prescribedrugs for "off-label" uses — that is, uses not approved by the FDA and not described in the product's labeling — because the FDA does notregulate the practice of medicine. However, FDA regulations impose restrictions on manufacturers' communications regarding off-label uses.Broadly speaking, a manufacturer may not promote a drug for off-label use, but under certain conditions may engage in non-promotional, balanced,scientific communication regarding off-label use. Failure to comply with applicable FDA requirements and restrictions in this area may subject acompany to adverse publicity and enforcement action by the FDA, the Department of Justice, or the Office of the Inspector General of theDepartment of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have asignificant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotesor distributes a drug.Other Requirements. NDA holders must comply with other regulatory requirements, including submitting annual reports, reporting informationabout adverse drug experiences, and maintaining certain records.Hatch-Waxman ActThe Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act) establishes two abbreviated approval pathways forpharmaceutical products that are in some way follow-on versions of already approved products.Generic Drugs. A generic version of an approved drug is approved by means of an ANDA, by which the sponsor demonstrates that the proposedproduct is the same as the approved, brand-name drug, which is referred to as the RLD. Generally, an ANDA must contain data and informationshowing that the proposed generic product and RLD (i) have the same active ingredient, in the same strength and dosage form, to be delivered viathe same route of administration, (ii) are intended for the same uses, and (iii) are bioequivalent. This is instead of independently demonstrating theproposed product's safety and effectiveness, which are inferred from the fact that the product is the same as the RLD, which the FDA previouslyfound to be safe and effective.505(b)(2) NDAs. As discussed above, if a product is similar, but not identical, to an already approved product, it may be submitted for approvalvia an NDA under section 505(b)(2) of the FD&C Act. Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposedproduct's safety and effectiveness. Rather, the sponsor is permitted to rely to some degree on the FDA's finding that the RLD is safe andeffective, and must submit its own product-specific data of safety and effectiveness to an extent necessary because of the differences betweenthe products. An NDA approved under 505(b)(2) may in turn serve as an RLD for subsequent applications from other sponsors.RLD Patents. In an NDA, a sponsor must identify patents that claim the drug substance or drug product or a method of using the drug. When thedrug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved Drug Products withTherapeutic Equivalence Evaluations, which is33Table of Contentsreferred to as the Orange Book. The sponsor of an ANDA or 505(b)(2) application seeking to rely on an approved product as the RLD must makeone of several certifications regarding each listed patent. A "Paragraph III" certification is the sponsor's statement that it will wait for the patent toexpire before obtaining approval for its product. A "Paragraph IV" certification is an assertion that the patent does not block approval of the laterproduct, either because the patent is invalid or unenforceable or because the patent, even if valid, is not infringed by the new product.Regulatory Exclusivities. The Hatch-Waxman Act provides periods of regulatory exclusivity for products that would serve as RLDs for an ANDAor 505(b)(2) application. If a product is a "new chemical entity," or NCE — generally meaning that the active moiety has never before beenapproved in any drug — there is a period of five years from the product's approval during which the FDA may not accept for filing any ANDA or505(b)(2) application for a drug with the same active moiety. An ANDA or 505(b)(2) application may be submitted after four years, however, if thesponsor of the application makes a Paragraph IV certification.A product that is not an NCE may qualify for a three-year period of exclusivity if the NDA contains new clinical data, derived from studiesconducted by or for the sponsor, that were necessary for approval. In that instance, the exclusivity period does not preclude filing or review of anANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years afterapproval of the RLD. Additionally, the exclusivity applies only to the conditions of approval that required submission of the clinical data.Once the FDA accepts for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days providenotice to the RLD NDA holder and patent owner that the application has been submitted, and provide the factual and legal basis for the applicant'sassertion that the patent is invalid or not infringed. If the NDA holder or patent owner files suit against the ANDA or 505(b)(2) applicant for patentinfringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the ANDA or 505(b)(2) application for aperiod of 30 months or the resolution of the underlying suit, whichever is earlier. If the RLD has NCE exclusivity and the notice is given and suitfiled during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval. The FDA may approve theproposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the court shortens the periodbecause the parties have failed to cooperate in expediting the litigation.Patent Term Restoration. A portion of the patent term lost during product development and FDA review of an NDA is restored if approval of theapplication is the first permitted commercial marketing of a drug containing the active ingredient. The patent term restoration period is generallyone-half the time between the effective date of the IND or the date of patent grant (whichever is later) and the date of submission of the NDA, plusthe time between the date of submission of the NDA and the date of FDA approval of the product. The maximum period of restoration is five years,and the patent cannot be extended to more than 14 years from the date of FDA approval of the product. Only one patent claiming each approvedproduct is eligible for restoration and the patent holder must apply for restoration within 60 days of approval. The U.S. Patent and Trademark Office(PTO) in consultation with the FDA, reviews and approves the application for patent term restoration. When any of our products is approved, weintend to seek patent term restoration for an applicable patent when it is appropriate.Other ExclusivitiesPediatric Exclusivity. Section 505A of the FD&C Act provides for six months of additional exclusivity or patent protection if an NDA sponsorsubmits pediatric data that fairly respond to a written request from the FDA for such data. The data does not need to show that the product iseffective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA's request, the additional protection isgranted. If reports of requested pediatric studies are submitted to and accepted by FDA within the statutory time limits, whatever statutory orregulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months. This is not a patent termextension, but it effectively extends the regulatory period during which the FDA cannot approve an ANDA or 505(b)(2) application owing toregulatory exclusivity or listed patents. When any product is approved, we will evaluate seeking pediatric exclusivity as appropriate.Orphan Drug Exclusivity. The Orphan Drug Act provides incentives for the development of drugs intended to treat rare diseases or conditions,which generally are diseases or conditions affecting less than 200,000 individuals in the U.S. If a sponsor demonstrates that a drug is intended totreat a rare disease or condition, the FDA grants orphan drug designation to the product for that use. The benefits of orphan drug designationinclude research and development tax credits and exemption from user fees. A drug that is approved for the orphan drug designated indicationgenerally is granted seven years of orphan drug exclusivity. During that period, the FDA generally may not34Table of Contentsapprove any other application for the same product for the same indication, although there are exceptions, most notably when the later product isshown to be clinically superior to the product with exclusivity.U.S. Healthcare ReformThe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, which we refer totogether as the Affordable Care Act, is a sweeping measure intended to expand healthcare coverage within the U.S., primarily through theimposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. This law substantially changed theway healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. Changes that mayaffect our business include those governing enrollment in federal healthcare programs, reimbursement changes, benefits for patients within acoverage gap in the Medicare Part D prescription drug program (commonly known as the "donut hole"), rules regarding prescription drug benefitsunder the health insurance exchanges, changes to the Medicaid Drug Rebate program, expansion of the Public Health Service's 340B drug pricingdiscount program (340B program), fraud and abuse, and enforcement. These changes impact existing government healthcare programs and haveresulted in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician qualityreporting system and feedback program. Details of the changes to the Medicaid Drug Rebate program and the 340B program are discussed underthe risk factor "If we are able to successfully commercialize XHANCE and if we participate in but fail to comply with our reporting and paymentobligations under the Medicaid drug rebate program, or other governmental pricing programs, we could be subject to additional reimbursementrequirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operationsand growth prospects" in the "Risk Factors" section of this 10-K.Some states have elected not to expand their Medicaid programs to individuals with an income of up to 133% of the federal poverty level, as ispermitted under the Affordable Care Act. For each state that does not choose to expand its Medicaid program, there may be fewer insured patientsoverall, which could impact our sales of products and product candidates for which we receive regulatory approval, and our business and financialcondition. Where new patients receive insurance coverage under any of the new Medicaid options made available through the Affordable Care Act,the possibility exists that manufacturers may be required to pay Medicaid rebates on drugs used under these circumstances, a decision that couldimpact manufacturer revenues.Some of the provisions of the Affordable Care Act have yet to be fully implemented, and certain provisions have been subject to judicial andCongressional challenges. In addition, there have been efforts by the Trump Administration to repeal or replace certain aspects of the AffordableCare Act and to alter the implementation of the Affordable Care Act and related laws. For example, on December 22, 2017, the U.S. governmentsigned into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act), which includes a provision repealing,effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail tomaintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Further, the Bipartisan BudgetAct of 2018, among other things, amended the Medicare statute to reduce the coverage gap in most Medicare drugs plans, commonly known asthe “donut hole,” by raising the required manufacturer point-of-sale discount from 50% to 70% off the negotiated price effective as of January 1,2019. Additional legislative changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible. It is unclearhow the Affordable Care Act and its implementation, as well as efforts to repeal or replace, or invalidate, the Affordable Care Act, or portionsthereof, will affect our business, financial condition and results of operations. It is possible that the Affordable Care Act, as currently enacted or asit may be amended or replaced in the future, and other healthcare reform measures that may be adopted in the future, could have a materialadverse effect on our industry generally and on our ability to maintain or increase sales of our products or product candidates for which we receiveregulatory approval or to successfully commercialize our products and product candidates.U.S. Tax ReformOn December 22, 2017, the U.S. enacted major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act(2017 Tax Act). The 2017 Tax Act imposes a repatriation tax on accumulated earnings of foreign subsidiaries, implements a territorial tax systemtogether with a current tax on certain foreign earnings and lowers the general corporate income tax rate to 21%.35Table of ContentsCoverage and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of our products and any product candidates for which we may obtainregulatory approval. Sales of any of our products and product candidates, if approved, will depend, in part, on the extent to which the costs of theproducts will be covered by third-party payors, including government healthcare programs such as Medicare and Medicaid, and private payors,such as commercial health insurers and managed care organizations. Third-party payors determine which drugs they will cover and the amount ofreimbursement they will provide for a covered drug. In the U.S., there is no uniform system among payors for making coverage and reimbursementdecisions. In addition, the process for determining whether a payor will provide coverage for a product may be separate from the process forsetting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage tospecific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication.In order to secure coverage and reimbursement for our products we may need to conduct expensive pharmacoeconomic studies in order todemonstrate the medical necessity and cost-effectiveness of the product, in addition to the costly studies required to obtain FDA or othercomparable regulatory approvals. Even if we conduct pharmacoeconomic studies, our products and product candidates may not be consideredmedically necessary or cost-effective by payors. Further, a payor's decision to provide coverage for a product does not imply that an adequatereimbursement rate will be approved.In the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as thebasis for reimbursement rates, such as average sales price (ASP), average manufacturer price (AMP), and actual acquisition cost. The existingdata for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for thepurpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services (CMS) surveys and publishes retail pharmacyacquisition cost information in the form of National Average Drug Acquisition Cost files to provide state Medicaid agencies with a basis ofcomparison for their own reimbursement and pricing methodologies and rates.Participation in the Medicaid Drug Rebate program requires us to pay a rebate for each unit of drug reimbursed by Medicaid. The amount of the"basic" portion of the rebate for each product is set by law as the larger of: (i) 23.1% of quarterly AMP, or (ii) the difference between quarterly AMPand the quarterly best price available from us to any commercial or non-governmental customer (Best Price). AMP must be reported on a monthlyand quarterly basis and Best Price is reported on a quarterly basis only. In addition, the rebate also includes the "additional" portion, which adjuststhe overall rebate amount upward as an "inflation penalty" when the drug's latest quarter's AMP exceeds the drug's AMP from the first full quarterof sales after launch, adjusted for increases in the Consumer Price Index-Urban. The upward adjustment in the rebate amount per unit is equal tothe excess amount of the current AMP over the inflation-adjusted AMP from the first full quarter of sales. The rebate amount is recomputed eachquarter based on our report to CMS of current quarterly AMP and Best Price for our drug. The terms of our participation in the program wouldimpose a requirement for us to report revisions to AMP or Best Price within a period not to exceed 12 quarters from the quarter in which the datawas originally due. Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on thedirection of the revision.Federal law requires that any manufacturer that participates in the Medicaid Drug Rebate program also participate in the 340B program in order forfederal funds to be available for the manufacturer's drugs under Medicaid and Medicare Part B. The 340B program, which is administered by theHealth Resource and Services Administration (HRSA) requires participating manufacturers to agree to charge statutorily defined covered entitiesno more than the 340B "ceiling price" for the manufacturer's covered outpatient drugs. These 340B covered entities include a variety of communityhealth clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve adisproportionate share of low-income patients. The 340B ceiling price is calculated using a statutory formula, which is based on the AMP andrebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. Any changes to the definition of AMP andthe Medicaid rebate amount under the Affordable Care Act or other legislation could affect our 340B ceiling price calculations and negativelyimpact our results of operations. HRSA issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civilmonetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. Itis currently unclear how HRSA will apply its enforcement authority under the new regulation. HRSA also is implementing a ceiling price reportingrequirement related to the 340B program during the first quarter of 2019 under which we will be required to report36Table of Contents340B ceiling prices to HRSA on a quarterly basis. In addition, legislation may be introduced that, if passed, would further expand the 340B programto additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatientsetting.Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information each quarter to CMS forcertain categories of drugs that are paid under the Medicare Part B program. Manufacturers calculate the average sales price based on astatutorily defined formula as well as regulations and interpretations of the statute by CMS. CMS uses these submissions to determine paymentrates for drugs under Medicare Part B.In the U.S. Medicare program, outpatient prescription drugs may be covered under Medicare Part D. Medicare Part D is a voluntary prescriptiondrug benefit, through which Medicare beneficiaries may enroll in prescription drug plans offered by private entities for coverage of outpatientprescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement toMedicare Advantage plans provided for under Medicare Part C.Coverage and reimbursement for covered outpatient drugs under Part D are not standardized. Part D prescription drug plan sponsors are notrequired to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and atwhat tier or level. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeuticcommittee. Although Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs,they have some flexibility to establish those categories and classes and are not required to cover all of the drugs in each category or class.Medicare Part D prescription drug plans may use formularies to limit the number of drugs that will be covered in any therapeutic class and/orimpose differential cost sharing or other utilization management techniques.The availability of coverage under Medicare Part D may increase demand for our products and any product candidates for which we receivemarketing approval. However, in order for the products that we market to be included on the formularies of Part D prescription drug plans, we likelywill have to offer pricing that is lower than the prices we might otherwise obtain. Changes to Medicare Part D that give plans more freedom to limitcoverage or manage utilization, and other cost reduction initiatives in the program could decrease the coverage and price that we receive for anyapproved products and could harm our business.In order to be eligible to have our products or any future products paid for with federal funds under the Medicaid and Medicare Part B programs, asapplicable, and purchased by certain federal agencies and grantees, we also participate in the U.S. Department of Veterans Affairs (VA) FederalSupply Schedule (FSS) pricing program. Under this program, we are obligated to make our "innovator" drugs available for procurement on an FSScontract and charge a price to four federal agencies — the VA, U.S. Department of Defense (DoD) Public Health Service and U.S. Coast Guard —that is no higher than the statutory Federal Ceiling Price (FCP). The FCP is based on the non-federal average manufacturer price (Non-FAMP),which we calculate and report to the VA on a quarterly and annual basis. We also participate in the Tricare Retail Pharmacy program, under whichwe pay quarterly rebates on utilization of innovator products that are dispensed through the Tricare Retail Pharmacy network to Tricarebeneficiaries. The rebates are calculated as the difference between the annual Non-FAMP and FCP.Pricing and rebate calculations vary across products and programs, are complex, and are often subject to interpretation by manufacturers,governmental or regulatory agencies, and the courts. Significant civil monetary penalties can be applied if a manufacturer is found to haveknowingly submitted any false price information to the government or fails to submit the required price data on a timely basis. Such conduct alsocould be grounds for CMS to terminate the manufacturer's Medicaid drug rebate agreement, in which case federal payments may not be availableunder Medicaid or Medicare Part B for the manufacturer's covered outpatient drugs. Civil monetary penalties could also be applied if we are foundto have charged 340B covered entities more than the statutorily mandated ceiling price. In addition, claims submitted to federally-fundedhealthcare programs, such as Medicare and Medicaid, for drugs priced based on incorrect pricing data provided by a manufacturer can implicatethe False Claims Act.The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus inthis effort. The U.S. government, state legislatures, and foreign governments have shown significant interest in implementing cost-containmentprograms to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement, and requirements forsubstitution of generic products for branded prescription drugs. For example, there have been several recent U.S. Congressional inquiries andproposed federal and state legislation designed to, among other things, bring more transparency to37Table of Contentsdrug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs, and reform government programreimbursement methodologies for drug products.Beginning April 1, 2013, Medicare payments for all items and services, including drugs, were reduced by 2% under the sequestration(i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012.Subsequent legislation extended the 2% reduction, on average, to 2027. If Congress does not take action in the future to modify thesesequestrations, Medicare Part D plans could seek to reduce their negotiated prices for drugs. Other legislative or regulatory cost containmentlegislation could have a similar effect.Further, the Affordable Care Act may reduce the profitability of drug products. It expanded manufacturers' rebate liability under the Medicaidprogram from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, increased the minimumMedicaid rebate due for most innovator drugs, and capped the total rebate amount at 100% of AMP. The Affordable Care Act and subsequentlegislation also changed the definition of AMP. On February 1, 2016, CMS issued final regulations to implement the changes to the Medicaid drugrebate program under the Affordable Care Act. These regulations became effective on April 1, 2016.The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federalgovernment. Each such manufacturer pays a prorated share of the branded prescription drug fee of $2.8 billion in 2019, based on the dollar valueof its branded prescription drug sales to certain federal programs identified in the law. The Affordable Care Act also expanded the Public HealthService's 340B program to include additional types of covered entities. Substantial new provisions affecting compliance have also been enacted,which may affect our business practices with healthcare practitioners. It appears likely that the Affordable Care Act will continue the pressure onpharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.Additional legislative changes, regulatory changes and judicial challenges related to the Affordable Care Act remain possible, as discussed aboveunder the heading "U.S. Healthcare Reform." In addition, there likely will continue to be proposals by legislators at both the federal and statelevels, regulators, and third-party payors to contain healthcare costs. Thus, even if we obtain favorable coverage and reimbursement status for ourproducts and any product candidates for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may beimplemented in the future.Additional information regarding these programs is discussed under the risk factor "If we are able to successfully commercialize XHANCE and ifwe participate in but fail to comply with our reporting and payment obligations under the Medicaid drug rebate program, or other governmentalpricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a materialadverse effect on our business, financial condition, results of operations and growth prospects" in the "Risk Factors" section of this 10-K.Healthcare Fraud and Abuse LawsIn addition to FDA restrictions on marketing of pharmaceutical products, our business is subject to healthcare fraud and abuse regulation andenforcement by both the federal government and the states in which we conduct our business. These laws include, but are not limited to, thefollowing:•The federal Anti-kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receivingremuneration, directly or indirectly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for orrecommending the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaidor other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceuticalmanufacturers on one hand and prescribers, purchasers, and formulary managers on the other. A violation of the Anti-Kickback Statutemay be established without proving actual knowledge of the statute or specific intent to violate it. The government may assert that a claimincluding items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim forpurposes of the federal civil False Claims Act. Although there are a number of statutory exceptions and regulatory safe harbors protectingcertain common activities from prosecution, the exceptions and safe harbors are drawn narrowly and practices that involve remunerationto those who prescribe, purchase, or recommend pharmaceuticals, including certain discounts, or engaging such individuals asconsultants, speakers or advisors, may be subject to scrutiny if they do not fit squarely within the exception or safe harbor. Our practicesmay not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Moreover, there are no safe harbors formany common practices, such as educational and38Table of Contentsresearch grants, charitable donations, product support and patient assistance programs. Arrangements that implicate the Anti-KickbackStatute and do not fit within an exception or safe harbor are reviewed on a case-by-case basis to determine whether, based on the factsand circumstances, they violate the statute.•The federal civil False Claims Act prohibits any person from, among other things, knowingly presenting, or causing to be presented, afalse or fraudulent claim for payment of government funds, or knowingly making, using, or causing to be made or used, a false record orstatement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding,decreasing, or concealing an obligation to pay money to the federal government. Actions under the False Claims Act may be brought byprivate individuals known as qui tam relators in the name of the government. In recent years, several pharmaceutical and other healthcarecompanies have faced enforcement actions under the False Claims Act for, among other things, providing free product to customers withthe expectation that the customers would bill federal programs for the product, and other interactions with prescribers and other customersincluding interactions that may have affected customers' billing or coding practices on claims submitted to the federal government. Othercompanies have faced enforcement actions for causing false claims to be submitted because of the company's marketing the product forunapproved, and thus non-reimbursable, uses. Federal enforcement agencies also have shown increased interest in pharmaceuticalcompanies' product and patient assistance programs, including reimbursement and co-pay support services, and a number ofinvestigations into these programs have resulted in significant civil and criminal settlements.•The Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic andClinical Health Act, which we refer to collectively as HIPAA, prohibits, among other things, knowingly and willfully executing a scheme todefraud any healthcare benefit program, including private third-party payors. HIPAA also prohibits knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making orusing any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry inconnection with the delivery of or payment for healthcare benefits, items or services. We may obtain health information from third partiesthat are subject to privacy and security requirements under HIPAA and we could potentially be subject to criminal penalties if we, ouraffiliates, or our agents knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in amanner that is not authorized or permitted by HIPAA.•The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to itemsand services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states nowrequire pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those statesand to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. Other states have laws requiringpharmaceutical sales representatives to be registered or licensed, and still others impose limits on co-pay assistance that pharmaceuticalcompanies can offer to patients. In addition, several states require pharmaceutical companies to implement compliance programs ormarketing codes.•The Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing regulations, requiresmanufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children'sHealth Insurance Program (with certain exceptions) to report annually to CMS information related to direct or indirect payments and othertransfers of value to physicians and teaching hospitals, as well as ownership and investment interests held in the company by physiciansand their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regardingpayments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurseanesthetists and certified nurse-midwives.Compliance with such laws and regulations will require substantial resources. Because of the breadth of these various fraud and abuse laws, it ispossible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have materialadverse effects on our business, financial condition and results of operations. In the event governmental authorities conclude that our businesspractices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws andregulations, they may impose sanctions under these laws, which are potentially significant and may include civil monetary penalties, damages,exclusion of an entity or individual from participation in government health care programs, criminal fines and imprisonment, additional reportingrequirements if we become subject to a corporate39Table of Contentsintegrity agreement or other settlement to resolve allegations of violations of these laws, as well as the potential curtailment or restructuring of ouroperations. Even if we are not determined to have violated these laws, government investigations into these issues typically require theexpenditure of significant resources and generate negative publicity.Healthcare Privacy LawsWe may be subject to laws and regulations covering data privacy and the protection of health-related and other personal information. Thelegislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus on privacy anddata protection issues which may affect our business. Numerous federal and state laws and regulations, including state security breachnotification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure, andprotection of personal information. Failure to comply with such laws and regulations could result in government enforcement actions and createliability for us (including the imposition of significant penalties), private litigation and/or adverse publicity that could negatively affect our business.In addition, healthcare providers who prescribe our products and research institutions we collaborate with are subject to privacy and securityrequirements under HIPAA.Foreign Corrupt Practices ActIn addition, the U.S. Foreign Corrupt Practices Act prohibits corporations and individuals from engaging in certain activities to obtain or retainbusiness or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value toany official of another country, government staff member, political party or political candidate in an attempt to obtain or retain business or tootherwise influence a person working in that capacity.EmployeesAs of March 1, 2019, we had a total of 102 full-time employees and three part-time employees. The majority of our employees are located in theU.S., with the exception of three employees located in United Kingdom and two employees located in Norway. We have no collective bargainingagreements with our employees and none are represented by labor unions. We consider our current relations with our employees to be good.PropertiesOur principal office is located in Yardley, Pennsylvania, where we lease approximately 30,000 square feet of office space pursuant to a lease thatexpires in May 2021. We also lease facilities in Ewing, New Jersey, Oslo, Norway and Swindon, England. We believe our facilities are adequate tomeet our current needs, although we may seek to negotiate new leases or evaluate additional or alternate space for our operations. We believeappropriate alternative space will be readily available on commercially reasonable terms.Legal ProceedingsWe are not currently a party to any legal proceedings.Corporate InformationWe were incorporated under the laws of the State of Delaware in May 2010. Our predecessor entity OptiNose AS was formed under the laws ofNorway in September 2000. In 2010, OptiNose AS became our subsidiary as part of an internal reorganization. Our corporate office is located at1020 Stony Hill Road, Suite 300, Yardley, PA 19067. Our telephone number is (267) 364-3500. We maintain an Internet website atwww.optinose.com. The information contained on our website is not incorporated by reference into this Form 10-K.We make available free of charge under the “Investors—SEC Filings” section of our website all of our filings with the SEC, including our annualreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to such documents, eachof which is provided on our website as soon as reasonably practicable after we electronically file the information with the SEC.ITEM 1A. RISK FACTORSInvesting in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should consider carefully therisks and uncertainties described below, together with general economic and business risks and all of the other information contained in this 10-K,including our consolidated financial statements and the40Table of Contentsrelated notes and the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." If any of thefollowing risks actually occur, our business, financial condition, results of operations and prospects could be harmed. In that event, the price of ourcommon stock could decline and you could lose all or part of your investment. This 10-K also contains forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specificfactors, including the risks described below. See "Note Regarding Forward-Looking Statements."Risks Related to Our Financial Position and Capital ResourcesWe have incurred significant losses since our inception and anticipate that we will incur continued losses in the future.We are a specialty pharmaceutical company with a limited operating history. To date, we have focused primarily on developing XHANCE as wellas other product candidates using our proprietary exhalation delivery system (EDS) technology. Since inception, we have incurred significant netlosses and expect to continue to incur net losses for the foreseeable future. To date, we have generated revenue from sales of XHANCE since itslaunch in 2018 and from our license agreement (the AVP-825 License Agreement) with Avanir Pharmaceuticals, Inc. (Avanir), pursuant to whichwe granted them the exclusive right to further develop and commercialize AVP-825 for the acute treatment of migraines in adults. We incurred netlosses of $106.7 million and $48.9 million for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had anaccumulated deficit of $317.9 million.We expect to incur losses for the foreseeable future as we:▪continue to commercialize XHANCE and further scale up external manufacturing and distribution capabilities to commercialize XHANCE orany other product candidate for which we may obtain regulatory approval;▪continue to focus our regulatory compliance efforts on requirements applicable to marketed drugs;▪continue clinical development activities for XHANCE, including the U.S. Food and Drug Administration (FDA) mandated pediatric studies,and a Phase 3b clinical trial in pursuit of a follow-on indication for the treatment of chronic sinusitis;▪seek to discover and develop, in-license or acquire additional products, product candidates and technology;▪maintain, expand and protect our intellectual property portfolio;▪hire additional commercial, clinical, manufacturing and scientific personnel;▪add operational, financial and management information systems and personnel, including personnel to support commercialization efforts;and▪incur additional legal, accounting and other expenses in operating as a publicly traded commercial-stage company.Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to accurately predictthe timing or amount of expenses or when, or if, we will be able to achieve profitability. If we are required by regulatory authorities to performstudies in addition to those expected, or if there are any delays in the initiation and completion of our clinical trials or the development of any of ourproduct candidates, our expenses could increase.We may never achieve or maintain profitability.Our ability to become and remain profitable will depend on our ability to generate revenue. Our ability to generate revenue depends upon our abilityto successfully commercialize XHANCE and any of our other product candidates or any other product candidates, if approved, that we may in-license or acquire in the future, as well as from our ability to successfully out-license any of our products or technology. Our ability to generaterevenue from our current or future products and product candidates will depend on a number of factors, including:▪our ability to successfully commercialize XHANCE for the treatment of nasal polyps;▪our ability to successfully complete required clinical trials and submit a supplemental new drug application to the FDA and obtainregulatory approval for XHANCE for the treatment of chronic sinusitis;41Table of Contents▪our ability to complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities, if we choose tocommercialize XHANCE outside the U.S.;▪the size of the markets in the territories for which we gain regulatory approval;▪the performance of our contract sales organization, and once onboarded our internal sales team, in marketing and promoting XHANCE;▪our ability to maintain and further develop a commercial organization capable of sales, marketing and distribution for XHANCE and any ofour other product candidates for which we may obtain marketing approval;▪our ability to maintain commercially reasonable agreements with wholesalers, distributors and other third parties in our supply chain;▪our success in establishing a commercially viable price for our products;▪our success in defending against potential generic competition and other developments in our market generally;▪our ability to manufacture commercial quantities of our products at acceptable cost levels;▪our ability to obtain coverage and adequate reimbursement from third parties, including government payors;▪our ability to commercialize and/or find a partner to commercialize AVP-825; and▪our ability to successfully complete development activities, including the necessary clinical trials, with respect to our other productcandidates.XHANCE, as well as any of our other product candidates, if approved for commercial sale, may not gain market acceptance or achievecommercial success. If our addressable market is not as significant as we estimate or the treatment population is narrowed by competition,physician choice or clinical practice guidelines, we may not generate significant revenue from sales of XHANCE. In addition, we would anticipateincurring significant costs associated with commercializing any approved product. We may not achieve profitability soon after generating productsales, if ever. If we are unable to generate enough product revenues to cover our operating expenses and prior losses, we will not becomeprofitable and may be unable to continue operations without continued funding.Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become andremain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain ourdevelopment efforts, obtain drug approvals, diversify our offerings or continue our operations. A decline in the value of our company could alsocause you to lose all or part of your investment.We will likely require additional capital to fund our operations and, if we fail to obtain necessary financing, we may be unable tocontinue the commercialization of XHANCE and the development of our other product candidates.Our operations have consumed substantial amounts of cash. To date, we have financed our operations primarily through the sale and issuance ofcommon and preferred stock, debt, licensing revenues, 2018 XHANCE revenue and research grants. We expect to continue to spend substantialamounts to commercialize XHANCE and to advance the clinical development of XHANCE for the treatment of chronic sinusitis and our otherproduct candidates. As of December 31, 2018, we had cash and cash equivalents of $201.0 million. Although it is difficult to predict our futureliquidity requirements, we believe that existing cash and cash equivalents at December 31, 2018 will be sufficient to meet our debt serviceobligations under our Notes, and to carry out our planned development and commercial activities into the fourth quarter of 2020. Our estimate ofthe period of time through which our financial resources will be adequate to support our operations is based on assumptions that may prove to bewrong, and we could deplete our available capital resources sooner than we currently expect.Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:▪the success of our commercialization of XHANCE for the treatment of nasal polyps including, among other things, patient and physicianacceptance of XHANCE and our ability to obtain adequate insurance coverage and reimbursement for XHANCE;42Table of Contents▪the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales;▪net product revenues received from sales of XHANCE;▪the costs and timing of internalizing and expanding our sales force;▪the level of co-pay assistance and other patient affordability programs offered for XHANCE;▪our clinical development plans for XHANCE, including FDA-mandated pediatric studies and clinical trials for the supplemental indication forthe 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 forthe 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, maintaining and enforcing our intellectual property rights;▪the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;▪fluctuations in the three-month LIBOR-based floating interest rate of our Notes;▪the initiation, progress, timing, costs and results of clinical trials and other research and development related to additional productcandidates; and▪the extent to which we in-license, acquire or otherwise partner in development of other products, product candidates or technologies.We cannot be certain that additional funding will be available when needed on acceptable terms, or at all. If we are unable to raise additional capitalin sufficient amounts, when required or on acceptable terms, we also could be required to:▪seek strategic collaborations to assist in the commercialization of XHANCE in the U.S. and other markets;▪significantly delay, scale back or discontinue the development of XHANCE for the treatment of chronic sinusitis;▪relinquish or license on unfavorable terms our rights to our EDS devices and technologies or other product candidates that we otherwisewould seek to develop or commercialize ourselves;▪delay, limit, reduce or terminate the drug development of our current or future product candidates, or seek collaborators for one or more ofour current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable thanmight otherwise be available; or▪significantly curtail our operations.Although we may have the ability to obtain an additional $25.0 million through the issuance of additional senior secured notes pursuant to the NotePurchase Agreement, the availability of this $25.0 million is subject to certain conditions that we may not be able to meet.Our failure to comply with the covenants or other terms of the Note Purchase Agreement, including as a result of events beyond ourcontrol, could result in a default under the Note Purchase Agreement that could materially and adversely affect the ongoing viability ofour business.On December 29, 2017, we entered into a Note Purchase Agreement with Athyrium Opportunities III Acquisition LP, as collateral agent (theCollateral Agent) and the purchasers party thereto (the Purchasers) that provides for the issuance of up to $100.0 million of senior secured notes(the Notes). $75.0 million of the Notes were issued on December 29, 2017, of which $50.0 million were issued by OptiNose AS and $25.0 millionwere issued by OptiNose US, Inc. (the Issuers.) The remaining $25.0 million of Notes (the Delayed Draw Notes) may be issued by OptiNose US,Inc. and sold to the Purchasers between April 1, 2019 and August 14, 2019, subject to us and our consolidated subsidiaries achieving trailing fourquarter net revenues (as calculated pursuant to the terms of the Note Purchase Agreement) of $15.0 million, a pro forma ratio of total debt totrailing four quarter net revenues not exceeding 6.50 to 1.00 and other specified conditions.43Table of ContentsThe unpaid principal amount under the Notes is due and payable on June 29, 2023 (the Maturity Date). The proceeds of the Notes were used toprovide ongoing working capital to support the launch and commercialization of XHANCE, as well as for general corporate purposes. The Notesbear interest at a per annum rate of three-month LIBOR rate (subject to a 1.0% floor) plus 9.0%. The interest rate was 11.8125% at December 31,2018. The Issuers are required to make quarterly interest-only payments until the Maturity Date. In addition, the Issuers paid an upfront fee of 1%of the aggregate commitment amount of the Notes on December 29, 2017. We are also required to pay an exit fee of 2% of any principal payments(whether mandatory, voluntary or at maturity) made throughout the term of the Note Purchase Agreement.In addition, each Note holder may elect to accelerate the repayment of all unpaid principal and accrued interest under such holder’s Note uponconsummation of a specified change of control transaction or occurrence of certain events of default (as specified in the Note PurchaseAgreement), including, among other things:•our default in a payment obligation under the Notes;•our breach of the restrictive covenants or other terms of the Notes;•our breach of reporting obligations;•our failure to properly maintain the collateral; and•certain specified insolvency and bankruptcy-related events.Subject to any applicable cure period set forth in the Notes, all amounts outstanding with respect to the Notes (principal and accrued interest)would become due and payable immediately upon an event of default. Our assets or cash flow may not be sufficient to fully repay our obligationsunder the Notes if the obligations thereunder are accelerated upon any events of default. Further, if we are unable to repay, refinance or restructureour obligations under the Notes, the holders of such Notes could proceed to protect and enforce their rights under the Notes by exercising suchremedies as are available to the holders thereunder and in respect thereof under applicable law, either by suit in equity or by action at law, or both,whether for specific performance of any covenant or other agreement contained in the Notes or in aid of the exercise of any power granted in theNotes. The foregoing would materially and adversely affect the ongoing viability of our business.Our Note Purchase Agreement contains restrictions that limit our flexibility in operating our business.The Note Purchase Agreement contains various covenants that limit our ability to engage in specified types of transactions without our lenders’prior consent. These covenants limit our ability to, among other things:•sell, transfer, lease or dispose of our assets;•create, incur or assume additional indebtedness;•encumber or permit liens on certain of our assets;•make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our common stock;•make specified investments (including loans and advances);•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;•enter into certain transactions with our affiliates;•grant certain license rights related to our products, technology and other intellectual property rights; and•permit our cash and cash equivalents held in certain deposit accounts to be less than $10,000,000 at any time.The covenants in our Note Purchase Agreement and related security agreements may limit our ability to take certain actions that may be in ourlong-term best interests. In the event that we breach one or more covenants, our lenders may choose to declare an event of default and requirethat we immediately repay all amounts outstanding, plus penalties and interest, terminate their commitments to extend further credit and forecloseon the collateral granted to them to secure such indebtedness. Such repayment could have a material adverse effect on our business, operatingresults and financial condition.44Table of ContentsProvisions of the Notes for certain potential payments to the holders of such Notes that could impede a sale of the Company.Subject to certain exceptions, the Issuers are required to make mandatory prepayments of the Notes, with the proceeds of assets sales,extraordinary receipts and prohibited debt issuances, and upon the occurrence of a change of control. In addition, the Issuers may make voluntaryprepayments of the Notes, in whole or in part. All mandatory and voluntary prepayments of the Notes are subject to the payment of prepaymentpremiums as follows: (i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal to the amountby which (a) the present value of 102% of the principal prepaid plus all interest that would have accrued on such principal through such secondanniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date ofissuance but prior to the third anniversary of such issuance, an amount equal to 2% of the principal prepaid, and (iii) if prepayment occurs on orafter the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 1% of theprincipal prepaid. No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance of anyNotes. These provisions may make it more costly for a potential acquirer to engage in a business combination transaction with us. Provisions thathave the effect of discouraging, delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium fortheir shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights toour technologies or product candidates.We do not have any committed external source of funds other than the additional $25.0 million that may become available under the NotePurchase Agreement between April 1, 2019 and August 14, 2019, subject to us and our consolidated subsidiaries achieving trailing four quarter netrevenues (as calculated pursuant to the terms of the Note Purchase Agreement) of $15.0 million, a pro forma ratio of total debt to trailing fourquarter net revenues not exceeding 6.50 to 1.00 and other specified conditions. Until such time, if ever, as we can generate substantial revenue,we may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances andlicensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownershipinterest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debtfinancings may be coupled with an equity component, such as warrants to purchase shares, which could also result in dilution of our existingstockholders' ownership. The incurrence of additional indebtedness would result in increased fixed payment obligations and could also result incertain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectualproperty rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens being placedon our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and intellectual property.If we raise additional funds through collaborations, or strategic alliance, marketing, distribution or licensing arrangements with third parties, we mayhave to relinquish valuable rights to our technologies, product candidates or future revenue streams or grant licenses on terms that are notfavorable to us.Our ability to use our net operating loss carry forwards and other tax attributes may be limited.As of December 31, 2018, we had U.S. federal net operating loss (NOL) carry forwards of approximately $86.6 million available to offset futureU.S. taxable income and U.S. federal research and development (R&D) tax credits of $2.4 million. While some of our federal NOL carry forwardswill carry forward indefinitely, some of our U.S. NOL and credit carry forwards will expire if not utilized with the first expiration occurring in2030. We also have state NOL carry forwards of $57.0 million as of December 31, 2018. These state NOL carry forwards can only offset income inthe same state in which they were generated and thus may not be utilized. The carry forward period varies among the states, with the firstexpiration in 2028, and some may expire unutilized. In addition, our Norwegian and UK subsidiaries have total foreign NOL carry forwards of $50.5million as of December 31, 2018. These foreign NOL carry forwards do not expire but can only be used to offset profits generated in Norway or theUnited Kingdom, respectively, and may be limited in use based on the laws of those countries.Our U.S. NOL and tax credit carry forwards could expire unused and be unavailable to offset future income tax liabilities because of their limitedduration or because of the restrictions under U.S. tax law. Under Sections 382 and 383, if a corporation undergoes an “ownership change”,generally defined as a greater than 50% change, by value, in equity ownership during a three-year period, the corporation’s ability to offset pre-change tax attributes, such as45Table of ContentsNOLs and R&D tax credits, against post-change income or tax may be limited. We have not performed an analysis under Section 382 and cannotpredict or otherwise determine whether utilization of our federal tax attribute carry forwards may be limited. As a result, if we have taxable incomein the future, our ability to use existing U.S. NOL and R&D tax credit carry forwards to reduce U.S. taxable income or tax liability may be subjectto limitation resulting in increased future tax liabilities. Similar rules at the state level may also limit our ability to use state NOLs. Also, there maybe periods when the use of NOLs is suspended or otherwise limited at the state level, which could accelerate or permanently increase state taxesowed.We may have ownership changes in the future due to additional changes in our stock ownership which could be outside of our control. If anownership change occurs and our ability to use our historical net operating loss and tax credit carry forwards is limited, it could adversely impactour future operating results by increasing our tax obligations.The termination of the AVP-825 License Agreement may generate additional expenses for us.On December 10, 2018, we received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result, the AVP-825 License Agreement is expected to terminate on March 10, 2019 (the Termination Date). We do not expect to receive any additional proceedsfrom the AVP-825 License Agreement.Upon termination of the AVP-825 License Agreement, we may elect to continue to commercialize Onzetra Xsail ourselves or through a newlicensee. However, we may not be able to find a new licensee willing to enter into a license agreement on commercially reasonable terms, if at all.Further, we may incur additional expenses in connection with the process of identifying potential new licensees and in connection with thetermination of the AVP-825 License Agreement.Foreign exchange risks and controls may affect our financial position and results of operations.Through the operation of our subsidiaries based in the United Kingdom and Norway, we are exposed to foreign currency fluctuations and exchangerate risks. In addition to the operations of our foreign subsidiaries, we also contract with vendors that are located outside the U.S., and in somecases make payment of invoices denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection withthese arrangements and we do not currently hedge our foreign currency exchange rate risk. In addition, because we maintain our consolidatedfinancial statements in U.S. dollars, our financial results are vulnerable to fluctuations in the exchange rate between the U.S. dollar and foreigncurrencies, such as the British pound sterling, the euro, and the Norwegian krone. In preparing our consolidated financial statements, we mustconvert all non-U.S. dollar results to U.S. dollars, which impacts our results of operations, is reflected as a component of our stockholder's equity(deficit), and may be credited or charged to operations and reflected in other income (expense), net. The impact of changes in exchange rates hasnot been significant historically. However, changes in exchange rates could cause significant changes in our financial position and results ofoperations in the future.Risks Related to Commercialization of XHANCEWe have a limited history of commercializing drugs, which may make it difficult for you to evaluate the success of our business to dateand to assess our future viability.Although our predecessor and subsidiary OptiNose AS commenced operations in 2000, our operations to date have been largely focused onraising capital and developing AVP-825 and XHANCE, including undertaking preclinical studies and conducting clinical trials, as well ascommercializing XHANCE through the last nine months of 2018. While we conducted the pre-approval stages of clinical development for AVP-825,Avanir was responsible for completing the clinical development of, obtaining regulatory approval for, and initiating the commercial launch of thatproduct under our license agreement with them. Further, while we have been commercializing XHANCE for the last nine months of 2018, we havelimited history regarding sales, marketing, distribution and other activities necessary for successful product commercialization. Consequently, anypredictions about our future success or viability may not be as accurate as they could be if we had a longer history of successfully developing andcommercializing drugs.If we are unable to successfully commercialize XHANCE, our business, financial condition and results of operations may be materiallyadversely affected and the price of our common stock may decline.Our ability to successfully commercialize XHANCE depends on many factors, including:▪our ability to manufacture commercial quantities of XHANCE at a reasonable cost and with sufficient speed to meet commercial demand;46Table of Contents▪our ability to manage our third-party sales organization, and once onboarded our internal sales team, to market, promote and sellXHANCE;▪our success in educating physicians, patients and caregivers about the benefits, administration and use of XHANCE;▪the availability, perceived advantages, relative cost, relative safety and relative efficacy of competing products;▪the availability of coverage and adequate reimbursement for XHANCE;▪our ability to commercialize XHANCE at a profitable average net revenue per prescription;▪our ability to contract with wholesalers distributors and/or preferred pharmacy network partners (PPNPs) on acceptable terms;▪our ability to obtain regulatory approval for XHANCE for a follow-on indication for the treatment of chronic sinusitis;▪the effectiveness of our marketing campaigns;▪our ability to attract and retain qualified pharmaceutical industry personnel;▪our effective use of promotional resources;▪a continued acceptable safety profile for XHANCE;▪our ability to obtain and maintain appropriate state licenses in the states in which we sell or intend to sell XHANCE; and▪our ability to successfully defend any challenges to our intellectual property relating to XHANCE.It is difficult for us to predict future performance. As we gain additional commercial experience, a number of factors over which we have limitedcontrol may contribute to fluctuations in our financial results. Demand for our products may be impacted adversely by the annual resetting ofpatient healthcare insurance plan deductibles, both of which may cause patients to delay fulfilling an XHANCE prescription. Demand may also beimpacted by the seasonal variation in patient visits with their doctor.Many of these matters are beyond our control and are subject to other risks described elsewhere in this "Risk Factors" section. Accordingly, wecannot assure you that we will be able to successfully commercialize or generate enough revenue from XHANCE to achieve profitability. If wecannot do so, or are significantly delayed in doing so, our business, financial condition and results of operations may be materially adverselyaffected and the price of our common stock may decline.The commercial success of XHANCE will depend upon its acceptance by multiple stakeholders, including physicians, patients andhealthcare payors.Physicians may not prescribe XHANCE, in which case we would not generate the revenues we anticipate. The degree of market acceptance ofXHANCE will depend on a number of factors, including:▪demonstration of clinical safety and efficacy;▪relative convenience and ease of administration;▪pricing and cost-effectiveness;▪availability of alternative treatments and perceived advantages over such alternative treatments;▪the clinical indications for which XHANCE is approved;▪the prevalence and severity of any AEs;▪limitations or warnings contained in the FDA-approved label for XHANCE;▪the effectiveness of our or any future collaborators' sales and marketing strategies;▪consolidation among healthcare providers, which increases the impact of the loss of any relationship;47Table of Contents▪our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement; and▪the willingness of patients to pay out-of-pocket in the absence of third-party coverage.If XHANCE does not achieve an adequate level of acceptance by physicians, patients and healthcare payors, we may not generate sufficientrevenue in order to become or remain profitable.If third-party payors do not reimburse patients for XHANCE or if reimbursement levels are set too low for us to sell XHANCE at a profit,our ability to successfully commercialize XHANCE and our results of operations will be harmed.Our ability to commercialize XHANCE successfully depends in part on the extent to which coverage and adequate reimbursement for XHANCE willbe available in a timely manner from third-party payors, including governmental healthcare programs such as Medicare and Medicaid, commercialhealth insurers and managed care organizations. Government authorities and other third-party payors, such as private health insurers and healthmaintenance organizations, determine which medications they will cover and establish reimbursement levels. Reimbursement decisions byparticular third-party payors depend upon a number of factors, including each third-party payor's determination that use of a product is:▪a covered benefit under its health plan;▪appropriate and medically necessary for the specific condition or disease;▪cost effective; and▪neither experimental nor investigational.Obtaining coverage and reimbursement approval for XHANCE from government authorities or other third-party payors is a time consuming andcostly process that could require us to provide supporting scientific, clinical and cost-effectiveness data, including expensive pharmacoeconomicstudies beyond the data required to obtain marketing approval, for the use of XHANCE to each government authority or other third-party payor. Wemay not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement from government authorities or otherthird-party payors.Third-party payors may deny reimbursement for covered products if they determine that a medical product was not used in accordance with cost-effective diagnosis methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuseto reimburse for procedures and devices deemed to be experimental. Third-party payors may also limit coverage to specific products on anapproved list, or formulary, which might not include all of the FDA-approved products for a particular indication.Third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medicalproducts and services. The process for determining whether a payor will provide coverage for a product may be separate from the process forsetting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Levels of reimbursement may alsodecrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for andreimbursement available for XHANCE, which in turn, could negatively impact pricing. Further, payors, including healthcare insurers, pharmacybenefit managers and group purchasing organizations, increasingly seek ways to reduce their costs. Many payors continue to adopt benefit planchanges that shift a greater portion of prescription costs to patients. Such measures include more limited benefit plan designs, higher patient co-pay or co-insurance obligations and limitations on patients’ use of commercial manufacturer co-pay payment assistance programs (includingthrough co-pay accumulator adjustment or maximization programs). Payors also increasingly seek price discounts or rebates in connection withthe placement of our products on their formularies or those they manage. Payors may also control costs by imposing restrictions on access to orusage of our products, such as by requiring prior authorizations or "step-edits," and may choose to exclude certain indications for which ourproducts are approved or even choose to exclude coverage entirely. For example, insurers may establish a step-edit system that requires a patientto first use a lower price alternative product prior to becoming eligible for reimbursement of a higher price product. Some providers may notcomplete the burdensome administrative process required to demonstrate or document that the patients for whom XHANCE has been prescribedmeet the payors’ utilization management criteria (i.e., prior authorizations or step-edits) and, as a result, patients will not gain access to XHANCEtreatment. Further, other patients may obtain coverage for XHANCE but abandon their prescriptions rather than pay their co-pay payment whichwould result in a significant shortfall in achieving revenue expectations and negatively impact our business, prospects, results of operations andfinancial condition.48Table of ContentsSignificant consolidation in the health insurance industry has resulted in a few large insurers and pharmacy benefit managers exerting greaterpressure in pricing and usage negotiations with drug manufacturers, significantly increasing discounts and rebates required of manufacturers andlimiting patient access and usage. Further consolidation among insurers, pharmacy benefit managers and other payors, including throughintegrated delivery systems, would increase the negotiating leverage such entities have over us and other drug manufacturers. Ultimately, furtherdiscounts, rebates, coverage or plan changes, restrictions or exclusions as described above could have a material adverse effect on sales of ouraffected products.If we are unable to differentiate XHANCE from current and future products or existing methods of treatments, our ability to successfullycommercialize XHANCE would be adversely affected.We are currently commercializing XHANCE for the treatment of nasal polyps and intend to seek FDA approval for a follow-on indication ofXHANCE for the treatment of chronic sinusitis. Currently, Nasonex, marketed by Merck, is the only other branded drug therapy approved by theFDA for the treatment of nasal polyps. A generic version of Nasonex, mometasone furoate monohydrate, was approved by the FDA for, amongother indications, the treatment of nasal polyps and launched in 2016. In addition, Beconase AQ, which is an INS marketed by GlaxoSmithKline, isindicated for the prophylaxis of nasal polyps after surgical resection, while SINUVATM is a commercially available corticosteroid-eluting implantindicated for the treatment of nasal polyps in adult patients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus underendoscopic visualization for up to 90 days. We are not aware of any product approved for the treatment of chronic sinusitis. In addition tocompetition from Nasonex and Beconase AQ, we will also need to differentiate XHANCE from other products and treatments identified in currentclinical practice guidelines for the treatment of chronic rhinosinusitis with and without nasal polyps. Such products and treatments include the useof nasal rinses, decongestants, over-the-counter and INS products, oral steroids, antibiotics, and sinus surgery and other procedures, includingfunctional endoscopic sinus surgery, balloon sinus dilation and steroid-releasing sinus implants. In addition, several biologic monoclonal antibodiesare in clinical development for the treatment of nasal polyps, including omalizumab, reslizumab, mepolizumab and dupilumab. For dupilumab, thesubmission of an Supplemental Biologics License Application (sBLA) was recently publicly announced. In addition, there are new small molecules,including fevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibit specific pathways of inflammation presentin nasal polyps. If we are unable to achieve significant differentiation for XHANCE against these other products and treatments, including on thebasis of efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement, the opportunity for XHANCE tobe commercialized successfully would be adversely affected.If the market opportunities for XHANCE are smaller than we believe, our revenue may be adversely affected, and our business maysuffer.Our initial target market for XHANCE consists of ENT physicians, allergists and high-decile INS-prescribing primary care physicians that webelieve treat an estimated 3.5 million U.S. patients with chronic rhinosinusitis, an estimated 1.2 million of whom have chronic rhinosinusitis withnasal polyps. If we are able to obtain a follow-on indication of XHANCE for the treatment of chronic sinusitis, we intend to broaden our reach andtarget primary care physicians that we believe treat an additional estimated 6.25 million patients with chronic rhinosinusitis, an estimated one-thirdof whom have chronic rhinosinusitis with nasal polyps.Our projections of both the number of people who suffer from chronic rhinosinusitis with and without nasal polyps, as well as the subset of peoplewith these diseases who have the potential to benefit from the use of XHANCE, are based on our beliefs and estimates. These estimates havebeen derived from a variety of sources, including scientific literature, surveys we commissioned, prescription data or other market research andmay prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of chronic rhinosinusitis or nasal polyps. Thenumber of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for XHANCE may be limitedor may not be amenable to treatment with XHANCE, and new patients may become increasingly difficult to identify or gain access to, which wouldadversely affect our results of operations and our business.Clinical practice guidelines and recommendations published by various organizations could have significant influence on the use ofXHANCE.Government agencies may promulgate clinical practice guidelines directly applicable to XHANCE. In addition, professional societies, practicemanagement groups, private health and science foundations and organizations involved in various diseases from time to time may also publishguidelines or recommendations to the healthcare and patient communities. Recommendations of government agencies or these other groups ororganizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies.49Table of ContentsRecommendations or guidelines suggesting the reduced use of XHANCE or the use of competitive or alternative products as the standard of careto be followed by patients and healthcare providers could result in decreased use of XHANCE.If we are unable to maintain agreements with third parties to market and sell XHANCE, or we are unable to effectively onboard our thirdparty sales force to employees, our business may be harmed.We currently have limited sales, marketing or distribution capabilities. We have contracted to use an outsourced contract sales organization (CSO)to promote XHANCE to our defined specialty audience of ENT and allergy specialists and high-decile INS-prescribing primary care physicians.While we plan to transition to an internal sales force model in April 2019, our CSO may not dedicate sufficient resources to the commercializationof XHANCE prior to such transition or may otherwise fail in its commercialization due to factors beyond our control. Additionally, our CSO may failto comply with applicable legal or regulatory requirements, or may enter into agreements with other parties that have products and services thatcould compete with XHANCE. Additionally, we may not effectively or efficiently manage such transition and our sales force may fail to complywith applicable legal or regulatory requirements. This could subject us to significant civil, criminal and administrative penalties, damages, fines,imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, additional oversight and reportingrequirements if we become subject to a corporate integrity agreement to resolve allegations of non-compliance with these laws and the curtailmentor restructuring of our operations.We may also seek to enter into a strategic collaboration with a third party to commercialize XHANCE. We face significant competition in seekingappropriate strategic collaborators, and these strategic collaborations can be intricate and time-consuming to negotiate and document. We may notbe able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategiccollaborations because of the numerous risks and uncertainties associated with establishing strategic partnerships.A significant portion of our sales are to a limited number of pharmaceutical wholesalers and PPNPs. Changes in terms required by thesewholesalers, disruptions in these relationships or a default could harm our results of operations and financial condition.Approximately 42% of our XHANCE net revenues during the fiscal year ended December 31, 2018 were to the three largest pharmaceuticalwholesalers. Additionally, approximately 57% of our XHANCE net revenues during the fiscal year ended December 31, 2018 were to PPNPs, themajority of which relate to a particular PPNP, Foundation Care LLC. If any of these wholesalers or PPNPs ceases to purchase our product for anyreason, then unless and until the remaining wholesalers or PPNPs increase their purchases of XHANCE or alternative distribution channels areestablished:▪our commercial operations could be significantly disrupted;▪the availability of XHANCE to patients could be disrupted; and▪we may not achieve the sales of XHANCE that we expect, which could decrease our revenues.We do not require collateral from our wholesalers or PPNPs but rather maintain credit limits and as a result we have an exposure to credit risk inour accounts receivable. A default by a large wholesaler or PPNP could harm our results of operations and financial condition.In addition to pharmaceutical wholesalers, we rely on PPNPs for distribution of XHANCE in the U.S., and the failure of those PPNPs todistribute XHANCE effectively would adversely affect sales of XHANCE.Our reliance on PPNPs for the distribution of XHANCE in the U.S. involves certain risks, including, but not limited to, risks that these PPNPs will:▪not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaintsabout our products;▪reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support our products;▪not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;▪engage in unlawful or inappropriate business practices that result in legal or regulatory enforcement activity which could result in liability toour Company or damage our goodwill with patients; or50Table of Contents▪be unable to satisfy financial obligations to us or others.In the event that any of the PPNPs with whom we work do not fulfill their contractual obligations to us or refuse to or fail to adequately servepatients, or the agreements are terminated without adequate notice, shipments of XHANCE, and associated revenues, would be adverselyaffected.If we cannot successfully implement our patient affordability programs or improve formulary access for XHANCE in the face ofincreasing pressure to reduce the price of medications, the adoption of XHANCE by physicians and patients may decline.While we offer patient affordability programs through traditional retail pharmacies, part of our commercial strategy to increase adoption and accessto XHANCE is to offer physicians the opportunity to have patients fill prescriptions through PPNPs that can apply appropriate patient affordabilityprograms to help reduce eligible patients’ out-of-pocket costs for prescriptions filled. Because of this assistance, eligible patients’ out-of-pocketcost for XHANCE, when dispensed through PPNPs, may be lower than such costs when XHANCE is dispensed from traditional retail pharmacies.However, to the extent physicians do not direct prescriptions to the participating PPNPs, the adoption of XHANCE by physicians and patients maydecline.Our ability to increase utilization of our patient affordability programs will depend on physician and patient awareness and comfort with theprograms, and we have limited ability to influence whether physicians use our patient affordability programs to prescribe XHANCE or whetherpatients will agree to receive XHANCE through PPNPs. In addition, the patient affordability programs are not available to federal health careprograms (such as Medicare and Medicaid) beneficiaries. We have also contracted with certain Pharmacy Benefit Managers (PBMs) and otherpayors to secure formulary status and reimbursement for XHANCE, which generally require us to pay administrative fees and rebates to the PBMsand other payors for qualifying prescriptions. While we have business relationships with three of the largest PBMs, as well as other PBMs, webelieve these agreements will secure formulary status for XHANCE but we cannot guarantee that we will be able to agree to terms with otherPBMs and other payors, or that such terms will be commercially reasonable to us. Despite our agreements with PBMs, the extent of formularystatus and reimbursement will ultimately depend to a large extent upon individual healthcare plan formulary decisions. If healthcare plans thatcontract with PBMs with which we have agreements do not adopt formulary changes recommended by the PBMs with respect to XHANCE, wemay not realize the expected access and reimbursement benefits from these agreements. Consequently, the success of our PBM contractingstrategy will depend not only on our ability to expand formulary adoption among healthcare plans, but also upon the relative mix of healthcare plansthat have PBM-chosen formularies versus custom formularies. If we are unable to realize the expected benefits of our contractual arrangementswith the PBMs the adoption of XHANCE by physicians and patients may decline. If we are unable to increase adoption of PPNPs for fillingprescriptions of XHANCE by physicians or to secure formulary status and reimbursement through arrangements with PBMs and other payors,particularly with healthcare plans that use custom formularies, our ability to achieve net sales growth for XHANCE would be impaired.The negative publicity regarding specialty pharmacies may result in physicians being less willing to participate in our patientaffordability programs, which would limit our ability to increase patient access and adoption of XHANCE.There has been negative publicity and inquiries from Congress and enforcement authorities regarding the use of specialty pharmacies and drugpricing. PPNPs with whom we contract may be considered specialty pharmacies. Our patient affordability programs are in place to assist inensuring that when a physician determines XHANCE offers a potential clinical benefit to their patients and they prescribe it for an eligible patient,financial assistance may be available to reduce the patient’s out-of-pocket costs. We do not own or possess any option to purchase an ownershipstake in any pharmacy that distributes XHANCE and our relationship with each pharmacy is non-exclusive and arm’s length. All of our sales areprocessed through pharmacies independent of us. Despite this, the negative publicity and interest from Congress and enforcement authoritiesregarding specialty pharmacies may result in physicians being less willing to participate in our patient affordability programs and thereby limit ourability to increase patient access and adoption of XHANCE.We may be unable to form and maintain relationships with pharmacies that participate in our patient affordability programs, which couldadversely affect the commercialization of XHANCE and our operating results.We may also encounter difficulty in forming and maintaining relationships with pharmacies that participate in our patient affordability programs. Wecurrently depend on a limited number of PPNPs to fulfill patient prescriptions. If51Table of Contentsthese PPNPs are unable to process and fulfill the volume of patient prescriptions directed to them, our ability to maintain or increase prescriptionsfor XHANCE will be impaired. The commercialization of XHANCE and our operating results could be affected should any of the PPNPs choose notto continue to fulfill XHANCE prescriptions or by any adverse market events at any of the PPNPs. For example, pharmacies that dispenseXHANCE could lose contracts that they currently maintain with managed care organizations (MCOs), including PBMs. Pharmacies often enter intoagreements with MCOs. They may be required to abide by certain terms and conditions to maintain access to MCO networks, including terms andconditions that could limit their ability to participate in patient affordability programs like ours. Failure to comply with the terms of their agreementswith MCOs could result in a variety of penalties, including termination of their agreement, which could negatively impact the ability of thosepharmacies to dispense XHANCE and collect reimbursement from MCOs for such medicines.Our patient affordability programs are subject to certain federal and state laws, the violation of which could have an adverse impact onour business and subject us to significant penalties.Our patient affordability programs may implicate certain federal and state laws related to, among other things, unlawful schemes to defraud,excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. We have a comprehensive complianceprogram in place to address adherence with various laws and regulations relating to the selling, marketing and manufacturing of XHANCE. Despiteour compliance efforts, to the extent the patient affordability programs are found to be inconsistent with applicable laws or the pharmacies thatparticipate in our patient affordability programs do not comply with applicable laws, we may be required to restructure or discontinue suchprograms, terminate our relationship with certain pharmacies, or be subject to other significant penalties.If the cost of maintaining our patient affordability programs increases relative to our sales revenue, we could be force to reduce oreliminate our financial assistance programs, which could have an adverse effect on our financial results.If the cost of maintaining our patient affordability programs increases relative to our sales revenues, we could be forced to reduce the amount ofpatient financial assistance that we offer or otherwise scale back or eliminate such programs, which could in turn have a negative impact onphysicians’ willingness to prescribe and patients’ willingness to fill prescriptions of XHANCE. While we believe that our arrangements with PBMswill result in broader inclusion of certain of our therapies on healthcare plan formularies, and lower our cost of providing patient affordabilityprograms, these arrangements generally require us to pay administrative and rebate payments to the PBMs and/or other payors and theireffectiveness will ultimately depend to a large extent upon individual healthcare plan formulary decisions that are beyond the control of the PBMs.If our arrangements with PBMs and other payors do not result in increased prescriptions and reductions in our costs to provide our patientaffordability programs that are sufficient to offset the administrative fees and rebate payments to the PBMs and/or other payors, our financialresults may continue to be harmed.XHANCE may become associated with undesirable adverse reactions or have other properties that could result in significant negativeconsequences following regulatory approval.If we or others identify adverse events (AEs) associated with XHANCE, a number of potentially significant negative consequences could result,including:▪we may be forced to suspend marketing of XHANCE;▪the FDA may withdraw its approval of XHANCE or impose restrictions on its distribution;▪the FDA may require additional warnings or contradictions in the label that could diminish the usage or otherwise limit the commercialsuccess of XHANCE;▪we may be required to conduct additional post-marketing studies;▪we could be sued and held liable for harm caused to patients; and▪our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of XHANCE.52Table of ContentsIf the FDA or other applicable regulatory authorities approve generic or similar products that compete with XHANCE, or if the FDA orother applicable regulatory authorities change or create new pathways that may expedite approval of such products, it could decreaseour expected sales of XHANCE.Once an NDA, including a Section 505(b)(2) application, is approved, the product covered thereby becomes a "listed drug" which can, in turn, becited by potential competitors in support of approval of an abbreviated NDA (ANDA). The FD&C Act, FDA regulations and other applicableregulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of anANDA for generic substitutes. Manufacturers may be able to bring a generic product to market in a much more cost-efficient pathway than wecurrently anticipate. If the costs involved in bringing such a product to market are significantly less than our costs with respect to the developmentof XHANCE, companies that produce generic equivalents to XHANCE may be able to offer their products at lower prices. Further, if the timeline forbringing such a product to market is expedited, companies that produce generic equivalents to XHANCE may compete with XHANCE faster thanwe currently anticipate. For example, the FDA has communicated a priority to build on initiatives to accelerate generic entry of complex generics,which include locally acting nasal drug products. If the FDA provides for alternatives to comparative clinical endpoint bioequivalence studies forgeneric versions of locally-acting orally inhaled and nasal drug products, companies that produce generic equivalents to XHANCE may competewith XHANCE faster than we currently anticipate and a significant percentage of any future sales of XHANCE could be lost to such genericproducts. Moreover, in addition to generic competition, we could face competition from other companies seeking approval of products that aresimilar to ours using the Section 505(b)(2) pathway. Such applicants may be able to rely on XHANCE or other approved drug products or publishedliterature to develop drug products that are similar to ours. The introduction of a drug product similar to our products or product candidates couldexpose us to increased competition, leading to a decrease in sales of XHANCE. Competition that we may face from generic or similar versions ofXHANCE could materially and adversely impact our future revenue, profitability, and cash flows.Even though we have obtained regulatory approval for XHANCE, we will still face extensive FDA regulatory requirements and may facefuture regulatory difficulties.Even though we have obtained regulatory approval in the U.S. for XHANCE, the FDA and state regulatory authorities may still impose significantrestrictions on the indicated uses or marketing of XHANCE, or impose ongoing requirements for potentially costly post-approval studies or post-marketing surveillance. For example, as part of its approval of XHANCE for the treatment of nasal polyps in adults, the FDA required that weconduct a randomized, double-blind, placebo controlled clinical study in children and adolescents with nasal polyposis to assess the safety,efficacy, and pharmacokinetics of XHANCE in this population. The FDA originally indicated the study was to be conducted in children andadolescents 6 to 17 years of age. On October 30, 2017, the FDA notified us that in response to our request it had modified the required age rangeto 12 to 17 years of age. We submitted our final protocol to the FDA with respect to the pediatric study by January 2018 as required, and we havesince contracted with various clinical trial sites and begun patient enrollment. We are required to complete the study by January 2022 and tosubmit a final report with respect to the study by July 2022. Because the Optinose EDS for XHANCE was designed for use in adult patients, wemay discover that the dimensions of this EDS make it unsuitable for use in pediatric patient populations. As such, this pediatric study may alsorequire us to undergo a costly and time-consuming development process to design and manufacture as appropriate a modified EDS to conductthese studies.We are also subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising,promotion, record-keeping and reporting of safety and other post-marketing information. The holder of an approved NDA is obligated to monitor andreport AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new orsupplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.Advertising and promotional materials must comply with FDA regulations and may be subject to other potentially applicable federal and state laws.The applicable regulations in countries outside the U.S. grant similar powers to the competent authorities and impose similar obligations oncompanies.In addition, manufacturers of drug products and their facilities are subject to payment of substantial user fees and continual review and periodicinspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice (cGMP) regulations andadherence to commitments made in the NDA. Since XHANCE is a combination product, we will also need to comply with some of the FDA'smanufacturing regulations for devices. In addition to cGMP, the FDA requires that our drug-device combination product comply with the QualitySystem Regulation (QSR), which sets forth the FDA's manufacturing quality standards for medical devices, and other applicable governmentregulations and corresponding foreign standards. If we, or a regulatory authority,53Table of Contentsdiscover previously unknown problems with XHANCE, such as AEs, of unanticipated severity or frequency, or problems with a facility where theproduct is manufactured, a regulatory authority may impose restrictions relative to XHANCE or the manufacturing facility, including requiring recallor withdrawal of the product from the market, suspension of manufacturing, or other FDA action or other action by foreign regulatory authorities.If we fail to comply with applicable regulatory requirements following approval of XHANCE, a regulatory authority may:▪issue a warning letter asserting that we are in violation of the law;▪seek an injunction or impose civil or criminal penalties or monetary fines;▪suspend, modify or withdraw regulatory approval;▪suspend any ongoing clinical trials;▪refuse to approve a pending NDA or a pending application for marketing authorization or supplements to an NDA or to an application formarketing authorization submitted by us;▪seize our product candidate; and/or▪refuse to allow us to enter into supply contracts, including government contracts.Our relationships with physicians, patients and payors in the U.S. are subject to applicable anti-kickback, fraud and abuse laws andregulations. Our failure to comply with these laws could expose us to criminal, civil and administrative sanctions, reputational harm,and could harm our results of operations and financial conditions.Our current and future operations with respect to the commercialization and further development of XHANCE, as well as potential futuredevelopment programs, are subject to various U.S. federal and state healthcare laws and regulations. These laws impact, among other things, ourproposed sales, marketing, support and education programs and constrain our business and financial arrangements and relationships with third-party payors, healthcare professionals and others who may prescribe, recommend, purchase or provide XHANCE, and other parties through whichwe market, sell and distribute XHANCE. Finally, our current and future operations are subject to additional healthcare-related statutory andregulatory requirements and enforcement by foreign regulatory authorities in jurisdictions in which we conduct our business. The laws aredescribed in greater detail in the previous section under "Business — Government Regulation — Healthcare Fraud and Abuse Laws," and include,but are not limited to:▪the federal Anti-Kickback Statute, prohibits persons or entities from, among other things, knowingly and willfully soliciting, offering,receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral ofan individual for, or the purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any good or service, forwhich payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entitydoes not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.▪the federal civil False Claims Act (which can be enforced through "qui tam," or whistleblower actions, by private citizens on behalf of thefederal government) prohibits any person from, among other things, knowingly presenting, or causing to be presented false or fraudulentclaims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement materialto an obligation to pay money to the government or knowingly and improperly avoiding, decreasing or concealing an obligation to paymoney to the U.S. federal government.▪the federal federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes criminal and civil liability for, among otherthings, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly andwillfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, orpayment for healthcare benefits, items or services by a healthcare benefit program, which includes both government and privately fundedbenefits programs; similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of thestatute or specific intent to violate it in order to have committed a violation.54Table of Contents•numerous federal and state laws and regulations that address privacy and data security, including state data breach notification laws,state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade CommissionAct (FTC Act)), govern the collection, use, disclosure and protection of health-related and other personal information, many of which differfrom each other in significant ways and often are not preempted by HIPAA, thus complicating relevant compliance efforts.▪a majority of states whom have adopted laws and regulations analogous to federal laws, including state anti-kickback and false claimslaws, that may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements andclaims involving healthcare items or services reimbursed by any third-party payor, including private insurers. Other states have adoptedlaws that, among other things, require pharmaceutical companies to comply with the pharmaceutical industry's voluntary complianceguidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may bemade to healthcare providers and other potential referral sources; and state laws and regulations that require drug manufacturers to filereports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided tohealthcare professionals and entities. In addition, some states have laws requiring pharmaceutical sales representatives to be registeredor licensed, and still others impose limits on co-pay assistance that pharmaceutical companies can offer to patients.•the Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing regulations, requiresmanufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or theChildren's Health Insurance Program (with certain exceptions) to report annually to CMS information related to direct or indirect paymentsand other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held in the company byphysicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report informationregarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurseanesthetists and certified nurse-midwives.The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with differentcompliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail tocomply fully with one or more of these requirements. Efforts to ensure that our business arrangements with third parties will comply with applicablehealthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our businesspractices do not comply with applicable fraud and abuse or other healthcare laws and regulations or guidance. If our operations are found to be inviolation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal andadministrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid,additional oversight and reporting requirements if we become subject to a corporate integrity agreement to resolve allegations of non-compliancewith these laws and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect todo business is found not to be in compliance with applicable laws, they may be subject to the same criminal, civil or administrative sanctions,including exclusions from government funded healthcare programs. Even if we are not determined to have violated these laws, governmentinvestigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm ourfinancial condition and divert resources and the attention of our management from operating our business.The occurrence of any event or penalty described above may inhibit our ability to commercialize and further develop XHANCE and generaterevenues which would have a material adverse effect on our business, financial condition and results of operations.If we are able to successfully commercialize XHANCE and if fail to comply with our reporting and payment obligations under theMedicaid Drug Rebate Program, or other governmental pricing programs, we could be subject to additional reimbursementrequirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results ofoperations and growth prospects.We participate in the Medicaid Drug Rebate Program, and other governmental pricing programs, and therefore we are obligated to pay certainspecified rebates and report pricing information with respect to XHANCE. Pricing and rebate calculations are complex and are often subject tointerpretation by us, governmental or regulatory agencies and the courts. We cannot assure you that our submissions will not be found by theCenters for Medicare & Medicaid Services (CMS) to be incomplete or incorrect. Governmental agencies may also make changes in55Table of Contentsprogram interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated orpaid. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our current average manufacturer price (AMP)and best price for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation ofthe pricing data, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the dataoriginally were due, and CMS may request or require restatements for earlier periods as well. Such restatements and recalculations increase ourcosts for complying with the laws and regulations governing the Medicaid Drug Rebate Program. Any corrections to our rebate calculations couldresult in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also mayaffect the ceiling price at which we are required to offer our products to certain covered entities, such as safety-net providers, under the PublicHealth Service's 340B drug pricing program (the 340B program) and under other similar government pricing programs. These programs aredescribed in greater detail in the previous section under "Business — Government Regulation — Coverage and Reimbursement."We will also be liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B programrefunds, if we are found to have knowingly submitted false AMP, or best price information to the government, we may be liable for significant civilmonetary penalties. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participatein the Medicaid program. In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid forXHANCE.The Health Resource and Services Administration (HRSA) issued a final regulation regarding the calculation of the 340B ceiling price and theimposition of civil monetary penalties on manufacturers that knowingly and intentionally overcharge covered entities, which became effective onJanuary 1, 2019. It is currently unclear how HRSA will apply its enforcement authority under the new regulation. HRSA also is implementing aceiling price reporting requirement related to the 340B program during the first quarter of 2019 under which we will be required to report 340B ceilingprices to HRSA on a quarterly basis. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additionalcovered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report ASP information each quarter to CMS forcertain categories of drugs that are paid under the Medicare Part B program. Manufacturers calculate the average sales price based on astatutorily defined formula as well as regulations and interpretations of the statute by CMS. CMS uses these submissions to determine paymentrates for drugs under Medicare Part B.Federal law requires that a company must participate in the U.S. Department of Veterans Affairs (VA) Federal Supply Schedule (FSS) pricingprogram to be eligible to have its products paid for with federal funds. As part of this program, we are obligated to make XHANCE available forprocurement on an FSS contract under which we must comply with standard government terms and conditions and charge a price that is no higherthan the statutory Federal Ceiling Price (FCP) to four federal agencies (VA, U.S. Department of Defense (DOD) Public Health Service, and U.S.Coast Guard). The FCP is based on the Non-Federal Average Manufacturer Price (Non-FAMP), which we calculate and report to the VA on aquarterly and annual basis. If we overcharge the government in connection with our FSS contract or Section 703 Agreement, whether due to amisstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identifycontract overcharges can result in allegations against us under the U.S. civil False Claims Act and other laws and regulations. Unexpected refundsto the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could havea material adverse effect on our business, financial condition, results of operations and growth prospects.Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safetyand efficacy have been demonstrated.Our promotional materials, statements and training methods must comply with applicable laws and regulations, including FDA's prohibition of thepromotion of unapproved, or off-label, use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician'sindependent choice of treatment within the practice of medicine. As healthcare professionals frequently prescribe corticosteroids for the treatmentof chronic nasal inflammatory diseases, such as chronic rhinosinusitis, doctors often prescribe XHANCE for the treatment of chronic rhinosinusitisand other chronic nasal inflammatory diseases, even though the FDA has granted approval of XHANCE only for the treatment of nasal polyps andwe promote the use of XHANCE only for the treatment of nasal polyps. If the FDA determines that our promotional materials, statements oractivities constitute promotion of an off-56Table of Contentslabel use, we could be required to modify our promotional materials, statements or training methods or subject us to regulatory or enforcementactions, such as the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine, disgorgement of money, operating restrictions orcriminal penalties. We may also be subject to actions by other governmental entities or private parties, such as the U.S. civil False Claims Act,civil whistleblower or "qui tam" actions. It is also possible that other federal, state or foreign enforcement authorities might take action if theyconsider our promotional, materials or activities to constitute promotion of an off-label use, which could result in significant fines or penalties underother statutory authorities. In that event, our reputation could be damaged and market adoption of XHANCE could be impaired.Even though we have obtained FDA approval for XHANCE in the U.S., we may never obtain approval for or successfully commercialize itoutside of the U.S., which would limit our ability to realize its full market potential.In order to market XHANCE outside of the U.S., we must obtain marketing authorizations and comply with numerous and varying regulatoryrequirements of other countries regarding quality, safety and efficacy. Clinical trials conducted in one country may not be accepted by foreignregulatory authorities, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country.Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods.Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical studies or clinical trials, whichcould be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introductionof XHANCE in those countries. While our management team has experience in obtaining foreign regulatory approvals at other companies, we donot have any product candidates approved for sale in any foreign jurisdiction, and we, as a company, do not have experience in obtainingregulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintainrequired approvals, or if regulatory approval in international markets is delayed, our target market for XHANCE will be reduced and we would not beable to realize the full market potential of XHANCE.The Affordable Care Act and any changes in healthcare law may increase the difficulty and cost for us to commercialize XHANCE andaffect the prices we may obtain.The U.S. and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system that couldrestrict or regulate post-approval activities and affect our ability to profitably sell XHANCE. The U.S. government, state legislatures and foreigngovernments also have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcarecosts, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively theAffordable Care Act) was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhanceremedies against fraud and abuse, add transparency requirements for the healthcare and health insurance industries, impose new taxes and feeson the health industry and impose additional health policy reforms. These intended reforms are described in greater detail in the previous sectionunder "Business — Government Regulation — U.S. Healthcare Reform."Among the provisions of the Affordable Care Act that have been implemented since enactment and are of importance to the commercialization ofXHANCE are the following:▪an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs or biologic agents;▪an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;▪expansion of healthcare fraud and abuse laws, including the U.S. civil False Claims Act and the Anti-Kickback Statute, new governmentinvestigative powers, and enhanced penalties for noncompliance;▪a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts offnegotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer'soutpatient drugs to be covered under Medicare Part D;57Table of Contents▪extension of manufacturers' Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations;▪price reporting requirements for drugs that are inhaled, infused, instilled, implanted, or injected;▪expansion of eligibility criteria for Medicaid programs;▪expansion of the entity types eligible for discounts under the Public Health Service's 340B drug pricing program;▪a requirement to annually report certain information regarding drug samples that manufacturers and distributors provide to physicians; and▪a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research.Some of the provisions of the Affordable Care Act have yet to be fully implemented, and certain provisions have been subject to judicial andCongressional challenges. In addition, there have been efforts by the Trump Administration to repeal or replace certain aspects of the AffordableCare Act and to alter the implementation of the Affordable Care Act and related laws. For example, on December 22, 2017, the U.S. governmentsigned into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act), which includes a provision repealing,effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail tomaintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Further, the Bipartisan BudgetAct of 2018, among other things, amended the Medicare statute to reduce the coverage gap in most Medicare drugs plans, commonly known asthe “donut hole,” by raising the required manufacturer point-of-sale discount from 50% to 70% off the negotiated price effective as of January 1,2019. Additional legislative changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible. It is unclearhow the Affordable Care Act and its implementation, as well as efforts to repeal or replace, or invalidate, the Affordable Care Act, or portionsthereof, will affect our business, financial condition and results of operations. We expect that the Affordable Care Act, as currently enacted or as itmay be amended in the future, and other healthcare reform measures that may be adopted in the future, could have a material adverse effect onour industry generally and on our ability to maintain or increase sales of XHANCE or to successfully commercialize it.We also expect that the Affordable Care Act, as well as other healthcare reform measures that have and may be adopted in the future, may resultin more rigorous coverage criteria and in additional downward pressure on the price that we receive for XHANCE and could seriously harm ourfuture revenues. Any reduction in reimbursement from Medicare, Medicaid, or other government programs may result in a similar reduction inpayments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able togenerate revenues, attain profitability or successfully commercialize XHANCE.Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of XHANCE and anyother product candidates that we may develop.We currently face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials, and this riskwill increase significantly as we commercialize XHANCE and other product candidates that we may develop. We may face product liability claims,regardless of FDA approval for commercial manufacturing and sale as product liability claims may be brought against us by patients who haveused XHANCE in any of our clinical trials, future patients, healthcare providers or others using, administering or selling our products, if and whenapproved. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incursubstantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:▪decreased demand for XHANCE;▪injury to our reputation and significant negative media attention;▪termination of clinical trial sites or entire trial programs that we conduct in the future relating to XHANCE or our other product candidates;▪withdrawal of clinical trial participants from any future clinical trial relating to XHANCE or our other product candidates;58Table of Contents▪significant costs to defend the related litigation;▪substantial monetary awards to patients;▪loss of revenue;▪diversion of management and scientific resources from our business operations; and▪an increase in product liability insurance premiums or an inability to maintain product liability insurance coverage.We currently carry product liability insurance with coverage up to $10.0 million in the aggregate, with a per incident limit of $10.0 million, whichmay not be adequate to cover all liabilities that we may incur. Further, we may not be able to maintain insurance coverage at a reasonable cost orin an amount adequate to satisfy any liability that may arise. Our inability to maintain sufficient product liability insurance at an acceptable costcould adversely affect our XHANCE product revenues, inhibit the development of XHANCE for additional indications or inhibit the development ourother product candidates.Additionally, any agreements we may enter into in the future with collaborators in connection with the development or commercialization ofXHANCE, AVP-825, our exhalation device technology or any of our other product candidates may entitle us to indemnification against productliability losses, but such indemnification may not be available or adequate should any claim arise. In addition, several of our agreements require usto indemnify third parties and these indemnifications obligations may exceed the coverage under our product liability insurance policy. Forexample, under the terms of the license agreement we entered into with Inexia we expect to enter into a clinical supply agreement with Inexiawhereby we will provide certain exhalation devices to Inexia, which may expose us to indemnification obligations that may exceed the coverageunder our product liability insurance policy or otherwise expose us to third party product liability losses.Risks Related to Clinical Development and Regulatory Approval of XHANCE for the Treatment of Chronic Sinusitis and Our OtherProduct CandidatesThe design and execution of clinical trials to support FDA-approval of XHANCE for the treatment of chronic sinusitis is subject tosubstantial risk and uncertainty.We have initiated a clinical program to support a follow-on indication of XHANCE for the treatment of chronic sinusitis. Similar to our NDA forXHANCE for the treatment of nasal polyps, we believe we may also be able to use the Section 505(b)(2) pathway for potential U.S. approval forXHANCE for the treatment of chronic sinusitis. Because there is no FDA-approved product for the treatment of chronic sinusitis, we believe thereis substantial risk and uncertainty in planning and conducting adequate clinical trials to meet FDA requirements to support approval for thisindication. If the clinical program required by the FDA is more costly or time-consuming than anticipated, we may decide to cease to pursuit of thisfollow-on indication. Additionally, clinical trials for this indication may not demonstrate sufficient efficacy or safety to support FDA approval for afollow-on indication for XHANCE. If we do not obtain a follow-on indication for the treatment of chronic sinusitis, our promotion of XHANCE will belimited to nasal polyps, which would limit our potential sales of XHANCE.The regulatory approval processes of the FDA are lengthy, time consuming and inherently unpredictable, and if we are ultimately unableto obtain regulatory approval for our product candidates, our business may be substantially harmed.The time required to obtain approval by the FDA is unpredictable but typically takes many years following the commencement of clinical trials anddepends upon numerous factors, including the substantial discretion of the regulatory agency. In addition, approval policies, regulations, or thetype and amount of clinical data necessary to gain approval may change during the course of a product candidate's clinical development.Our product candidates could fail to receive regulatory approval for many reasons, including the following:▪the FDA may not accept our NDA filing;▪the FDA may disagree with the design, scope or implementation of our clinical trials;▪we may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for its proposed indication;59Table of Contents▪we may be unable to demonstrate that a product candidate's clinical and other benefits outweigh its safety risks;▪the FDA may disagree with our interpretation of data from preclinical studies or clinical trials;▪the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA;▪the FDA may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical andcommercial supplies; and▪the approval policies or regulations of the FDA may change in a manner rendering our clinical data insufficient for approval.The failure to obtain regulatory approval for a particular product candidate, could substantially harm our business.Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not bepredictive of future trial results. Clinical failure can occur at any stage of clinical development.Clinical trials are expensive, can take many years to complete and have highly uncertain outcomes. Failure can occur at any time during theclinical trial process as a result of inadequate performance of a drug, inadequate adherence by patients or investigators to clinical trial protocols,investigators failure to comply with applicable laws, or other factors. Drug candidates in later stages of clinical trials may fail to show the desiredsafety and efficacy traits despite having progressed through earlier clinical trials. A number of companies in the pharmaceutical industry havesuffered significant setbacks in advanced clinical trials as a result of a lack of efficacy or adverse safety profiles, despite promising results inearlier trials. Our clinical trials for the follow-on indication of XHANCE for the treatment of chronic sinusitis or our other product candidates may notbe successful or may be more expensive or time-consuming than we currently expect. If clinical trials for this or any other product candidate fail todemonstrate safety or efficacy to the satisfaction of the FDA, the FDA may not approve the product candidate and we would not be able tocommercialize it, which could substantially harm our business.Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delayour ability to obtain regulatory approval and commence product sales.We may experience delays in clinical trials of our product candidates or the time required to complete clinical trials for our product candidates maybe longer than anticipated. Our ongoing and future clinical trials may not begin on time, have an effective design, enroll a sufficient number ofpatients, timely enroll patients, or be completed on schedule, if at all. Our clinical trials can be delayed for a variety of reasons, including, but notlimited to:▪inability to raise funding necessary to initiate or continue a clinical trial;▪delays in obtaining regulatory approval to commence a clinical trial;▪delays in reaching agreement with the FDA or foreign regulatory authorities on final trial design or the scope of the development program;▪imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or foreign regulatory authorities;▪delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;▪delays in obtaining required institutional review board (IRB) approval;▪delays in recruiting suitable patients to participate in a clinical trial;▪delays as a result of interim analyses, if any, of clinical trials that indicate futility of the trial or necessitate an increase in the number ofpatients enrolled in trial;▪patients' delays or failure to complete participation in a clinical trial or return for post-treatment follow-up;▪clinical sites dropping out of a clinical trial;▪time required to add new clinical sites; or60Table of Contents▪delays by our contract manufacturing organizations (CMOs) to produce and deliver a sufficient supply of clinical trial materials.If clinical trials for our product candidates are delayed for any of the above reasons or other reasons, our development costs may increase, ourapproval process could be delayed and our ability to commercialize our product candidates could be materially harmed.We will need to identify proprietary names for our product candidates that are acceptable to FDA, and any delay associated with doing somay adversely impact our business.Any proprietary name we propose to use with our product candidates in the U.S. must be reviewed and accepted by the FDA, regardless ofwhether we have registered it, or applied to register it, as a trademark. The FDA reviews any proposed product name, including an evaluation ofpotential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately impliesmedical claims or contributes to an overstatement of efficacy. If the FDA objects to any proposed proprietary product name, we may be required toexpend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable laws, notinfringe the existing rights of third parties and be acceptable to the FDA.Our product candidates, if approved, may require REMS, which may significantly increase our costs.Our product candidates, if approved, may require REMS. The REMS may include requirements for special labeling or medication guides forpatients, special communication plans to healthcare professionals and restrictions on distribution and use. We cannot predict the specific scope ormagnitude of REMS that may be required as part of the FDA's approval of our other product candidates. Depending on the extent of the REMSrequirements, our costs to commercialize our product candidates may increase significantly and distribution restrictions could limit sales. Similarrequirements may arise in countries outside of the U.S.Changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols submitted to applicableregulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethicscommittees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.The FDA's and other regulatory authorities' policies may change, and additional government regulations may be enacted that could prevent, limit ordelay regulatory approval of our other product candidates. We cannot predict the likelihood, nature or extent of government regulation that mayarise from future legislation or administrative action, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existingrequirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketingapproval that we may have obtained.If we are required to conduct additional clinical trials or other studies with respect to our product candidates beyond those that we currentlycontemplate, or if we are unable to successfully complete our clinical trials or other studies, we may be delayed in obtaining regulatory approval ofany of our product candidates, we may not be able to obtain regulatory approval at all or we may obtain approval of indications that are not asbroad as intended. Our product development costs will also increase if we experience delays in testing or approvals, and we may not havesufficient funding to complete the testing and approval process for our product candidates. Significant clinical trial delays could allow ourcompetitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of thisoccurs, our business would be harmed.Risks Related to Our Reliance on Third PartiesIf we encounter difficulties in maintaining commercial manufacturing and supply agreements with our third-party manufacturers andsuppliers of XHANCE, our ability to commercialize XHANCE would be impaired.We do not own any manufacturing facilities. We currently have no plans to build our own clinical or commercial scale manufacturing facility. Welack the resources to manufacture and test, on a commercial scale, the technical performance of XHANCE and our other product candidates. Wecurrently rely, and expect to continue to rely, on a limited number of experienced personnel and CMOs and suppliers who assist in the production,assembly, test, supply, storage and distribution of XHANCE and its components in our clinical trials and FDA registration, and we control onlysome of the aspects of their activities. We may not be able to maintain terms that are favorable to us. We may not be able to enter intocommercial manufacturing and supply agreements with any necessary third parties, should such additional agreements become necessary. If weare unable to enter into such agreements or61Table of Contentsmaintain existing agreements, each on commercially reasonable terms, our ability to commercialize XHANCE would be impaired, and ourbusiness, financial condition and results of operations would be materially adversely affected.If we encounter issues with our contract manufacturers or suppliers, we may need to qualify alternative manufacturers or suppliers,which could impair our ability to sufficiently and timely manufacture and supply XHANCE.We currently depend on contract manufacturers and suppliers for XHANCE and its components. Although we could obtain each of thesecomponents from other third-party suppliers, we would need to qualify and obtain FDA approval for another contract manufacturer or supplier as analternative source for each such component, which could be costly and cause significant delays. Each of our current commercial manufacturingand supply agreements include limitations on our ability to utilize alternative manufacturers or suppliers for these components above certainspecified thresholds during the terms of the agreements, which impairs our ability to fully implement any future manufacturing strategies to preventsupply shortages or quality issues.In addition, some of our suppliers, including our active pharmaceutical ingredient (API) supplier and our contract manufacturers, conduct theirmanufacturing operations for us at a single facility. Unless and until we qualify additional facilities, we may face limitations in our ability to respondto manufacturing and supply issues. For example, if regulatory, manufacturing or other problems require one of these manufacturers or suppliers todiscontinue production at their respective facility, or if the equipment used for the production of XHANCE in these facilities is significantlydamaged or destroyed by fire, flood, earthquake, power loss or similar events, the ability of such manufacturer or supplier to provide componentsor API needed for XHANCE, or to manufacture XHANCE may be significantly impaired. In the event that these parties suffer a temporary orprotracted loss of its facility or equipment, we would still be required to obtain FDA approval to qualify a new manufacturer or supplier, asapplicable, as an alternate manufacturer or source for the respective component before any components manufactured by such manufacturer or bysuch supplier could be sold or used.Any production shortfall that impairs the supply of XHANCE or any of these components could have a material adverse effect on our business,financial condition and results of operations and adversely affect our ability to satisfy demand for XHANCE, which could adversely affect ourproduct sales and operating results materially.If third-party manufacturers, wholesalers and distributors fail to devote sufficient time and resources to XHANCE or their performance issubstandard, our product supply may be impacted.Our reliance on a limited number of manufacturers, wholesalers and distributors exposes us to the following risks, any of which could limitcommercial supply of our products, result in higher costs, or deprive us of potential product revenues:▪our CMOs, or other third parties we rely on, may encounter difficulties in achieving the volume of production needed to satisfy commercialdemand, may experience technical issues that impact quality or compliance with applicable and strictly enforced regulations governing themanufacture of pharmaceutical products, and may experience shortages of qualified personnel to adequately staff production operations;▪our wholesalers and distributors could become unable to sell and deliver XHANCE for regulatory, compliance and other reasons;▪our CMOs, wholesalers and distributors could default on their agreements with us to meet our requirements for commercial supply ofXHANCE;▪our CMOs, wholesalers and distributors may not perform as agreed or may not remain in business for the time required to successfullyproduce, store, sell and distribute our products and we may incur additional cost; and▪if our CMOs, wholesalers and distributors were to terminate our arrangements or fail to meet their contractual obligations, we may beforced to delay or cease sales and ongoing development of XHANCE, or find alternatives that may be more expensive than originallyanticipated.Our reliance on third parties reduces our control over our product candidate development and commercialization activities but does not relieve usof our responsibility to ensure compliance with all required legal, regulatory and scientific standards. For example, the FDA and other regulatoryauthorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP andsimilar foreign standards. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes,including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead62Table of Contentsto a delay in, or failure to obtain, regulatory approval of any of our product candidates or supply our commercial volume of XHANCE. In addition,such failure could be the basis for the FDA to issue a warning or untitled letter, withdraw approvals for product candidates previously granted to us,or take other regulatory or legal action, including recall or seizure, total or partial suspension of production, suspension of ongoing clinical trials,refusal to approve pending applications or supplemental applications, detention or product, refusal to permit the import or export of products,injunction, imposing civil penalties or pursuing criminal prosecution.Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.As we further scale up manufacturing of XHANCE and conduct required stability testing, issues may arise involving product-packaging and third-party equipment malfunctions. These issues may require refinement or resolution in order to continue with commercial marketing of XHANCE. Inaddition, quality issues may arise during scale-up and of commercial manufacturing processes. Any issues in our product or delivery devicescould result in increased scrutiny by regulatory authorities, delays in our regulatory approval process, increases in our operating expenses,decreases in sales to customers, or failure to obtain or maintain approval for our products.We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meetexpected deadlines, or if they terminate their agreement with us, we may not be able to obtain regulatory approval for or commercializeour product candidates.We have relied upon and plan to continue to rely upon CROs to monitor and manage data for our prospective preclinical and clinical programs. Werely on these parties for execution of our clinical trials, and we control only some of the aspects of their activities. Nevertheless, we areresponsible for ensuring that each of our studies and clinical trials are conducted in accordance with the applicable protocol, legal, regulatory andscientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to complywith federal regulations and current Good Clinical Practices (GCP), which are international standards meant to protect the rights and health ofpatients and to define the roles of clinical trial sponsors, advisors and monitors. GCPs are enforced by the FDA and foreign regulatory authoritiesin the form of International Conference on Harmonization (ICH) guidelines for all of our product candidates in clinical development. Regulatoryauthorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail tocomply with applicable GCP and other regulations, including as a result of any recent changes in such regulations, the clinical data generated inour clinical trials may be deemed unreliable and the FDA or foreign regulatory authorities may require us to perform additional clinical trials beforeapproving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority willdetermine that any of our clinical trials comply with GCP requirements. In addition, our clinical trials must be conducted with product producedunder cGMP requirements. While we have agreements governing activities of our CROs, we have limited influence over their actual performance.Failure to comply with applicable regulations in the conduct of the clinical trials for our product candidates may require us to repeat preclinicalstudies and clinical trials, which would increase our operating expenses and delay the regulatory approval process.Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether ornot they devote sufficient time and resources to our ongoing clinical and preclinical programs. If our CROs do not successfully carry out theircontractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtainis compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons or if we receive additional FDAnotices that do require corrective action, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatoryapproval for or successfully commercialize our product candidates. As a result, the commercial prospects for our product candidates would beharmed, our costs could increase substantially and our ability to generate revenue could be delayed.Switching or adding additional CROs involves additional cost and requires management time and focus. Identifying, qualifying and managingperformance of third-party service providers can be difficult, time-consuming and cause delays in our development programs. In addition, there is anatural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the originalprovider. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delaysin the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects. If any ofour relationships with our CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commerciallyreasonable terms. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines.63Table of ContentsBecause we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risks thatthird parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use ofthird-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this informationwill be misappropriated. We currently have a small number of employees, which limits the internal resources we have available to identify andmonitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providersin the future, our ability to advance our product candidates through clinical trials will be compromised. Though we carefully manage ourrelationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays orchallenges will not have a material adverse impact on our business, financial condition and prospects.Risks Related to Our Business Operations and IndustryOur future success depends on our ability to retain and have the full attention of our key executives and to attract, retain and motivateother qualified personnel.We are highly dependent on the management, development, clinical, financial and business development expertise of our executive team and, inparticular, the services of Peter K. Miller, our Chief Executive Officer, and Ramy A. Mahmoud, our President and Chief Operating Officer. Each ofMr. Miller and Dr. Mahmoud is employed by us at will and is permitted to terminate his employment with us at any time. We entered intoemployment agreements with Mr. Miller and Dr. Mahmoud in October 2017, but Mr. Miller and Dr. Mahmoud continue to be employed at will. We donot maintain "key person" insurance for any of our executives or other employees. The loss of the services of Mr. Miller or Dr. Mahmoud couldimpede the achievement of our development and commercialization objectives.Recruiting and retaining qualified employees for our business, including scientific, technical and sales and marketing personnel, will also be criticalto our success. Competition for skilled personnel in our industry is intense and the turnover rate can be high. We may not be able to attract andretain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. Inaddition, failure to succeed in our commercialization efforts or in the performance of any future clinical studies may make it more challenging torecruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee could impede the progress ofour research, development and commercialization objectives.We expect to grow the size of our organization, and we may experience difficulties in managing this growth.Implementation of our development and commercialization strategies may require additional managerial, operational, sales, marketing, financialand other resources. Our current management, personnel and systems may not be adequate to effectively manage the expansion of ouroperations, including but not limited to in connection with the onboarding of our contract sales organization to become our internal sales team,which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, employee turnover andreduced productivity. Future growth could require significant capital expenditures and may divert financial resources from other projects, such asthe development of our existing or future product candidates. Future growth would impose significant added responsibilities on members ofmanagement, including:▪managing the commercialization of XHANCE and any other products for which we obtain marketing approval;▪overseeing our preclinical studies and clinical trials effectively;▪identifying, recruiting, maintaining, motivating and integrating additional employees, including any sales and marketing personnel engagedin connection with the commercialization of any approved product;▪managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractorsand other third parties; and▪improving our managerial, development, operational and financial systems and procedures.As our operations expand, we will need to manage additional relationships with various strategic collaborators, suppliers and other third parties.Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on ourability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively andhire, train and integrate additional management, administrative and sales and marketing personnel. Failure to accomplish any of these activitiescould prevent us from successfully growing our company.64Table of ContentsWe are subject to intense competition and, if we are unable to compete effectively, our product candidates, if approved, may not reachtheir commercial potential.The development and commercialization of new drugs is highly competitive and subject to rapid and significant technological change as researchprovides a deeper understanding of the pathology of diseases and new technologies and treatments are developed. We face competition withrespect to XHANCE from prescription and over-the-counter INS, oral steroids and other medical management products, and will face competitionwith respect to any other product candidates that we may seek to develop or commercialize in the future, from many different sources, includinglarge pharmaceutical, biotechnology, specialty pharmaceutical and, to a lesser degree, medical device companies.The key competitive factors that we expect to impact the commercial success of XHANCE and any other product candidates we may develop arelikely to be their efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement. Nasonex, marketed byMerck, is currently the only other branded drug therapy approved by the FDA for the treatment of nasal polyps, which is our initial indication forXHANCE. A generic version of Nasonex, mometasone furoate monohydrate, was approved by the FDA for, among other indications, the treatmentof nasal polyps and launched in 2016. In addition, Beconase AQ, which is an INS marketed by GlaxoSmithKline, is indicated for the prophylaxis ofnasal polyps after surgical resection, and SINUVATM is a commercially available corticosteroid-eluting implant indicated for the treatment of nasalpolyps in adult patients who have had ethmoid sinus surgery that can be placed in the ethmoid sinus under endoscopic visualization for up to 90days. We are not aware of any drug therapy approved by the FDA or foreign regulatory agencies for the treatment of chronic sinusitis.Even though they have not been approved for the treatment of such indications, published clinical practice guidelines do recommend the use ofINS products for the treatment of chronic rhinosinusitis and nasal polyps in an effort to maximize medical therapy prior to surgical intervention.Currently approved branded INS products include Rhinocort, marketed by AstraZeneca, Nasacort AQ, marketed by sanofi-aventis, Beconase AQ,Flonase (which contains the same active pharmaceutical ingredient as XHANCE), and Veramyst, each marketed by GlaxoSmithKline, Qnasl,marketed by Teva Pharmaceuticals, and Omnaris and Zetonna, each marketed by Sunovion Pharmaceuticals. Due to the limitations of currenttreatments, several companies are investigating the treatment of nasal polyps with biologic monoclonal antibodies. To date, four biologicmonoclonal antibodies have been studied in nasal polyps: omalizumab, reslizumab, mepolizumab and dupilumab. For dupilumab, the submissionof an Supplemental Biologics License Application (sBLA) was recently publicly announced. In addition, there are new small molecules, includingfevipiprant, being developed for the treatment of nasal polyps, that are also believed to inhibit specific pathways of inflammation present in nasalpolyps. Most of these INS and biologics companies, as well as other potential competitors, have substantially greater financial, technical andhuman resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA andother regulatory approvals of products and the commercialization of those products.Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smallnumber of our competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval of drugs andachieving widespread market acceptance. Our competitors' drugs, or drugs they may develop in the future, may be more effective, or moreeffectively marketed and sold, than any drug we may commercialize and may render XHANCE or any of our other product candidates we maydevelop obsolete or non-competitive before we can recover the expenses of developing and commercializing XHANCE or any of our other productcandidates. Our competitors may also obtain FDA or other regulatory approval of products more rapidly than expected or may obtain better orpreferred market access by offering large rebates to payors or by other means. We may not have accurately or completely predicted thedevelopment of new and improved or low-cost surgical interventions, alternative medical therapies or other market-disrupting events. If we areunable to manufacture, distribute, stimulate demand reaching the predicted market share, overcome barriers to access or otherwise effectivelycommercialize the product, all of which factors may be influenced by current or future competition, then our opportunity to generate revenue fromthe sale of XHANCE or any of our other product candidates, if approved, will be compromised.Our long-term growth depends on our ability to develop and commercialize additional ENT products.It is important to our business that we continue to build a more complete product offering within the ENT and allergy markets. We are evaluatingthe use of our proprietary EDS technology to develop new product candidates for the ENT and allergy markets. Developing additional productcandidates is expensive and time-consuming and could divert management's attention away from the commercialization of XHANCE. Even if weare successful in65Table of Contentsdeveloping additional product candidates, the success of any new product candidates or enhancement to any existing product candidates willdepend on several factors, including our ability to:▪properly identify and anticipate ENT and allergy physician and patient needs;▪develop, obtain necessary regulatory clearances or approvals, and introduce new product candidates or product enhancements in a timelymanner;▪demonstrate, if required, the safety and efficacy of new product candidates with data from preclinical studies and clinical trials;▪avoid infringing upon the intellectual property rights of third parties;▪comply with all regulations relating to the marketing of new product candidates, including any new or modified EDS technologies; and▪provide adequate training to potential users of our product candidates.If we are unsuccessful in developing and commercializing additional product candidates in other areas of the ENT and allergy markets, our abilityto gain and maintain profitability may be impaired.We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies, whichcould negatively impact our operating results, dilute our stockholders' ownership, increase our debt or cause us to incur significantexpense.As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial-stage products or productcandidates, businesses or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify orcomplete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any suchtransaction. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to completetechnology transfers and integrate these acquisitions successfully into our existing business and we may incur additional debt or assume unknownor contingent liabilities as part of the transaction. Integration of an acquired company or assets may also disrupt ongoing operations, require thehiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition of commercialassets, and require management resources that would otherwise focus on developing our existing business. We may not be able to find suitablestrategic collaborators or identify other investment opportunities, and we may experience losses related to any such investments.To finance any acquisitions or collaborations, we may choose to issue debt or shares of our common or preferred stock as consideration. Anysuch issuance of shares would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able toacquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raiseadditional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or atall.Our employees, collaborators, independent contractors, principal investigators, consultants, vendors and CROs may engage inmisconduct or other improper activities, including noncompliance with regulatory standards and requirements.We are exposed to the risk that our employees, collaborators, independent contractors, principal investigators, consultants, vendors and CROsmay engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, recklessand/or negligent conduct or unauthorized activity that violates:▪FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA;▪manufacturing standards;▪federal and state healthcare fraud and abuse laws and regulations; or▪laws that require the true, complete and accurate reporting of financial information or data.66Table of ContentsIn particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended toprevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing,discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by theseparties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course ofclinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. Anyincidents or any other conduct that leads to an employee receiving an FDA debarment could result in a loss of business from third parties andsevere reputational harm.We have a Code of Business Conduct and Ethics to govern and deter such behaviors, but it is not always possible to identify and deter employeemisconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks orlosses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such lawsor regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actionscould have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines,possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm,diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement orsimilar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations.If we fail to comply with data and privacy protection laws and regulations, we could be subject to government enforcement actions,which could include civil or criminal penalties, as well as private litigation and/or adverse publicity, any of which could negatively affectour operating results and business.Our business is subject to complex and evolving U.S., state and international data and privacy protection laws. In the U.S., numerous federal andstate laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumerprotection laws (e.g., Section 5 of the Federal Trade Commission Act) govern the collection, use, disclosure, and protection of health-related andother personal information. For instance, HIPAA imposes certain obligations, including mandatory contractual terms, with respect to safeguardingthe privacy, security and transmission of individually identifiable health information and imposes notification obligations in the event of a breach ofthe privacy or security of individually identifiable health information on entities subject to HIPAA and their business associates that perform certainactivities that involve the use or disclosure of protected health information on their behalf.Additionally, the General Data Protection Regulation (GDPR), applicable in the European Union (EU) as of May 25, 2018, applies to all of ouractivities conducted from an establishment in the EU or related to products and services that we may offer to EU users. The GDPR created arange of new compliance obligations, which could cause us to change our business practices, and has significantly increased financial penaltiesfor noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever ishigher) for the most serious infringements).Certain of these laws and regulations are described in greater detail in the previous section under "Business — Government Regulation —Healthcare Privacy Laws." Failure to comply with applicable data protection laws and regulations could result in government enforcement actionsand create liability for us, which could include civil and/or criminal penalties, as well as private litigation and/or adverse publicity that couldnegatively affect our operating results and business.Our business and operations would suffer in the event of computer system failures, cyberattacks or a deficiency in our cybersecurity orthose of any business partners.Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable todamage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures, cyberattacksor cyber-intrusions over the Internet, loss of funds or information from phishing or other fraudulent schemes, attachments to emails, persons insideour organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number,intensity and sophistication of attempted attacks and intrusions from around the world have increased. Such an event could cause interruption ofour operations or loss of Company funds and have a negative financial consequence on our business. For example, the loss of data fromcompleted or ongoing clinical trials for our product candidates could result in delays in our regulatory approval efforts and significantly increase ourcosts to recover or reproduce the data. To the extent that any disruption or security breach were to67Table of Contentsresult in a loss of or damage to our data, or inappropriate disclosure of confidential, proprietary or personal information, we could incur materiallegal claims and liability and damage to our reputation and the development and commercialization of XHANCE and our product candidates couldbe delayed. Additionally, breach remediation costs may be significant If we fail to successfully manage our global enterprise resource planning system, it could adversely affect our operations and operatingresults.In 2018 we implemented a new global enterprise resource planning (ERP) system. This system replaces many of our existing operating andfinancial systems. Such an implementation was a major undertaking, both financially and from a management and personnel perspective. Anydisruptions, delays or deficiencies in the maintenance of our ERP system could adversely affect our ability to process financial transactions, fulfillcontractual obligations or otherwise operate our business.We are subject to risks inherent in foreign operations.We currently operate portions of our business through our foreign subsidiaries, including through our Norwegian subsidiary, OptiNose AS, whichcurrently owns a substantial portion of our intellectual property and conducts development activities, and our United Kingdom subsidiary OptiNoseUK Ltd., which performs research and development and regulatory activities for the Optinose EDS technology as well as other services. We havecommitted, and intend to continue to commit, resources to our international operations. We are subject to a number of risks associated with ourinternational business operations and activities that may increase liability, costs, and require significant management attention. These risksinclude:▪compliance with the laws of the U.S., the United Kingdom, Norway, and other countries that apply to our international operations, includingimport and export legislation;▪compliance with foreign data protection laws and regulations in the United Kingdom, Norway and other countries that apply to ourinternational operations;▪the complexities and expenses of administering a business abroad;▪complications in compliance with, and unexpected changes in, tariffs, trade barriers, price and exchange controls and other foreignregulatory requirements, including potential trade conflicts, changes to trade agreements/treaties, and the implementation of traderestrictions;▪instability in economic or political conditions, including inflation, recession and actual or anticipated military conflicts, social upheaval orpolitical uncertainty;▪production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;▪uncertainties of laws and enforcement relating to the protection of intellectual property or secured technology;▪litigation in foreign court systems;▪language barriers;▪changes in tax laws and regulations in the jurisdictions in which we operate;▪compliance with tax, employment, immigration and labor laws, regulations and restrictions for employees living or traveling abroad;▪difficulties staffing and managing foreign operations; and▪workforce uncertainty in countries where labor unrest is more common than in the U.S.;There can be no assurance that the policies and procedures we implement to address or mitigate these risks will be successful, that our personnelwill comply with them or that we will not experience these factors in the future or that they will not have a material adverse effect on our business,results of operations and financial condition.68Table of ContentsOur corporate structure and foreign operations may have adverse tax consequences and expose us to additional tax liabilities. Inaddition, tax returns we file are subject to examination by U.S. federal, state and foreign tax authorities.We have operations in Norway and the UK and a substantial portion of our intellectual property, including certain rights to XHANCE, are owned byOptiNose AS, our Norwegian subsidiary. We file tax returns in various jurisdictions and those returns are subject to examination by the taxauthorities. During an examination, a tax authority could challenge positions taken on a return. Such a challenge could result in the loss of taxattributes or in the payment of tax which could have an unfavorable impact on our financial condition.We operate pursuant to written intercompany license, service and related agreements that establish prices for intellectual property and for servicesprovided such as production, marketing, management, and technology development activities that are performed by one group company foranother group company. The amounts paid under these intercompany agreements are commonly considered for tax purposes as transfer prices. Ifthe affiliated companies are located in different countries, the tax laws and regulations of each country generally require that transfer prices be atarm’s length as if between unrelated companies. Our transfer pricing arrangements consider requirements of the jurisdictions in which we operatebut are not binding on the tax authorities. If any tax authority is successful in challenging our transfer prices, there could be an increase in taxableincome in that jurisdiction which could increase our tax liabilities. Further, if the tax authority in the other country does not agree with theadjustment, both countries could tax the same income, resulting in double taxation.Any income earned by our foreign subsidiaries, including a portion of the sales of XHANCE in the U.S., may be subject to additional tax liabilities.If our foreign operations generate cash that we want to repatriate to the U.S. or if cash generated by our U.S. operations is not sufficient to fundour U.S. operations, we may face additional tax liabilities in returning or otherwise providing such cash to support our U.S. operations or otherstrategic opportunities in the U.S. If we are forced to repatriate any foreign-held cash, we could incur a significant tax charge, and our business,operating results or financial condition could be adversely impacted.If foreign subsidiary income is subject to the Subpart F, investment in US property or global intangible low-taxed income provisions, or similarprovisions of the U.S. Internal Revenue Code, collectively referred to in this paragraph as Subpart F, the income may be subject to U.S. corporateincome tax even if there is no cash distribution of those earnings to the U.S. For example, Subpart F income includes certain "passive" income,certain income from intercompany transactions, foreign subsidiary income over a legislative threshold or income of a foreign subsidiary whichmakes an "investment in U.S. property", such as holding the stock in, or making a loan to, a U.S. corporation. Any foreign subsidiary incomesubject to the Subpart F provisions would be included in determining U.S. taxable income and potentially subject to federal corporate income tax atrates up to 21%.Comprehensive tax reform legislation could adversely affect our business and financial condition.On December 22, 2017, the U.S. government signed into law comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (Tax Act).The Tax Act introduced significant changes to the U.S. corporate tax laws. The Tax Act changes include, but are not limited to:▪a reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%;▪limits on the tax deductibility of interest expense;▪limits on the utilization of net operating losses generated after 2017 to 80% of current year taxable income;▪elimination of net operating loss carrybacks;▪accelerated deduction for certain investments instead of depreciation deductions;▪allowing indefinite carry forward of net operating loss carry forwards generated after 2017;▪modifying or repealing certain business deductions and credits; and▪limits on the deduction for certain compensation in excess of $1 million.While guidance has been provided on some of these new provisions, the overall impact of the Tax Act on our Company is uncertain and ourbusiness and financial condition could be adversely affected depending on how the new provisions are interpreted.69Table of ContentsWe may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act and other U.S. and foreign anti-corruption anti-moneylaundering, export control, sanctions, and other trade laws and regulations, and any determination that we violated these laws couldhave a material adverse effect on our business.We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations,and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Control. We arealso subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), the U.S. domestic bribery statute contained in 18 U.S.C.§ 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, and possibly otheranti-bribery and anti-money laundering laws in countries outside of the U.S. in which we conduct our activities. Anti-corruption laws are interpretedbroadly and prohibit companies and their employees and third-party intermediaries from authorizing, promising, offering, providing, soliciting, oraccepting, directly or indirectly, improper payments or benefits to or from any person whether in the public or private sector. As we commercializeXHANCE and any other product candidates that we may develop, we may engage with third-party manufacturers and collaborators who operateabroad and are required to obtain certain necessary permits, licenses and other regulatory approvals with respect to our business. Our activitiesabroad create the risk of unauthorized payments or offers of payments by employees, consultants, sales agents or distributors, even though theymay not always be subject to our control. We have implemented policies to discourage these practices by our employees, consultants, salesagents and distributors. However, our employees, consultants, sales agents, or distributors of our company may engage in conduct for which wemight be held responsible, even if we do not explicitly authorize such activities.Noncompliance with anti-corruption, anti-money laundering, export control, sanctions, and other trade laws could subject us to whistleblowercomplaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages,other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges,reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or investigations are launched, or governmentalor other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financialcondition could be materially harmed. Responding to any action will likely result in a materially significant diversion of management's attention andresources and significant defense and compliance costs and other professional fees. In addition, the U.S. government may seek to hold us liablefor successor liability FCPA violations committed by companies in which we invest or that we acquire. As a general matter, enforcement actionsand sanctions could harm our business, results of operations, and financial condition.Risks Related to Our Intellectual PropertyIf we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate to protect our technology,XHANCE or our other product candidates, our competitors could develop and commercialize technology similar to ours, and ourcompetitive position could be harmed.Our commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection in the U.S.and other countries with respect to our proprietary technology and products. We rely on trade secret, patent, copyright and trademark laws, andconfidentiality and other agreements with employees and third parties, all of which offer only limited protection. Our strategy is to seek patentprotection for XHANCE, our other product candidates and their compositions, their methods of use and processes for their manufacture, and anyother aspects of inventions that are commercially important to the development of our business.The patent prosecution process is expensive and time-consuming, and we and any future licensors and licensees may not be able to apply for orprosecute patents on certain aspects of our product candidates or delivery technologies at a reasonable cost, in a timely fashion, or at all. We maynot have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to thirdparties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of ourbusiness. It is also possible that we or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course ofdevelopment and commercialization activities before it is too late to obtain patent protection on them. Therefore, our patents and applications maynot be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparationor filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship,claim scope or patent term adjustments. If any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution,maintenance, or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties frommaking, using, and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, suchpatents or applications may be invalid or unenforceable. Moreover, our competitors may70Table of Contentsindependently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair our ability to prevent competition fromthird parties, which may have an adverse impact on our business, financial condition, and operating results.The patent positions of pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recentyears been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of any patents that issue,are highly uncertain. The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietaryinformation or infringement of our intellectual property rights, both inside and outside the U.S. Further, the examination process may require us tonarrow the claims of pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue.The rights that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we areseeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtainedis not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability tosuccessfully commercialize our technology and products may be impaired.As February 28, 2019, we owned a total of 47 U.S. patents and 27 pending U.S. patent applications. These U.S. patents will expire between 2020and 2034. With respect to these patent rights, we do not know whether any of our patent applications will result in issued patents or, if any of ourpatent applications do issue, whether such patents will protect our technology and drugs, in whole or in part, or whether such patents willeffectively prevent others from commercializing competitive technologies and products. There is no guarantee that any of our issued or grantedpatents will not later be found invalid or unenforceable.The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. or vice versa. For example, European patentlaw restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in the scientificliterature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until18 months after filing or in some cases not at all, until they are issued as a patent. Therefore, we cannot be certain that we were the first to makethe inventions claimed in our pending patent applications, that we were the first to file for patent protection of such inventions, or that we havefound all of the potentially relevant prior art relating to our patents and patent applications that could invalidate one or more of our patents orprevent one or more of our patent applications from issuing. Even if patents do successfully issue and even if such patents cover our productcandidates, third parties may initiate oppositions, interferences, re-examinations, post-grant reviews, inter partes reviews, nullification or derivationactions in court or before patent offices or similar proceedings challenging the validity, enforceability, or scope of such patents, which may resultin the patent claims being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may notadequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing around our claims. Anyof these outcomes could impair our ability to prevent competition from third parties.Furthermore, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patentsmay be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operateor in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using orcommercializing similar or identical technology and drugs, or limit the duration of the patent protection of our technology and drugs. Given theamount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates mightexpire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us withsufficient rights to exclude others from commercializing drugs similar or identical to ours.We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, timeconsuming and unsuccessful.Competitors may infringe our patents or the patents of any party from whom we may license patents from in the future. To counter infringement orunauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In a patent litigation in the U.S.,defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure tomeet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceabilityassertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. Patent andTrademark Office (USPTO) or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity andunenforceability during patent litigation is unpredictable. A court may decide that a patent of ours or of any of our future licensors is not valid or is71Table of Contentsunenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover thetechnology in question. In addition, to the extent that we have to file patent litigation in a federal court against a U.S. patent holder, we would berequired to initiate the proceeding in the state of incorporation or residency of such entity. With respect to the validity question, for example, wecannot be certain that no invalidating prior art exists. An adverse result in any litigation or defense proceedings could put one or more of ourpatents at risk of being invalidated, found unenforceable, or interpreted narrowly, and it could put our patent applications at risk of not issuing.Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employeeresources from our business. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, andperhaps all, of the patent protection on one or more of our products or certain aspects of the Optinose EDS technology. Such a loss of patentprotection could compromise our ability to pursue our business strategy.Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents and patentapplications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or to attempt tolicense rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that areacceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of ourmanagement and other employees. We may not be able to prevent, alone or with any of our future licensors, misappropriation of our proprietaryrights, particularly in countries where the laws may not protect those rights as fully as in the U.S. Furthermore, because of the substantial amountof discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could becompromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions orother interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantialadverse effect on the price of our common stock.Moreover, we may be subject to a third-party pre-issuance submission of prior art to the USPTO or other foreign patent offices, or becomeinvolved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights orthe patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, ourpatent rights, allow third parties to commercialize our technology or drugs and compete directly with us, without payment to us, or result in ourinability to manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of protectionprovided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop, orcommercialize current or future product candidates.We may not be able to protect our intellectual property rights throughout the world.Filing, prosecuting and defending patents on XHANCE, our other product candidates and the Optinose EDS technology throughout the world wouldbe prohibitively expensive, and our intellectual property rights in some countries outside the U.S. may be less extensive than those in the U.S. Inaddition, the laws and practices of some foreign countries do not protect intellectual property rights, especially those relating to life sciences, tothe same extent as federal and state laws in the U.S. For example, novel formulations of existing drugs and manufacturing processes may not bepatentable in certain jurisdictions, and the requirements for patentability may differ in certain countries, particularly developing countries. Also,some foreign countries, including European Union countries, India, Japan and China, have compulsory licensing laws under which a patent ownermay be compelled under certain circumstances to grant licenses to third parties. Consequently, we may have limited remedies if patents areinfringed or if we are compelled to grant a license to a third party, and we may not be able to prevent third parties from practicing our inventions inall countries outside the U.S., or from selling or importing products made using our inventions into or within the U.S. or other jurisdictions. Thiscould limit our potential revenue opportunities. Competitors may use our technologies in jurisdictions where we have not obtained patent protectionto develop their own products, and may export otherwise infringing products to territories where we have patent protection, but where enforcementis not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued patents andour patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing with us in thesejurisdictions. Furthermore, the prevalence of counterfeit medicines, which is one that has been deliberately and fraudulently mislabeled as to itsidentity and source, is a significant and growing industry-wide issue that could impact our revenue and our reputation for which we may havelimited or no recourse. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significantcommercial advantage from our intellectual property. We may not prevail in any lawsuits that we initiate in these foreign countries and thedamages or other remedies awarded, if any, may not be commercially meaningful.72Table of ContentsObtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee paymentand other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid tothe USPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and applications. TheUSPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and othersimilar provisions during the patent application process and after a patent has issued. There are situations in which non-compliance can result inabandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which couldbe uncertain and could harm our business.Our commercial success depends upon our ability to develop, manufacture, market and sell XHANCE and our other product candidates and useour proprietary technologies without infringing the proprietary rights of third parties. While our product candidates are in preclinical studies andclinical trials, we believe that the use of our product candidates in these preclinical studies and clinical trials falls within the scope of theexemptions provided by 35 U.S.C. Section 271(e) in the U.S., which exempts from patent infringement liability activities reasonably related to thedevelopment and submission of information to the FDA. As XHANCE and our other product candidates progress toward commercialization, thepossibility of a patent infringement claim against us increases. For instance, our use of the Section 505(b)(2) regulatory pathway for the follow-onindication of chronic sinusitis or any of our other product candidates will require us to provide a Paragraph IV certification to the NDA and patentholders of the RLD pursuant to the Hatch-Waxman Act if the RLD is covered by Orange Book-listed patents. If the NDA or patent holder files apatent infringement lawsuit against us within 45 days of its receipt of notice of our certification, the FDA is prevented from approving ourSection 505(b)(2) NDA until the earliest of 30 months, expiration of the patents, settlement of the lawsuit or a court decision in the infringementcase that is favorable to us. Accordingly, we may invest significant time and expense in the development of our product candidates only to besubject to significant delay and expensive and time-consuming patent litigation before our product candidates may be commercialized. There canbe no assurance that our product candidates do not infringe other parties' patents or other proprietary rights and competitors or other parties mayassert that we infringe their proprietary rights in any event.There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatenedwith, future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, including interferenceor derivation proceedings before the USPTO. Numerous U.S. and foreign issued patents and pending patent applications owned by third partiesexist in the fields in which we are developing our drug candidates. Third parties may assert infringement claims against us based on existingpatents or patents that may be granted in the future.If we are found to infringe a third party's intellectual property rights, we could be required to obtain a license from such third party to continuecommercializing our product candidates. However, we may not be able to obtain any required license on commercially reasonable terms or at all.Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the sametechnology or intellectual property rights licensed to us. If we fail to obtain a required license, we may be unable to effectively market productcandidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us fromgenerating revenue sufficient to sustain our operations. Alternatively, we may need to redesign our infringing products, which may be impossible orrequire substantial time and monetary expenditure. Under certain circumstances, we could be forced, including by court order, to ceasecommercializing our product candidates. In addition, in any such proceeding or litigation, we could be found liable for substantial monetarydamages, potentially including treble damages and attorneys' fees, if we are found to have willfully infringed. A finding of infringement couldprevent us from commercializing our product candidates or force us to cease some of our business operations, which could harm our business.Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on ourbusiness.The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor,could be substantial, and litigation would divert our management's attention. Some of our competitors may be able to sustain the costs of complexpatent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation andcontinuation of patent litigation or other proceedings could compromise our commercialization efforts, delay our research and73Table of Contentsdevelopment efforts and limit our ability to continue our operations. There could also be public announcements of the results of the hearing,motions, or other interim proceedings or developments. If securities analysts or investors perceive those results to be negative, it could cause theprice of shares of our common stock to decline.Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringingmanner.Our competitors may seek to market generic versions of any of our approved products by submitting ANDAs to the FDA or new products that useour approved products as the RLD, in each case where our competitors claim that our patents are invalid, unenforceable or not infringed.Alternatively, our competitors may seek approval to market their own products that are the same as, similar to or otherwise competitive withXHANCE and any future product candidates we may develop. In these circumstances, we may need to defend or assert our patents, by meansincluding filing lawsuits alleging patent infringement requiring us to engage in complex, lengthy and costly litigation or other proceedings. In any ofthese types of proceedings, a court or government agency with jurisdiction may find our patents invalid, unenforceable or not infringed. We mayalso fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. Even if we have valid andenforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our businessobjectives.Changes in either U.S. or foreign patent law or interpretation of such laws could diminish the value of patents in general, therebyimpairing our ability to protect our products.As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining andenforcing patents in the pharmaceutical industry involve both technological and legal complexity, and it therefore is costly, time-consuming andinherently uncertain. In addition, on September 16, 2011, the Leahy-Smith America Invents Act (the AIA) was signed into law. The AIA includes anumber of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may alsoaffect patent litigation.An important change introduced by the AIA is that, as of March 16, 2013, the U.S. transitioned to a "first-to-file" system for deciding which partyshould be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files apatent application in the USPTO after that date, but before us, could therefore be awarded a patent covering an invention of ours even if we hadmade the invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of apatent application.Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providingopportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued beforeMarch 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in USPTO proceedings compared to theevidentiary standard in U.S. federal court, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to holda claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly,a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged bythe third party as a defendant in a district court action.Depending on decisions by the U.S. Congress, the federal courts, the USPTO, or similar authorities in foreign jurisdictions, the laws andregulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existingpatents and patents that we might obtain in the future.We may be subject to claims asserting that our employees, consultants, independent contractors and advisors have wrongfully used ordisclosed confidential information and/or alleged trade secrets of their current or former employers or claims asserting ownership ofwhat we regard as our own intellectual property.Although we try to ensure that our employees, consultants, independent contractors and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have inadvertently or otherwise used or disclosedconfidential information and/or intellectual property, including trade secrets or other proprietary information, of the companies that any suchindividual currently or formerly worked for or provided services to. Litigation may be necessary to defend against these claims. If we fail indefending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property74Table of Contentsrights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction toour business.In addition, while we require our employees and contractors who may be involved in the conception or development of intellectual property toexecute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, infact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that theymay bring against us, to determine the ownership of what we regard as our intellectual property.Intellectual property rights do not prevent all potential threats to competitive advantages we may have.The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, andintellectual property rights may not adequately protect our business or permit us to maintain our competitive advantage.The following examples are illustrative:▪Others may be able to make drug and device components that are the same as or similar to XHANCE and our other product candidatesbut that are not covered by the claims of the patents that we own or have exclusively licensed;▪We or any of our licensors or collaborators might not have been the first to make the inventions covered by the issued patent or pendingpatent application that we own or have exclusively licensed;▪We or any of our licensors or collaborators might not have been the first to file patent applications covering certain of our inventions;▪Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectualproperty rights;▪The prosecution of our pending patent applications may not result in granted patents;▪Granted patents that we own or have licensed may not cover our products or may be held not infringed, invalid or unenforceable, as aresult of legal challenges by our competitors;▪With respect to granted patents that we own or have licensed, especially patents that we either acquire or in-license, if certain informationwas withheld from or misrepresented to the patent examiner, such patents might be held to be unenforceable;▪Patent protection on our product candidates may expire before we are able to develop and commercialize the product, or before we areable to recover our investment in the product;▪Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patentinfringement claims for such activities, as well as in countries in which we do not have patent rights, and may then use the informationlearned from such activities to develop competitive products for sale in markets where we intend to market our product candidates;▪We may not develop additional proprietary technologies that are patentable;▪The patents of others may have an adverse effect on our business; and▪We may choose not to file a patent application for certain technologies, trade secrets or know-how, and a third party may subsequentlyfile a patent covering such intellectual property.Should any of these events occur, they could significantly harm our business, financial condition, results of operations and prospects.75Table of ContentsIf we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.In addition to seeking patent protection for certain aspects of our product candidates and delivery technologies, we also consider trade secrets,including confidential and unpatented know-how important to the maintenance of our competitive position. We protect trade secrets andconfidential and unpatented know-how, in part, by customarily entering into non-disclosure and confidentiality agreements with parties who haveaccess to such knowledge, such as our employees, outside scientific and commercial collaborators, CROs, CMOs, consultants, advisors andother third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants thatobligate them to maintain confidentiality and assign their inventions to us. Despite these efforts, any of these parties may breach the agreementsand disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Inaddition, our trade secrets may otherwise become known, including through a potential cybersecurity breach, or may be independently developedby competitors.Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome isunpredictable. In addition, some courts in the U.S. and certain foreign jurisdictions are less willing or unwilling to protect trade secrets. If any of ourtrade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using thattechnology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, ourcompetitive position would be harmed.If our trademarks are not adequately protected, then we may not be able to build name recognition in our markets of interest and ourbusiness may be adversely affected.We expect to rely on trademarks as one means to distinguish any of our product candidates that are approved for marketing from the products ofour competitors. OPTINOSE® and XHANCE® are registered trademarks of ours in the U.S. Our trademarks may be challenged, infringed,circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks ormay be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. If weare unable to establish name recognition based on our trademarks, we may not be able to compete effectively.Risks Related to Ownership of Our Common Stock and Our Status as a Public CompanyAn active market for our common stock may not develop.We completed our initial public offering in October 2017, but prior to that offering there was no market for our shares of common stock. Althoughour common stock is listed on Nasdaq, an active market for our common stock may not develop. The lack of an active market may impair yourability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may alsoreduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of ourcommon stock and may impair our ability to enter into strategic collaborations or acquire companies or products by using our shares of commonstock as consideration.The price of our common stock may be volatile and you may lose all or part of your investment.The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, someof which are beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this 10-K, these factorsinclude:▪our ability to successfully commercialize XHANCE;▪any delay in our regulatory approval or filings for XHANCE for a follow-on indication for the treatment of chronic sinusitis or any otherproduct candidate we may develop, and any adverse development or perceived adverse development with respect to the applicableregulatory authority's review of such filings, including without limitation the FDA's issuance of a "refusal to file" letter, a request foradditional information, or a CRL;▪the success of competitive products or technologies;▪adverse regulatory actions with respect to our product candidates, including the failure to receive regulatory approval, or our competitors'products or product candidates;76Table of Contents▪actual or anticipated changes in our growth rate relative to our competitors;▪announcements by us or our competitors of significant acquisitions or divestitures, strategic collaborations, joint ventures, collaborationsor capital commitments;▪the commencement, enrollment or results of planned clinical trials of our product candidates or any future clinical trials we may conduct,or any changes generally in the development status of our product candidates or those of our competitors;▪regulatory or legal developments in the U.S. and other countries;▪the outcome of any investigations or regulatory scrutiny of our operations or litigation that may be brought against us;▪developments or disputes concerning patent applications, issued patents or other proprietary rights;▪the recruitment or departure of key personnel;▪the level of expenses related to any of our product candidates or clinical development programs;▪actual or anticipated variations in our quarterly operating results;▪the number and characteristics of our efforts to in-license or acquire additional product candidates or products;▪introduction of new products or services by us or our competitors;▪failure to meet the estimates and projections of the investment community or financial guidance that we may otherwise provide to thepublic;▪actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;▪actual or anticipated changes in estimates as to development timelines that we may provide to the public;▪variations in our financial results or those of companies that are perceived to be similar to us;▪fluctuations in the valuation of companies perceived by investors to be comparable to us;▪share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;▪announcement or expectation of additional financing efforts;▪sales of our common stock by us, our insiders or our other stockholders;▪significant lawsuits, including patent or stockholder litigation;▪changes in the structure of healthcare payment systems;▪market conditions in the pharmaceutical and biotechnology sectors;▪general political, economic, industry and market conditions;▪investors' general perception of our company and our business;▪publication of research reports about us, our competitors or our industry, or positive or negative recommendations or withdrawal ofresearch coverage by securities or industry analysts; and▪other events or factors, many of which are beyond our control.In addition, the stock market in general, and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations thathave often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negativelyaffect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of abroad range of other risks stated above could have a material adverse effect on the market price of our common stock.77Table of ContentsA significant portion of our total outstanding shares are restricted from resale but may be sold into the market in the near future. Sales ofa substantial number of shares of our common stock in the public market could cause our stock price to fall, even if our business isdoing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the marketperceives that the holders of a large number of shares intend to sell, substantial amounts of our common stock in the public market, the marketprice of our common stock could decline significantly.As of March 1, 2019, there were 41,264,422 outstanding shares of our common stock. Holders of an aggregate of 15,674,055 shares of ourcommon stock have rights, subject to specified conditions, that require us to file registration statements covering their shares or to include theirshares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they couldbe freely sold in the public market. Additionally, these shares are also eligible for sale without registration under Rule 144, subject to volumelimitations applicable to affiliates. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the tradingprice of our common stock could decline.Future issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, couldresult in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.We will likely require additional capital in the future to execute our business plan. To raise capital, we may sell substantial amounts of commonstock or securities convertible into or exchangeable for common stock. These future issuances of common stock or common stock-relatedsecurities, together with the exercise of outstanding options, warrants and any additional shares issued in connection with acquisitions, if any, mayresult in material dilution to our investors. Such sales may also result in material dilution to our existing stockholders, and new investors could gainrights, preferences and privileges senior to those of holders of our common stock.Our principal stockholders and management own a majority of our stock and are able to exert significant control over matters subject tostockholder approval, which could prevent new investors from influencing significant corporate decisions.Our executive officers, directors, beneficial owners of 5% or more of our capital stock and their respective affiliates, in the aggregate, beneficiallyown approximately 78.6% of our outstanding common stock as of March 1, 2019. Entities associated with Avista Capital Partners II, L.P. (Avista),our largest stockholder, collectively hold as a group approximately 37.6% of our outstanding common stock as of March 1, 2019. As a result,Avista can significantly influence the outcome of matters requiring stockholder approval, including the election of directors, amendments of ourorganizational documents, or approval of any merger, sale of assets or other major corporate transaction. This may prevent or discourageunsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest. The interests of Avista may notalways coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and notnecessarily those of other stockholders, including seeking a premium value for their common stock. For instance, under the terms of our fourthamended and restated certificate of incorporation, neither Avista nor any of its respective representatives on our board of directors are required tooffer us any transaction opportunity of which they become aware, and they could take any such opportunity for themselves or offer it to othercompanies in which they have an investment, unless that opportunity is expressly offered to a person serving on our board of directors solely inhis or her capacity as one of our directors. These actions might affect the prevailing market price for our common stock. In addition, becauseAvista and certain of our other principal stockholders have held their shares for several years, they may be more interested in selling our companyto an acquiror than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders. Suchconcentration of ownership control may also:▪delay, defer or prevent a change in control;▪entrench our management and/or the board of directors; or▪impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.We may also take actions that our other stockholders do not view as beneficial, which may adversely affect our results of operations and financialcondition and cause the value of your investment to decline.78Table of ContentsSome provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of usby others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace orremove our current management.Provisions in our fourth amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of Delawarelaw, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders,or remove our current management. These include provisions that :▪permit our board of directors to issue up to five million shares of preferred stock, with any rights, preferences and privileges as it maydesignate, which issuance could result in the loss of voting control by other stockholders;▪provide that our board of directors will be classified into three classes with staggered, three-year terms and that, subject to the rights ofAvista to remove its respective director nominees with or without cause, directors may only be removed for cause by the affirmative voteof the holders of at least a majority of the voting power of outstanding shares of our capital stock;▪subject to any director nomination rights afforded Avista, provide that all vacancies on our board of directors, including as a result of newlycreated directorships, may, except as otherwise required by law, be filled only by the affirmative vote of a majority of directors then inoffice, even if less than a quorum;▪require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and notbe taken by written consent;▪provide that, with the exception of director nominees submitted by Avista pursuant to our Stockholders Agreement, dated October 2, 2017with Avista, stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election asdirectors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content ofa stockholder's notice;▪require that the amendment of certain provisions of our certificate of incorporation relating to anti-takeover measures may only beapproved by a vote of 662/3% of our outstanding common stock;▪require that the amendment of our bylaws be approved by the affirmative vote of a majority of directors then in office or 662/3% of ouroutstanding common stock entitled to vote thereon;▪not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in anyelection of directors to elect all of the directors standing for election; and▪provide that special meetings of our stockholders may be called only by the chairman or vice chairman of our board of directors, our chiefexecutive officer, or a majority of our board of directors.These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it moredifficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Underour fourth amended and restated certificate of incorporation, we have elected not to be governed by Section 203 of the Delaware GeneralCorporation Law until such time that Avista ceases to own 15% or more of our capital stock. Our fourth amended and restated certificate ofincorporation does, however, contain a provision that generally mirrors Section 203 of the Delaware General Corporation Law, except that itexcludes Avista and its affiliates from the definition of "interested stockholder." At such time that Avista ceases to own 15% or more of our capitalstock, we will be governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may discourage, delay orprevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Section 203, acorporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has heldthe stock for three years or, among other things, prior to the time the stockholder has become an interested stockholder, the board of directors hasapproved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder.These provisions of our fourth amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law could havethe effect of discouraging potential acquisition proposals and delaying or preventing a change in control. They could also have the effect ofdiscouraging others from making tender offers for our common stock, including transactions that may be in your best interests or provide anopportunity for our stockholders to79Table of Contentsreceive a premium for their shares of our common stock. These provisions could also affect the price that some investors are willing to pay for ourcommon stock.Our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum forsubstantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicialforum for disputes with us or our directors, officers or employees.Our fourth amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, theCourt of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any actionasserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; any action asserting aclaim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting aclaim against us that is governed by the internal affairs doctrine. Our fourth amended and restated certificate of incorporation also provides that theU.S. District Court for the District of Delaware and any appellate courts thereof will be the exclusive forum for resolving any such complaint forwhich subject matter jurisdiction of such claim is vested exclusively in the federal courts of the U.S. of America. These choice of forum provisionsmay limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or otheremployees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to findthe choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additionalcosts associated with resolving such action in other jurisdictions.We may fail to qualify for continued listing on Nasdaq which could make it more difficult for investors to sell their shares.We list our common stock on The Nasdaq Global Select Market. We will need to satisfy the continued listing requirements of The Nasdaq StockMarket, LLC (Nasdaq) for inclusion on The Nasdaq Global Select Market to maintain such listing, including, among other things, the maintenanceof a minimum bid price of $1.00 per share and stockholders' equity of at least $10.0 million. There can be no assurance that we will be able tomaintain compliance with the continued listing requirements or that our common stock will not be delisted from Nasdaq in the future. If ourcommon stock is delisted by Nasdaq, we could face significant material adverse consequences, including:▪a limited availability of market quotations for our securities;▪reduced liquidity with respect to our securities;▪a determination that our shares are a "penny stock," which will require brokers trading in our shares to adhere to more stringent rules,possibly resulting in a reduced level of trading activity in the secondary trading market for our shares;▪a limited amount of news and analyst coverage for our company; and▪a decreased ability to issue additional securities or obtain additional financing in the future.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stockprice and trading volume could decline.The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or ourbusiness. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurateor unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our companyor fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.80Table of ContentsBecause we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, willbe your sole source of gain and you may never receive a return on your investment.We have never declared or paid cash dividends on our capital stock, and you should not rely on an investment in our common stock to providedividend income. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business and do notanticipate declaring or paying any cash dividends for the foreseeable future. In addition, the terms of the Note Purchase Agreement precludes usfrom paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.We may be subject to securities litigation, which is expensive and could divert our management's attention.As we operate in the pharmaceutical industry, we may be especially vulnerable to volatility in the market price of our common stock, especially tothe extent that various factors affect the common stock of companies in our industry. In the past companies that have experienced volatility in themarket price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future.Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which couldseriously harm our business, and could also require us to make substantial payments to satisfy judgments or to settle litigation.We are an "emerging growth company" and intend to take advantage of reduced disclosure and governance requirements applicable toemerging growth companies, which could result in our common stock being less attractive to investors.We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act) and we are eligible to andintend to take advantage of some of the exemptions from reporting requirements applicable to other public companies, but not to emerging growthcompanies, including, but not limited to, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduceddisclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement toseek non-binding advisory votes on executive compensation or golden parachute arrangements. We will remain an emerging growth company untilthe earliest of (1) the beginning of the first fiscal year following the fifth anniversary of our initial public offering, or January 1, 2023, (2) thebeginning of the first fiscal year after our annual gross revenue is $1.07 billion or more, (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities and (4) the end of any fiscal year in which the market value of ourcommon stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year.In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition periodprovided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. An emerginggrowth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to privatecompanies. However, we have chosen to "opt out" of such extended transition period and, as a result, we will comply with new or revisedaccounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 ofthe JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards isirrevocable.We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If someinvestors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock andour stock price may be more volatile. We may also be unable to raise additional capital as and when we need it.If we fail to maintain an effective system of internal control over financial reporting, we may not be able to timely and accurately reportour financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, thevalue of our common stock.We are subject to the reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act), as well as the Sarbanes-Oxley Act andthe rules and regulations of the stock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things, that wemaintain effective internal control over financial reporting. Commencing with our fiscal year ending December 31, 2018, we are required, underSection 404 of the Sarbanes-Oxley Act, to include in our Form 10-K filing for that year a report by management on, among other things, theeffectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any81Table of Contentsmaterial weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, orcombination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a materialmisstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Section 404 of theSarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of ourinternal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend totake advantage of an exemption from the independent registered public accounting firm attestation requirement.Our compliance with Section 404's requirement to furnish a report by management requires that we incur substantial accounting expense andexpend significant management efforts. Prior to our initial public offering in October 2017, we were never required to test our internal control withina specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. We currently do nothave an internal audit function. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion, whichcould potentially subject us to sanctions or investigations by the Securities and Exchange Commission (the SEC) or other regulatory authorities.We may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a materialmisstatement of our consolidated financial statements. During the evaluation and testing process, if we identify one or more material weaknessesin our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannotassure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Ourinternal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherentlimitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occuror that all control issues and instances of fraud will be detected.Any failure to maintain internal control over financial reporting could severely inhibit our ability to timely and accurately report our financialcondition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if ourindependent registered public accounting firm determines we have a material weakness in our internal control over financial reporting once that firmbegins the testing procedures over internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports,the market price of our common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or otherregulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain othereffective control systems required of public companies, could also restrict our future access to the capital markets.Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.We are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonablyassure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated tomanagement, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe thatany disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met.These inherent limitations reflect the reality that judgments can be faulty, and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorizedoverride of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur andnot be detected. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations byNasdaq, the SEC or other regulatory authorities.We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management isrequired to devote substantial time to new compliance initiatives.Prior to the consummation of our initial public offering in October 2017, we were not subject to public company reporting obligations. We now incursignificant additional legal, accounting, administrative and other costs and expenses as a public company. Compliance with the Sarbanes-OxleyAct, the Dodd-Frank Act of 2010, the Exchange Act, as well as rules of the SEC and Nasdaq, for example, resulted in, and will result in further,significant82Table of Contentsinitial costs to us as well as ongoing increases in our legal, audit and financial compliance costs, particularly after we are no longer an "emerginggrowth company." In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, includingregulations implemented by Nasdaq and the SEC, may increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolveover time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulationsand standards, and this investment may result in increased general and administrative expenses and a diversion of management's time andattention from revenue-generating activities to compliance activities. Any changes that we make to comply with these obligations may not besufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financialcondition. Our board of directors, management and other personnel need to devote a substantial amount of time to these compliance initiatives.Moreover, failure to comply with these rules and regulations might make it more difficult and more expensive for us to obtain director and officerliability insurance, or we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same orsimilar coverage.83Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal office is located in Yardley, Pennsylvania, where we lease approximately 30,000 square feet of office space pursuant to a lease thatexpires in May 2021. We also lease facilities in Ewing, New Jersey, Oslo, Norway and Swindon, England. We believe our facilities are adequate tomeet our current needs, although we may seek to negotiate new leases or evaluate additional or alternate space for our operations. We believeappropriate alternative space will be readily available on commercially reasonable terms.ITEM 3. LEGAL PROCEEDINGSWe are not currently a party to any legal proceedings.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.PART IIITEM 5. MARKET FOR RESISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOur common stock is traded on The Nasdaq Global Select Market under the symbol “OPTN”. As of March 1, 2019, there were 41,264,422 sharesof our common stock outstanding. There were approximately 25 stockholders of record at March 1, 2019. Because many of our shares are held bybrokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these recordholders.Securities Authorized for Issuance under Equity Compensation PlansInformation required by Item 5 of Form 10-K regarding our equity compensation plans is incorporated herein by reference to Item 12 of Part III ofthis Annual Report on Form 10-K.Recent Sales of Unregistered SecuritiesIn May 2018 and July 2018, we issued an aggregate of 14,647 shares of common stock to pursuant to the exercise of certain warrants issued priorto our initial public offering. The shares of common stock issued upon exercise of the warrants were offered and sold without registration under theSecurities Act pursuant to the exemption provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder as transactionsnot involving a public offering.The certificates representing the issued shares of common stock described in this Item 5 included appropriate legends setting forth that theapplicable securities have not been registered and reciting the applicable restrictions on transfer. There were no underwriters employed inconnection with any of the transactions set forth in this Item 5. Except as set forth above, we did not sell any shares of our common stock or ourpreferred stock, or grant any stock options or restricted stock awards, during the year ended December 31, 2018 that were not registered under theSecurities Act of 1933, as amended (the Securities Act) and that have not otherwise been described in a Quarterly Report on Form 10-Q or aPeriodic Report on Form 8-K.Purchases of Equity Securities by the Issuer and Affiliated PurchasersWe did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.Use of Proceeds from Registered SecuritiesOur initial public offering (IPO) was effected through a Registration Statement on Form S-1 (File No. 333-220515) that was declared effective bythe SEC on October 12, 2017. On October 17, 2017, 8,625,000 shares of our common stock were sold at a price to the public of $16.00 per share,for aggregate gross proceeds of $138.0 million. All of the securities registered pursuant to the offering were sold prior to termination of the offering.Jefferies84Table of Contentsand Piper Jaffray acted as joint lead book-running managers in the IPO, and BMO Capital Markets and RBC Capital Markets acted as joint book-running managers in the IPO.On October 17, 2017 we received proceeds from the IPO of $128.3 million, which was net of underwriting discounts and commissions ofapproximately $9.7 million. Of this amount, we paid offering expenses of approximately $2.8 million.There has been no material change in the use of proceeds from the IPO as described in the final prospectus for the IPO filed with the SEC onOctober 12, 2017 (the Final Prospectus). During the period from the closing of our IPO to December 31, 2018, we used $115.4 million of theproceeds as follows:•approximately $70.3 million to support the launch of XHANCE, including investments in marketing and sales, inventory and ourcommercial infrastructure;•approximately $9.7 million to fund further development efforts for XHANCE; and•approximately $35.4 million to fund other working capital and general corporate purposes, including costs of operating as a publiccompany.The balance of the funds totaling approximately $10.1 million are expected to be used in a manner consistent with the use of proceeds describedin the Final Prospectus.The foregoing expenses are a reasonable estimate of the expenses incurred by us in the offering and do not represent the exact amount ofexpenses incurred. All of the foregoing expenses were direct or indirect payments to persons other than (i) our directors, officers or any of theirassociates; (ii) persons owning 10% or more of our common stock; or (iii) our affiliates.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAWe are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide theinformation under this item.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with our historical consolidatedfinancial statements and the related notes thereto appearing in this Annual Report. In addition to historical information, some of the informationcontained in this discussion and analysis or set forth elsewhere in this Annual Report, includes forward‑looking statements that involve risks anduncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual resultscould differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis.Company OverviewWe are a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose andthroat (ENT) and allergy specialists. Our first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 mcg, is a therapeuticutilizing our proprietary Optinose Exhalation Delivery System (EDS) that delivers a topically-acting corticosteroid for the treatment of chronicrhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also known as chronic sinusitis). Chronicrhinosinusitis is a serious nasal inflammatory disease that is currently treated using therapies, such as intranasal steroids (INS), which havesignificant limitations. We believe XHANCE has a differentiated clinical profile with the potential to become part of the standard of care for thisdisease because it is able to deliver medication to the primary site of inflammation high and deep in the nasal passages in regions not adequatelyreached by current INS.On September 18, 2017, the U.S. Food and Drug Administration (FDA) approved XHANCE for the treatment of nasal polyps in patients 18 years ofage or older. XHANCE was made widely available through retail channels in April 2018.Since the FDA approval of XHANCE, we have focused on executing our integrated launch plan and have made progress in each of these keystrategic areas:•Customer Model. We have defined a sales force footprint of approximately 120 territories targeting approximately 14,000 ENTs, allergistsand “specialty-like” primary care physicians and have deployed a hybrid sales model that combines an internal sales leadership team witha fully-dedicated contract sales85Table of Contentsforce to call on our target health care provider (HCP) customer universe. We prioritized approximately 80 territories within our sales forcefootprint to deploy in 2018 based upon pre-launch expectations regarding where we could achieve an estimated 65% commercial marketaccess within each territory. The initial 80 territory managers were deployed in March 2018, actively engaging approximately 7,600 ENTs,allergists and "specialty like" primary care physician targets to promote XHANCE for the treatment of nasal polyps. During the first half of2019, we plan to internalize our contract sales team and deploy an additional 20 territory managers in “XHANCE naive” geographies toexpand our reach among our target physician audience. This is expected to grow the target audience for our sales team by approximately25% to approximately 9,500 HCPs. We intend to eventually increase the size of our sales force to approximately 120 territory managers toexpand our called on target audience to approximately 14,000 ENT, allergists and specialty-like primary care physicians. Additionally, weexpect to target additional physicians through digital and non-personal promotion in areas where we do and do not have territory managers.•XHANCE Patient Affordability Programs. In late August 2018, we implemented our current co-pay savings program. We believe thisprogram, with an indefinite duration, provides an affordability solution for patients that physicians will support. The current programprovides patient co-pay assistance including a first prescription at no out-of-pocket cost to patients ($0 co-pay) to commercially insuredpatients and low subsequent co-pays for refills. Our data suggests these programs are playing a role in building demand for XHANCE,particularly as they become more widely understood in the prescribing community.•Market Access. In meeting with pharmacy benefit managers (PBMs) and health insurers/potential payors, we share what we believe is acompelling economic value proposition. Our analyses suggest that XHANCE will have a comparatively low pharmacy budget impact andour clinical trial data suggest that XHANCE may produce an offsetting benefit by helping reduce other healthcare resource utilization, mostnotably the rate of endoscopic surgery and, therefore, surgery-related costs. For an insurance plan, this could represent potential foroverall cost reduction in the population of patients with nasal polyps, as the overall cost of XHANCE could be less than the offsettingcosts related to the reduction in surgeries. During clinical trials, XHANCE was also associated with an improvement in reported workproductivity in treated patients, which should be valued by employers and patients. Further, we believe the cost of XHANCE to insuranceplans will likely be significantly less than the projected costs of monoclonal antibodies that are currently in development for the treatmentof nasal polyps, including dupilumab, for which the submission of an Supplemental Biologics License Application (sBLA) was recentlypublicly announced.Based on currently available third-party data and our internal analyses, we believe that greater than 75% of commercially insured lives arecurrently in a plan in which XHANCE is covered in a Tier 3 formulary position, and approximately 60% of commercially insured lives are ina plan that covers XHANCE in a “low hassle factor” position. However, payors may change coverage levels for XHANCE or controls suchas step edits and prior authorization (PAs), positively or negatively, at any time. We use the term “hassle factor” to characterize the levelof difficulty that physicians and patients must overcome to prescribe and fill XHANCE. We define a low “hassle factor” as Tier 3unrestricted, Tier 3 single step edit, or Tier 3 with a simple PA requiring, for example, only the prior use of an over-the-counter or genericINS - although we acknowledge that any step edit or PA involves a level of burden for physicians and patients that could negativelyimpact XHANCE utilization. Our initial goal was for 75% of commercially insured lives to have access to XHANCE in a Tier 3 formularyposition with a “low hassle factor" by the end of 2018. While at approximately 60% "low hassle factor" at December 31, 2018 we did notmeet this goal, it remains an important concept for us as we seek to expand overall coverage for XHANCE.We have also contracted with the Centers for Medicare and Medicaid Services for coverage of certain government insured lives andcontinue to expand XHANCE market access for other government-insured populations. As noted above, we have in place a co-payassistance program for patients covered by commercial insurers and plan to continue to analyze affordability issues and assess patientaffordability programs to appropriately support patient access to XHANCE for government insured patients.•Infrastructure. We continue to develop our internal capabilities in a manner commensurate with having become a fully integrated andpublicly traded commercial-stage specialty pharmaceutical company. We have implemented an enterprise resource planning system toexpand our operational and commercial finance capabilities. We have also implemented a robust healthcare compliance program to guideour staff’s and our partners' compliance with rules and regulations regarding pharmaceutical sales. In managing our growth, we haveremained focused on fostering our One Mission culture.86Table of Contents•XHANCE Prescriptions. Based on third-party prescription data as well as data from preferred pharmacy network partners, the totalestimated number of XHANCE prescriptions in the second quarter, third quarter and fourth quarter 2018 were 8,611, 9,427, and 14,106,respectively, which represents 50% growth for prescriptions when comparing fourth quarter to third quarter. The INS market increasedapproximately 11% from third quarter to fourth quarter of 2018 based on third-party prescription data. Estimated XHANCE prescriptions inDecember 2018 and January 2019 were 4,570 and 6,292, respectively, which represents 38% month-over-month growth. The INS marketincreased approximately 5% from December 2018 to January 2019 based on third-party prescription data. In addition, XHANCEprescriptions for the 4-week periods ended January 25 and February 22, 2019 were 5,156 and 7,186, respectively, which represents period-over-period growth of 39%. The INS market decreased approximately 1% from the 4-week period ended January 25 to the 4-week periodended February 22 based on third-party prescription data.XHANCE prescribing may be subject to a seasonal effect historically observed in the INS market in which market volume generally peaksin the second quarter and declines in the third quarter of each calendar year. Although the underlying disease that we are treating ischronic and causes symptoms year-round, we believe the variation in patient flow through the offices of relevant specialists, andseasonality in disease flare-ups, may have an impact on the number of patients that present themselves and who are therefore availablefor prescribing a new medication like XHANCE. We also believe the annual resetting of patient healthcare insurance plan deductibles mayhave a negative impact on demand for XHANCE. Based on our limited commercial history, we are unable to estimate the extent to whichINS market seasonality and deductible resets may affect XHANCE.XHANCE Development UpdateIn addition to XHANCE’s existing indication for the treatment of nasal polyps, in order to broaden our U.S. market opportunity we initiated a clinicalresearch program in pursuit of a follow-on indication for the treatment of chronic sinusitis in the U.S. The program will comprise two phase 3bclinical trials, the first of which was initiated in the fourth quarter of 2018. We expect to initiate the second trial in 2019.Financial Operations OverviewThe following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items.Net product revenuesSales of XHANCE generated $7.1 million in net product revenues for the year ended December 31, 2018. In accordance with GAAP, we determinenet product revenues for XHANCE, with specific assumptions for variable consideration components including but not limited to trade discountsand allowances, co-pay assistance programs and payor rebates.Based on available XHANCE prescription data purchased from third parties and data from our pharmacy network, our average net revenues perprescription for the fourth quarter of 2018 was approximately $214, which is favorable compared to our average net product revenues perprescription of approximately $202 and $148 in the third and second quarters of 2018, respectively. The 6% improvement in the average netrevenue per prescription in the fourth quarter vs. the third quarter of 2018 is primarily attributable to lower rates of utilization of our patientaffordability programs. We calculate average net product revenues per prescription by dividing net product revenues for the quarter by theestimated number of XHANCE prescriptions dispensed during the quarter. As a result, average net product revenues per prescription is subject tovariability. 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 preferred pharmacy network partners, patientutilization rates of affordability programs and the proportion of patients acquiring XHANCE through an insurance benefit. There is also the potentialfor variability that results from changes in estimation methodology by the third parties that we rely upon to provide prescription data which maylead to revisions of historical estimates of prescription volumes and our calculated average revenue per prescription.Based on data available to date, we expect first quarter 2019 net revenue per prescription to be between $155 - $175. This decrease from thefourth quarter 2018 is a consequence of the reset of many patient insurance deductibles in January. As a result of this annual reset, we expectgreater copay support to be provided by us under our assistance programs which are designed to support continued volume growth. For theremainder of 2019, we believe average net revenue per prescription will improve and we expect that the full-year 2019 average net87Table of Contentsrevenue per prescription will be between $185 - $205. Factors supporting this expected growth include patients meeting their out-of-pocket expensethresholds, expected improvements in insurance coverage and an increase in the proportion of prescription refills.Costs of product salesCosts of product sales includes the cost of inventory sold, which includes direct and indirect manufacturing and supply chain costs.Research and development expensePrior to the FDA approval of XHANCE in September 2017, research and development expense consisted primarily of costs incurred in connectionwith the development and pursuit of regulatory approval for XHANCE for the treatment of nasal polyps. Post-FDA approval of XHANCE, researchand development expense consists primarily of expenses incurred to prepare for, initiate and conduct our planned clinical trials, ongoing researchefforts 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 related to the continued development of our product sample portfolio;▪expenses incurred under agreements with contract manufacturing organizations (CMOs), including manufacturing scale-up expenses priorto regulatory approval of products for commercial sale and the cost of acquiring and manufacturing preclinical study and clinical trialmaterials;▪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 withthe FDA prior to regulatory approval of products for commercial sale;▪costs incurred to maintain, expand and protect our patent portfolio as it relates to product candidates in development; and▪allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.Certain regulatory, patent and pre-commercialization expenses that were previously classified as research and development expenses (prior to theFDA approval of XHANCE in September 2017) have been classified as selling, general and administrative expenses if incurred post approval ofXHANCE to the extent that these expenses support the commercialization of XHANCE.We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certainoutsourced 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 for the foreseeable future as we expect to continue the development of XHANCE for thetreatment of chronic sinusitis and our other product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinicaldevelopment, including rate of subject enrollment, number of subject required, and trial duration, and the early stage of our other productcandidates, we are unable to estimate with any certainty the costs we will incur and the timelines we will require in our continued developmentefforts.Selling, general and administrative expenseGeneral and administrative expense consists primarily of personnel expenses, including salaries, benefits and stock-based compensationexpense, for employees in executive, finance, accounting, business development, legal and human resource functions. General and administrativeexpense also includes corporate facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research anddevelopment expense, as well as regulatory fees and professional fees for legal, patent, accounting and other consulting services.88Table of ContentsEarly sales and marketing related expenses included expenses related to building brand awareness through advertising and the deployment of ournurse educator team, training and deploying our contract sales force and securing market access for XHANCE as well as salaries and relatedbenefits for employees focused on such efforts. Current and expected commercial investments include our sales team and supporting promotionalmaterials, digital promotion, peer to peer education, congresses / conventions, samples, and marketing activities such as direct to patient / directto consumer initiatives.Selling, general and administrative expenses increased in 2018 as compared to 2017 as a result of an expanded infrastructure and an increasedheadcount to support the commercial launch of XHANCE. We also incurred higher corporate infrastructure costs in 2018 as compared to 2017including, but not limited to, accounting, legal, human resources, consulting and investor relations expenses, and increased director and officerinsurance premiums associated with operating as a public company.Interest (income) expenseInterest (income) expense consists of interest earned on our cash and cash equivalents held with institutional banks and interest expense relatedto our long-term debt and amounts amortized and accrued under our convertible notes that were converted into preferred stock in March 2017.Other (income) expenseOther (income) expense consists primarily of grant and other income as a result of government cost reimbursements for research anddevelopment activities over a contractually defined period, as well as foreign currency (income) losses due to exchange rate fluctuations ontransactions denominated in a currency other than our functional currency.Critical accounting policiesOur consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation ofour consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during thereported period. We base our estimates on historical experience, known trends and events and various other factors that we believe to bereasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differfrom these estimates under different assumptions and conditions.While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere inthis report, we believe that the following accounting policies are those most critical to the preparation of our consolidated financial statements.Revenue recognitionWe account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018.This standard applies to all contracts with customers with the exception of contracts that are within the scope of other standards, such as leases,insurance and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods orservices, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services.We perform the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identify theperformance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in thecontract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only recognize revenue when it is probable thatwe will collect the consideration to which we are entitled in exchange for the goods or services that will be transferred to the customer.Net Product RevenuesWe sell XHANCE to preferred pharmacy network partners and wholesalers in the U.S. (collectively, Customers). These Customers subsequentlyresell our products to healthcare providers, patients and other retail pharmacies. In addition to agreements with Customers, we enter intoarrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks anddiscounts for the purchase of our products.89Table of ContentsWe recognize revenue from product sales at the point the Customer obtains control of the product, which generally occurs upon delivery. Thetransaction price that is recognized as revenue for products includes an estimate of variable consideration, which is described below. Paymentterms with Customers do not exceed one year and, therefore, we do not account for a financing component in our arrangements. Incremental costsof obtaining a contract with a Customer (for example, sales commissions) are expensed when incurred as the period of benefit is less than oneyear. Shipping and handling costs for product shipments to Customers are recorded as selling, general and administrative expenses.Transaction Price, including Estimates of Variable ConsiderationRevenue from products is recognized at the estimated net sales price (transaction price), which includes estimates of variable consideration. Weinclude estimated amounts in the transaction price to the extent it is determined probable that a significant reversal of cumulative revenuerecognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration anddetermination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performanceand all information (historical, current and forecasted) that is reasonably available.Components of Variable ConsiderationComponents of variable consideration include provider chargebacks and discounts, trade discounts and allowances, product returns, governmentrebates, third-party payor rebates, sales order management fees and other incentives, such as voluntary patient assistance and other allowancesthat are offered within contracts between us and our Customers, payors and other indirect customers relating to our sale of products. Thosecomponents, as described below, are based on the amounts earned or to be claimed on the related sales and are presented as reductions ofaccounts receivable (if the amount is payable to the Customer) or as a current liability (if the amount is payable to a party other than theCustomer). We consider all relevant factors, such as current contractual and statutory requirements, specific known market events and trends,industry data and forecasted customer buying and payment patterns.•Variable Consideration - Accounts Receivable Reductions◦Provider Chargebacks and Discounts. Chargebacks for fees and discounts to providers represent the estimated obligations resultingfrom contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customerswho directly purchase the product from us. Customers charge us for the difference between what they pay for the product and theultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the sameperiod that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reserves forchargebacks consist of credits we expect to issue for units that remain in the distribution channel inventories at each reporting period-end that we expect will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed but for which wehave not yet issued a credit.◦Trade Discounts and Allowances. We generally provide Customers with discounts that include incentive fees which are explicitly stated inour contracts. These discounts are recorded as a reduction of revenue and accounts receivable in the period in which the relatedproduct revenue is recognized. In addition, we reimburse our Customers (through discounts and allowances) for sales ordermanagement, data and distribution services.•Variable Consideration - Current Liabilities◦Product Returns. Consistent with industry practice, we have a product returns policy that provides Customers a right of return forproduct purchased within a specified period prior to and subsequent to the product’s expiration date. The right of return lapses uponshipment of the goods to a patient. We estimate the amount of our products that may be returned and present this amount as areduction of revenue in the period the related product revenue is recognized in addition to establishing a liability. We consider severalfactors in the estimation process, including expiration dates of product shipped to preferred pharmacy network partners and wholesalers,inventory levels within the distribution channel, product shelf life, prescription trends and other relevant factors.◦Government Rebates. We are subject to discount obligations under state Medicaid programs and Medicare. These reserves arerecorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of acurrent liability. For Medicaid, accruals are90Table of Contentsbased on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center forMedicaid and Medicare Services. The Medicare Part D prescription drug benefit mandates manufacturers to fund approximately 50% ofthe Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. To estimate the cost to us of this Medicarecoverage gap responsibility, we estimate the number of patients in the prescription drug coverage gap for whom we will owe anadditional liability under the Medicare Part D program. Our liability for these rebates consists of estimates of claims for the currentquarter and estimated future claims that will be made for product that has been recognized as revenue but remains in the distributionchannel inventories at the end of the reporting period.◦Payor Rebates. We contract with certain third-party payors, primarily health insurance companies and pharmacy benefit managers, forthe payment of rebates with respect to utilization of our products. These rebates are based on contractual percentages applied to theamount of product prescribed to patients who are covered by the plan or the organization with which we contract. We estimate theserebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue andthe establishment of a current liability.◦Other Incentives. Other incentives that we offer include voluntary patient assistance programs, such as co-pay assistance programs,which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments requiredby payors, and coupon programs for cash payors. The calculation of the accruals for this assistance is based on an estimate of claimsand the cost per claim that we expect to receive associated with product that has been recognized as revenue but remains in thedistribution channel inventories at the end of each reporting period.Licensing RevenuesThrough December 31, 2017, our revenues were generated pursuant to the terms of a single license agreement (the AVP-825 License Agreement),with Avanir Pharmaceuticals, Inc. (Avanir) (Note 7). The AVP-825 License Agreement included licensed rights to patented technology, non-refundable up-front payment, research services, and regulatory and sales milestones as well as royalty payments. Through December 31, 2018,under the terms of the AVP-825 License Agreement, we received aggregate cash payments of $70.0 million in connection with the initial signingand the achievement of certain development milestones.On December 10, 2018, we received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result, the AVP-825 License Agreement is expected to terminate on March 10, 2019. Upon termination we may elect to continue to commercialize Onzetra Xsailourselves or through a new licensee. We do not expect to receive any additional proceeds from the AVP-825 License Agreement.Prior to the receipt of notice of termination of the License Agreement, we analyzed the performance obligations under the AVP-825 LicenseAgreement, the consideration received to date and the consideration we could have received in the future as part of our analysis related to ASU2014-09. The consideration received to date, which included an upfront payment, research and development funding and development milestonepayments was recognized in prior years and our performance obligations pursuant to the arrangement have been completed.Research and development expensesPrior to the FDA approval of XHANCE in September 2017, research and development expense consisted primarily of costs incurred in connectionwith the development and pursuit of regulatory approval for XHANCE for the treatment of nasal polyps. Post-FDA approval of XHANCE, researchand development expense consists primarily of expenses incurred to prepare for, initiate and conduct our clinical trials, ongoing research efforts ofnew products and device improvements. We expense research and development costs as incurred.At the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion ofthe applicable research or development objectives. Such estimates are subject to change as additional information becomes available. Dependingon the timing of payments to the service providers and the progress that we estimate has been made as a result of the service provided, we mayrecord net prepaid or accrued expenses relating to these costs. To date, we have not made any material adjustments to our prior estimates ofaccrued research and development expenses.91Table of ContentsStock-based compensationWe account for stock-based compensation awards in accordance with the FASB Accounting Standards Codification (ASC), Topic718, Compensation — Stock Compensation (ASC 718). ASC 718 requires all stock-based compensation awards to employees to be recognized asexpense based on their grant date fair values. We use the Black-Scholes option pricing model to value our stock option awards and shares issuedunder our employee stock purchase plan. We account for forfeitures of stock option awards as they occur. For awards issued to employees, werecognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award.Stock-based awards issued to nonemployees are revalued at each reporting period until the award vests in accordance with ASC Topic505, Equity. The resulting increase or decrease in value, if any, is recognized as expense or income, respectively, during the period the relatedservices are rendered. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon ourassessment of the probability that the performance condition will be met. We have not issued awards where vesting is subject to marketconditions; however, if we were to grant such awards in the future, recognition would be based on the derived service period.Estimating the fair value of option shares issued under the employee stock purchase plan requires the input of subjective assumptions, includingthe estimated fair value of our common stock, the expected life of the option, stock price volatility, the risk-free interest rate and expecteddividends. The assumptions used in our Black-Scholes option-pricing model represent management's best estimates and involve a number ofvariables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective. If any assumptionschange, our stock-based compensation expense could be materially different in the future.These assumptions used in our Black-Scholes option-pricing model are estimated as follows:•Expected Term. Due to the lack of sufficient company-specific historical data, the expected term of employee options is determinedusing the "simplified" method, as prescribed in SEC's Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals thearithmetic average of the vesting term and the original contractual term of the option. The expected term of nonemployee options is equalto the contractual term. •Expected Volatility. The expected volatility is based on historical volatilities of similar entities within our industry which werecommensurate with the expected term assumption as described in SAB No. 107. •Risk-Free Interest Rate. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the timeof grant for a period that is commensurate with the assumed expected term. •Expected Dividends. The expected dividend yield is 0% because we have not historically paid, and do not expect for the foreseeablefuture to pay, a dividend on our common stock.The following table reflects the weighted average assumptions used to estimate the fair value of options granted during the periods presented. Year Ended December 31, 2018 2017Expected term (in years)5.95 6.06Expected volatility74.42% 78.67%Risk free interest rate2.74% 2.06%Expected dividend yield0.00% 0.00%Fair value of common stock$12.85 $9.68For information about our employee stock purchase plan, see Note 13 to the Consolidated Financial Statements.Recent Accounting PronouncementsSee Note 3 of our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a description of recentaccounting pronouncements applicable to our consolidated financial statements.JOBS ActThe JOBS Act permits an “emerging growth company”, such as us, to take advantage of an extended transition92Table of Contentsperiod to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to privatecompanies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standardswhen they are required to be adopted by public companies that are not emerging growth companies.Consolidated Results of OperationsComparison of the years ended December 31, 2018 and 2017The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands): Year Ended December 31, 2018 2017Net product revenues$7,065 $—Cost of product sales1,588 — Gross margin5,477 —Operating expenses: Research and development10,099 16,832Selling, general and administrative95,618 31,698Total operating expenses105,717 48,530Loss from operations(100,240) (48,530)Other (income) expense: Interest (income) expense6,776 607Other (income) expense(358) (235)Total other (income) expense6,418 372Net loss$(106,658) $(48,902)Net product revenuesNet product revenues related to sales of XHANCE were $7.1 million for the year ended December 31, 2018. We did not record any net productrevenues during the year ended December 31, 2017.Cost of product salesCost of product sales related to XHANCE were $1.6 million for the year ended December 31, 2018. We did not record any cost of product salesduring the year ended December 31, 2017.Research and development expenseResearch and development expenses were $10.1 million and $16.8 million for the years ended December 31, 2018 and 2017, respectively. The$6.7 million decrease in 2018 was attributable primarily to:▪a $6.5 million decrease in regulatory and medical affairs expenses, including payroll and administrative expenses, as a result of a shift indepartmental focus from research and development to commercialization activities as a result of the FDA approval of XHANCE inSeptember 2017; and▪a $3.0 million decrease related to the substantial completion of the preparation of contract manufacturing capabilities prior to the receipt ofFDA approval of XHANCE in September of 2017 in anticipation of the expected commercial launch of XHANCE in the U.S. in 2018.These decreases were offset by:▪a $3.0 million increase in clinical expenses related to the preparation for and initiation of our clinical trials of XHANCE for a follow-onindication for the treatment of chronic sinusitis and FDA-mandated pediatric studies.Selling general and administrative expenseSelling, general and administrative expenses were $95.6 million and $31.7 million for the years ended December 31, 2018 and 2017, respectively.The $63.9 million increase was due primarily to:93Table of Contents▪a $37.3 million increase in sales and marketing expenses related to our preparation for and support of the commercial launch of XHANCEin the U.S. for the treatment of nasal polyps, of which:◦$22.2 million related to the deployment of our contract sales force and our nurse educator team;◦$15.1 million related primarily to marketing expenses for XHANCE;▪a $12.4 million increase in payroll-related expenses due to increases in headcount;▪a $6.5 million increase in regulatory and medical affairs expenses, including payroll-related and administrative expenses, as a result of ashift in departmental focus from research and development to commercialization activities as a result of the FDA approval of XHANCE inSeptember 2017;▪a $1.6 million increase in facilities expense, professional fees and consultancy expenses to support our expanding infrastructure toprepare for and support the commercial launch of XHANCE and operate as a public company; and▪a $3.7 million increase in stock-based compensation expense.Interest (income) expense, netInterest expense, net, was $6.8 million and $0.6 million for the years ended December 31, 2018 and 2017, respectively. The increase in interestexpense, net, for the year ended December 31, 2018 was related to $9.2 million in interest expense on our long-term debt which was issued inDecember 2017, offset by $2.5 million in interest income. Interest income increased $2.2 million during the year ended December 31, 2018, ascompared to the year ended December 31, 2017 as a result of higher cash balances. Interest expense for the year ended December 31, 2017 wasrelated to our convertible notes, which were converted to shares of preferred stock in March 2017.Other (income) expense, netOther income, net, was $0.4 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively. The income in both periodswas attributable primarily to grant eligible research and development expenses incurred by OptiNose AS, our Norwegian subsidiary.Liquidity and Capital ResourcesSince inception, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future. We incurred netlosses of $106.7 million and $48.9 million for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had anaccumulated deficit of $317.9 million. We have funded our operations primarily through the sale of stock and the issuance of debt, as well asthrough licensing revenues received under the terms of the AVP-825 License Agreement and revenues from sales of XHANCE. As ofDecember 31, 2018, we had $201.0 million in cash and cash equivalents.The following table shows a summary of our cash flows for the periods indicated (in thousands): Year Ended December 31, 2018 2017Net cash used in operating activities $(91,817) $(35,680)Net cash used in investing activities (1,690) (2,406)Net cash provided by financing activities 59,579 236,125Effects of exchange rates on cash and cash equivalents 64 (11)Net (decrease) increase in cash and cash equivalents $(33,864) $198,028Operating activitiesCash used in operating activities increased by $56.1 million, from $35.7 million for the year ended December 31, 2017 to $91.8 million for the yearended December 31, 2018. The increase in cash used in operating activities was attributable primarily to the increase in our net loss from $48.9million for the year ended December 31, 2017 to $106.7 million for the year ended December 31, 2018. The increase in net loss is primarily relatedincreased in expenses related to our preparation for and ongoing efforts to support the commercial launch of XHANCE.94Table of ContentsInvesting activitiesCash used in investing activities decreased $0.7 million from $2.4 million for the year ended December 31, 2017 to $1.7 million for the year endedDecember 31, 2018. The decrease was related primarily to a decrease in equipment purchases related to our preparation for the commercial launchof XHANCE.Financing activitiesCash provided by financing activities was $59.6 million for the year ended December 31, 2018, driven primarily by net proceeds to us of $59.9million as a result of of the Offering of 5,750,000 shares of our common stock at a price of $22.25 per share, which consisted of 2,875,000 sharesof our common stock sold by us and 2,875,000 shares of our common stock sold by certain stockholders.Cash provided by financing activities was $236.1 million for the year ended December 31, 2017, driven primarily by the receipt of $36.4 million innet proceeds from the sale of our Series D Preferred Stock, $125.5 million in net proceeds from our IPO and $71.9 million in net proceeds from theissuance of the Notes.Senior Secured Note Purchase AgreementIn December 2017, we entered into a Note Purchase Agreement with Athyrium Opportunities III Acquisition LP, as collateral agent (the CollateralAgent) and the purchasers party thereto (the Purchasers) that provides for the issuance of up to $100.0 million of senior secured notes (the Notes)of which $75.0 million of the Notes were issued on December 29, 2017, of which $50.0 million were issued by OptiNose AS and $25 million wereissued by OptiNose US, Inc. (the Issuers). The remaining $25.0 million of Notes (the Delayed Draw Notes), may be issued by OptiNose US, Inc.and sold to the Purchasers between April 1, 2019 and August 14, 2019, subject to achieving trailing four quarter net revenues (as calculatedpursuant to the terms of the Note Purchase Agreement) of $15.0 million and a pro forma ratio of total debt to trailing four quarter net revenues notexceeding 6.50 to 1.00, and certain other conditions.The unpaid principal amount under the Notes is due and payable on June 29, 2023 (the Maturity Date). The Notes bear interest at a per annum rateof three-month LIBOR rate (subject to a 1.0% floor) plus 9.0%. The Issuers are required to make quarterly interest-only payments until the MaturityDate. In addition, the Issuers paid an upfront fee of 1% of the aggregate principal amount of the Notes on the Closing Date. We are also required topay an exit fee of 2% of any principal payments (whether mandatory, voluntary or at maturity) made throughout the term of the Note PurchaseAgreement. Subject to certain exceptions, the Issuers are required to make mandatory prepayments of the Notes, with the proceeds of assetssales extraordinary receipts and prohibited debt issuances and upon the occurrence of a change of control. In addition, the Issuers may makevoluntary prepayments of the Notes, in whole or in part. All mandatory and voluntary prepayments of the Notes are subject to the payment ofprepayment premiums as follows: (i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal tothe amount by which (a) the present value of 102% of the principal prepaid plus all interest that would have accrued on such principal through suchsecond anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable dateof issuance but prior to the third anniversary of such issuance, an amount equal to 2% of the principal prepaid, and (iii) if prepayment occurs on orafter the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 1% of theprincipal prepaid. No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance of anyNotes.The Note Purchase Agreement contains affirmative and negative covenants customary for financings of this type, including limitations on our andour subsidiaries’ ability, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge orconsolidate with others, dispose of assets, grant certain license rights to our products, technology and other intellectual property rights, paydividends 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 all times (i) at least $10 million of cash and cashequivalents and (ii) following the issuance of the Delayed Draw Notes or upon entering into certain exclusive licenses of XHANCE, a total debt totrailing four quarter XHANCE net revenue ratio of not more than 6.50 to 1.00 initially, and thereafter declining quarterly by equal half-steps to a ratioof not more than 3.00 to 1.00.Projected 2019 operating expensesWe expect that our total GAAP operating expenses (consisting of selling, general & administrative expenses and research & developmentexpenses) for 2018 will be between $135.0 - $142.0 million of which $10 - $12 million is95Table of Contentsexpected to be stock-based compensation. Total GAAP operating expenses excluding stock-based compensation are expected to be in the rangefrom $125 - $130 million.Future funding requirementsWe expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we:▪internalize and expand our commercial infrastructure to support the sales and marketing for XHANCE;▪maintain and expand our sales force;▪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 FDA-mandated pediatric studies and clinical trials for a follow-on indicationfor the treatment of chronic sinusitis;▪hire additional staff and add operational, financial and information systems to execute our business plan;▪maintain, expand and protect our patent portfolio;▪continue to contract to manufacture XHANCE and our other product candidates;▪service our debt obligations under the Notes issued in December 2017;▪continue research and development activities for additional product candidates; and▪maintain infrastructure necessary to operate as a publicly traded commercial-stage company.Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:▪the success of our commercialization of XHANCE for the treatment of nasal polyps including, among other things, patient and physicianacceptance of XHANCE and our ability to obtain adequate insurance coverage and reimbursement for XHANCE;▪the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales;▪net product revenues received from sales of XHANCE;▪the costs and timing of internalizing and expanding our sales force;▪the level of co-pay assistance and other patient affordability programs offered for XHANCE;▪our clinical development plans for XHANCE, including FDA-mandated pediatric studies and clinical trials for the supplemental indication forthe 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 forthe 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, maintaining and enforcing our intellectual property rights;▪the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;▪fluctuations in the three-month LIBOR-based floating interest rate of our Notes;▪the initiation, progress, timing, costs and results of clinical trials and other research and development related to additional productcandidates; and▪the extent to which we in-license, acquire or otherwise partner in development of other products, product candidates or technologies.Although it is difficult to predict our future liquidity requirements, we believe that existing cash and cash equivalents at December 31, 2018 will besufficient to meet our debt service obligations under our Notes, and to carry out our96Table of Contentsplanned development and commercial activities into the fourth quarter of 2020. Additional capital, secured in the future through equity or debtfinancings, partnerships, collaborations, or other sources, may not be available on a timely basis, on favorable terms, or at all, and such capital, ifraised, may not be sufficient to meet our debt service obligations, including repayment, or enable us to continue to implement our long-termbusiness strategy. If additional capital is not secured when required, we may need to delay or curtail our operations until such funding is received.If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financialcondition and results of operations could be materially adversely affected and we may need to delay or curtail our operations until such funding isreceived. Additionally, we may never become profitable, or if we do, we may not be able to sustain profitability on a recurring basis.Contractual obligations and commitmentsThe following table summarizes our contractual obligations at December 31, 2018 (in thousands): Total Less than 1 year 1-3 years 3-5 years More than 5 yearsOperating leases(1) $3,128 $1,630 $1,498 $— $—Long-term debt(2) 117,229 $8,958 17,965 90,306 —Purchase obligations (3) 2,335 $2,335 — — — Total $122,692 $12,923 $19,463 $90,306 $—(1) Reflects obligations pursuant to our office leases in Yardley, Pennsylvania, Ewing, New Jersey, Oslo, Norway and Swindon, England and leases of certain other equipment.(2) Reflects principal, interest obligations and exit fees pursuant to the Note Purchase Agreement entered into on December 29, 2017. The Notes bear interest at 9.0% plus thethree-month LIBOR rate, subject to a 1.0% floor. We are required to make quarterly, interest only payments until the maturity date. Interest amounts included above arecalculated at the quarterly rate as of December 31, 2018 of 11.8125%.(3) Reflects non-cancellable services under an agreement we entered into in November 2017 with a contract sales organization for the recruitment, deployment and managementof a contract sales force to market XHANCE in the U.S. Subject to certain limited exceptions, we could not terminate this agreement until after the first anniversary of thedeployment of the sales force (which occurred in March 2018). In December 2018, as a result of our decision to manage the sales force directly, we terminated the agreementeffective April 1, 2019. We estimate the expenses related to the remaining non-cancellable services to be approximately $2.3 million.Off-balance sheet arrangementsWe did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules andregulations of the SEC.ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKWe are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide theinformation under this item.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by Item 8 including the financial statements and notes thereto, and report of the independent registered public accountingfirm thereon, are included in this Form 10-K as set forth in the “Index to Consolidated Financial Statements” on page F-1.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresThe term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct, refers to controls and procedures that are designed to ensure that information required to be disclosed by a97Table of Contentscompany in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periodsspecified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensurethat such information is accumulated and communicated to a company's management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding required disclosure.In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures aremet. 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 certainassumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals underall potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance withpolicies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur andnot be detected.Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as defined inRules 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 ChiefExecutive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.Management's Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is a process designed to provide reasonable assurance of the reliability of financial reporting and of the preparation of financialstatements for external reporting purposes, in accordance with U.S. generally accepted accounting principles.Internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expendituresare being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding theprevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on its financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies and procedures included in such controls may deteriorate.Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making thisassessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control - Integrated Framework (2013). These criteria are in the areas of control environment, risk assessment, control activities,information and communication, and monitoring. Management’s assessment included extensive documentation, evaluating and testing the designand operating effectiveness of its internal controls over financial reporting.Based on management’s processes and assessment, as described above, management has concluded that, as of December 31, 2018, ourinternal control over financial reporting was effective.Attestation Report of the Registered Public Accounting FirmThis Annual Report on Form 10-K does not include an attestation report of our registered public accounting firmdue to an exemption established by the JOBS Act for “emerging growth companies.”98Table of ContentsChanges in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during our the quarter ended December 31, 2018 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone.PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.Our Board has adopted a written Code Conduct applicable to all officers, directors and employees, which is available on our website(www.optinose.com) under "Corporate Governance" within the “Investors” section. We intend to satisfy the disclosure requirement under Item 5.05of Form 8-K regarding amendment to, or waiver from, a provision of this Code and by posting such information on the website address and locationspecified above.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filedwith the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2018.PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) (1) Consolidated Financial Statements.The Consolidated Financial Statements are filed as part of this report. See the Index to the Consolidated Financial Statements on page F-1.(2) Consolidated Financial Statement Schedule.99Table of ContentsSchedules are omitted because they are not applicable, or are not required, or because the information is included in the ConsolidatedFinancial Statements and Notes thereto.(3) The exhibits listed under Item 15(b), which are incorporated herein by reference, are filed or furnished as part of this report or areincorporated into this report by reference.(b) Exhibits. Incorporated by Reference ExhibitNumber Exhibit Description Form Date Number FiledHerewith2.1 Exchange Agreement, dated as of June 7, 2010, by and among the Registrant, OptiNoseAS and the other signatories thereto (the Registrant hereby agrees to furnishsupplementally a copy of any omitted schedules to the SEC upon request) S-1 9/18/17 2.1 3.1 Fourth Amended and Restated Certificate of Incorporation of OptiNose, Inc. 8-K 10/18/17 3.1 3.2 Amended and Restated Bylaws of OptiNose, Inc. 8-K 10/18/17 3.2 4.1 Form of Common Stock Certificate. S-1/A 10/3/17 4.1 4.2 Second Amended and Restated Registration Rights Agreement, dated March 24, 2017,by and among the Registrant and certain of its stockholders. S-1 9/18/17 4.2 4.3 Form of Warrant issued by the Registrant on June 7, 2010. S-1 9/18/17 4.4 4.4 Stockholders’ Agreement, dated October 2, 2017, by and among OptiNose, Inc. andcertain of its stockholders. S-1/A 10/3/2017 4.6 4.5 First Amendment to the Second Amended and Restated Registration Rights Agreement,dated October 2, 2017, by and among the Registrant and certain of its stockholders. S-1/A 10/11/2017 4.7 10.1 Form of Indemnification Agreement.+ x10.2 Employment Agreement, dated October 12, 2017, between OptiNose US, Inc. and PeterK. Miller.+ 8-K 10/18/17 10.1 10.3 Employment Agreement, dated October 12, 2017, between OptiNose US, Inc. and RamyA. Mahmoud.+ 8-K 10/18/17 10.2 10.4 Employment Agreement, dated October 12, 2017, between OptiNose US, Inc. andThomas E. Gibbs.+ 8-K 10/18/17 10.3 10.5 Employment Agreement, dated October 12, 2017, between OptiNose US, Inc. andKeith A. Goldan.+ 8-K 10/18/17 10.4 10.6 Employment Agreement, dated October 12, 2017, between OptiNose US, Inc. andMichael F. Marino.+ 8-K 10/18/17 10.5 10.7 Amended and Restated 2010 Stock Incentive Plan.+ S-1/A 10/3/17 10.7 10.8 Form of Non-Qualified Stock Option Agreement Granted Under the 2010 Stock IncentivePlan (Relating to Success Pool Grants).+ S-1/A 10/3/17 10.8 10.9 Form of Non-Qualified Stock Option Agreement Granted Under the 2010 Stock IncentivePlan (Relating to Option Pool Grants).+ S-1/A 10/3/17 10.9 10.10 Form of Non-Qualified Stock Option Agreement Granted Under the 2010 Stock IncentivePlan.+ S-1/A 10/3/17 10.10 10.11 License Agreement, dated as of July 1, 2013, by and between OptiNose AS and AvanirPharmaceuticals, Inc.† S-1 9/18/17 10.11 10.12 First Amendment of License Agreement, dated as of April 25, 2014, by and betweenOptiNose US, Inc. and Avanir Pharmaceuticals, Inc.† S-1 9/18/17 10.12 10.13 Amendment to License Agreement, dated as of August 6, 2015, by and betweenOptiNose AS and Avanir Pharmaceuticals, Inc.† S-1 9/18/17 10.13 10.14 Supply Agreement, dated July 1, 2017, by and between Hovione Inter Ltd and OptiNoseUS, Inc., OptiNose UK, Ltd and OptiNose AS.† S-1 9/18/17 10.14 10.15 Manufacture and Supply Agreement, dated as of August 18, 2017, by and amongOptiNose US, Inc., OptiNose UK Ltd. and OptiNose AS and Contract PharmaceuticalsLimited Canada.† S-1 9/18/17 10.15 100Table of Contents10.16 Manufacturing Services Agreement, dated as of August 31, 2017, by and amongOptiNose US, Inc., OptiNose UK Ltd. and OptiNose AS and Ximedica, LLC.† S-1 9/18/17 10.16 10.17 Form of Non-Qualified Stock Option Agreement Under the Amended and Restated 2010Stock Incentive Plan+ S-1/A 10/3/17 10.17 10.18 2017 Employee Stock Purchase Plan.+ S-1/A 10/3/17 10.18 10.19 Note Purchase Agreement dated December 29, 2017, among OptiNose AS andOptiNose US, Inc., as the Issuers, OptiNose, Inc. as Parent and a Guarantor, andAthyrium Opportunities III Acquisition LP, as Collateral Agent and a Purchaser 10-K 3/13/18 10.19 10.20 Manufacturing Services Agreement, dated December 21, 2018, by and among OptiNoseUS, Inc., OptiNose UK Ltd. and Optinose AS and Advance Mold & Manufacturing, Inc.d/b/a Vision Technical Molding.†† x21.1 List of Subsidiaries x23.1 Consent of Ernst & Young LLP, independent registered public accounting firm. x31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15a-14(a) underthe Exchange Act. x31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15a-14(a) under theExchange Act. x32.1 Certification Pursuant to 18 U.S.C. Section 1350 of principal executive officer andprincipal financial officer. x32.2 Certification Pursuant to 18 U.S.C. Section 1350 of principal executive officer andprincipal financial officer. x101.INS XBRL Instance Document. x101.SCH XBRL Taxonomy Extension Schema Document. x101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. x101.DEF XBRL Taxonomy Extension Definition Linkbase Document. x101.LAB XBRL Taxonomy Extension Label Linkbase Document. x101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. x †Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment granted pursuant to Rule 406 under theSecurities Act of 1933.††Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 406 under the Securities Act of1933.+Indicates management contract or compensatory plan.ITEM 16. FORM 10-K SUMMARYNot applicable.101Table of ContentsSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized in the capacities and on the date indicated. OPTINOSE, INC.Date: March 6, 2019 By: /s/ PETER K. MILLER Name: Peter K. Miller Title: Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.Signature Title Date /s/ PETER K. MILLER Chief Executive Officer and Director (Principal Executive Officer) March 6, 2019Peter K. Miller /s/ KEITH A. GOLDAN Chief Financial Officer (Principal Finance Officer and Principal Accounting Officer) March 6, 2019Keith A. Goldan /s/ JOSEPH C. SCODARI Chairman of the Board of Directors March 6, 2019Joseph C. Scodari /s/ ROBERT P. O'NEIL Director March 6, 2019Robert P. O'Neil /s/ SRIRAM VENKATARAMAN Director March 6, 2019Sriram Venkataraman /s/ WILLIAM F. DOYLE Director March 6, 2019William F. Doyle /s/ JOSHUA A. TAMAROFF Director March 6, 2019Joshua A. Tamaroff /s/ WILHELMUS GROENHUYSEN Director March 6, 2019Wilhelmus Groenhuysen /s/ SANDRA L. HELTON Director March 6, 2019Sandra L. Helton 102INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageAudited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets as of December 31, 2018 and 2017 F-3Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 F-4Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018 and 2017 F-5Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the yearsended December 31, 2018 and 2017 F-6Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-7Notes to Consolidated Financial Statements F-8F-1Report of Independent Registered Public Accounting FirmTo the Shareholders and Board of Directors and of OptiNose, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of OptiNose, Inc. (the Company) as of December 31, 2018 and 2017, the relatedconsolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and cashflows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017,and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required toobtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of theCompany's internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis forour opinion./s/ Ernst & Young LLPWe have served as the Company’s auditor since 2016.Philadelphia, PennsylvaniaMarch 6, 2019F-2Table of ContentsOptiNose, Inc.Consolidated Balance Sheets(in thousands, except share and per share data) December 31, 2018 2017Assets Current assets: Cash and cash equivalents$200,990 $234,854Accounts receivable, net2,310 —Grants and other receivables242 46Inventory7,132 2,013Prepaid expenses and other current assets2,183 1,254Total current assets212,857 238,167Property and equipment, net3,884 2,564Other assets248 405Total assets$216,989 $241,136Liabilities and stockholders' equity Current liabilities: Accounts payable$7,116 $5,893Accrued expenses18,421 8,698Deferred other income160 186Total current liabilities25,697 14,777Long-term debt, net72,500 71,863Other liabilities181 —Total liabilities98,378 86,640Commitments and contingencies (Note 11) Stockholders' equity: Common stock, $0.001 par value; 200,000,000 December 31, 2018 and 2017; 41,227,530 and 37,802,556 shares issuedand outstanding at December 31, 2018 and December 31, 2017, respectively41 38Additional paid-in capital436,554 365,838Accumulated deficit(317,927) (211,269)Accumulated other comprehensive loss(57) (111)Total stockholders' equity118,611 154,496Total liabilities and stockholders' equity$216,989 $241,136See accompanying notes to consolidated financial statementsF-3Table of ContentsOptiNose, Inc.Consolidated Statements of Operations(in thousands, except share and per share data) Year Ended December 31, 2018 2017Net product revenues $7,065 $—Cost of product sales 1,588 — Gross margin 5,477 —Operating expenses: Research and development 10,099 16,832Selling, general and administrative 95,618 31,698Total operating expenses 105,717 48,530Loss from operations (100,240)(48,530)Other (income) expense: Grant and other income (406) (162)Interest income (2,453) (303)Interest expense 9,229 910Foreign currency (gains) losses 48 (73)Net loss $(106,658) $(48,902)Deemed dividend — 11,969Accretion to redemption value — 1,096Net loss attributable to common stockholders $(106,658) $(61,967)Net loss per share of common stock, basic and diluted $(2.68) $(5.63)Weighted average common shares outstanding, basic and diluted 39,765,983 10,999,121See accompanying notes to consolidated financial statementsF-4Table of ContentsOptiNose, Inc.Consolidated Statements of Comprehensive Loss(in thousands) Year EndedDecember 31, 2018 2017Net loss $(106,658) $(48,902)Other comprehensive (loss) income: Foreign currency translation adjustment 54 (12)Comprehensive loss $(106,604) $(48,914)See accompanying notes to consolidated financial statementsF-5Table of ContentsOptiNose, Inc.Consolidated Statements of Changes in Redeemable Convertible Preferred Stock andStockholders' Equity (Deficit)(in thousands, except share data) RedeemableConvertible PreferredStock Stockholders' Equity (Deficit) Common Stock AdditionalPaid -inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss TotalStockholders'Equity (Deficit) Shares Amount Shares Amount Balance at January 1, 20176,875,514 $168,173 4,067,717 $4 $— $(151,102) $(99) $(151,197)Conversion of convertible debt toSeries C-2 preferred stock687,474 19,527 — — — — — —Sale of Series D preferred stock, net ofissuance costs1,117,578 36,494 — — — — — —Stock compensation expense— — — — 5,096 — — 5,096Accretion of Series C, Series C-1 &Series D preferred stock to redemptionvalue— 1,096 — — (1,096) — — (1,096)Accretion of Series C, Series C-1,Series C-2 & Series D preferred stockin lieu of 8% dividend— 11,969 — — (704) (11,265) — (11,969)Sale of common stock uponconsummation of initial public offering,net of issuance costs— — 8,625,000 9 125,462 — — 125,471Reclassification of redeemableconvertible preferred stock uponconsummation of initial public offering(8,680,566) (237,259) 25,068,556 25 237,234 — — 237,259Exercise of stock options, net ofshares withheld for income taxes— — 41,283 — (154) — — (154)Foreign currency translation adjustment— — — — — — (12) (12)Net loss— — — — — (48,902) — (48,902)Balance at December 31, 2017— $— 37,802,556 $38 $365,838 $(211,269) $(111) $154,496Stock compensation expense— — — — 8,645 — — 8,645Sale of common stock, net of issuancecosts— — 2,875,000 3 59,914 — — 59,917Exercise of common stock options— — 482,190 — 1,418 — — 1,418Exercise of warrants— — 14,647 — — — — —Issuance of common stock underemployee stock purchase plan— — 53,137 — 739 — — 739Foreign currency translation adjustment— — — — — — 54 54Net loss— — — — — (106,658) — (106,658)Balance at December 31, 2018 41,227,530 $41 $436,554 $(317,927) $(57) $118,611See accompanying notes to consolidated financial statementsF-6Table of ContentsOptiNose, Inc.Consolidated Statements of Cash Flows(in thousands) Year EndedDecember 31, 2018 2017Operating activities: Net loss$(106,658) $(48,902)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization539 166Stock-based compensation8,543 5,096Amortization of debt discount and issuance costs404 198Changes in operating assets and liabilities: Accounts receivable(2,310) —Grants and other receivables(196) 337Prepaid expenses and other assets(762) 2,358Inventory(4,698) (2,013)Accounts payable3,171 392Accrued expenses and other liabilities10,150 6,688Cash used in operating activities(91,817) (35,680)Investing activities: Purchases of property and equipment(1,690) (2,406)Cash used in investing activities(1,690) (2,406)Financing activities: Proceeds from the sale of Series D preferred stock— 36,712Proceeds from the issuance of common stock63,969 138,000Proceeds from the issuance of common stock under employee stock purchase plan739 —Proceeds from long-term debt— 75,000Proceeds from the exercise of stock options1,488 134Payments of withholdings on shares withheld for income taxes(70) (288)Cash paid for financing costs(6,547) (13,433)Cash provided by financing activities59,579 236,125Effects of exchange rate changes on cash and cash equivalents64 (11)Net (decrease) increase in cash, cash equivalents and restricted cash(33,864) 198,028Cash, cash equivalents and restricted cash at beginning of period234,875 36,847Cash, cash equivalents and restricted cash at end of period$201,011 $234,875Supplemental disclosure of cash flow information: Cash paid for interest$8,253 $—Supplemental disclosure of noncash financing activities: Deemed dividend$— $11,969Accretion to redemption value$— $1,096Fixed asset purchases within accounts payable and accrued expenses$146 $—Fixed asset additions acquired through tenant allowance$361 $—Financing costs within accounts payable and accrued expenses$— $2,454Conversion of convertible notes payable and accrued interest into Series C-2 preferred stock$— $19,527Conversion of redeemable convertible preferred stock into common stock$— $237,259See accompanying notes to consolidated financial statementsF-7Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)1. Organization and Description of BusinessOptiNose, Inc. (the Company) was incorporated in Delaware in May 2010 (inception) and has facilities in Yardley, Pennsylvania, Ewing, NewJersey, Oslo, Norway and Swindon, England. The Company's predecessor entity, OptiNose AS, was formed under the laws of Norway inSeptember 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, isa therapeutic utilizing its proprietary Optinose Exhalation Delivery System (EDS) that delivers a topically-acting corticosteroid for the treatment ofchronic rhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also known as chronic sinusitis). XHANCEwas approved by the United States (US) Food and Drug Administration (FDA) in September 2017 for the treatment of nasal polyps in patients18 years of age or older, and XHANCE was launched commercially in the US in March 2018.2. LiquiditySince inception, the Company's operations have focused on organization and staffing, business planning, raising capital, establishing anintellectual property portfolio, conducting preclinical studies and clinical trials, pursuing regulatory approvals and most recently, preparing for andlaunching XHANCE. As of December 31, 2018, the Company had cash and cash equivalents of $200,990.On June 11, 2018, the Company and certain stockholders closed an underwritten public offering (the Offering) of 5,750,000 shares of Companycommon stock (Common Stock) at a price of $22.25 per share. The Offering consisted of 2,875,000 shares of Common Stock sold by theCompany and 2,875,000 shares of Common Stock sold by certain stockholders. As a result of the Offering, the Company received $59,917 in netproceeds, after deducting discounts and commissions of $3,678 and offering expenses of approximately $373 payable by the Company.The Company will likely require additional capital in the future through equity or debt financings, partnerships, collaborations, or other sources inorder to meet the debt service obligations under the Company's outstanding senior secured notes (Senior Secured Notes), including repayment,and to carry out the Company's planned development and commercial activities. If additional capital is not secured when required, the Companymay need to delay or curtail its operations until such funding is received. The Company is subject to a number of risks similar to other lifesciences companies, including, but not limited to, successful discovery, development and commercialization of its products and productcandidates, raising additional capital, the development by its competitors of new technological innovations, protection of proprietary technologyand market acceptance of the Company's products.3. Summary of Significant Accounting PoliciesBasis of presentationThe accompanying 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) andAccounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB).Principles of consolidationThe consolidated financial statements include the accounts of OptiNose, Inc. and its wholly-owned subsidiaries, OptiNose US, Inc., OptiNose ASand OptiNose UK Ltd. All inter-company balances and transactions have been eliminated in consolidation.F-8Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)Use of estimatesThe preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financialstatements and reported amounts of expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates orjudgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates. Estimatesand assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they aredetermined to be necessary.Stock SplitOn October 10, 2017, the Company effected a 2.8879-for-1 reclassification, or stock split, of the Company's common stock in connection with itsinitial public offering, or the IPO. All common share and per share amounts in these consolidated financial statements and notes thereto have beenretroactively adjusted for all periods presented to reflect the stock split.Concentration of credit riskFinancial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and accounts receivable.TheCompany generally invests its cash in deposits with high credit quality financial institutions. Additionally, the Company performs periodicevaluations of the relative credit standing of these financial institutions.The Company has exposure to credit risk in accounts receivable from sales of product. XHANCE is sold to wholesale pharmaceutical distributorsand preferred pharmacy network partners, who, in turn, sell XHANCE to pharmacies, hospitals and other customers. Four customers representapproximately 90% of the Company's accounts receivable at December 31, 2018 and four customers represent approximately 94% of theCompany's net product sales for the year ended December 31, 2018.Cash and cash equivalentsAll highly liquid investments purchased with an original maturity date of three months or less at the date of purchase are considered to be cashequivalents. The Company maintains its cash and cash equivalent balances at foreign and domestic financial institutions. Bank deposits withNorwegian banks are insured up to approximately 2,000 Norwegian krone by the Norwegian Banks' Guarantee Fund. Bank deposits with US banksare insured up to $250 by the Federal Deposits Insurance Corporation. The Company had uninsured cash balances of $199,507 and $233,772 atDecember 31, 2018 and 2017, respectively.Fair value of financial instrumentsThe Company measures certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid totransfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The FASB accounting guidanceoutlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair valuemeasurements and the related disclosures. In determining fair value, the Company uses quoted prices and observable inputs. Observable inputsare inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fairvalue hierarchy is broken down into three levels based on the source of the inputs as follows:•Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.•Level 2 — Valuations based on observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similarassets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that areobservable or can be corroborated by observable market data.F-9Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)•Level 3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.At December 31, 2018 and 2017, the Company's financial instruments included cash and cash equivalents, accounts receivable, grantsreceivable, accounts payable, and accrued expenses. The carrying amounts reported in the Company's financial statements for these instrumentsapproximates their respective fair values because of the short-term nature of these instruments. In addition, at December 31, 2018, the Companybelieves the carrying value of debt approximates fair value as the interest rates are reflective of the rate the Company could obtain on debt withsimilar terms and conditions. At December 31, 2018 and 2017, there were no financial assets or liabilities measured at fair value on a recurringbasis.Accounts receivableAccounts receivable primarily relates to amounts due from customers, which are typically due within 31 to 61 days. The Company analyzesaccounts that are past due for collectability. Given the nature and historical collectability of the Company’s accounts receivable, an allowance fordoubtful accounts was not deemed necessary at December 31, 2018.InventoryPrior to receiving FDA approval for XHANCE in September 2017, inventory purchases were expensed as incurred and recorded as a component ofresearch and development expense. Subsequent to receiving FDA approval, inventories are stated at the lower of cost or net realizable value.Costs of inventories, which include amounts related to materials and manufacturing overhead, are determined on a first-in, first-out basis. Anassessment of the recoverability of capitalized inventory is performed during each reporting period and any excess and obsolete inventories arewritten down to their estimated net realizable value in the period in which the impairment is first identified.Property and equipmentProperty and equipment is recorded at cost less accumulated depreciation. Significant additions or improvements are capitalized, andexpenditures for repairs and maintenance are charged to expense as incurred. Gains and losses on disposal of assets are included in theconsolidated statements of operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.The estimated useful lives of property and equipment are as follows:Computer equipment2-3 yearsSoftware3 yearsMachinery & production equipment5-10 yearsFurniture & fixtures3-5 yearsLeasehold improvementsShorter of lease term or useful lifeLong lived assetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future netcash flows expected to be generated. Impairment charges are recognized at the amount by which the carrying amount of an asset exceeds the fairvalue of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The Company didnot recognize any impairment or disposition of long-lived assets for the years ended December 31, 2018 and 2017.F-10Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)Revenue recognitionThe Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January1, 2018. This standard applies to all contracts with customers, with the exception of contracts that are within the scope of other standards, suchas leases, insurance and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promisedgoods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services.The Company performs the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identifythe performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations inthe contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue when itis probable that it will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.Net Product RevenuesThe Company sells XHANCE to preferred pharmacy network partners and wholesalers in the US (collectively, Customers). These Customerssubsequently resell the Company’s products to healthcare providers, patients and other retail pharmacies. In addition to agreements withCustomers, the Company enters into arrangements with healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which generally occurs upondelivery. The transaction price that is recognized as revenue for products includes an estimate of variable consideration which is described below.Payment terms with Customers do not exceed one year and, therefore, the Company does not account for a financing component in itsarrangements. The Company expenses incremental costs of obtaining a contract with a Customer (for example, sales commissions) when incurredas the period of benefit is less than one year. Shipping and handling costs for product shipments to Customers are recorded as selling, generaland administrative expenses.Transaction Price, including Estimates of Variable ConsiderationRevenue from products is recognized at the estimated net sales price (transaction price), which includes estimates of variable consideration. TheCompany includes estimated amounts in the transaction price to the extent it is determined probable that a significant reversal of cumulativerevenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates ofvariable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment ofits anticipated performance and all information (historical, current and forecasted) that is reasonably available.Components of Variable ConsiderationComponents of variable consideration include provider chargebacks and discounts, trade discounts and allowances, product returns, governmentrebates, third-party payor rebates, sales order management fees and other incentives, such as voluntary patient assistance and other allowancesthat are offered within contracts between the Company and its Customers, payors and other indirect customers relating to the Company’s sale ofproducts. Those components, as described below, are based on the amounts earned, or to be claimed, on the related sales and are presented asreductions of accounts receivable (if the amount is payable to the Customer) or as a current liability (if the amount is payable to a party other thanthe Customer). The Company considers all relevant factors such as current contractual and statutory requirements, specific known market eventsand trends, industry data and forecasted customer buying and payment patterns.F-11Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)•Variable Consideration - Accounts Receivable Reductions◦Provider Chargebacks and Discounts. Chargebacks for fees and discounts to providers represent the estimated obligations resultingfrom contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customerswho directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for theproduct and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are establishedin the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reservesfor chargebacks consist of credits the Company expects to issue for units that remain in the distribution channel inventories at eachreporting period-end that the Company expects will be sold to qualified healthcare providers, as well as chargebacks that Customershave claimed, but for which the Company has not yet issued a credit.◦Trade Discounts and Allowances. The Company generally provides Customers with discounts that include incentive fees which areexplicitly stated in the Company’s contracts. These discounts are recorded as a reduction of revenue and accounts receivable in theperiod in which the related product revenue is recognized. In addition, the Company reimburses (through discounts and allowances) itsCustomers for sales order management, data and distribution services.•Variable Consideration - Current Liabilities◦Product Returns. Consistent with industry practice, the Company has a product returns policy that provides Customers a right of returnfor product purchased within a specified period prior to and subsequent to the product’s expiration date. The right of return lapses uponshipment of the goods to a patient. The Company estimates the amount of its products that may be returned and presents this amountas a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a liability. The Companyconsiders several factors in the estimation process, including expiration dates of product shipped to preferred pharmacy networkpartners and wholesalers, inventory levels within the distribution channel, product shelf life, prescription trends and other relevantfactors.◦Government Rebates. The Company is subject to discount obligations under state Medicaid programs and Medicare. These reservesare recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of acurrent liability. For Medicaid, accruals are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unitrebate formula established by the Center for Medicaid and Medicare Services. The Medicare Part D prescription drug benefit mandatesmanufacturers to fund approximately 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients.To estimate the cost to the Company of this Medicare coverage gap responsibility, the Company estimates the number of patients inthe prescription drug coverage gap for whom it will owe an additional liability under the Medicare Part D program. The Company’s liabilityfor these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product thathas 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 benefitmanagers, for the payment of rebates with respect to utilization of its products. These rebates are based on contractual percentagesapplied to the amount of product prescribed to patients who are covered by the plan or the organization with which it contracts. TheCompany estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in areduction of product revenue and the establishment of a current liability.◦Other Incentives. Other incentives that the Company offers include voluntary patient assistance programs, such as co-pay assistanceprograms, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors and coupon programs for cash payors. The calculation of the accruals for this assistance is based on anestimate of claims and the cost per claim that the Company expects to receive associated with productF-12Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period.Licensing RevenuesThrough December 31, 2017, the Company's revenues had been generated pursuant to the terms of a single license agreement (the AVP-825License Agreement) with Avanir Pharmaceuticals, Inc. (Avanir) (Note 7). The AVP-825 License Agreement included licensed rights to patentedtechnology, non-refundable up-front payment, research services, and regulatory and sales milestones as well as royalty payments. ThroughDecember 31, 2018, under the terms of the AVP-825 License Agreement, the Company received aggregate cash payments of $70,000 inconnection with the initial signing and the achievement of certain development milestones.On December 10, 2018, the Company received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result,the AVP-825 License Agreement is expected to terminate on March 10, 2019. We do not expect to receive any additional proceeds from the AVP-825 License Agreement.Prior to the receipt of notice of termination of the License Agreement, the Company analyzed the performance obligations under the AVP-825License Agreement, the consideration received to date and the consideration the Company could have received in the future as part of its analysisrelated to ASU 2014-09. The consideration received to date, which included an upfront payment, research and development funding anddevelopment milestone payments was recognized in prior years and the Company’s performance obligations pursuant to the arrangement havebeen completed.Advertising expensesThe Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $9,767 and $1,833 forthe years ended December 31, 2018 and 2017, respectively.Research and developmentResearch and development costs are expensed as incurred. Research and development costs consist primarily of device development, clinicaltrial related costs and regulatory related costs. The Company enters into agreements with contract research organizations (CROs) to facilitate,coordinate and perform agreed upon research and development activities for the Company's clinical trials. These CRO contracts typically call forthe payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical trial milestones. The Companyprepays certain CRO fees whereby the prepayments are recorded as a current or non-current prepaid asset and are amortized into research anddevelopment expense over the period of time the contracted research and development services were performed. The Company's CRO contractsgenerally also included other fees such as project management and pass through fees whereby the Company expenses these costs as incurred,using the Company's best estimate. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, andother miscellaneous costs. Pass through fees incurred are based on the amount of work completed for the clinical trials and are monitored throughreporting provided by the Company's CROs.Stock-based compensationThe Company measures and recognizes compensation expense for all stock options awarded to employees and nonemployees and shares issuedunder the employee stock purchase plan based on the estimated fair value of the awards on the respective grant dates. The Company uses theBlack-Scholes option pricing model to value its stock option awards and shares issued under the employee stock purchase plan. The Companyrecognizes compensation expense for time-based awards on a straight-line basis over the requisite service period, which is generally the vestingperiod of the award. The Company recognizes compensation expense for performance based awards when the performance condition is probableof achievement. Stock-based awards issued to nonemployees are revalued at each reporting period until the award vests. The Company accountsfor forfeitures of stock option awards as they occur.F-13Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)Estimating the fair value of options and shares issued under the employee stock purchase plan requires the input of subjective assumptions,including the estimated fair value of the Company's common stock, the expected life of the options, stock price volatility, the risk-free interest rateand expected dividends. The assumptions used in the Company's Black-Scholes option-pricing model represent management's best estimates andinvolve a number of variables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective.Income taxesIncome taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for temporarydifferences between the financial reporting basis and the tax basis of the Company's assets and liabilities and the expected benefits of netoperating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the period in which temporarydifferences are expected to be settled, is reflected in the Company's financial statements in the period of enactment. The measurement of deferredtax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets willnot be realized. As of December 31, 2018 and 2017, the Company has concluded that a full valuation allowance is necessary for all of its netdeferred tax assets. The Company had no amounts recorded for uncertain tax positions, interest or penalties in the accompanying consolidatedfinancial statements.Grant incomeGovernment grants are agreements that provide cost reimbursement for certain research and development activities over a contractually definedperiod. Income from government grants is recognized in the period in which related costs are incurred, provided that the conditions under whichgovernment grants were provided have been met and only perfunctory obligations are outstanding. Grant income received in excess of costsincurred is recognized as deferred other income.Net income (loss) per common shareBasic net income (loss) per common share is determined by dividing net income (loss) applicable to common stockholders by the weightedaverage common shares outstanding during the period. For the years ended December 31, 2018 and 2017, the outstanding common stock optionsand common stock warrants 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 beantidilutive: Year Ended December 31, 2018 2017Stock options 6,182,873 2,141,367Common stock warrants 1,866,831 1,890,489Employee stock purchase plan 31,892 —Total 8,081,596 4,031,856Recent accounting pronouncementsIn August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing ArrangementThat Is a Service Contract. ASU 2018-15 requires that certain implementation costs incurred in a cloud computing arrangement be deferred andrecognized over the term of the arrangement. The new standard is effective for fiscal years, and interim periods within those fiscal years,beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the potential impact of the adoption ofthis standard on its results of operations, financial position and cash flows and related disclosures.F-14Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair ValueMeasurement. ASU 2018-13 resulted in certain modifications to fair value measurement disclosures, primarily related to level 3 fair valuemeasurements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019,and early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard on its disclosures.In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting. ASU 2017-09 provides guidance onwhich changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard iseffective for fiscal years beginning after December 15, 2017. The adoption of ASU 2017-09 did not have a material impact on the Company’sresults of operations, financial position, cash flows and related disclosures.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230). ASU No. 2016-18 requires that a statement of cashflows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restrictedcash equivalents. The new standard is effective for fiscal years beginning after December 15, 2017. The Company adopted ASU 2016-18 in thefirst quarter of 2018, and the guidance has been retrospectively applied to all periods presented. The restricted cash balance included in prepaidexpenses and other assets was $21 as of December 31, 2018 and 2017.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued the update to require the recognition of lease assets andliabilities on the balance sheet of lessees. The standard will be effective for fiscal years beginning after December 15, 2018, with early adoptionpermitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients.The following are other key disclosures, as well as determinations made and actions taken by the Company, related to the adoption of ASC 842:•Elected the optional modified retrospective transition method as of January 1, 2019; therefore prior period amounts will not be restated;•Established and implemented key implementation controls to ensure the Company meets the new reporting and disclosure requirements;•Elected the following transition practical expedients:◦to not reassess lease identification, lease classification and initial indirect costs related to those leases entered into prior to theadoption of ASC 842;◦to not separate lease and non-lease components for our office lease portfolio;•Made policy elections as of January 1, 2019:◦to not apply the recognition and measurement requirements to leases with an initial term of one year or less;◦to apply the portfolio approach for the development of the discount rate related to leases with similar characteristics;◦to keep leases with an immaterial right-of-use asset at inception, off the balance sheet and recognize this expense on a straight-linebasis in the consolidated statements of operations;While we continue to assess all the effects of adoption, the Company believes the most significant effect relates to the recognition of right-of-useassets and corresponding liabilities on its consolidated balance sheet, primarily related to its existing facility operating leases, and providing newdisclosures with regards to the Company’s leasing activities.F-15Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements (Continued)(in thousands, except share and per share data)In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU-2014-09, which replacednumerous requirements in US GAAP, including industry-specific requirements. This guidance provides a five-step model to be applied to allcontracts with customers, with an underlying principle that an entity will recognize revenue to depict the transfer of goods or services to customersat an amount that the entity expects to be entitled to in exchange for those goods or services. The new standard also defines accounting forcertain costs related to origination and fulfillment of contracts with customers, including whether such costs should be capitalized.This statement requires extensive quantitative and qualitative disclosures covering the nature, amount, timing and uncertainty of revenue and cashflows arising from customer contracts, including disclosures on significant judgments made when applying the guidance and assets recognizedfrom costs incurred to obtain or fulfill a contract. The guidance was effective for annual reporting periods beginning after December 15, 2017, andinterim periods within that reporting period. An entity could elect to apply the guidance under one of the following two methods: (i) retrospectively toeach prior reporting period presented — referred to as the full retrospective method or (ii) retrospectively with the cumulative effect of initiallyapplying the standard recognized at the date of initial application in retained earnings — referred to as the modified retrospective method.The Company assessed the impact that ASU No. 2014-09 had on its financial statements and related disclosures. Through the January 1, 2018adoption date, the Company has derived its revenues from a single licensing agreement with Avanir (the AVP-825 License Agreement). Theconsideration the Company has received to date includes an upfront payment, research and development funding and development milestonepayments. The Company analyzed the performance obligations under the AVP-825 License Agreement as well as the consideration received todate as part of its analysis of the impact of ASU 2014-09 on this arrangement.The Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective transition method. No transition adjustments wererecognized as a result of the adoption. The comparative information has not been restated and continues to be reported under the accountingstandards in effect for those periods.4. InventoryInventory consisted of the following: December 31, 2018 2017Raw materials$1,969 $1,385Work-in-process2,344 628Finished goods2,819 —Total inventory$7,132 $2,0135. Property and EquipmentProperty and equipment, net, consisted of: December 31, 2018 2017Computer equipment and software$833 $307Furniture and fixtures389 89Machinery and equipment2,723 2,495Leasehold improvements609 28Construction in process481 — 5,035 2,919Less: accumulated depreciation(1,151) (355) $3,884 $2,564F-16Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)Depreciation expense was $535 and $164 for the years ended December 31, 2018 and 2017, respectively. In addition, depreciation expense of$322 and $10 is included within inventory and prepaid expenses and other assets, respectively, as of December 31, 2018, which representsdepreciation expense related to equipment involved in the manufacturing process.6. Accrued ExpensesAccrued expenses consisted of: December 31, 2018 2017Contract sales organization expenses$4,482 $1,432Selling, general and administrative expenses4,812 2,031Research and development expenses933 80Bonus expense3,635 4,163Payroll and benefit expenses564 448Employee contributions withheld359 185Product revenue allowances2,856 —Interest expense345 45Other435 314 $18,421 $8,6987. AVP-825 License AgreementIn July 2013, the Company's wholly owned subsidiary, OptiNose AS, entered into the AVP-825 License Agreement with Avanir for the exclusiveright to sell AVP-825 (now marketed as Onzetra® Xsail®), a product combining a low-dose powder form of sumatriptan with the Company's EDStechnology platform, for the acute treatment of migraines in adults and any follow-on products under development that consist of a formulation thatcontains triptans as the sole active ingredient.Through December 31, 2018, under the terms of the AVP-825 License Agreement, the Company received aggregate cash payments of $70,000 inconnection with the initial signing and the achievement of certain development milestones. The Company did not recognize any licensing revenueduring the years ended December 31, 2018 and 2017.On December 10, 2018, the Company received written notice from Avanir of its election to terminate the AVP-825 License Agreement. As a result,the AVP-825 License Agreement is expected to terminate on March 10, 2019. Upon termination, the Company may elect to continue tocommercialize Onzetra Xsail itself or through a new licensee. We do not expect to receive any additional proceeds from the AVP-825 LicenseAgreement.8. Convertible NotesOn September 30, 2015, the Company entered into a Senior Secured Convertible Note Purchase Agreement (Notes) with various existingstockholders. The Notes provided the Company with up to $30,000 in capital available in two separate tranches.The first tranche of $15,000 closedon September 30, 2015. The second tranche of up to $15,000 was available to the Company until March 30, 2017 but was never drawn. The Notesbore an annual interest rate of 17% and were scheduled to mature on September 30, 2020 if not otherwise converted to Series C-2 shares.On March 24, 2017, in connection with the Series D Financing, the Notes and associated accrued interest and back end fees thereon totaling$19,527 converted into 687,474 shares of Series C-2 preferred stock at a per share conversion price of approximately $28.40.The Company recorded interest expense of $862 during the year ended December 31, 2017 in conjunction with the Notes. Total coupon interest onthe Notes and back end fees was $743 during the year ended December 31, 2017.F-17Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)The front-end fees of $450 were recorded as debt discount at issuance and were amortized to interest expense over the 18 months loanconversion period. During the year ended December 31, 2017, the Company recorded a total of $75 of interest expense related to the front endfees. Additionally, back end fees of $450 were amortized to interest expense over the 18 months loan conversion period of which $90 wasrecorded as interest expense and as an increase in the carrying amount of the Notes during the year ended December 31, 2017. The Companyalso incurred $265 in debt issuance costs during the year ended December 31, 2015 which were amortized to interest expense over the 18 monthsloan conversion period.As of December 31, 2018 and 2017, none of the Notes were outstanding.9. Long-term DebtOn December 29, 2017, the Company entered into a Senior Secured Note Purchase Agreement (the Senior Secured Notes) with AthyriumOpportunities III Acquisition LP. The Senior Secured Notes provided the Company with up to $100,000 in capital, of which $75,000 was issuedimmediately. The remaining $25,000 (the Delayed Draw Notes) may be issued between April 1, 2019 and August 14, 2019, subject to the Companyachieving trailing four quarter net revenues (as calculated pursuant to the terms of the Note Purchase Agreement) of $15,000 and a pro forma ratioof total debt to trailing four quarter net revenues not exceeding 6.50 to 1.00, and certain other conditions.The Senior Secured Notes bear interest at 9.0% plus the three-month London Inter-bank Offered Rate (LIBOR) rate, subject to a 1.0% floor and arescheduled to mature on June 29, 2023. The interest rate was 11.8125% at December 31, 2018. The Senior Secured Notes bore front-end fees of1% of the aggregate principal amount, which were paid at issuance. The Company is also required to pay an exit fee of 2% of any principalpayments (whether mandatory, voluntary, or at maturity) made throughout the term of the Note Purchase Agreement.The Company is required to make quarterly, interest only payments until the maturity date. The Company may make voluntary prepayments of theSenior Secured Notes, in whole or in part, and subject to certain exceptions, is required to make mandatory prepayments upon the occurrence ofcertain events as defined in the agreement, including, the occurrence of a change of control.All mandatory and voluntary prepayments of the Senior Secured Notes are subject to the payment of prepayment premiums as follows: (i) ifprepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal to the amount by which (a) the presentvalue of 102% of the principal prepaid plus all interest that would have accrued on such principal through such second anniversary exceeds (b) theamount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date of issuance but prior to the thirdanniversary of such issuance, an amount equal to 2% of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of theapplicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 1% of the principal prepaid. No prepaymentpremium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance of any Senior Secured Notes.The Senior Secured Notes are secured by a pledge of substantially all of the Company’s assets and contains affirmative and negative covenantscustomary for financings of this type, including limitations on the Company’s and its subsidiaries’ ability to, among other things, incur additionaldebt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, grant certainlicense rights related to the Company's products, technology and other intellectual property rights, pay dividends and distributions, repay juniorindebtedness and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the Senior Secured Notes containsfinancial covenants requiring the Company to maintain (i) at least $10,000 of cash and cash equivalents and (ii) following the issuance of theDelayed Draw Notes or upon entering into certain exclusive licenses of XHANCE, a total debt to trailing four quarter net revenue ratio of less than6.50 to 1.00 initially, and thereafter declining quarterly by equal half-steps to a ratio of less than 3.00 to 1.00. As of December 31, 2018, theCompany was in compliance with the covenants.The Company recorded interest expense of $9,229 and $48 during the years ended December 31, 2018 and 2017, respectively, in conjunction withthe Senior Secured Notes. Interest expense included total coupon interest, backF-18Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)end fees, front end fees and the amortization of debt issuance costs. The front-end fees of $1,000 were recorded as debt discount at issuance andare being amortized to interest expense over the 5.5 year term of the loan. Additionally, back end fees of $2,000 are being amortized to interestexpense and are recorded as an increase in the carrying amount throughout the term of the Senior Secured Notes. The Company also incurred$2,181 in debt issuance costs during the year ended December 31, 2017 which are also being amortized to interest expense over the term of theSenior Secured Notes.As of December 31, 2018 and 2017, the long-term debt balance is comprised of the following: December 31, 2018 2017Face amount$75,000 $75,000Front end fees(872) (999)Debt issuance costs(1,902) (2,139)Back end fees274 1 $72,500 $71,86310. Employee Benefit PlansFor US employees, the Company maintains a defined contribution 401(k) retirement plan, which covers all employees. Employees are eligible toparticipate in the plan on the first of the month following their date of hire. Under the 401(k) retirement plan, participating employees may defer upto 100% of their pre-tax salary, but not more than statutory limits. In October 2017, the Company adopted a 401(k) matching program for its USemployees. The Company matches 100% of the first 3% of participating employee contributions and 50% of the next 2% of participating employeecontributions, subject to applicable IRC limits. The Company incurred costs of $645 and $230 related to the Company match applicable toemployee contributions for the years ended December 31, 2018 and 2017. The Company's contributions are made in cash. The Company'scommon stock is not currently an investment option available to participants in the 401(k) retirement plan.For Norway and UK employees, the Company maintains defined contribution pension plans which meet statutory requirements of thosejurisdictions. The Company incurred costs of $81 and $56 related to the pension plans for the years ended December 31, 2018 and 2017,respectively.11. Commitments and ContingenciesLeasesThe Company leases office space under four operating leases and has leases for certain other equipment. Rent expense is recognized asincurred.The following is a schedule of future minimum annual payments as of December 31, 2018 under operating lease agreements:For the years ending December 31: 20191,63020201,1072021391Total future minimum lease payments as of December 31, 2018$3,128Rent expense related to leases of office space was $831 and $689 for the years ended December 31, 2018 and 2017, respectively.F-19Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)In January 2018, the Company amended its existing office lease agreement for the Company’s headquarters in Yardley, PA (the LeaseAmendment). Under the terms of the Lease Amendment, the Company’s leased office space was increased from approximately 20,050 squarefeet to approximately 30,000 square feet, and the term of the lease was extended from March 31, 2018 to May 31, 2021 (the Extended Term), withan option to renew the lease for an additional three-year term. The Company’s rent payments during the Extended Term will be approximately$2,750 in the aggregate, and the Company will also be required to pay its proportionate share of certain operating costs and property taxesapplicable to the leased premises.Purchase commitmentsIn November 2017, the Company entered into an agreement with a contract sales organization for the recruitment, deployment and management ofa contract sales force to market XHANCE in the US. Subject to certain limited exceptions, the Company could not terminate this agreement untilafter the first anniversary of the deployment of the sales force (which occurred in March 2018). In December 2018, as a result of the Company'sdecision to manage its sales force directly, the Company terminated the agreement effective April 1, 2019 and accrued an early termination fee of$691. The Company estimates the expenses related to the remaining non-cancellable services, all of which will be provided in 2019, to beapproximately $2,335.As of December 31, 2018, the Company had no other material outstanding non-cancellable purchase commitments related to inventory and othergoods and services, including pre-commercial manufacturing scale-up and sales and marketing activities.Employment agreementsThe Company has entered into employment contracts with its officers and certain employees that provide for severance and continuation ofbenefits in the event of termination of employment by the Company without cause or by the employee for good reason. In addition, in the event oftermination of employment following a change in control, the vesting of certain equity awards may be accelerated.LitigationLiabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probablethat a liability has been incurred and the amount can be reasonably estimated. There are no matters currently outstanding.12. Stockholders' equityCommon stockIn October 2017, the Company increased the number of authorized common shares from 10,624,486 to 200,000,000 and completed an initial publicoffering (IPO) of its common stock, selling 8,625,000 shares at $16.00 per share. As a result of the IPO, the Company received $125,471 in netproceeds, after deducting discounts and commissions of $9,660 and offering expenses of approximately $2,869 payable by the Company.On June 11, 2018, the Company and certain stockholders closed the Offering of 5,750,000 shares of Common Stock at a price of $22.25 pershare. The Offering consisted of 2,875,000 shares of Common Stock sold by the Company and 2,875,000 shares of Common Stock sold bycertain stockholders. As a result of the Offering, the Company received $59,917 in net proceeds, after deducting discounts and commissions of$3,678 and offering expenses of approximately $373 payable by the Company.Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Subject topreferences that may apply to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends that theCompany’s board of directors may declare out of funds legally available for that purpose on a non-cumulative basis. No dividends had beendeclared through December 31, 2018.Common stock warrantsAs of December 31, 2018, the Company had 1,866,831 warrants outstanding to purchase shares of the Company's common stock with anexercise price of $8.16. The warrants expire on November 1, 2020.F-20Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)Redeemable convertible preferred stockDuring the year ended December 31, 2017, the Company sold 1,117,578 shares of Series D Preferred Stock at a per share purchase price of$32.85, resulting in gross proceeds to the Company of $36,712 (the Series D Financing). In connection with the Series D Financing, theCompany's existing convertible notes and associated accrued interest and back end fees thereon totaling $19,527 converted into 687,474 sharesof Series C-2 Preferred Stock at a per share conversion price of approximately $28.40 (Note 8).Upon consummation of the IPO in October 2017, all of the outstanding shares of the Company's redeemable convertible preferred stock wereconverted into an aggregate of 25,068,556 shares of common stock. In connection with the IPO, 5,000,000 shares of preferred stock, with a parvalue of $0.001 per share, were authorized for issuance. As of December 31, 2018 and 2017, no preferred stock was issued or outstanding.13. Stock-based compensationThe Company issues stock-based awards pursuant to its 2010 Stock Incentive Plan. Effective as of October 12, 2017, the Company's 2010 StockIncentive Plan was amended and restated (A&R Plan). The A&R Plan provides for the grant of incentive stock options, non-statutory stockoptions, restricted stock awards, restricted stock units, deferred stock units, performance shares, stock appreciation rights and other equity-basedawards. The Company's employees, officers, directors and other persons are eligible to receive awards under the A&R Plan. As of December 31,2018, 8,406,547 shares of the Company's common stock were authorized to be issued under the A&R Plan, and 1,635,295 shares were reservedfor future awards under the A&R Plan. The number of shares of the Company's common stock authorized under the A&R Plan will automaticallyincrease on January 1st of each year, commencing on January 1, 2018 and continuing until the expiration of the A&R Plan, in an amount equal tofour percent of the total number of shares of the Company's common stock outstanding on December 31st of the preceding calendar year, subjectto the discretion of the Company's board of directors or compensation committee to determine a lesser number of shares shall be added for suchyear. The amount, terms of grants, and exercisability provisions are determined and set by the Company's board of directors or compensationcommittee. The Company measures employee stock-based awards at grant-date fair value and records compensation expense on a straight-linebasis over the vesting period of the award. Stock-based awards issued to non-employees are revalued until the award vests.Stock optionsThe Company has issued service-based and performance-based stock options that generally have a contractual life of up to 10 years and may beexercisable in cash or as otherwise determined by the board of directors. 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 onlyexercisable upon a change in control or upon or after an initial public offering. As of December 31, 2018, all of the performance conditions relatedto performance-based stock options issued by the Company have been achieved.F-21Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)The following table summarizes the activity related to stock option grants to employees and nonemployees for the years ended December 31,2018: Shares Weightedaverageexercise priceper share Weightedaverageremainingcontractual lifeOutstanding at December 31, 20176,251,589 $9.34 6.67Granted472,792 19.36 Exercised(491,654) 3.21 Expired— — Forfeited(49,854) 9.67 Outstanding at December 31, 20186,182,873 $10.60 6.48Exercisable at December 31, 20183,804,999 $8.15 5.09Vested and expected to vest at December 31, 20186,182,873 $10.60 6.48During the year ended December 31, 2018, stock options to purchase 472,792 shares of common stock were granted to employees that generallyvest over four years. The options had an estimated weighted average grant date fair value of $12.85. The grant date fair value of each option grantwas estimated at the time of grant using the Black-Scholes option-pricing model.The total aggregate intrinsic value of stock options exercised during the years ended December 31, 2018 and 2017 was $9,255 and $435,respectively. The aggregate intrinsic value of stock options outstanding and stock options exercisable as of December 31, 2018 was $8,470 and$8,028, respectively. At December 31, 2018, the unrecognized compensation cost related to unvested stock options expected to vest was$20,405. This unrecognized compensation will be recognized over an estimated weighted-average amortization period of 2.7 years.2017 Employee Stock Purchase PlanThe Company's 2017 Employee Stock Purchase Plan (the 2017 Plan) became effective on October 12, 2017. As of December 31, 2018, 522,420shares of the Company's common stock were authorized to be issued pursuant to purchase rights granted to its employees or to employees of anyof its participating affiliates under the 2017 Plan. 469,283 shares of the Company's common stock were reserved for future issuance under the2017 Plan. The number of shares of the Company's common stock that may be issued pursuant to rights granted under the 2017 Plan shallautomatically increase on January 1st of each year, commencing on January 1, 2018 and continuing until the expiration of the 2017 Plan, in anamount equal to one percent of the total number of shares of the Company's common stock outstanding on December 31st of the precedingcalendar year, subject to the discretion of the board of directors or compensation committee to determine a lesser number of shares shall beadded for such year.Under the 2017 Plan, eligible employees can purchase the Company’s common stock through accumulated payroll deductions at such times asare established by the administrator. The 2017 Plan is administered by the compensation committee. Under the 2017 Plan, eligible employeesmay purchase the Company’s common stock at 85% of the lesser of the average high and low sales price of the Company's common stock on (i)the first trading day of the relevant offering period and (ii) on the last trading day of the relevant offering period (or, if the relevant offering periodhas multiple purchase periods, the last trading day of the relevant purchase period). Eligible employees may contribute up to 15% of their eligiblecompensation. Under the 2017 Plan, a participant may not accrue rights to purchase more than $25 worth of the Company’s common stock foreach calendar year in which such right is outstanding. Effective October 12, 2017, employees who elected to participate in the 2017 Plan commenced payroll withholdings that accumulated throughJune 30, 2018.F-22Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)Beginning on January 1, 2018, employees who elected to participate in the 2017 Plan commenced payroll withholdings that accumulate during thefollowing six month offering periods each calendar year while the Purchase Plan is effective:•January 1 through June 30, and•July 1 through December 31.At the end of each offering period, shares of the Company’s common stock may be purchased at 85% of the lesser of the average of the high andlow sales price of the Company’s common stock on (i) the first trading day of the relevant offering period and (ii) the last trading day of the relevantoffering period (or, if the relevant offering period has multiple purchase periods, the last trading day of the relevant purchase period). In accordancewith the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s common stock at thelower of the price on the first day of the offering period or the last day of the offering period (i.e. the purchase date) represents an option and,therefore, the 2017 Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on theoption’s grant-date fair value as estimated by applying the Black Scholes option-pricing model and is recognized over the requisite service periodof the option. The Company has recognized stock-based compensation expense of $446 and $106 during the years ended December 31, 2018 and2017, respectively, related to the 2017 Plan.Stock-based compensation expenseThe Company recorded stock-based compensation expense in the following expense categories of its accompanying consolidated statements ofoperations for the years ended December 31, 2018 and 2017: Year Ended December 31, 2018 2017Cost of product sales$9 $—Research and development$989 1,288Selling, general and administrative7,545 3,808Total stock-based compensation expense$8,543 $5,096In addition, stock-based compensation expense of $99 and $2 is included within inventory and prepaid expenses and other assets, respectively,as of December 31, 2018, which represents the total stock-based compensation expense incurred related to employees involved in themanufacturing process of finished goods and samples during the period.The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options granted and the option component of the2017 Plan. The Company calculated the fair value of each option grant and the option component of the 2017 Plan on the respective dates of grantusing the following weighted average assumptions: 2010 A&R StockIncentive Plan 2017 Employee StockPurchase Plan December 31, December 31, 2018 2018Risk free interest rate2.74% 1.53%Expected term (in years)5.95 0.64Expected volatility74.42% 80.40%Annual dividend yield0.00% 0.00%Option valuation methods, including Black-Scholes, require the input of subjective assumptions, which are discussed below.•The expected term of employee options is determined using the "simplified" method, as prescribed in SEC's Staff Accounting Bulletin(SAB) No. 107, whereby the expected life equals the arithmetic average of theF-23Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)vesting term and the original contractual term of the option due to the Company's lack of sufficient historical data. The expected term ofnonemployee options is equal to the contractual term.•The expected volatility is based on historical volatilities of similar entities within the Company's industry which were commensurate withthe expected term assumption as described in SAB No. 107.•The risk-free interest rate is based on the interest rate payable on US Treasury securities in effect at the time of grant for a period that iscommensurate with the assumed expected term.•The expected dividend yield is 0% because the Company has not historically paid, and does not expect for the foreseeable future to pay,a dividend on its common stock.14. Income taxesThe Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017 with most changes effective January 1, 2018. Among other changes, theTCJA significantly lowered the US corporate income tax rate from 35% to 21% as of January 1, 2018. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.As a result of the reduction in the US corporate income tax rate, the Company revalued its net deferred tax assets at December 31, 2017. Due tothe full valuation allowance on the Company's deferred tax assets, no tax expense or benefit associated with the re-measurement was recognizedin the Company's consolidated statement of operations for the year ended December 31, 2017. The change in the US corporate tax rate is alsoincluded in the Company’s deferred tax table.The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits(E&P). As the Company's foreign subsidiaries did not have accumulated E&P, the Company did not record any income tax expense related to thetransition tax.Due to the timing of and the substantial changes made by the TCJA, the Staff of the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin No. 118 (SAB 118), which provides registrants a measurement period to report the impact of the new US tax law. During themeasurement period, provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made. To the extentthat all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up toone year following enactment of the TCJA. Accordingly, the Company recorded a preliminary estimate of the impact of the TCJA and the re-measurement of its deferred tax assets and liabilities in 2017. The Company finalized its analysis of the impact of the TCJA and recorded theadjustment, which was not material, in 2018.Income taxes have been recorded on the following book income (loss) before income tax expense: Year Ended December 31, 2018 2017Domestic operations $(146,247) $(30,463)Foreign operations 39,589 (18,439)Loss before provision for income taxes $(106,658) $(48,902)F-24Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)A reconciliation of income tax expense (benefit) at the US federal statutory income tax rate and the income tax provision in the financialstatements is as follows: Year Ended December 31, 2018 2017Income tax expense at statutory rate 21.0 % 35.0 % Permanent items 0.5 0.5 Foreign rate differential (0.8) (4.2) Impact of foreign operations (7.2) — State taxes, net of federal benefit 3.9 0.8 Tax rate changes (0.6) (15.4) Foreign exchange and other (0.6) — Change in valuation allowance (16.2) (16.7)Effective income tax rate 0.0 % 0.0 %Tax rate changes includes the impact of the reduction in the US tax rate in 2017 under the TCJA and a reduction in the Norway tax rate in both2017 and 2018.The principal components of the Company’s deferred tax assets and liabilities are as follows: Year Ended December 31, 2018 2017Deferred tax assets: Accrued expenses and other $1,674 $972 Prepaid licensing arrangement 11,562 — Property and equipment — 55 Interest expense 1,267 783 Stock compensation 3,493 1,701 Research and development credits 2,485 2,485 Net operating losses 32,548 29,636 Total deferred tax assets 53,029 35,632Deferred tax liabilities: Fixed assets (409) — Total deferred tax liabilities: (409) — Less: Valuation allowance (52,620) (35,632)Total net deferred tax assets (liabilities) $— $—During 2018, our wholly-owned subsidiary in Norway licensed certain intellectual property rights related to XHANCE to our US subsidiary. Whilethis transaction did not result in any gain or loss in the condensed consolidated statements of operations, the transaction generated taxableincome in both Norway and the US. Norway tax loss carryforwards were utilized to offset the taxable income in Norway and the income reducedthe current year US taxable loss. There were no cash taxes associated with the transaction.The TCJA, in addition to the changes indicated above, contained other provisions that may have a future impact on the Company. The provisionsinclude limitations on the deductibility of interest based on the amount of adjusted taxable income, the deferral of research and developmentdeductions, the acceleration of deductions related to fixed assetF-25Table of ContentsOptiNose, Inc.Notes to Consolidated Financial Statements(in thousands, except share and per share data)additions, changes to the utilization of net operating loss carry forwards and changes in the carry forward period, and global intangible low-taxedincome provisions that subject foreign subsidiary income that exceeds an allowable return to current US taxation.As of December 31, 2018, the Company had foreign net operating loss (NOL) carry forwards of $50,513 primarily from its operations in Norway. Asof December 31, 2018, the Company had federal and state NOLs of $86,574 and $57,017, respectively. These domestic NOL carry forwards maybe subject to an annual limitation in the event of cumulative changes in the ownership interests of significant stockholders over a three‑year periodin excess of 50%. This could limit the amount of NOLs that the Company can utilize annually to offset future domestic taxable income, if any. Theamount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change.Subsequent ownership changes may further affect the limitation in future years. The federal NOL generated in 2018 has an indefinite carry forwardperiod. The federal NOLs generated prior to 2018 will expire from 2030 through 2037. Some state NOLs will not expire while other state NOLsexpire over various periods depending on the rules of the jurisdiction in which they were generated. The earliest state NOL expiration is in 2028.ASC 740 requires the establishment of a valuation allowance to reduce deferred tax assets if, based on the weight of the available positive andnegative evidence it is more likely than not that all or a portion of the deferred tax assets will not be realized. There is insufficient positiveevidence to overcome the negative evidence attributable to the Company’s cumulative operating losses. Consequently, the Company establisheda full valuation allowance against its net deferred tax assets at December 31, 2018 and 2017, respectively, because the Company’s managementwas unable to conclude that it is more likely than not that these assets will be fully realized. The Company had a net increase in its valuationallowance of $16,988 during the year ended December 31, 2018.The Company files income tax returns in Norway, the UK, the US, and various states. The Company is subject to examination by federal, stateand foreign jurisdictions. The Company’s tax years in the US are open under statute from inception to present. All open years may be examined tothe extent that tax credits or net operating loss carryforwards are used in future periods.The Company’s policy is to record interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018, theCompany had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’sstatement of operations.15. Related-party transactionsDebt and equity transactionsAll of the Company's convertible debt (see Note 8) was issued to holders of the Company's convertible preferred stock.During the year ended December 31, 2018 and 2017, the Company reimbursed Avista Capital Holdings, LP and related parties $51 and $157,respectively in expenses, primarily related to legal fees incurred in conjunction with the Company's Offering of Common Stock in June 2018, theIPO in October 2017 and the issuance of Series D redeemable convertible preferred stock March 2017.16. Subsequent eventsOn January 31, 2019, OptiNose AS, a wholly owned subsidiary of the Company, entered into a license agreement (the Inexia License Agreement)with Inexia Limited (Inexia).Under the terms of the Inexia License Agreement, Inexia paid the Company a $500 upfront payment. For each product developed under the InexiaLicense Agreement, the Company is eligible to receive up to $8,000 of development milestone payments and up to $37,000 of sales milestonepayments. In addition, the Company is eligible to receive tiered, low-to-mid single digit royalties based on net sales of any products successfullydeveloped and commercialized under the Inexia License Agreement. Other than the upfront payment, the Company does not anticipate the receiptof any milestone or royalty payments from Inexia in the near term.F-26INDEMNIFICATION AGREEMENTThis Indemnification Agreement (this “Agreement”) is made as of __________, 201___ by and between OptiNose, Inc., a Delaware corporation (the“Corporation”), in its own name and on behalf of its direct and indirect subsidiaries, and __________________, an individual (“Indemnitee”). ThisAgreement supersedes and replaces any and all previous Agreements between the Corporation and Indemnitee covering the subject matter of this Agreement.RECITALS:WHEREAS, directors, officers, employees, controlling persons, fiduciaries and other agents (“Representatives”) in service to corporations orbusiness enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionallywould have been brought only against the corporation or business enterprise itself;WHEREAS, the Board of Directors of the Company (the “Board”) believes that highly competent persons have become more reluctant to servecorporations as Representatives unless they are provided with adequate protection through insurance and adequate indemnification against inordinate risksof claims and actions against them arising out of their service to and activities on behalf of the corporation or business enterprise;WHEREAS, the Board has determined that the increased difficulty in attracting and retaining highly competent persons is detrimental to the bestinterests of the Corporation and its stockholders and that the Corporation should act to assure such persons that there will be increased certainty of protectionagainst inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the Corporation;WHEREAS, it is reasonable, prudent and necessary for the Corporation contractually to obligate itself to indemnify, and to advance expenses onbehalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Corporation free from undue concernregarding such risks;WHEREAS, (a) the Amended and Restated Bylaws of the Corporation (the “Bylaws”) require indemnification of the officers and directors of theCorporation, (b) Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware, as it may be amendedfrom time to time (the “DGCL”) and (c) the Bylaws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusiveand thereby contemplate that contracts may be entered into between the Corporation and its Representatives with respect to indemnification;WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws and any resolutions adopted pursuant thereto, and shall not bedeemed a substitute therefore, nor to diminish or abrogate any rights of Indemnitee thereunder; andWHEREAS, (a) Indemnitee does not regard the protection available under the Bylaws and insurance as adequate in the present circumstances,(b) Indemnitee may not be willing to serve or continue to serve as a Representative without adequate protection, (c) the Corporation desires Indemnitee toserve or continue to serve in such capacity and (d) Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of theCorporation on the condition that he/she be so indemnified.1 AGREEMENT:NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby covenantand agree as follows:Section 1.Definitions.(a) As used in this Agreement:“Agreement” shall have the meaning ascribed to such term in the Preamble hereto.“Beneficial Owner” shall have the meaning given to such term in Rule 13d-3 under the Exchange Act (as defined below); provided,however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of theCorporation approving a merger of the Corporation with another entity.“Board” shall have the meaning ascribed to such term in the Recitals hereto.“Bylaws” shall have the meaning ascribed to such term in the Recitals hereto.“Certificate of Incorporation” shall mean the Fourth Amended and Restated Certificate of Incorporation of the Corporation.A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:i. Acquisition of Stock by Third Party. Any Person (as defined below), other than the Sponsor Entities (as defined below), is orbecomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Corporation representing fifteen percent (15%)or more of the combined voting power of the Corporation’s then outstanding securities, unless the change in relative Beneficial Ownershipof the Corporation’s securities by any Person results solely from a reduction in the aggregate number of outstanding shares of securitiesentitled to vote generally in the election of directors;ii. Change in Board of Directors. During any period of two (2) consecutive years (not including any period prior to the executionof this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a directordesignated by a person who has entered into an agreement with the Corporation to effect a transaction described herein) whose election bythe Board or nomination for election by the Corporation’s stockholders was approved by a vote of at least two-thirds of the directors thenstill in office who either were directors at the beginning of the period or whose election or nomination for election was previously soapproved, cease for any reason to constitute at least a majority of the members of the Board;iii. Corporate Transactions. The effective date of a merger or consolidation of the Corporation with any other entity, other than amerger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger orconsolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entityin any such transaction) more than fifty percent (50%) of the combined voting power of the voting securities of such surviving entityoutstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or othergoverning body of such Surviving Entity;2 iv. Liquidation. The approval by the stockholders of the Corporation of a complete liquidation of the Corporation or anagreement for the sale or disposition by the Corporation of all or substantially all of the Corporation’s assets; andv. Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) ofSchedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act(as defined below), whether or not the Corporation is then subject to such reporting requirement.“Corporate Status” describes the status of an individual who is or was a Representative of an Enterprise.“Corporation” shall have the meaning ascribed to such term in the Preamble hereto.“DGCL” shall have the meaning ascribed to such term in the Recitals hereto.“Enterprise” shall mean the Corporation and any other Person, employee benefit plan, joint venture or other enterprise of which Indemniteeis or was serving at the request of the Corporation as a Representative.“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder.“Expenses” shall include all reasonable costs, expenses, fees and charges, including, without limitation, attorneys’ fees, retainers, courtcosts, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges,postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting,defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding.Expenses also shall include, without limitation, (i) expenses incurred in connection with any appeal resulting from any Proceeding,including, without limitation, the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond orits equivalent, (ii) for purposes of Section 12(d) only, expenses incurred by Indemnitee in connection with the interpretation, enforcementor defense of Indemnitee’s rights under this Agreement, by litigation or otherwise, (iii) any federal, state, local or foreign taxes imposed onIndemnitee as a result of the actual or deemed receipt of any payments under this Agreement (on a grossed up basis), (iv) excise taxes andpenalties under the Employee Retirement Income Security Act of 1974, and (v) any interest, assessments or other charges in respect of theforegoing.“Indemnitee” shall have the meaning ascribed to such term in the Preamble hereto.“Indemnity Obligations” shall mean all obligations of the Corporation to Indemnitee under this Agreement, including, without limitation,the Corporation’s obligations to provide indemnification to Indemnitee and advance Expenses to Indemnitee under this Agreement.“Independent Counsel” shall mean a law firm, or a member of a law firm, that is experienced in matters of corporation law and neitherpresently is, nor in the past five (5) years has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to eithersuch party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similarindemnification agreements) or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder; provided,however, that the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conductthen prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determineIndemnitee’s rights under this Agreement.3 “Liabilities” shall mean all claims, liabilities, damages, losses, judgments, orders, fines, penalties and other amounts payable in connectionwith, arising out of, in respect of, relating to or occurring as a direct or indirect consequence of, any Proceeding, including, withoutlimitation, amounts paid in whole or partial settlement of any Proceeding, all Expenses incurred in complying with any judgment, order ordecree issued or entered in connection with any Proceeding or any settlement agreement, stipulation or consent decree entered into orissued in settlement of any Proceeding, and any consequential damages resulting from any Proceeding or the settlement, judgment, or resultthereof.“Person” shall mean any individual, corporation, partnership, limited partnership, limited liability company, trust, governmental agency orbody or any other legal entity.“Proceeding” shall include any threatened, pending or completed action, claim, suit, counterclaim, cross claim, arbitration, mediation,alternate dispute resolution mechanism, formal or informal hearing, inquiry or investigation, administrative hearing or any other actual,threatened or completed judicial, administrative or arbitration proceeding (including, without limitation, any such proceeding under theSecurities Act of 1933, as amended, or the Exchange Act or any other federal law, state law, statute or regulation), whether brought in theright of the Corporation or otherwise, and whether of a civil, criminal, administrative legislative or investigative nature, including anyappeal therefrom, in which Indemnitee was, is or will be, or is threatened to be, involved as a party, potential party, non-party witness orotherwise (i) by reason of the fact that Indemnitee is or was a Representative of the Corporation, (ii) by reason of any actual or allegedaction taken by Indemnitee (or a failure to take action by Indemnitee) or of any action (or failure to act) on Indemnitee’s part while acting asRepresentative of the Corporation or (iii) by reason of the fact that Indemnitee is or was serving at the request of the Corporation as aRepresentative of another Person, whether or not serving in such capacity at the time any liability or Expense is incurred for whichindemnification, reimbursement, or advancement of Expenses can be provided under this Agreement. If the Indemnitee believes in goodfaith that a given situation may lead to or culminate in the institution of a Proceeding, this shall be considered a Proceeding under thisparagraph.“Representative” shall have the meaning ascribed to such term in the Recitals hereto. “Sponsor Entities” shall mean funds affiliated with Avista Capital Partners and any of their respective Affiliates who beneficially ownshares of common stock, par value $0.001 per share, of the Corporation, and any securities into which such shares of common stock shallhave been changed or any securities resulting from any reclassification or recapitalization of such shares of common stock from time totime; provided, however, that neither the Corporation nor any of its subsidiaries shall be considered Sponsor Entities hereunder.“Submission Date” shall have the meaning ascribed to such term in Section 11(a).(b) For the purpose hereof, references to “fines” shall include any excise tax assessed with respect to any employee benefit plan; referencesto “serving at the request of the Corporation” shall include any service as a Representative of the Corporation which imposes duties on, or involvesservices by, such Representative with respect to an employee benefit plan, its participants or beneficiaries; and a Person who acted in good faith andin a manner he/she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemedto have acted in manner “not opposed to the best interests of the Corporation” as referred to in this Agreement.Section 2. Indemnity in Third-Party Proceedings. The Corporation shall indemnify and hold harmless Indemnitee, to the fullest extent permitted byapplicable law, from and against all Liabilities and Expenses suffered or incurred by Indemnitee or on Indemnitee’s behalf in connection with or as aconsequence of any Proceeding (other than any Proceeding brought by or in the right of the Corporation to procure a judgment in its favor which4 shall be governed by the provisions set forth in Section 3 below), if Indemnitee acted in good faith and in a manner he/she reasonably believed to be in, ornot opposed to, the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his conduct wasunlawful. For the avoidance of doubt, a finding, admission or stipulation that an Indemnitee has not met such applicable standard of conduct or thatIndemnitee acted with gross negligence or recklessness shall not, of itself, be a defense to any action pursuant to this Agreement or create a presumption thatsuch Indemnitee has failed to meet the standard of conduct required for indemnification in this Section 2.Section 3. Indemnity in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify and hold harmless Indemnitee, to thefullest extent permitted by applicable law, from and against all Liabilities and Expenses suffered or incurred by Indemnitee or on Indemnitee’s behalf inconnection with or as a consequence of any Proceeding brought by or in the right of the Corporation to procure a judgment in its favor, or any claim, issue ormatter therein, if Indemnitee acted in good faith and in a manner he/she reasonably believed to be in, or not opposed, to the best interests of the Corporation.No indemnification for Liabilities and Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall havebeen finally adjudged by a court to be liable to the Corporation, unless and only to the extent that the Delaware Court of Chancery or any court in which theProceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of thecase, Indemnitee is fairly and reasonably entitled to indemnification for such Liabilities and Expenses which the Court of Chancery or such other court shalldeem proper. For the avoidance of doubt, a finding, admission or stipulation that an Indemnitee has not met such applicable standard of conduct or thatIndemnitee acted with gross negligence or recklessness shall not, of itself, be a defense to any action pursuant to this Agreement or create a presumption thatsuch Indemnitee has failed to meet the standard of conduct required for indemnification in this Section 3.Section 4. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement,and without limiting the rights of Indemnitee under any other provision hereof, to the extent that Indemnitee is a party to (or a participant in) any Proceedingand is successful on the merits or otherwise (including, without limitation, settlement thereof), as to one or more but less than all claims, issues or matters insuch Proceeding, in whole or in part, then the Corporation shall indemnify Indemnitee, to the fullest extent permitted by applicable law, against allLiabilities and Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf, in connection with or as a consequence of eachsuccessfully resolved claim, issue or matter. For purposes of this Section 4 and without limitation, the termination of any claim, issue or matter in such aProceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.Section 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for someor a portion of Expenses, but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion thereof towhich Indemnitee is entitled.Section 6. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, byreason of Indemnitee’s Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified to the fullest extentpermitted by applicable law against all Liabilities and Expenses suffered or incurred by him or on his behalf in connection therewith.Section 7. Additional Indemnification.(a) Notwithstanding any limitation in Sections 2, 3, 4 or 5, the Corporation shall indemnify Indemnitee to the fullest extent permitted byapplicable law if Indemnitee is a party to, or threatened to be made a party to, any Proceeding (including, without limitation, a Proceeding by or inthe right of the Corporation to procure a judgment in its favor), by reason of Indemnitee’s Corporate Status.(b) For purposes of Section 7(a), the meaning of the phrase “to the fullest extent permitted by applicable law” shall include, but not belimited to:5 (i) to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additionalindemnification by agreement, or the corresponding provision of any amendment to, or replacement of, the DGCL, and(ii) to the fullest extent authorized or permitted by any amendments to, or replacements of, the DGCL adopted after thedate of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.Section 8. Exclusions. Notwithstanding any provision in this Agreement, the Corporation shall not be obligated under this Agreement to make anyindemnification payment in connection with any claim involving Indemnitee:(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision,except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or(b) subject to Section 14, for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee ofsecurities of the Corporation within the meaning of Section 16(b) of the Exchange Act (as defined in Section 1(a) hereof) or similar provisions ofstate statutory law or common law, (ii) any reimbursement of the Corporation by the Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by the Indemnitee from the sale of securities of the Corporation, as required in each case under theExchange Act (including any such reimbursements that arise from an accounting restatement of the Corporation pursuant to Section 304 of theSarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Corporation of profits arising from the purchase and sale byIndemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act) or (iii) any reimbursement of the Corporation by Indemnitee of anycompensation pursuant to any compensation recoupment or clawback policy adopted by the Board or the compensation committee of the Board tocomply with stock exchange listing requirements implementing Section 10D of the Exchange Act; or(c) except as provided in Section 13(d) of this Agreement, in connection with any Proceeding (or any part of any Proceeding) initiated byIndemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Corporation or its directors, officers,employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) theCorporation provides the indemnification, in its sole discretion, pursuant to the powers vested in the Corporation under applicable law.Section 9. Advances of Expenses. Notwithstanding any provision of this Agreement to the contrary (other than Section 13(d)), the Corporationshall advance, to the fullest extent permitted by law, Expenses incurred by Indemnitee in connection with any Proceeding (or part of any Proceeding) notinitiated by Indemnitee or any Proceeding initiated by Indemnitee with the prior approval of the Board, and such advancement shall be made within ten(10) days after the receipt by the Corporation of a statement or statements requesting such advances from time to time, whether prior to, or after, finaldisposition of any Proceeding. Advances shall be unsecured and interest free. Indemnitee shall be entitled to continue to receive advancement of Expensespursuant to this Section 9 unless and until the matter of Indemnitee’s entitlement to indemnification hereunder has been finally adjudicated by court order orjudgment from which no further right or appeal exists. Advances shall be made without regard to Indemnitee’s ability to repay Expenses and without regardto Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. In accordance with Section 13(d), advances shallinclude any and all Expenses incurred pursuing an action to enforce this right of advancement, including, without limitation, Expenses incurred preparingand forwarding statements to the Corporation to support the advances claimed. Indemnitee shall qualify for advances upon the execution and delivery to theCorporation of this Agreement, which shall constitute an undertaking, providing that Indemnitee undertakes to repay the amounts advanced (withoutinterest) to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Corporation. No other form of undertaking shallbe required other than the execution of this Agreement. This Section 9 shall not apply to any claim made by Indemnitee for which indemnity is excludedpursuant to Section 8.6 Section 10. Procedure for Notification and Defense of Claim.(a) Indemnitee shall notify the Corporation in writing of any Proceeding with respect to which Indemnitee intends to seek indemnificationor advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof. The writtennotification to the Corporation shall include a description of the nature of the Proceeding and the facts underlying the Proceeding. To obtainindemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith suchdocumentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extentIndemnitee is entitled to indemnification following the final disposition of such Proceeding. Any delay or failure by Indemnitee to notify theCorporation hereunder will not relieve the Corporation from any liability which it may have to Indemnitee hereunder or otherwise than under thisAgreement, nor shall such delay or failure constitute a waiver by Indemnitee of any rights under this Agreement. The Secretary of the Corporationshall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.(b) In the event Indemnitee seeks indemnification and/or advancement of Expenses with respect to any Proceeding, Indemnitee may, atIndemnitee’s option, (i) retain legal counsel selected by Indemnitee and approved by the Corporation (which approval shall not to be unreasonablywithheld, conditioned or delayed) to defend Indemnitee in such Proceeding, at the sole expense of the Corporation or (ii) have the Corporationassume the defense of Indemnitee in the Proceeding, in which case the Corporation shall assume the defense of such Proceeding with legal counselselected by the Corporation and approved by Indemnitee (which approval shall not be unreasonably withheld, conditioned or delayed) within ten(10) days of the Corporation’s receipt of written notice of Indemnitee’s election to cause the Corporation to do so. If the Corporation is required toassume the defense of any such Proceeding, it shall engage legal counsel for such defense, and shall be solely responsible for all Expenses of suchlegal counsel and otherwise of such defense. Such legal counsel may represent both Indemnitee and the Corporation (and/or any other party orparties entitled to be indemnified by the Corporation with respect to such matter) unless, in the reasonable opinion of legal counsel to Indemnitee,there is a conflict of interest between Indemnitee and the Corporation (or any other such party or parties) or there are legal defenses available toIndemnitee that are not available to the Corporation (or any such other party or parties). Notwithstanding either party’s assumption of responsibilityfor defense of a Proceeding, each party shall have the right to engage separate legal counsel at its own expense. The party having responsibility fordefense of a Proceeding shall provide the other party and its legal counsel with all copies of pleadings and material correspondence relating to theProceeding. Indemnitee and the Corporation shall reasonably cooperate in the defense of any Proceeding with respect to which indemnification issought hereunder, regardless of whether the Corporation or Indemnitee assumes the defense thereof. Indemnitee may not settle or compromise anyProceeding without the prior written consent of the Corporation (which consent shall not be unreasonably withheld, conditioned or delayed). TheCorporation may not settle or compromise any Proceeding without the prior written consent of Indemnitee (which consent shall not be unreasonablywithheld, conditioned or delayed).Section 11. Procedure Upon Application for Indemnification.(a) Upon receipt of a written request by Indemnitee for indemnification pursuant to Section 10(a) (the “Submission Date”), if anydetermination by the Corporation is required by applicable law with respect to Indemnitee’s ultimate entitlement to indemnification, suchdetermination shall be made (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy ofwhich shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors,even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the DisinterestedDirectors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, byIndependent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Board, by thestockholders of the7 Corporation. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days aftersuch determination. Indemnitee shall cooperate with the Person(s) making such determination with respect to Indemnitee’s entitlement toindemnification, including, without limitation, providing to such Person(s), upon reasonable advance request, any documentation or informationwhich is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to suchdetermination. Any Expenses incurred by Indemnitee in so cooperating with the Person(s) making such determination shall be borne by theCorporation (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Corporation hereby indemnifies and agreesto hold Indemnitee harmless therefrom. The Corporation will not deny any written request for indemnification hereunder made in good faith byIndemnitee unless a determination as to Indemnitee’s entitlement to such indemnification described in this Section 11(a) has been made. TheCorporation agrees to pay Expenses of the Independent Counsel referred to above and to fully indemnify the Independent Counsel against any andall Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.(b) In the event that the determination of entitlement to indemnification is to be made by the Independent Counsel pursuant toSection 11(a) hereof, the Independent Counsel shall be selected as provided in this Section 11(b). If a Change in Control has not occurred, theIndependent Counsel shall be selected by the Board, and the Corporation shall give written notice to Indemnitee advising Indemnitee of the identityof the Independent Counsel so selected. If a Change in Control has occurred, the Independent Counsel shall be selected by Indemnitee (unlessIndemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall givewritten notice to the Corporation advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Corporation,as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Corporation or toIndemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the groundthat the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1(a) of this Agreement,and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selectedshall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve asIndependent Counsel unless and until such objection is withdrawn or the Delaware Court of Chancery has determined that such objection is withoutmerit. If, within twenty (20) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereofand the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Corporation orIndemnitee may petition the Delaware Court of Chancery for resolution of any objection which shall have been made by the Corporation orIndemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court orby such other person as such court shall designate, and the person with respect to whom all objections are so resolved or the person so appointedshall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant toSection 13(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to theapplicable standards of professional conduct then prevailing).Section 12. Presumptions and Effect of Certain Proceedings.(a) In making a determination with respect to entitlement to indemnification hereunder, the Person(s) making such determination shall, tothe fullest extent permitted by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted arequest for indemnification in accordance with Section 10(a) of this Agreement, and the Corporation shall, to the fullest extent permitted by law,have the burden of proof to overcome that presumption with clear and convincing evidence in connection with the making by any Person(s) of anydetermination contrary to that presumption. Neither the failure of the Corporation (including, without limitation, by its directors or independentlegal counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper inthe circumstances because Indemnitee has met8 the applicable standard of conduct, nor an actual determination by the Corporation (including, without limitation, by its directors or independentlegal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption thatIndemnitee has not met the applicable standard of conduct.(b) Subject to Section 12(e), if the Person(s) empowered or selected under Section 10 hereof to determine whether Indemnitee is entitled toindemnification shall not have made a determination within sixty (60) days after receipt by the Corporation of the request therefore, the requisitedetermination of entitlement to indemnification shall, to the fullest extent permitted by law, be deemed to have been made and Indemnitee shall beentitled to such indemnification, absent a prohibition of such indemnification under applicable law; provided, however, that such sixty (60) dayperiod may be extended for a reasonable time, not to exceed an additional thirty (30) days, if (i) the determination is to be made by the IndependentCounsel and there is an objection to the selection of the Independent Counsel and (ii) the Person(s) making such determination requires suchadditional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoingprovisions of this Section 12(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuantto Section 11(a) of this Agreement and if (A) within fifteen (15) days after receipt by the Corporation of the request for such determination the Boardhas resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five(75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days aftersuch receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so calledand such determination is made thereat.(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a pleaof nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right ofIndemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he/she reasonably believedto be in, or not opposed to, the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause tobelieve that Indemnitee’s conduct was unlawful.(d) Reliance as Safe Harbor. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith ifIndemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied toIndemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise, or on information orrecords given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected withreasonable care by the Enterprise. The provisions of this Section 12(d) shall not be deemed to be exclusive or to limit in any way the othercircumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.(e) Actions of Others. The knowledge and/or actions, or failure to act, of any Representative (other than Indemnitee) of the Enterprise shallnot be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.Section 13. Remedies of Indemnitee.(a) Subject to Section 12(d), in the event that (i) a determination is made pursuant to Section 11 of this Agreement that Indemnitee is notentitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 9 of this Agreement, (iii) nodetermination of entitlement to indemnification shall have been made pursuant to Section 11(a) of this Agreement within ninety (90) days after theSubmission Date, (iv) payment of indemnification is not made pursuant to Section 4, 5, 6 or 11(a) of this Agreement within ten (10) days after receiptby the Corporation of a written9 request therefore, (v) payment of indemnification pursuant to Section 2, 3 or 7 of this Agreement is not made within ten (10) days after adetermination has been made that Indemnitee is entitled to indemnification or (vi) in the event that the Corporation or any other person takes orthreatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or Proceeding designed todeny, or to recover from, Indemnitee, the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to anadjudication by a court of Indemnitee’s entitlement to such indemnification and/or advancement of Expenses. Alternatively, Indemnitee, atIndemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of theAmerican Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within onehundred and eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section13(a). The Corporation shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.(b) In the event that a determination shall have been made pursuant to Section 11 of this Agreement that Indemnitee is not entitled toindemnification, any judicial proceeding or arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo trial,or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitrationcommenced pursuant to this Section 13, the Corporation shall have the burden of proving by clear and convincing evidence Indemnitee is notentitled to indemnification or advancement of Expenses, as the case may be.(c) If a determination shall have been made pursuant to Section 11 of this Agreement that Indemnitee is entitled to indemnification, theCorporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) amisstatement by the Indemnitee of a material fact, or an omission by the Indemnitee of a material fact necessary to make the Indemnitee’s statementnot materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.(d) The Corporation shall, to the fullest extent not prohibited by law, be precluded from asserting in any judicial proceeding or arbitrationcommenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shallstipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. It is the intent of theCorporation that, to the fullest extent permitted by law, Indemnitee not be required to incur legal fees or other Expenses associated with theinterpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereofwould substantially detract from the benefits intended to be extended to Indemnitee hereunder. In addition, the Corporation shall, to the fullestextent permitted by law, indemnify Indemnitee against any and all such Expenses and, if requested by Indemnitee, shall (within ten (10) days afterreceipt by the Corporation of a written request therefore) advance, to the fullest extent not prohibited by law, such Expenses to Indemnitee, whichare incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advancement of Expenses from theCorporation under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Corporation if, in the case ofindemnification, Indemnitee is wholly successful on the underlying claims; if Indemnitee is not wholly successful on the underlying claims, thensuch indemnification shall be only in connection with each successfully resolved claim, issue or matter, or otherwise as permitted by law, whicheveris greater.(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under thisAgreement shall be required to be made prior to the final disposition of the Proceeding; provided, that in absence of any such determination withrespect to such Proceeding, the Corporation shall pay Liabilities and advance Expenses with respect to such Proceeding as if Indemnitee has beendetermined to be entitled to indemnification and advancement of Expenses with respect to such Proceeding.10 Section 14. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusiveof any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, anyagreement, a vote of stockholders, a resolution of directors or otherwise. No amendment, alteration or repeal of this Agreement or of any provisionhereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee inIndemnitee’s Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in applicable law, whether by statute orjudicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Certificate ofIncorporation, the Bylaws and/or this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greaterbenefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every otherright and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or inequity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion oremployment of any other right or remedy.(b) The Corporation hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of Expenses and/orinsurance provided by one or more Persons with whom or which Indemnitee may be associated (including, without limitation, any Sponsor Entity).The Corporation hereby acknowledges and agrees that (i) the Corporation shall be the indemnitor of first resort with respect to any Proceeding,Expense, Liability or matter that is the subject of the Indemnity Obligations, (ii) the Corporation shall be primarily liable for all IndemnityObligations and any indemnification afforded to Indemnitee in respect of any Proceeding, Expense, Liability or matter that is the subject ofIndemnity Obligations, whether created by law, organizational or constituent documents, contract (including, without limitation, this Agreement) orotherwise, (iii) any obligation of any other Persons with whom or which Indemnitee may be associated (including, without limitation, any SponsorEntity) to indemnify Indemnitee and/or advance Expenses to Indemnitee in respect of any proceeding shall be secondary to the obligations of theCorporation hereunder, (iv) the Corporation shall be required to indemnify Indemnitee and advance Expenses to Indemnitee hereunder to the fullestextent provided herein without regard to any rights Indemnitee may have against any other Person with whom or which Indemnitee may beassociated (including, without limitation, any Sponsor Entity) or insurer of any such Person and (v) the Corporation irrevocably waives, relinquishesand releases any other Person with whom or which Indemnitee may be associated (including, without limitation, any Sponsor Entity) from any claimof contribution, subrogation or any other recovery of any kind in respect of amounts paid by the Corporation hereunder. In the event that any otherPerson with whom or which Indemnitee may be associated (including, without limitation, any Sponsor Entity) or their insurers advances orextinguishes any liability or loss which is the subject of any Indemnity Obligation owed by the Corporation or payable under any insurance policyprovided under this Agreement, such payor shall have a right of subrogation against the Corporation or its insurer or insurers for all amounts so paidwhich would otherwise be payable by the Corporation or its insurer or insurers under this Agreement. In no event will payment of an IndemnityObligation of the Corporation under this Agreement by any other Person with whom or which Indemnitee may be associated (including, withoutlimitation, any Sponsor Entity) or their insurers, affect the obligations of the Corporation hereunder or shift primary liability for any IndemnityObligation to any other Person with whom or which Indemnitee may be associated (including, without limitation, any Sponsor Entity). Anyindemnification and/or insurance or advancement of Expenses provided by any other Person with whom or which Indemnitee may be associated(including, without limitation, any Sponsor Entity), with respect to any liability arising as a result of Indemnitee’s Corporate Status or capacity as anofficer or director of any Person, is specifically in excess of any Indemnity Obligation of the Corporation or valid and any collectible insurance(including, without limitation, any malpractice insurance or professional errors and omissions insurance) provided by the Corporation under thisAgreement, and any obligation to provide indemnification and/or insurance or advance Expenses provided by any other Person with whom or whichIndemnitee may be associated (including, without limitation, any Sponsor Entity) shall be reduced11 by any amount that Indemnitee collects from the Corporation as an indemnification payment or advancement of Expenses pursuant to thisAgreement.(c) The Corporation shall use its best efforts to obtain and maintain in full force and effect an insurance policy or policies providingliability insurance for Representatives of the Corporation or of any other Enterprise, and Indemnitee shall be covered by such policy or policies inaccordance with its or their terms to the maximum extent of the coverage available for any such Representative under such policy or policies. If, atthe time of the receipt of a notice of a claim pursuant to the terms hereof, the Corporation maintains an insurance policy or policies providingliability insurance for Representatives of the Corporation or of any other Enterprise, the Corporation shall give prompt notice of the commencementof such Proceeding to the insurers in accordance with the procedures set forth in the respective policy or policies. The Corporation shall thereaftertake all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding inaccordance with the terms of such policies. In the event of a Change in Control or the Corporation’s becoming insolvent, the Corporation shallmaintain in force any and all insurance policies then maintained by the Corporation in providing insurance (directors’ and officers’ liability,fiduciary, employment practices or otherwise) in respect of Indemnitee for a period of six years thereafter.(d) In the event of any payment under this Agreement, the Corporation shall not be subrogated to, and hereby waives any rights to besubrogated to, any rights of recovery of Indemnitee, including, without limitation, rights of indemnification provided to Indemnitee from any otherPerson or entity with whom Indemnitee may be associated (including, without limitation, any Sponsor Entity) as well as any rights to contributionthat might otherwise exist; provided, however, that the Corporation shall be subrogated to the extent of any such payment of all rights of recovery ofIndemnitee under insurance policies of the Corporation or any of its subsidiaries, and the Indemnitee shall execute all papers required and take allaction necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to brings suit to enforcesuch rights.(e) The indemnification and contribution provided for in this Agreement will remain in full force and effect regardless of anyinvestigation made by or on behalf of Indemnitee.Section 15. Duration of Agreement; Not Employment Contract. This Agreement shall continue until and terminate upon the latest of: (a) ten(10) years after the date that Indemnitee shall have ceased to serve as a Representative of the Corporation or any other Enterprise and (b) one (1) year after thefinal termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunderand of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement relating thereto. This Agreement shall be binding upon theCorporation and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. The Corporationshall require and cause any direct or indirect successor (whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business orassets of the Corporation, by written agreement, expressly or to assume and agree to perform this agreement in the same manner and to the same extent thatthe Corporation would be required to perform if no such succession had taken place. This Agreement shall not be deemed an employment contract betweenthe Corporation (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee’s employment with theCorporation (or any of its subsidiaries or any Enterprise), if any, is at will, and Indemnitee may be discharged at any time for any reason, with or withoutcause, except as may be otherwise provided in any written employment contract between Indemnitee and the Corporation (or any of its subsidiaries or anyEnterprise), other applicable formal severance policies duly adopted by the Board, or, with respect to service as a Representative of the Corporation, by theCertificate of Incorporation, Bylaws and the DGCL.Section 16. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reasonwhatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of anySection of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shallnot in any way be affected or impaired thereby and shall remain enforceable to the fullest extent12 permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximumeffect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion ofany Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable)shall be construed so as to give effect to the intent manifested thereby.Section 17. Enforcement.(a) The Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on ithereby in order to induce Indemnitee to serve as a Representative of the Corporation, and the Corporation acknowledges that Indemnitee is relyingupon this Agreement in serving or continuing to serve as a Representative of the Corporation.(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes allprior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided,however, that this Agreement is a supplement to and in furtherance of the Bylaws and applicable law, and shall not be deemed a substitute therefore,nor to diminish or abrogate any rights of Indemnitee thereunder.(c) The Corporation shall not seek from a court, or agree to, a “bar order” which would have the effect of prohibiting or limiting theIndemnitee’s right to receive advancement of expenses under this Agreement.Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writingby the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of thisAgreement nor shall any waiver constitute a continuing waiver. The failure of any party to enforce any of the provisions of this Agreement shall in no way beconstrued as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement inaccordance with its terms.Section 19. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed tohave been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailedby certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, (c) mailed by reputable overnight courierand receipted for by the party to whom said notice or other communication shall have been directed or (d) sent by facsimile transmission, with receipt of oralconfirmation that such transmission has been received:(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide tothe Corporation.(b) If to the Corporation to:OptiNose, Inc.1020 Stony Hill Road, Suite 300Yardley, Pennsylvania 19067Attn: Chief Legal OfficerFacsimile: (267) 395-2119 or to any other address as may have been furnished to Indemnitee by the Corporation. Section 20. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement isunavailable to Indemnitee for any reason whatsoever, the Corporation, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred byIndemnitee, whether for judgments, fines,13 penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event underthis Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of the Proceeding in order to reflect (a) the relativebenefits received by the Corporation and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (b) the relativefault of the Corporation (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).Section 21. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, andconstrued and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to anyarbitration commenced by Indemnitee pursuant to Section 13(a), the Corporation and Indemnitee hereby irrevocably and unconditionally (a) agree that anyaction or proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court of Chancery, and not in any other stateor federal court in the United States of America or any court in any other country, (b) consent to submit to the exclusive jurisdiction of the Delaware Court ofChancery for purposes of any action or proceeding arising out of or in connection with this Agreement, (c) waive any objection to the laying of venue of anysuch action or proceeding in the Delaware Court of Chancery and (d) waive, and agree not to plead or to make, any claim that any such action or proceedingbrought in the Delaware Court of Chancery has been brought in an improper or inconvenient forum.Section 22. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be anoriginal but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability issought needs to be produced to evidence the existence of this Agreement. Counterparts may be delivered via facsimile, electronic mail (including pdf or anyelectronic signature) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be validand effective for all purposes.Section 23. Third-Party Beneficiaries. The Sponsor Entities are intended third-party beneficiaries of this Agreement.Section 24. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. Theheadings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect theconstruction thereof.[SIGNATURE PAGE FOLLOWS] 14  IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written. OPTINOSE, INC. Name: Peter Miller Title: Chief Executive Officer [Signature Page to Indemnification Agreement] 15  INDEMNITEE: [ ] [Signature Page to Indemnification Agreement] 16 Schedule to Exhibit 10.1The following directors and executive officers are parties to an Indemnification Agreement with the Company, each of which are substantially identical in allmaterial respects to the representative Indemnification Agreement filed herewith as Exhibit 10.1 except as to the name of the signatory and the date of eachsignatory’s Indemnification Agreement, which are listed below. The actual Indemnification Agreements are omitted pursuant to Instruction 2 to Item 601 ofRegulation S-K.INDEMNITEE DATEPeter K. Miller October 2, 2017Ramy A. Mahmoud, M.D., M.P.H. October 2, 2017Thomas E. Gibbs October 2, 2017Keith A. Goldan October 2, 2017Michael F. Marino October 2, 2017William F. Doyle October 1, 2017Sriram Venkataraman September 29, 2017Joshua A. Tamaroff September 29, 2017Joseph C. Scodari October 5, 2017Wilhelmus Groenhuysen October 5, 2017Sandra K. Helton February 22, 2018Robert P. O'Neil June 7, 201817 Exhibit 10.20[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.MANUFACTURING SERVICES AGREEMENT FOR SUBASSEMBLY(does not apply to cap)This Manufacturing Services Agreement (this “Agreement”), dated as of December 21, 2018 (the “Effective Date”), is by andamong, on the one hand, OptiNose US, Inc., duly organized and existing under the laws of Delaware and having offices located at1020 Stony Hill Road, Suite 300, Yardley, PA 19067 (referred to herein as "OptiNose US"), OptiNose UK Ltd. duly organized andexisting under the laws of England and having offices located at Hunts Rise, South Marston Park, Wiltshire, SN3 4TG, England(referred to herein as "OptiNose UK"), and OptiNose AS, duly organized and existing under the laws of Norway and having officeslocated at Gaustadalléen 21, 0349 Oslo, Norway (referred to herein as "OptiNose Norway", and collectively with OptiNose US andOptiNose UK, “OptiNose”), and, on the other hand, and Advance Mold & Manufacturing, Inc., d/b/a Vision Technical Molding, aConnecticut corporation having offices located at 71 Utopia Road, Manchester, CT 06042 (“VTM”).WHEREAS, VTM is a device development and manufacturing company skilled in the design, development, manufacture andassembly of medical devices and delivery systems and of their components;WHEREAS, VTM and OptiNose previously entered into a Molded Parts Agreement dated October 24, 2017 (the “MoldedParts Agreement”) whereby VTM molded various product components and product cap for OptiNose;WHEREAS, concurrent with the execution of this Agreement, the parties shall enter into an amendment to the Molded PartsAgreement whereby the parties will remove VTM’s future manufacture for OptiNose of various product components thereunder (otherthan the product cap noted therein); andWHEREAS, OptiNose desires to retain VTM to assemble and supply DSAs (as defined herein) for use by OptiNose in thesubsequent production of Finished Product (as defined herein) under FDA and other regulations for the benefit of patients.In consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows:ARTICLE IDEFINITIONS[***].“Action” shall have the meaning set forth in Section 12.03.“Affiliate” means any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or isunder common control with, another Person. The term [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.“control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of thepower to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities,by contract or otherwise.“Agreement” shall have the meaning set forth in the preamble.“Approved Vendor List” shall mean the list of vendors approved in writing by OptiNose and VTM to provide the Inventoryor services specified in the Bill of Materials for a DSA.“Bill of Materials” shall mean the Inventory and OptiNose Components that comprise the DSA, as set forth in theSpecifications.“Binding Period” shall have the meeting set forth in Section 2.07.“Capacity” means the facility space, equipment, utilities, maintenance capabilities, infrastructure, human capital, and othercapabilities in sufficient volume needed to manufacture DSAs, except for the OptiNose Equipment.“Confidential Information” means any information that is treated as confidential by a Disclosing Party, whether tangible orintangible, including, without limitation, any and all specification information, techniques, discoveries, inventions, processes, know-how, patent applications and related information, inventor certificates, trade names, trade secrets, methods of production, technology,other proprietary information, other intellectual property, information pertaining to business operations and strategies, and informationpertaining to pricing, and marketing of Finished Product or Inventory. Confidential Information shall not include information that: (a) isalready known to the Receiving Party without restriction on use or disclosure prior to receipt of such information from the DisclosingParty; (b) is or becomes generally known by the public other than by breach of this Agreement by, or other wrongful act of, theReceiving Party; (c) is developed by the Receiving Party independently of, and without reference to, any Confidential Information ofthe Disclosing Party; or (d) is received by the Receiving Party from a third party who is not under any obligation to the DisclosingParty to maintain the confidentiality of such information.“Defaulting Party” shall have the meaning set forth in Section 15.02.“Defective Product” means any DSA that fails to conform to the Specifications, Quality Agreement or applicable Laws or thatcontains a Latent Defect or Patent Defect.“Deliverables” means all documents, work product and other materials that are delivered to OptiNose hereunder or preparedby or on behalf of VTM in the course of performing the services under this Agreement.“Disclosing Party” means a party that discloses Confidential Information under this Agreement.“DSA” means a device subassembly manufactured under this Agreement.2 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.“Effective Date” shall have the meaning set forth in the preamble of this Agreement.[***].“FDA” means the U.S. Food & Drug Administration.“Excess Inventory” shall mean any DSA, partially completed DSA or Inventory (in each instance, to the extent procured byor on-order with VTM) that is not required for consumption to satisfy the next [***] of demand for DSAs under the then-currentForecast.“FD&C Act” means the Federal Food, Drug, and Cosmetic Act, as amended, and includes the rules, regulations andguidances promulgated thereunder (including, without limitation, current Good Manufacturing Practices).“Finished Product” means the full saleable product unit for XHANCE® (formerly known as OPN-375) including withoutlimitation active ingredient, delivery system, container closure system, and market package.“Forecast” shall have the meeting set forth in Section 2.07.“Force Majeure Event” shall have the meaning set forth in Section 17.01.“Intellectual Property Rights” means all (a) patents, patent disclosures and inventions (whether patentable or not), (b)trademarks, service marks, trade dress, trade names, logos, corporate names and domain names, together with all of the goodwillassociated therewith, (c) copyrights and copyrightable works (including computer programs), mask works, and rights in data anddatabases, (d) trade secrets, know-how and other confidential information, and (e) all other intellectual property rights, in each casewhether registered or unregistered and including all applications for, and renewals or extensions of, such rights, and all similar orequivalent rights or forms of protection in any part of the world.“Inventory” shall mean any materials, parts, components and inputs needed for VTM to manufacture the DSAs in accordancewith the Specifications, whether made by VTM or procured from a third-party. (other than OptiNose Components) that are procuredby or on-order with VTM in accordance with the applicable Lead Time for use in the manufacture of DSAs pursuant to a PurchaseOrder or Forecast from OptiNose, which may include (unless the context requires otherwise) Special Inventory and Minimum OrderInventory.“Inventory Procurement Lead Time” shall mean, with respect to any particular item of Inventory, the longer of (a) the leadtime to obtain such Inventory as recorded on VTM’s system of record or (b) the actual lead time.“Latent Defect” means a defect where any DSA fails to conform to the Specifications, Quality Agreement or applicable Laws,which could not reasonably have been discovered upon receipt and physical inspection of the DSA by OptiNose or its designee.3 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.“Law” means any statute (including without limitation the FD&C Act), law, ordinance, regulation, rule, code, order,constitution, treaty, common law, judgment, decree, other requirement or guidance, or rule of law of any federal, state, local or foreigngovernment or political subdivision thereof, or any arbitrator, court or tribunal of competent jurisdiction that is applicable: (a) to theobligations of VTM in supplying OptiNose with the DSAs, and performing any related activities under other terms of this Agreement,or (b) to the obligations of OptiNose.“Lead Time” shall mean the Inventory Procurement Lead Time plus the manufacturing cycle time required from the deliveryof the Inventory at VTM’s facility to the completion of the manufacture, assembly and test processes for the DSA.“Long Lead Time Inventory” shall mean Inventory with Lead Times exceeding the period covered by the accepted PurchaseOrders for the DSA.“Losses” means all losses, damages, liabilities, deficiencies, actions, judgments, interest, awards, penalties, fines, costs orexpenses of whatever kind, including reasonable attorneys’ fees and the cost of enforcing any right to indemnification hereunder andthe cost of pursuing any insurance providers.“Minimum Order Inventory” shall mean Inventory purchased in excess of requirements for Purchase Orders and Forecastbecause of minimum lot sizes required by the vendor.“NDA” means a new drug application filed with the FDA.“Obsolete Inventory” shall mean any partially completed DSA or Inventory that is any of the following: (a) removed from theBill of Materials for a DSA by an engineering change; or (b) no longer on an active Bill of Materials for a DSA.“OptiNose” shall have the meaning set forth in the preamble.“OptiNose Components” shall mean the consigned inventory that has the meaning set forth in Section 2.02(a).“OptiNose Equipment” means equipment (i) that can be used only for production of DSA’s under this Agreement or (ii) thatOptiNose desires to have dedicated solely to the production of DSA’s under this Agreement.“OptiNose Indemnitee” shall have the meeting set forth in Section 12.02.“OptiNose Information” means any documents, data, know-how, trade secrets, methodologies, software and otherinformation (Confidential Information or otherwise) provided to VTM by or on behalf of OptiNose or developed by VTM on behalf ofOptiNose, including without limitation computer programs, reports and specifications.“OptiNose Supply Relationship Manager” shall have the meaning set forth in Section 7.01(a)4 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.“Patent Defect” means any instance where any DSA fails to conform to the Specifications, Quality Agreement or applicableLaws, where such failure is or was discoverable upon reasonable physical inspection upon receipt by OptiNose or its designee.“Person” means an individual, corporation, partnership, joint venture, limited liability company, governmental authority,unincorporated organization, trust, association or other entity.“Production Materials” shall mean materials that are consumed in the production processes to manufacture DSAs includingwithout limitation, [***]; Production Materials do not include any such production materials that have been specified by OptiNose.“Purchase Order” shall have the meaning set forth in Section 2.09(a).“Quality Agreement” means that Quality Agreement between OptiNose and VTM to be entered between the parties related toproduction of the DSAs.“Quantitative Defect” means any instance in which VTM has delivered a quantity that is [***] less than, or [***] greaterthan, the quantity stated in any invoice or bill of lading.“Receiving Party” means a party that receives or acquires Confidential Information directly or indirectly under thisAgreement.“Special Inventory” shall mean any mutually agreed Inventory acquired by VTM to support flexibility, demand requirements,safety stock or pricing discounts.“Specifications” shall mean the procedures, standards, quality control and other data and requirements for each DSA, whichshall include, without limitation: Bills of Materials, designs, schematics, assembly drawings, process documentation, specificationsaccording to the Device Master Record for the DSA, current revision number, and an Approved Vendor List.“Standard Cost” shall mean, as applicable, (a) the quoted cost of Inventory represented on the Bill of Materials current at thetime such Inventory is acquired; or (b) the value of any services required to be performed hereunder on work-in-progress at the timesuch services are performed.“Term” shall have the meaning set forth in Section 14.01.“VTM” shall have the meaning set forth in the preamble.“VTM Supply Relationship Manager” shall have the meaning set forth in Section 6.01(a).“VTM Equipment” means any and all equipment, systems, or facilities owned or leased, by or on behalf of VTM and madeavailable for either direct or indirect performance by VTM under this Agreement.“VTM Personnel” means all employees, contractors, and consultants, engaged by VTM to perform under this Agreement.5 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.“VTM Tools” means all documents, data, know-how, methodologies, software and other information provided by or used byVTM in connection with performance by VTM under this Agreement, in any case developed or acquired by VTM independently ofthis Agreement and of other services performed by VTM for OptiNose prior to or after the date hereof.ARTICLE IIMANUFACTURE AND SUPPLY OF DSASSection 2.01 Manufacture and Supply. During the Term and subject to the terms and conditions set forth herein,VTM shall procure Inventory and manufacture and assemble DSAs in compliance with the Specifications, Quality Agreement,applicable Laws and the other terms of this Agreement and deliver them to OptiNose or its designee. Delivery of the DSAs shall beEXW (“Ex-Works”) VTM’s manufacturing facility 71 Utopia Road, Manchester, CT 06042 (INCOTERMS 2000); [***] shallarrange for the DSAs to be picked up by a carrier identified and paid by [***] or its designee. During the Term, VTM shall use [***]to ensure that it has the Capacity to meet all of OptiNose’s requirements for DSAs in a timely manner based on the applicable Forecastunder this Agreement; provided that if new or additional OptiNose Equipment is required, VTM will inform OptiNose with sufficientlead time for such OptiNose Equipment to be acquired by OptiNose [***] and qualified for use under this Agreement taking intoaccount normal equipment malfunctions and breakdowns not preventable through normal maintenance; Capacity metrics will beagreed upon and equipment will be initiated if projected utilization for the following year exceeds [***], or if OptiNose deems toinitiate a project for business continuity.Section 2.02 Inputs for Supply of DSA’s.(a) OptiNose is responsible for negotiation of agreements and payment to third parties for the items listed on Exhibit B (the“Third Party Components”) and was responsible for the agreements and payment for the Pre-Existing Inventory (as defined inExhibit A) listed on Exhibit B (collectively with the Third Party Components, the “OptiNose Components”), in each instance for usein the manufacture of DSAs.(b) OptiNose will manage the relationship with suppliers of the OptiNose Components identified in Exhibit B, placing ordersfor Third Party Components, arranging delivery to VTM of the OptiNose Components at OptiNose’s cost, and ensuring that suchsuppliers perform in accordance with requirements of OptiNose. VTM shall manage suppliers of the OptiNose Components withinVTM’s quality systems as appropriate to ensure compliance with the quality agreements referenced in this Section 2.02(b). OptiNosemay initiate the addition or replacement of suppliers for each OptiNose Component upon [***] written notice to VTM and will workwith VTM to execute such addition or replacement according to relevant OptiNose and VTM procedures at OptiNose’s expense.6 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.(c) If the suppliers of the OptiNose Components cause the assembly line at VTM to halt production due to lack of OptiNoseComponents, and if VTM has provided OptiNose at least [***] advance written notice of VTM’s projected or actual shortage of suchOptiNose Components, then subject to the following sentence, VTM may invoice OptiNose for the reasonable costs incurred by VTMfor such idle VTM operator time, which shall not exceed $[***]per week for [***] shift, or $[***] per week if running [***] shifts, inthe aggregate, for which VTM shall provide OptiNose with a detailed breakdown of such costs and which shall solely include thecompensation of the operators (and not any other overhead, facility costs, or profit of VTM), such amount to be the sole amountpayable by OptiNose with respect to such idle time. If OptiNose provides VTM with at [***] prior written notice of any such lack ofOptiNose Components then VTM shall use its [***] efforts to reassign its staff and otherwise mitigate its costs, which shall bededucted from any amounts due by OptiNose to VTM for such lack of OptiNose Components.(d) If any time after [***] VTM’s production of DSA requires less operators than anticipated or no operators at all, and thenan increase in demand requires operators to be retrained to manufacture and assemble the DSAs, (1) OptiNose shall pay for suchretraining at a rate [***], and (2) OptiNose must provide at least [***] prior written notice before VTM shall be required to effectuatesuch an increase.(e) At OptiNose’s request, VTM shall warehouse up to [***] pallets of the OptiNose Components listed on Exhibit B. Theparties will mutually agree to any additional warehousing and associated cost. Notwithstanding the foregoing, VTM shall atOptiNose’s request warehouse [***] any and all OptiNose Components that VTM previously manufactured for OptiNose pursuant tothe Molded Parts Agreement.(f) [***] is responsible for the negotiation, payment, purchase, and delivery to VTM of all Inventory, but not the OptiNoseComponents. Appropriate agreements and documentation of quality related requirements will also be the responsibility of [***].Section 2.03 Specifications. The Specifications may be amended in accordance with the terms of this Agreement,the Quality Agreement, or as required by the FDA or other similar regulatory authority, and by the written agreement of the parties.VTM shall not make changes to the Specifications without OptiNose’s prior written approval as provided for in the QualityAgreement.Section 2.04 Validation and Other Services. Before manufacturing DSAs under this Agreement, VTM will havecompleted validation necessary and appropriate for such manufacture in accordance with the Specifications, applicable protocols- andthe other requirements of this Agreement and the Quality Agreement.7 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.Section 2.05 Engineering Changes. Either party may request that VTM incorporate engineering changes into theDSAs or Specifications by providing a written description of the proposed engineering change sufficient to permit the parties toevaluate the feasibility and cost of the proposed change. VTM shall proceed with engineering changes when the parties have agreed inwriting upon the changes to the Specifications, delivery schedule and adjustments to the Pricing, [***]. In all instances VTM shall use[***] to incorporate engineering changes requested by OptiNose.Section 2.06 Pricing.(a) [***], the initial pricing for all DSAs and any associated services for such calendar year shall be the respective column asset forth on Exhibit A based on the [***] Forecast in such calendar year. At the end of each calendar year, if the actual volume of DSAproduction would have resulted in a lower applicable price per unit had the pricing been based on such respective column (i.e. if thepricing was initially based at the beginning of such calendar year on the [***] column but [***] DSA were actually assembled duringsuch calendar year, then the pricing will be based solely on the [***] column in Exhibit A), then VTM shall apply the appropriatecredit due OptiNose against future production until the full credit has been issued (if the amount of the credit is over [***], the creditwill be applied [***]), while in the event the actual volume of DSA production would have resulted in a higher applicable price perunit had the pricing been based on such respective column (i.e. if the pricing was initially based at the beginning of such calendar yearon the [***] column but [***] DSA were actually assembled during such calendar year, then the pricing will be based solely on the[***] column in Exhibit A), then VTM shall invoice OptiNose for the appropriate amount. Notwithstanding the foregoing, for thecalendar year 2019 the charge shall be based on the column [***] set forth in Exhibit A less any credit due to OptiNose per Exhibit A,and [***]. [***].(b) VTM will use [***] to engage in continuous improvement processes with respect to the manufacture of the DSAs and anysuch resulting cost reductions shall be applied to lower the pricing set forth in Exhibit A hereto. [***]. Additionally, the price may beadjusted prospectively for any costs directly related to any changes in the Specifications and/or levels of service requested by OptiNoseand agreed to by VTM, in writing. VTM shall provide sufficient documentation to support any price adjustment in accordance withthis Section [***]. (c) Commencing on [***] and [***] thereafter, during the Term of this Agreement, the unit price of each DSA shall beincreased or decreased, which adjustment shall become effective on January 1 and July 1, respectively, of the applicable calendar year,by the [***] provided, that, with respect to price increases of [***], (A) VTM shall have used [***] to negate, defer or reduceproposed [***] cost increases, and (B) the parties shall have discussed in good faith such increases and VTM shall have providedOptiNose with reasonable documentation to explain and support such increase or8 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.decrease. [***]. This pricing review may be triggered immediately if the price of [***] increases or decreases by more [***] at anytime between the scheduled review periods, in which case such change will not be considered for any price change to be implementedunder the preceding sentence in this Section 2.06(c).Section 2.07 Forecasts. Commencing on January 1, 2019, OptiNose shall provide VTM with a non-binding,rolling [***] forecast of its DSA requirements by month to VTM (“Forecast”). The portion of the Forecast for the first [***] periodshall be binding (a “Binding Period”) and the remaining [***] shall be for planning purposes and not binding (a “Non-BindingPeriod”). OptiNose shall place Purchase Orders for the Binding Period of the Forecast in accordance with Section 2.09 of thisAgreement. The Forecast shall be updated [***] by OptiNose no later than the [***] day of each calendar month with the BindingPeriod updated with each Forecast to include the new [***] of the going forward [***] rolling forecast. VTM shall participate inperiodic sales and operations planning meetings with OptiNose and other suppliers as OptiNose [***] deems appropriate. VTM shallprovide OptiNose monthly inventory reports of DSAs, OptiNose Components and all other Inventory inventoried by VTM solely forthe manufacture of DSAs.Section 2.08 Use of Forecasts. VTM will reference the latest available Forecasts when ordering Inventory(excluding the OptiNose Components which shall be ordered by OptiNose) necessary or appropriate to fulfill the forecasted DSArequirements, taking into account necessary lead times, volume-based pricing, the applicable Inventory’ expiration periods, the BindingPeriod, and any Purchase Orders for DSAs outside the Binding Period. VTM may purchase such Inventory (including minimumquantities required by suppliers) on the basis of OptiNose’s most recent Forecasts for the applicable Binding Period and, further, theForecast for the longer period in the case of such Inventory having a longer lead time than [***]. Notwithstanding anything containedin this Agreement to the contrary and other than as set forth in Section 3.09(d), in no case shall VTM maintain more than a [***]supply of Inventory (other than OptiNose Components) based on the then [***] rolling forecast without OptiNose’s prior writtenconsent. Beginning on July 1, 2020 and on an annual basis thereafter, if less than [***] DSAs are assembled over the prior [***]period (and such shortage is due to OptiNose ordering less than this amount and not due to any production delays attributable to VTMor otherwise), OptiNose will pay a fee equal to the number of DSAs below [***] not assembled over the relevant [***] periodmultiplied by [***] of the assembly fee set forth in Exhibit A (for example, if only [***] DSAs were assembled during the relevant[***] period then the amount due is $[***] ([***] multiplied by $[***] ([***] of $[***]))].Section 2.09 Purchase Orders.(a) The terms and conditions contained in this Agreement shall prevail over any terms and conditions of any Purchase Order,acknowledgment form or other form instrument exchanged by the9 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.parties. OptiNose shall submit purchase orders specifying: (a) the number of units of DSAs to be manufactured, (b) the price(determined in accordance with Exhibit A hereto) and (c) the expected delivery date (“Purchase Orders”). Unless otherwise agreed, aPurchase Order shall not request a shipment date sooner than [***] days from the date of the Purchase Order unless agreed toseparately by both parties. VTM shall confirm acceptance of Purchase Orders and projected dates of shipment within [***] days ofreceiving a Purchase Order. Failure of VTM to confirm any Purchase Order within the [***] day period shall be deemed to beacceptance of such Purchase Order, price and delivery.(b) For any Binding Period, OptiNose shall submit Purchase Orders that aggregately meet at least [***] of the Forecast forsuch Binding Period, and VTM shall fulfill such Purchase Orders. If the Purchase Orders for a month in the Binding Period inaggregate exceed the Forecast for such month by an amount between [***], VTM shall supply such excess under this Agreement,provided, however, that, in any consecutive [***] in a Binding Period, VTM shall not be required to supply DSAs in aggregate inexcess of [***]. If such Purchase Orders in aggregate exceed the Forecast for such month in the Binding Period by more than [***],VTM shall use [***] to fill such orders, but shall not be in breach of this Agreement if VTM does not accept such portion of the orderin excess of such [***], as applicable. VTM shall promptly advise OptiNose to what extent VTM can fulfill such excess amount above[***], as applicable, which amount shall be considered part of the accepted Purchase Order hereunder.Section 2.10 Release of DSAs. Upon completion of manufacture and associated testing documentation [***] andbefore shipping each batch, VTM shall send batch documentation, prepared pursuant to the Quality Agreement, to OptiNose’sdesignee for review and approval. If OptiNose or its designee advises VTM of any issues or concerns regarding such batchdocumentation in accordance with this Agreement, VTM shall promptly rectify any such issue or concern and reissue updated batchdocumentation for review and approval within the time periods set forth in the Quality Agreement. Upon OptiNose’s (or OptiNose’sdesignee) receipt of complete batch documentation for such shipment, OptiNose’s designee shall, within the time period set forth in theQuality Agreement, review and respond as to whether the batch is approved for shipment. [***].Section 2.11 Non- or late Deliveries. In the event that VTM is unable to make delivery by a ready to ship datespecified in the applicable Purchase Order, VTM shall immediately notify OptiNose (and any designee of OptiNose) of such delay andprovide the date of availability for the shipment. If VTM fails to deliver the DSAs in the quantities ordered in any Purchase Orderwithin [***] of the date specified in such Purchase Order, then in addition to, and without waiver or limitation of any of its other rightshereunder, at law or in equity, in all instances VTM shall use [***] to timely deliver DSAs even if there were prior delays in theOptiNose Components due to [***]. If shipment of Product is more than [***] late from the most recent agreed upon shipping datepursuant to the10 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.accepted Purchase Order, then promptly following OPN’s written request for expedited shipping, VTM shall be responsible for thecost of such expedited shipping over and above standard shipping costs for that shipment, but only if the reason for such expeditedshipping is attributable to a cause within VTM’s reasonable control. In the event that there is an actual or anticipated delay in shippingbeyond [***] or other project delay due to events within VTM’s control, OPN may request an immediate escalation of the issue toVTM’s senior management at the subsidiary level (e.g., Vice-President, Precision Plastics), and failing resolution of the issue in [***],to Flex’s senior management at the corporate level (e.g., President, Medical Segment). Failing resolution at such point, the matter shallbe further escalated pursuant to Exhibit D attached hereto after each [***] period.Section 2.12 Manager Meetings. The parties shall meet periodically [***] at meetings to be organized by theOptiNose Supply Relationship Manager and the VTM Supply Relationship Manager to discuss, agree upon, and overseeimplementation of initiatives to plan Capacity and OptiNose Equipment requirements, improve the DSA manufacturing process toimprove quality and to reduce cost and price for the benefit of both parties. Participants in such meetings will be agreed to by theparties. For each such agreed initiative, the parties shall agree on the capital and expense to implement the initiative, the party toprovide funds for such capital and expense, the expected cost savings to result, and an equitable sharing of the cost and other benefitsfrom the initiative after recoupment of the funds provided for the initiative (which sharing shall take into account a reasonable return oninvestment for the party providing the funds to implement such initiative). Additionally, promptly following the execution of thisAgreement, the parties shall use [***] to agree upon reporting metrics, which shall include but are not limited to [***].ARTICLE IIIEQUIPMENT, INVENTORY AND WORK IN PROGRESSSection 3.01 OptiNose Equipment(a) VTM acknowledges that the OptiNose Equipment [***], is owned by OptiNose and that OptiNose may place identifyingtags on the OptiNose Equipment confirming and providing notice of OptiNose’s ownership. VTM shall not permit [***] and shallonly use the OptiNose Equipment for the manufacture of the DSAs hereunder or other activities for OptiNose. VTM hereby disclaimsany interest, to the extent it has any, in the OptiNose Equipment and agrees to execute and deliver any agreements or other documentsevidencing OptiNose’s ownership of such OptiNose Equipment. In the event that any OptiNose Equipment is to be shipped fromVTM to OptiNose or any third party, [***] shall be responsible for all reasonable packing and shipping costs related thereto.(b) VTM shall, [***], maintain the OptiNose Equipment in good working order (including maintenance and repair in theordinary course and calibration, if needed) such that the OptiNose11 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.Equipment enables VTM to produce DSAs according to the Specifications and otherwise in accordance with this Agreement.OptiNose shall be responsible for [***].(c) At OptiNose’s written request, VTM shall make available at VTM’s facility such OptiNose Equipment as OptiNose maydesignate, [***], and VTM shall provide [***] at [***] in transitioning such OptiNose Equipment to OptiNose [***].Section 3.02 Inventory and Work In Progress. The parties acknowledge that the OptiNose Components aresignificant inputs to the DSAs by value and that the OptiNose Components will be the property of OptiNose at all times that suchOptiNose Components are in VTM’s possession. [***], VTM shall not [***].Section 3.03 Bailment Agreements. VTM agrees to enter a bailment agreement with OptiNose in the formreasonably acceptable to both parties for the OptiNose Equipment, and the OptiNose Components.Section 3.04 Inventory. Authorization. OptiNose’s accepted Purchase Orders and each Forecast shall constituteauthorization for VTM to procure, without OptiNose’s prior approval, but subject to the [***] limitation set forth in Section 2.08: (a)Inventory to manufacture the DSAs covered by such Purchase Orders and Forecast based on the applicable Lead Times, includingLong Lead Time Inventory; (b) Minimum Order Inventory reasonably required to support OptiNose’s Purchase Orders and Forecast;and (c) any Special Inventory which is separately authorized in writing by OptiNose.Section 3.05 Supply Chain Management. Purchases from Approved Vendor List. VTM shall maintain anApproved Vendor List. VTM shall purchase Inventory required to manufacture the DSA only from vendors listed on such ApprovedVendor List.Section 3.06 Vendor Warranties for Inventory. To the extent VTM actually receives from a vendor ofInventory or services the benefit arising from said vendor’s warranty obligations related to its Inventory or services, includingOptiNose Components, VTM shall transfer such benefit to OptiNose (without any actual liability for such vendor’s warrantyobligations) related to the following warranties with regard to the Inventory or services: (i) conformance of the Inventory or serviceswith the vendor’s specifications; (ii) that the Inventory or services shall be free from defects in design, materials, or workmanship; (iii)that the Inventory or services shall comply with environmental regulations and all other applicable Laws; and (iv) that the Inventory orservices shall not infringe the intellectual property rights of third parties. Nothing contained in this Section 3.06 is intended to limit thewarranties provided by VTM under Section 4.02 of this Agreement or any other obligation of VTM under this Agreement.12 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.Section 3.07 OptiNose Responsibility for Inventory. Subject to the other terms of this Section 3, OptiNose isfinancially responsible under the conditions provided in this Agreement for all Inventory purchased by VTM under this Section 3 thatcan only be used for manufacturing the DSAs. VTM agrees to maintain sufficient level of Inventory to manufacture the DSAs inaccordance with the Forecast and Purchase Orders and the terms of this Agreement; provided, that in the event such Inventory is notused in connection with the manufacture of DSA then VTM shall use [***] to return or utilize such Inventory and if they are unable todo so OptiNose shall reimburse VTM for such Inventory, as the case may be.Section 3.08 Quantity Increases and Shipment Schedule Changes.(a)For any accepted Purchase Order, OptiNose may request an increase in the quantity of DSAs ordered. All DSAquantity increases in excess of the amount set forth in such Purchase Order (“Excess Request”) shall require VTM’s approval, whichis subject to Inventory, OptiNose Component and capacity availability. VTM shall use [***] to meet any DSA quantity increases in anExcess Request.(b)For any accepted Purchase Order, OptiNose may request a reschedule of the expected delivery date set forth in theapplicable Purchase Order not to exceed [***] days. All DSA reschedules in excess of [***] days require VTM’s approval, which, inits reasonable discretion, may or may not be granted. If VTM agrees to accept a reschedule of any length of time, and if there are extracosts to meet such reschedule, then OptiNose shall be liable for such extra costs, provided, that VTM provides OptiNose advancenotice of such costs and OptiNose elects to proceed with such reschedule.(c)Any delays in the normal production or interruption in the workflow process caused by OptiNose’s changes to theSpecifications shall be considered a reschedule of any affected Purchase Orders for purposes of this Section 3.08 for the period of suchdelay.(d)Cancellations. OptiNose may not cancel all or any portion of DSA quantity of an accepted Purchase Order withoutVTM’s prior written approval, which, in its [***], may or may not be granted; provided, however, that any reduction of the DSAsordered in an accepted Purchase Order which reduction is equal to or less than [***] shall not require VTM’s approval and shall not besubject to the other terms and conditions of this Section 3.08; and, provided, further, that VTM will not withhold its approval of anycancellation in the event VTM is able to utilize the production capability that would have been utilized to produce product or otherwiseprovide services for another customer.Section 3.09 Excess and Obsolete Inventory.OptiNose shall be responsible for the following:a.Excess Inventory. When applicable, VTM shall report the Excess Inventory to OptiNose on a monthly basis. VTMshall advise whether such Excess Inventory was due to a decrease within the first [***] period of a Forecast in DSA productionhereunder or due to VTM’s purchase of Inventory13 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.beyond the amount reasonably necessary for the next [***] of demand for DSAs under the then-current Forecast. Such ExcessInventory reports shall be deemed agreed to by OptiNose, unless OptiNose provides a written objection within [***] days of the end ofthe calendar month in which such report is received by OptiNose. Upon notice from VTM to OptiNose of any Excess Inventorypursuant to a report, VTM shall attempt to cancel or amend any pending orders for such inventory to the extent such inventory is notreasonably likely to be necessary for any Forecasts hereunder or otherwise for VTM to comply with its obligations hereunder.b.Purchase of Excess Inventory. OptiNose shall pay VTM for Excess Inventory, as identified by VTM in each monthlyreport, and not objected to by OptiNose or returned/cancelled by VTM, in each instance pursuant to the process set forth above inSection 3.09(a), at a price equal to (as applicable) the price from the price list set forth in Exhibit A for any finished DSAs, theproportionate amount of such price for any partially completed DSAs, or the listed price for individual components, in each instancesuch price to be the price in existence at the time such Excess Inventory was acquired, used or completed; provided that if any suchcompleted DSAs, partially completed DSAs or other Excess Inventory are subsequently utilized by VTM for the manufacture andsupply of DSAs under this Agreement, VTM shall provide OptiNose a credit for the amount previously paid by OptiNose for suchcompleted DSA, partially completed DSA or other Excess Inventory pursuant to this Section 3.09(b); [***]. In connection with anypayments made by OptiNose to VTM pursuant to this Section 3.09(b), at VTM’s discretion and OptiNose’s request (1) VTM shallsafely store such Excess Inventory at the rate to be mutually agreed to by the parties, and/or (2) OptiNose can, [***], have some or allof such Excess Inventory stored by a third party for VTM’s potential future use.c.Obsolete Inventory. When applicable, VTM shall report the Obsolete Inventory to OptiNose on a monthly basis.OptiNose’s failure to object to VTM’s Obsolete Inventory report (or failure to deny its responsibility for such inventory) within [***]days of the end of the calendar month in which such report is received by OptiNose shall constitute its acceptance of VTM’s ObsoleteInventory report. After a validation period, which shall not exceed [***] from the date of such report, OptiNose shall purchase theObsolete Inventory (and pay in accordance with Section 2 of this Agreement) at a price equal to (as applicable) the price from the pricelist set forth in Exhibit A for any finished DSAs, the proportionate amount of such price for any partially completed DSAs, or the listedprice for individual components.d.Notwithstanding the foregoing in Sections 3.09(a), (b) and (c) above, for those OptiNose Components set forth onExhibit C, the [***] period noted in Sections 3.09(a) and (b) shall instead be [***] with respect to the items set forth in Exhibit C forwhich VTM shall also be required to maintain at least [***] but not more than [***] of available inventory at all times.14 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.e.Prior to invoicing OptiNose for the amounts due pursuant to Section this 3.09, VTM shall use [***] for a period notto exceed [***] to return for refund unused Inventory from Excess Inventory and Obsolete Inventory and to otherwise mitigate theamounts payable by OptiNose. OptiNose shall submit payment for the amounts identified and invoiced pursuant to this Section 3.09 inaccordance with the terms for payment set forth above in Section 2. At OptiNose’s discretion, VTM shall ship the Excess Inventoryand Obsolete Inventory to OptiNose promptly following said payment by OptiNose, or destroy such Excess Inventory and ObsoleteInventory, at [***]. [***].f.For changes (including cancellation and reschedules) that are not consistent with Sections 3.08 or 3.09, [***] shall beresponsible for any vendor cancellation charges incurred.ARTICLE IVDEFECTIVE PRODUCTSection 4.01 Notification of Defective Product. OptiNose or its designee shall notify VTM within:◦[***] days after receiving a shipment of DSAs if it determines that such shipment contains a QuantitativeDefect,◦[***] days after receiving a shipment of DSAs if it determines that such shipment contains a Patent Defect, and◦[***] days after OptiNose becomes aware of a Latent Defect.OptiNose or its designee shall provide VTM a sample of what it alleges contains a Latent or Patent Defect, subject to compliance withthe foregoing notice requirements and the provisions of Section 4.02, below.Section 4.02 Resolution of Defective Product.(a) Patent Defect and Latent Defect. VTM warrants and covenants that: (i) for a period of [***] from invoice date, such DSAsshall be free from defects in workmanship; (ii) be manufactured and delivered in accordance with the terms of this Agreement, theSpecifications, and the Quality Agreement, (iii) it shall perform its obligations under this Agreement using personnel of required skill,experience and qualifications and in a professional and workmanlike manner in accordance with generally recognized industrystandards, (iv) it is in compliance with, and shall perform under this Agreement in compliance with, all applicable Laws, and (v)OptiNose will receive good and valid title to all DSAs, free and clear of all encumbrances and liens of any kind (collectively, the“Warranty”).(b) Notwithstanding anything else in this Agreement, this Warranty does not apply to, and VTM makes no representations orwarranties whatsoever with respect to any of: (i) defects resulting from adherence to the Specifications, or any written instructionsprovided by or on behalf of OptiNose; (ii) the design of the DSAs; (iii) DSAs that have been abused, damaged, altered or misused or15 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.mishandled by any person or entity after title passes to OptiNose; or (iv) defects resulting from tooling, designs or written instructionsproduced or supplied by OptiNose.(c) Upon any failure of a DSA to comply with this Warranty, VTM shall, [***]; provided that OptiNose’s inspection orapproval shall not excuse Supplier’s responsibility with respect to Latent Defects. [***] shall bear all of the risk, and shipping costs,associated with DSAs that have been returned to VTM for which there is no defect found under the Warranty.(d) OptiNose or its designee must obtain a Returned Material Authorization (RMA) Number from VTM prior to returning anyDSA. The RMA must be indicated on the return package as notice to VTM’s Shipping Department to accept shipment. Any packagenot so marked will be returned at [***] expense. [***] is responsible for risk of loss and all costs associated with the return to VTM ofthe DSAs; provided that [***] shall reimburse [***] for such costs if it is determined that the DSA is non-conforming. For purposes ofthis Agreement, a DSA shall be deemed to be “non-conforming” if it does not meet the Specifications or the other requirements of thisWarranty. If OptiNose and VTM are unable to agree as to whether a DSA is conforming, then after [***] to resolve the disagreement,and subject to, and without waiver or limitation of OptiNose’s and/or VTM’s rights and remedies hereunder, at law and/or in equity,either party may submit a sample of such DSA to a mutually agreed upon independent third party testing laboratory which is an expertin the industry and which will expertly apply the agreed upon testing protocol in order to determine whether the DSA is conforming ornon-conforming. The independent laboratory’s results shall be final and binding for purposes of determining whether payment is owed(but not for purposes of any pending or potential product liability litigation which shall be governed by Article XII). If the parties or theindependent laboratory determine that the DSA was non-conforming, then in addition to, and without waiver or limitation ofOptiNose’s rights and remedies hereunder, at law and/or in equity, OptiNose shall [***]. If the parties or the independent laboratorydetermine the DSA was conforming, OptiNose shall [***]. Unless otherwise agreed to by the parties in writing, the costs associatedwith testing and review of a DSA pursuant to this Section shall be borne by [***].(e) The above warranties are given in lieu of any other representation or warranty, express or implied, and including but notlimited to the implied warranty of merchantability or fitness for a particular purpose.(f) Quantitative Defect. If OptiNose believes that a shipment of DSAs hereunder has a Quantitative Defect, OptiNose shallnotify VTM within the applicable period. If VTM agrees with such Quantitative Defect, VTM will promptly, and in no event morethan [***] days, ship sufficient DSAs at OptiNose’s direction to remedy such Quantitative Defect. If VTM does not agree withOptiNose’s determination that such shipment has a Quantitative Defect, then after [***] to resolve the disagreement, and subject to,and without waiver or limitation of OptiNose’s and/or VTM’s rights and16 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.remedies hereunder, at law and/or in equity, VTM may require a mutually agreed upon independent third party to determine whetherthe shipment had a Quantitative Defect. The independent party’s results shall be final and binding for purposes of determining whetherVTM is obligated to ship additional DSAs, and the costs of such independent third party shall be borne by [***]. If such resultsindicate that the shipment had a Quantitative Defect, OptiNose shall be entitled to [***].ARTICLE VRECORDS AND REGULATORY MATTERSSection 5.01 Recordkeeping. VTM shall maintain true and accurate books, records, inventory of Inventory andfinished DSAs, test and laboratory data, reports and all other information relating to Manufacturing under this Agreement, including allinformation required to be maintained by all Law. Such information shall be maintained for the period specified in the QualityAgreement or longer if required under Law. VTM shall provide or make such information available to OptiNose upon request andshall notify and provide OptiNose with advance notice and opportunity to obtain such information at the end of the retention period.Section 5.02 Regulatory Compliance. VTM will be responsible to maintain all permits and licenses required byany Law with respect to the facility and its equipment for the manufacture and delivery of DSAs and will manufacture and deliver theDSAs in accordance with the requirements of this Agreement, including the Quality Agreement, the Specifications and applicableLaws. In addition, during the Term, at OptiNose’s request VTM will provide [***] assistance [***] with all regulatory matters relatingto the manufacturing of the DSAs and services under this Agreement. Each Party intends and commits to cooperate to satisfy all Lawwithin the scope of its respective responsibilities under this Agreement.Section 5.03 Regulatory Correspondence. VTM shall notify OptiNose in accordance with the Quality Agreementof any notice, correspondence, and the result of any inspection(s) by or with the FDA or any Regulatory Authority (including withoutlimitation any 483, warning letter, or similar correspondence) concerning an actual or potential regulatory deficiency, noncomplianceor problem that directly or indirectly relates to the manufacturing of the DSAs or any of the services provided by VTM under thisAgreement. VTM shall notify OptiNose in accordance with the Quality Agreement of any other notice or correspondence, and theresult of any inspection(s), with the FDA or any Regulatory Authority that is reasonably likely to impact or directly relates to themanufacture of DSAs or other performance under this Agreement. In all of the foregoing notifications, VTM shall provide OptiNosewith copies of any such notices, correspondences, or results of inspection in accordance with the Quality Agreement subject to anyother customer confidentiality requirements of VTM; provided VTM shall attempt to reasonably redact any such other customerconfidential information in order to provide OptiNose with such information. Furthermore, VTM shall send a draft17 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.to OptiNose of all correspondence VTM intends to send to any Regulatory Authority with any substantial relation to DSAs. For allcorrespondence with a Regulatory Authority related directly to DSAs that is in response to any 483, warning letter, regulatorydeficiency or other problem relating to the manufacture of DSAs, VTM shall consult with, and reasonably consider the input of,OptiNose on the draft correspondence before such correspondence is sent to the Regulatory Authorities. Regarding all interactionswith Regulatory Authorities, both parties shall make [***] to act expeditiously in cooperating with each other and responding toRegulatory Authorities.Section 5.04 Governmental Inspections and Requests. VTM shall as soon as [***] in accordance with theQuality Agreement inform OptiNose in writing of any inspection, notice or request for inspection, and other regulatory action, by anyregulatory agency relating to the manufacture of DSAs and/or, in the case of a facility to the extent related to VTM’s manufacturing,packaging, testing and storage of DSAs at such facility, so that OptiNose has as much advance notice as possible to enable it to, asapplicable and relevant, participate in preparation and/or strategy regarding and/or attend the inspection. VTM shall permit theOptiNose’s representatives to be present during any such inspection related to DSAs ([***]), including being present at any inspectionof the facility to the extent such inspection is related to VTM’s manufacturing, packaging, testing or storage of the DSAs. As providedin Section 5.03, VTM will provide OptiNose with the results of all regulatory inspection or audits related to the DSAs after VTM’sreceipt of such results in accordance with the Quality Agreement.Section 5.05 Recall. In the event VTM believes a recall, field alert, product withdrawal or field correction may benecessary with respect to any DSA provided under this Agreement, VTM shall as soon as practicable notify OptiNose in writing.VTM will not act to initiate a recall, field alert, product withdrawal or field correction with respect to the DSAs. In the event OptiNosebelieves a recall, field alert, product withdrawal or field correction may be necessary with respect to any DSA provided under thisAgreement, OptiNose shall immediately notify VTM in writing and VTM shall provide [***] cooperation and assistance to OptiNose.The cost of any recall, field alert, product withdrawal or field correction, and any assistance in connection therewith, shall be borne by[***]. For avoidance of doubt and subject to applicable Laws, OptiNose shall have the ultimate and final authority to initiate a fieldalert or recall of the Finished Product.Section 5.06 Inspections and Audits by OptiNose. [***], representatives of OptiNose shall have access upon[***] prior notice to VTM’s facility where it manufactures DSAs for the purpose of: (a) conducting inspections of such facility andVTM’s maintenance and usage of the equipment utilized in the manufacture of the DSAs, (b) performing quality control and qualityassurance (including without limitation cGMP) audits (c) witnessing the manufacture, storage or transportation of the DSAs or theInventory, (d) verifying the storage of the OptiNose Components, and (d) requiring cycle counts by VTM (and adjustments toinventory as necessary). OptiNose shall have access to the18 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.results of any tests performed by VTM relating to DSAs and Inventory and the processes or the Inventory that VTM’s purchasesdirectly from a third party used in their manufacture. Such inspections shall not relieve VTM of any of its obligations under thisAgreement or create new obligations on the part of OptiNose. This right of inspection can be exercised [***] (and as often asnecessary for cause), subject to a written notice to VTM given in accordance with the time periods specified in the Quality Agreement,or at any time for cause. VTM shall permit such inspection during normal business hours at reasonable and mutually acceptable times[***]. At all times, OptiNose’s representatives shall be accompanied by VTM personnel and follow all site reasonable health andsafety policies of VTM. Each inspection, audit and witnessing shall be subject, at all times, to VTM’s confidentiality and non-disclosure obligations to its other third party customers.ARTICLE VIADDITIONAL VTM OBLIGATIONSSection 6.01 VTM shall:(a) appoint a VTM employee to serve as a primary contact with respect to this Agreement and who will have the expertise andauthority to act on behalf of VTM in connection with matters pertaining to this Agreement (the “VTM Supply RelationshipManager”);(b) [***] maintain the same VTM Supply Relationship Manager throughout the Term, however VTM has the right to replacethe VTM Supply Relationship Manager [***];(c) before the date on which the services under this Agreement are to start, obtain, and at all times during the Term maintain,all necessary licenses and consents and comply with all Laws;(d) prior to any VTM Personnel performing any services hereunder: (i) ensure that such VTM Personnel are suitably trained,skilled, experienced and qualified to perform such services; and (ii) ensure that such VTM Personnel have the legal right to work in theUnited States; and(e) maintain complete and accurate records relating to the provision of services under this Agreement, including records of thetime spent and Inventory and OptiNose Components used by VTM in providing such services in such form as [***] shall [***].During the Term and for a period of [***] thereafter, upon OptiNose’s written request, VTM shall allow OptiNose or OptiNose’srepresentative to inspect and make copies of such manufacturing and quality records in connection with the provision of the servicesunder this Agreement; provided that any such inspection shall take place during regular business hours no more than [***] (which limitshall not include any inspections for cause) and OptiNose provides VTM with [***] advance written notice.Section 6.02 VTM is responsible for all VTM Personnel and for the payment of their compensation, including, ifapplicable, withholding of income taxes, and the payment and19 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.withholding of social security and other payroll taxes, unemployment insurance, workers’ compensation insurance payments anddisability benefits.Section 6.03 VTM acknowledges that time is of the essence with respect to VTM’s obligations hereunder andthat prompt and timely performance of all such obligations is strictly required.Section 6.04 The obligations of VTM under this Agreement shall be performed fully within the facility located at71 and 20 Utopia Road, Manchester, CT 06042 United States, unless approved in writing in advance by OptiNose.Section 6.05 Upon VTM’s receipt of OptiNose Components, VTM shall promptly inspect such OptiNoseComponents in accordance with the applicable inspection criteria provided by OptiNose and ensure that such OptiNose Componentsprovided by each such supplier meets the applicable specifications for such OptiNose Components. VTM shall do such inspectionwithin [***] days of its receipt of such OptiNose Components. Should the OptiNose Components fail any such inspection or shouldVTM identify any issues with the OptiNose Components, VTM shall provide OptiNose and the applicable supplier of such OptiNoseComponents notice of such failure and/or issue within [***] day. ARTICLE VIIADDITIONAL OPTINOSE’S OBLIGATIONSSection 7.01 OptiNose shall:(a) appoint an OptiNose employee to serve as the primary contact with respect to this Agreement and who will have theexpertise and authority to act on behalf of OptiNose with respect to matters pertaining to this Agreement (the “OptiNose SupplyRelationship Manager”);(b) respond [***] to any VTM request to provide direction, information, approvals, authorizations or decisions that arereasonably necessary for VTM to perform in accordance with this Agreement;(c) provide such information as VTM may reasonably request and OptiNose considers [***] necessary in order to performunder this Agreement;(d) obtain and maintain all necessary licenses and consents and comply with all Law to the extent necessary for OptiNose’sperformance under the Agreement; and(e) obtain and maintain throughout the term of this Agreement insurance on the OptiNose Equipment in [***] amounts andcoverage.20 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.ARTICLE VIII FEES AND EXPENSES; PAYMENT TERMSSection 8.01 VTM shall issue invoices to OptiNose upon delivery to OptiNose in accordance with Section 2.01of DSAs with pricing pursuant to Exhibit A for such DSAs produced, and OptiNose shall pay all properly invoiced amounts due toVTM within [***] days after the date of the invoice except for any amounts disputed by OptiNose in good faith (subject to OptiNose’smatch process for Purchase Order, invoice and receipt). VTM shall provide, for OptiNose’s review and prior written approval,statements of work with budgetary allowances for any services not required to be provided by VTM at its costs by the qualityagreement or this Agreement. VTM will provide invoices to those services if incurred. All payments hereunder shall be in US dollarsand made by check or wire transfer. The provisions of this Agreement shall govern over any terms and conditions listed on any invoiceor Purchase Order. A service fee of [***]% per month will be added to all accounts more than [***] days past due, and [***] isresponsible for all collection and attorneys’ fees and costs required to collect unpaid amounts.Section 8.02 [***] shall be responsible for all sales, use and excise taxes, and any other similar taxes, duties andcharges of any kind imposed by any federal, state or local governmental entity on any amounts payable to VTM. [***]. In no eventshall [***] pay or be responsible for any taxes imposed on, or with respect to, [***] income, revenues, gross receipts, personnel or realor personal property or other assets.ARTICLE IXINTELLECTUAL PROPERTY RIGHTS; OWNERSHIPSection 9.01 Except as set forth in Section 9.03, OptiNose is, and shall be, the sole and exclusive owner of allright, title and interest in and to any Intellectual Property Rights generated in connection with VTM’s performance under thisAgreement, and to any of the Deliverables, including all Intellectual Property Rights therein. VTM agrees, and will cause its VTMPersonnel to agree, that with respect to any Intellectual Property Rights or Deliverables that may qualify as “work made for hire” asdefined in 17 U.S.C. §101, such Intellectual Property Rights and Deliverables are hereby deemed a “work made for hire” forOptiNose. To the extent that any of the Intellectual Property Rights or Deliverables hereunder do not immediately vest in OptiNose ordo not constitute a “work made for hire”, VTM hereby irrevocably assigns on behalf of itself and all VTM Personnel, and, [***], shallcause the VTM Personnel to irrevocably assign to OptiNose, in each case without additional consideration, all right, title and interestthroughout the world in and to such Intellectual Property Rights and Deliverables, including all Intellectual Property Rights therein.VTM hereby waives on behalf of itself and all VTM Personnel, and, [***], shall cause the VTM Personnel to irrevocably waive, tothe extent permitted by applicable Law, any and all claims VTM and/or such VTM Personnel21 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.may now or hereafter have in any jurisdiction to so-called “moral rights” or rights of droit moral with respect to such IntellectualProperty Rights and Deliverables.Section 9.02 Upon the request of OptiNose, VTM shall, and shall cause the VTM Personnel to, promptly takesuch further actions, including execution and delivery of all appropriate instruments of conveyance, as may be necessary to assistOptiNose to prosecute, register, perfect or record its rights in or to any Deliverables.Section 9.03 VTM and its licensors are, and shall remain, the sole and exclusive owners of all right, title andinterest in and to the VTM Tools, including all Intellectual Property Rights therein. VTM represents and warrants that the DSAsdelivered hereunder shall not incorporate any VTM Tools, and that OptiNose can use and/or sell the DSAs without the requirement ofany approval and/or license from VTMSection 9.04 OptiNose and its licensors are, and shall remain, the sole and exclusive owner of all right, title andinterest in and to the OptiNose Information, including all Intellectual Property Rights therein. VTM shall have no right or license to useany OptiNose Information, except solely during the Term of the Agreement to the extent necessary to perform under this Agreement.All other rights in and to the OptiNose Information are expressly reserved by OptiNose.ARTICLE XCONFIDENTIAL INFORMATIONSection 10.01 The Receiving Party agrees:(a) not to disclose or otherwise make available Confidential Information of the Disclosing Party to any third party without theprior written consent of the Disclosing Party; provided, however, that the Receiving Party may disclose the Confidential Information ofthe Disclosing Party to its Affiliates, and their officers, employees, consultants and legal advisors who have a “need to know”, whohave been apprised of this restriction and who are themselves bound by nondisclosure obligations at least as restrictive as those setforth in this Article X, provided, that, the Receiving Party shall be responsible for any disclosure or use of Confidential Information bysuch persons or entities that is contrary to the terms of this Agreement;(b) to use the Confidential Information of the Disclosing Party only for the purposes of performing its obligations under theAgreement or, in the case of OptiNose, to make use of the services under this Agreement and Deliverables; and(c) to promptly notify the Disclosing Party in the event it becomes aware of any loss or disclosure of any of the ConfidentialInformation of the Disclosing Party.Section 10.02 If the Receiving Party becomes legally compelled to disclose any Confidential Information, theReceiving Party shall provide: (i) prompt written notice of such22 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.requirement so that the Disclosing Party may seek, at its sole cost and expense, a protective order or other remedy; and (ii) [***]assistance, [***], in opposing such disclosure or seeking a protective order or other limitations on disclosure. If, after providing suchnotice and assistance as required herein, the Receiving Party remains required by Law to disclose any Confidential Information, theReceiving Party shall disclose no more than that portion of the Confidential Information which, on the advice of the Receiving Party’slegal counsel, the Receiving Party is legally required to disclose and, upon the Disclosing Party’s request, shall use commerciallyreasonable efforts to obtain assurances from the applicable court or agency that such Confidential Information will be affordedconfidential treatment.ARTICLE XIREPRESENTATIONS AND WARRANTIESSection 11.01 Each party further represents and warrants to the other party that:(a) it is duly organized, validly existing and in good standing as a corporation or other entity as represented herein under thelaws and regulations of its jurisdiction of incorporation, organization or chartering;(b) it has the full right, power and authority to enter into this Agreement, to grant the rights and licenses granted hereunder andto perform its obligations hereunder;(c) the execution of this Agreement by its representative whose signature is set forth at the end hereof has been dulyauthorized by all necessary corporate action of the party;(d) when executed and delivered by such party, this Agreement will constitute the legal, valid and binding obligation of suchparty, enforceable against such party in accordance with its terms; and(e) it will comply at all times with the provisions of applicable Laws of the United States (and, as applicable, analogous suchlaws in any other territories where regulatory approval is sought) regarding debarment and will upon request certify in writing to theother parties that none of its employees nor any person providing services in connection with this Agreement have been debarred underthe provisions of such laws.Section 11.02 VTM further represents and warrants to OptiNose that:(a) it shall perform the services under this Agreement using personnel of required skill, experience and qualifications and in aprofessional and workmanlike manner in accordance with generally recognized industry standards for similar services and shall devoteadequate resources to meet its obligations under this Agreement;(b) it is in compliance with, and shall perform under this Agreement in compliance with, all applicable Laws;23 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.(c) Upon delivery of DSAs to OptiNose in accordance with Section 2.1, OptiNose will receive good and valid title to allDeliverables, free and clear of all encumbrances and liens of any kind;(d) the DSAs provided under this Agreement shall be manufactured and delivered in strict compliance with the terms of thisAgreement, including (i) the Specifications; (ii) all Laws relating to the manufacture of the DSAs, including without limitation theFD&C Act and cGMPs; and (iii) the Quality Agreement; and(e) as of the date hereof, there are no pending or, to VTM’s knowledge, threatened claims, litigation or other proceedingspending against VTM by any third party, in each case, excluding any infringement or claim, litigation or other proceedings to theextent arising out of (x) any OptiNose Information or any instruction, information, designs, specifications or other materials providedby OptiNose to VTM, (y) use of the Deliverables in combination with any materials or equipment not supplied or specified by VTM, ifthe infringement would have been avoided by the use of the Deliverables not so combined, and (z) any modifications or changes madeto the Deliverables by or on behalf of any Person other than VTM.Section 11.03 EXCEPT FOR THE EXPRESS WARRANTIES IN THIS AGREEMENT, EACH PARTYHEREBY DISCLAIMS ALL WARRANTIES, EITHER EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE UNDERTHIS AGREEMENT, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR APARTICULAR PURPOSE.ARTICLE XIIINDEMNIFICATIONSection 12.01 OptiNose acknowledges that VTM has no control over, and is not responsible for, the manner inwhich the DSAs will be used or otherwise dealt with by OptiNose. OptiNose shall defend, indemnify and hold VTM and VTM’sAffiliates and their officers, directors, employees, agents, successors and permitted assigns (each, a “VTM Indemnitee”) harmlessfrom and against any and all third party suits, claims, losses, demands, liabilities, damages, costs and expenses (including reasonableattorneys’ fees) (“Losses”) and agree to assume all responsibility for any and all actions, claims, or demands arising out of or in anyway connected with, and any and all amounts which VTM and/or OptiNose becomes obligated to pay, caused by or resulting directlyor indirectly from the use or operation of the DSAs, including any intellectual property claims, except to the extent VTM is required toindemnity OptiNose for such Loss pursuant to Section 12.02.Section 12.02 VTM agrees to defend, indemnify and hold harmless OptiNose and OptiNose’s Affiliates and theirofficers, directors, employees, agents, successors and permitted assigns (each, an “OptiNose Indemnitee”) from and against, any andall Losses as follows: (a) any24 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.actual or alleged injury or damage to any person (including death) or property caused, or alleged to be caused, by a DSA sold by VTMto OptiNose hereunder, but solely to the extent such injury or damage has been caused by the breach by VTM of its Warranty set forthin Article IV, including but not limited to the failure of the DSA to conform to the Specifications; and (b) any actual or allegedinfringement or misappropriation of the intellectual property rights (including any industrial design rights, database rights or any otherform of intangible or business property rights) of any third party, but solely to the extent that such infringement or misappropriation iscaused by a process, VTM Tools, or Production Materials that VTM elects to use to manufacture, assemble or test the DSAs; however,VTM shall not have any obligation to indemnify OptiNose if such claim would not have arisen but for VTM’s manufacture, assemblyor test of the DSA in accordance with the Specifications.Section 12.03 The party seeking indemnification hereunder shall promptly notify the indemnifying party inwriting of any third party claim, suit, action or proceeding (“Action”) and cooperate with the indemnifying party [***]. Theindemnifying party shall immediately take control of the defense and investigation of such Action and shall employ counsel of itschoice to handle and defend the same, [***]. The indemnifying party shall not settle any Action in a manner that adversely affects therights of the indemnified party without the indemnified party’s prior written consent. The indemnified party’s failure to perform anyobligations under this Section 12.3 shall not relieve the indemnifying party of its obligations under this Section 12.3 except to theextent that the indemnifying party can demonstrate that it has been materially prejudiced as a result of such failure. The indemnifiedparty may participate in and observe the proceedings [***].ARTICLE XIIILIMITATION OF LIABILITYSection 13.01 EXCEPT AS OTHERWISE PROVIDED IN SECTION 13.02, IN NO EVENT WILL EITHERPARTY BE LIABLE TO THE OTHER OR TO ANY THIRD PARTY FOR ANY LOSS OF USE, REVENUE OR PROFIT ORFOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY, SPECIAL OR PUNITIVE DAMAGESWHETHER ARISING OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE,WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.FURTHERMORE, EXCEPT WITH RESPECT TO THE EQUITABLE EXCEPTIONS, IN NO EVENT WILL VTM BELIABLE FOR THE VALUE OF THE INTERNAL TIME OF OPTINOSE’S EMPLOYEES TO REMEDY A BREACH.Section 13.02 The exclusions and limitations in Section 13.01 shall not apply to the following (the “EquitableExceptions”):(a) damages or other liabilities arising out of or relating to a party’s failure to comply with its obligations under Article IX(Intellectual Property Rights; Ownership);25 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.(b) damages or other liabilities arising out of or relating to a party’s failure to comply with its obligations under Article X(Confidentiality);(c) a party’s indemnification obligations under Article XII (Indemnification); and(d) damages or other liabilities arising out of or relating to a party’s gross negligence, willful misconduct or intentional acts.EXCEPT WITH RESPECT TO THE EQUITABLE EXCEPTIONS ABOVE AND NOTWITHSTANDING ANYTHING TOTHE CONTRARY IN THIS AGREEMENT, VTM’S TOTAL LIABILITY TO OPTINOSE HEREUNDER SHALL BESUBJECT TO AN AGGREGATE CAP IN ACCORDANCE WITH THE FOLLOWING: [***].Section 13.03 No Double Recovery. Notwithstanding OptiNose’s rights under the Molded Parts Agreement, inthe event of a dispute of a claim under either this Agreement or the Molded Parts Agreement, OptiNose is only entitled to recoverunder this Agreement with respect to the DSAs, and the Molded Parts Agreement with respect to the cap covered thereunder. Further,notwithstanding the preceding sentence, if there are any disputes or claims regarding Pre-Existing Inventory that OptiNose purchasedfrom VTM prior to the date of this Agreement and such Pre-Existing Inventory would not be covered under this Agreement for anyclaims or disputes related thereto, then the parties agree and acknowledge that OptiNose maintains any and all rights set forth in theMolded Parts Agreements regarding such Pre-Existing Inventory.ARTICLE XIVTERMSection 14.01 This Agreement shall commence as of the Effective Date and shall expire at 11:59PM on October24, 2021, unless sooner terminated pursuant to Article XV. After the expiration of the initial term hereunder, this Agreement shall beautomatically renewed for separate but successive one-year terms unless either party provides written notice to the other party that itdoes not intend to renew this Agreement ninety (90) days or more prior to the end of any term.ARTICLE XVTERMINATION; EFFECT OF TERMINATIONSection 15.01 OptiNose, in its sole discretion, may terminate this Agreement:(a) [***];(b) by providing VTM written notice if VTM fails an inspection or suffers a hold, 483, warning letter, or other disciplinaryaction by the FDA or any other government authority and VTM fails to cure such inspection shortcoming, or remove or resolve suchhold or disciplinary action in such a manner that the VTM facility passes re-inspection by the FDA or government authority and/or isfree of the hold or disciplinary action, in good standing with FDA or such other government authority,26 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.and is lawfully able to and does resume timely and conforming manufacture and delivery of OptiNose’s DSAs requirements inaccordance with this Agreement within thirty days of such original inspection, or imposition of the hold or disciplinary action; or(c) by providing VTM written notice if VTM fails to gain recommendation for approval by FDA to manufacture DSAs inaccordance with this Agreement (with such recommendation being either unqualified or with any qualifications resolved to FDA’sacknowledged satisfaction) in a manner that does not delay such approval by the FDA.Section 15.02 Either party may terminate this Agreement, effective upon written notice to the other party (the“Defaulting Party”), if the Defaulting Party:(a) materially breaches this Agreement, and such breach is incapable of cure, or with respect to a material breach capable ofcure, the Defaulting Party does not cure such breach within [***] days after receipt of written notice of such breach.(b) (i) becomes insolvent or admits its inability to pay its debts generally as they become due; (ii) becomes subject, voluntarilyor involuntarily, to any proceeding under any domestic or foreign bankruptcy or insolvency law, which is not fully stayed within sevenbusiness days or is not dismissed or vacated within forty-five days after filing; (iii) is dissolved or liquidated or takes any corporateaction for such purpose; (iv) makes a general assignment for the benefit of creditors; or (v) has a receiver, trustee, custodian or similaragent appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of its property or business.Section 15.03 Upon expiration or termination of this Agreement for any reason:(a) OptiNose shall have the right at any time after a notice of termination has been given or an event has occurred which, withthe passage of time, will cause this Agreement to terminate to require VTM, as soon as reasonably practicable and in no more than[***] days from the effective date of termination, to make available for removal by OptiNose or its designee [***]: (i) all DSAs, allInventory, all partially completed DSAs, all Deliverables and all OptiNose Information ([***]), and (ii) all OptiNose Equipment. Uponpayment, as applicable, all of the foregoing items for removal shall be made available at the facility, [***], claims and encumbrances,and VTM shall provide [***] cooperation and assistance to OptiNose upon OptiNose’s written request [***] in transitioning themanufacture of DSAs and related services under this Agreement to an alternate supplier. [***].(b) Each party shall (i) return to the other party all documents and tangible materials (and any copies) containing, reflecting,incorporating or based on the other party’s Confidential Information, (ii) if the other party requests, use [***] efforts to permanentlyerase all of the other party’s Confidential Information from its computer systems, and (iii) certify in writing to the other party that it hascomplied with the requirements of this clause; provided, however, that OptiNose may retain copies of any Confidential Information ofVTM incorporated in the Deliverables or to the extent necessary to allow27 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.it to make full use of the DSAs and any Deliverables; and provided further, however, that VTM shall retain such documents andtangible materials as are required to be maintained by VTM under Law.(c) In no event shall OptiNose be liable for [***].Section 15.04 The rights and obligations of the parties set forth in this Section 15.04 and Article I, Sections 5.01,5.03, 5.04, 5.05, 5.06 and 6.01(e), Article IX, Article X, Article XI, Article XII, Article XIII, Section 15.03, Article XVI and ArticleXVIII, and any right or obligation of the parties in this Agreement which, by its nature, should survive termination or expiration of thisAgreement, will survive any such termination or expiration of this Agreement. For purposes of clarity, in no event shall anytermination or expiration of this Agreement excuse either party from any breach or violation of this Agreement or other obligation thatoccurred prior to such termination or expiration and, in each such case, full legal and equitable remedies shall remain available toaddress such issues.ARTICLE XVIINSURANCESection 16.01 At all times during the Term and for a period of at least [***] thereafter, VTM shall procure andmaintain, at its sole cost and expense, at least the following types and amounts of insurance coverage:(a) Commercial General Liability/ Completed Operation Liability with limits no less than $[***] per occurrence, includingbodily injury and property damage and products, which policy will include contractual liability coverage insuring the activities of VTMunder this Agreement;(b) Worker’s Compensation with employer’s liability limits no less [***];(c) Errors and Omissions and/or Professional Liability with limits no less than $[***] per occurrence; and(d) Umbrella Liability with limits no less than $[***] per occurrence and $[***] in the aggregate providing excess coverage ofthe primary Commercial General Liability, including Products/Completed Operations Liability.Section 16.02 All insurance policies required pursuant to this Article XVI shall:(a) be issued by an insurance company or insurance companies having an A.M. Best Rating of [***] or better;(b) provide that such insurance be primary insurance and any similar insurance in the name of and/or for the benefit ofOptiNose shall be excess and non-contributory; provided, however, this provision shall not apply to the insurance required by Section16.01(b); and28 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.(c) name OptiNose and OptiNose’s Affiliates, including, in each case, all successors and permitted assigns, as AdditionalInsureds; provided, however, this provision shall not apply to the insurance required by Section 16.01(b).Section 16.03 Upon the written request of OptiNose, VTM shall provide OptiNose with copies of the certificatesof insurance for all insurance coverage required by this Article XVI, and shall not do anything to invalidate such insurance. ThisArticle XVI shall not be construed in any manner as waiving, restricting or limiting the liability of either party for any obligationsimposed under this Agreement (including but not limited to, any provisions requiring a party hereto to indemnify, defend and hold theother harmless under this Agreement).ARTICLE XVIIFORCE MAJEURESection 17.01 No party shall be liable or responsible to the other party, nor be deemed to have defaulted under orbreached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to the extent suchfailure or delay is caused by or results from acts beyond the affected party’s reasonable control, including, without limitation:(a) acts of God;(b) flood, fire or explosion;(c) war, invasion, riot or other civil unrest;(d) actions, embargoes or blockades in effect on or after the date of this Agreement;(e) national or regional emergency;(f) strikes, labor stoppages or slowdowns or other industrial disturbances; or(g) compliance with any law or governmental order, rule, regulation or direction, or any action taken by agovernmental or public authority, including but not limited to imposing an embargo, export or import restriction, quotaor other restriction or prohibition, or failing to grant a necessary license or consent;(each of the foregoing, a “Force Majeure Event”). A party whose performance is affected by a Force Majeure Event shallgive notice to the other party, stating the period of time the occurrence is expected to continue and shall use [***] to end the failure ordelay and minimize the effects of such Force Majeure Event.29 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.Section 17.02 During the Force Majeure Event, the non-affected party may similarly suspend its performanceobligations until such time as the affected party resumes performance.Section 17.03 The non-affected party may terminate this Agreement if such failure or delay continues for a periodof [***] days or more and, [***].ARTICLE XVIIIMISCELLANEOUSSection 18.01 Each party shall, upon the reasonable request, promptly execute such documents and perform suchacts as may be necessary to give full effect to the terms of this Agreement.Section 18.02 The relationship between the parties is that of independent contractors. Nothing contained in thisAgreement shall be construed as creating any agency, partnership, joint venture or other form of joint enterprise, employment orfiduciary relationship between the parties, and neither party shall have authority to contract for or bind the other party in any mannerwhatsoever.Section 18.03 Neither party shall issue or release any announcement, statement, press release or other publicity ormarketing materials relating to this Agreement, or otherwise use the other party’s trademarks, service marks, trade names, logos,symbols or brand names, in each case, without the prior written consent of the other party, except to the extent necessary pursuant toany applicable securities exchange rule.Section 18.04 All notices, requests, consents, claims, demands, waivers and other communications hereundershall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) whenreceived by the addressee if sent by a nationally recognized overnight courier (receipt requested); or (c) on the third day after the datemailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respectiveparties at the addresses indicated below (or at such other address for a party as shall be specified in a notice given in accordance withthis Section 18.04.)30 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.If to VTM:VTM, LLCAttn: Chief Executive Officer71 Utopia RoadManchester, CT 06042Flex Health Solutions6201 America Center DriveSan Jose, CAAttn: Medical, General CounselIf to OptiNose:OptiNose US, Inc. Attn: Chief Executive Officer 1020 Stony Hill Road, Suite 300 Yardley, PA 19067To OptiNose UK: OptiNose UK, Ltd. Hunts Rise South Marston Park, Wiltshire SN3 4TG, England Attention: Chief Executive OfficerTo OptiNose Norway: OptiNose AS Gaustadalléen 210349 Oslo, Norway Attention: Chief Executive OfficerIn each instance, with cc to: OptiNose US, Inc.Attn: Chief Legal Officer1020 Stony Hill Road, Suite 300Yardley, PA 19067Section 18.05 For purposes of this Agreement, (a) the words “include,” “includes” and “including” shall bedeemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; and (c) the words “herein,” “hereof,”“hereby,” “hereto” and “hereunder” refer to this Agreement as a whole. Unless the context otherwise requires, references herein: (x) toSections and Exhibits refer to the Sections of, and Exhibits attached to, this Agreement; and (y) to a statute means such statute asamended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreementshall be construed without regard to any31 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to bedrafted. The Schedules, Exhibits and Statements of Work referred to herein shall be construed with, and as an integral part of, thisAgreement to the same extent as if they were set forth verbatim herein.Section 18.06 This Agreement, together with all Exhibits and any other documents incorporated herein byreference, constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein,and supersedes all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subjectmatter. For purposes of clarity, this Agreement shall not supersede the development agreements and other related project work betweenthe parties not otherwise covered by this Agreement.Section 18.07 Neither party may assign, transfer or delegate any or all of its rights or obligations under thisAgreement (including without limitation to any subcontractors), without the prior written consent of the other party, which consentshall not be unreasonably withheld or delayed; provided, that, upon prior written notice to the other party, either party may assign theAgreement to an Affiliate of such party or to a successor of all or substantially all of the assets of such party through merger,reorganization, consolidation or acquisition; provided further, that, notwithstanding the foregoing, VTM may not make such anassignment without OptiNose’s prior written consent, not to be unreasonably withheld. No assignment shall relieve the assigning partyof any of its obligations hereunder. Any attempted assignment, transfer or other conveyance in violation of the foregoing shall be nulland void. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors andpermitted assigns.Section 18.08 This Agreement is for the sole benefit of the parties hereto and their respective successors andpermitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitableright, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.Section 18.09 The headings in this Agreement are for reference only and shall not affect the interpretation of thisAgreement.Section 18.10 This Agreement may only be amended, modified or supplemented by an agreement in writingsigned by each party hereto. No waiver by any party of any of the provisions hereof shall be effective unless explicitly set forth inwriting and signed by the party so waiving. Except as otherwise set forth in this Agreement, no failure to exercise, or delay inexercising, any rights, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; norshall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof orthe exercise of any other right, remedy, power or privilege.32 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.Section 18.11 If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction,such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or renderunenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid,illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of theparties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated asoriginally contemplated to the greatest extent possible.Section 18.12 This Agreement shall be governed by and interpreted in accordance with the laws of the State ofNew York, exclusive of conflict or choice-of-law rules, except to the extent there may be any conflict between the laws of the State ofNew York and the Incoterms of the International Chamber of Commerce, 2010 edition, in which case the Incoterms shall becontrolling. The parties specifically agree that the 1980 United Nations Convention on Contracts for the International Sale of Goods, asmay be amended from time to time, shall not apply to this Agreement. The parties hereby consent to the personal and exclusivejurisdiction and venue of the New York state courts and the federal courts located in New York, New York.Section 18.13 Any controversy, claim, or dispute arising out of or relating to this order and not resolved byagreement of the parties shall be resolved in Arbitration in New York, New York. The decision and award of the arbitrator(s) shall befinal and binding and may be entered in any court having jurisdiction thereof. The parties will pay their respective attorneys’ fees andequally share all other costs and expenses of the arbitration proceedings.Section 18.14 Notwithstanding the foregoing, except with respect to enforcing claims for injunctive or equitablerelief, any dispute, claim or controversy arising out of or relating in any way to this Agreement, any other aspect of the relationshipbetween VTM and OptiNose or their respective affiliates and subsidiaries, the interpretation, application, enforcement, breach,termination or validity thereof (including, without limitation, any claim of inducement of this Agreement by fraud and a determinationof the scope or applicability of this agreement to arbitrate), or its subject matter (collectively, “Disputes”) shall be determined bybinding arbitration before one arbitrator. The arbitration shall be administered by JAMS conducted in accordance with the expeditedprocedures set forth in the JAMS Comprehensive Arbitration Rules and Procedures as those Rules exist on the Effective Date of thisAgreement, including Rules 16.1 and 16.2 of those Rules. Notwithstanding anything to the contrary in this Agreement, the FederalArbitration Act shall govern the arbitrability of all Disputes. The arbitration shall be held in New York, New York and it shall beconducted in the English language. The parties shall maintain the confidential nature of the arbitration proceeding and any award,including the hearing, except as may be necessary to prepare for or conduct the arbitration hearing on the merits, or except as may benecessary in connection with a court application for a33 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.preliminary remedy, a judicial challenge to an award or its enforcement, or unless otherwise required by law or judicial decision. Thearbitrator shall have authority to award compensatory damages only and shall not award any punitive, exemplary, or multiple damagesand the parties waive any right to recover any such damages. Judgment on any award in arbitration may be entered in any court ofcompetent jurisdiction. Notwithstanding the above, each party shall have recourse to any court of competent jurisdiction to enforceclaims for injunctive and other equitable relief.Section 18.15 IN THE EVENT OF ANY DISPUTE BETWEEN THE PARTIES, WHETHER IT RESULTSIN PROCEEDINGS IN ANY COURT IN ANY JURISDICTION OR IN ARBITRATION, THE PARTIES HEREBYKNOWINGLY AND VOLUNTARILY, AND HAVING HAD AN OPPORTUNITY TO CONSULT WITH COUNSEL,WAIVE ALL RIGHTS TO TRIAL BY JURY, AND AGREE THAT ANY AND ALL MATTERS SHALL BE DECIDED BYA JUDGE OR ARBITRATOR WITHOUT A JURY TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLELAW. To the extent applicable, in the event of any lawsuit between the parties arising out of or related to this Agreement, the partiesagree to prepare and to timely file in the applicable court a mutual consent to waive any statutory or other requirements for a trial byjury.Section 18.16 Each party acknowledges that a breach by a party of Article IX (Intellectual Property Rights;Ownership) or Article X (Confidentiality) may cause the non-breaching party irreparable damages, for which an award of damageswould not be adequate compensation and agrees that, in the event of such breach or threatened breach, the non-breaching party will beentitled to seek equitable relief, including a restraining order, injunctive relief, specific performance and any other relief that may beavailable from any court, in addition to any other remedy to which the non-breaching party may be entitled at law or in equity. Suchremedies shall not be deemed to be exclusive but shall be in addition to all other remedies available at law or in equity, subject to anyexpress exclusions or limitations in this Agreement to the contrary.Section 18.17 In the event that any action, suit, or other legal or administrative proceeding is instituted orcommenced by either party hereto against the other party arising out of or related to this Agreement, the prevailing party shall beentitled to recover its reasonable attorneys’ fees and court costs from the non-prevailing party.Section 18.18 This Agreement may be executed in counterparts, each of which shall be deemed an original, butall of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by e-mail or othermeans of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of thisAgreement.Section 18.19 [***].[Signature Page Follows]34 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADVANCE MOLD & MANUFACTURING, INC.By: /s/ Fabio Scagliarini Name: Fabio Scagliarini Its: General Manager OPTINOSE US, INC.By: /s/ Peter Miller Name: Peter MillerIts: Chief Executive Officer OPTINOSE UK LTD.By: /s/ Ricci Whitlow Name: Ricci WhitlowIts: VP, Tech Ops OPTINOSE ASBy: /s/ Peter Miller Name: Peter MillerIts: Chief Executive Officer35 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.EXHIBIT APRICING[***] *************** 36 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.EXHIBIT B37 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.OPTINOSE COMPONENTS[***]38 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.EXHIBIT COPTINOSE COMPONENTS WITH ADDITIONAL STORAGE TIME[***]39 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.EXHIBIT DESCALATION MATRIX40 [***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment hasbeen requested with respect to the omitted portions.41 Exhibit 21.1OPTINOSE, INC.LIST OF SUBSIDIARIESName Jurisdiction of Incorporation Percent OwnedOptiNose US, Inc. Delaware 100%Optinose AS Norway 100%Optinose UK, Ltd. United Kingdom 100%Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements:(1)Registration Statement (Form S-8 No. 333-221047) pertaining to the Amended and Restated 2010 Stock Incentive Plan and the 2017Employee Stock Purchase Plan of OptiNose, Inc.(2)Registration Statement (Form S-8 No. 333-223617) pertaining to the Amended and Restated 2010 Stock Incentive Plan and the 2017Employee Stock Purchase Plan of OptiNose, Inc.(3)Registration Statement (Form S-3 No. 333-228122) of OptiNose, Inc.of our report dated March 6, 2019, with respect to the consolidated financial statements of OptiNose, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2018./s/ Ernst & Young LLPPhiladelphia, PennsylvaniaMarch 6, 2019CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002I, Peter K. Miller, certify that:1. I have reviewed this Annual Report on Form 10-K of OptiNose, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting. Date: March 6, 2019 /s/ Peter K. MillerPeter K. MillerChief Executive Officer(Principal Executive Officer)CERTIFICATION OF PRINCIPAL FINANCIALOFFICER PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002I, Keith A. Goldan, certify that:1. I have reviewed this Annual Report on Form 10-K of OptiNose, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting. Date: March 6, 2019 /s/ Keith A. GoldanChief Financial Officer(Principal Financial Officer and Principal Accounting Officer)CERTIFICATION OF PRINCIPAL EXECUTIVEOFFICER PURSUANT TO 18 U.S.CSECTION 1350, AS ADOPTED PURSUANTTOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Peter K. Miller, Chief Executive Officer of OptiNose, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1.the Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,as amended; and 2.the information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company for the periods presented therein. Date: March 6, 2019 /s/ Peter K. MillerPeter K. MillerChief Executive Officer(Principal Executive Officer)CERTIFICATION OF PRINCIPAL FINANCIALOFFICER PURSUANT TO U.S.C SECTION1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Keith A. Goldan, Chief Financial Officer of OptiNose, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge 1.the Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,as amended; and 2.the information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company for the periods presented therein. Date: March 6, 2019 /s/ Keith A. GoldanKeith A. GoldanChief Financial Officer(Principal Financial Officer and Principal Accounting Officer)

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