10-Q
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Table of Contents
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
For the quarterly period ended June 30, 2020
Or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
Commission file number:
001-36545
 
 
INTERSECT ENT, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
20-0280837
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
 
 
1555 Adams Drive
Menlo Park, California
 
94025
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
Registrant’s telephone number, including area code:
(650641-2100
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class:
 
Trading symbol(s)
 
Name of Exchange on Which registered:
Common Stock, 0.001 par value
 
XENT
 
The Nasdaq Global Market
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, an emerging growth company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer
 
  
Accelerated filer
 
       
Non-accelerated filer
 
  
Smaller reporting company
 
       
 
 
 
  
Emerging growth company
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes  ☐    No  
Shares of common stock outstanding as of July 29, 2020 were 32,702,084.
 
 
 

Table of Contents
 
INTERSECT ENT, INC.
Form
10-Q
– QUARTERLY REPORT
For the Quarter Ended June 30, 2020
TABLE OF CONTENTS
 
 
  
Page
 
     3  
     3  
     3  
     4  
     5  
     6  
     7  
  
 
16
 
  
 
23
 
  
 
23
 
   
  
 
24
 
  
 
24
 
  
 
24
 
  
 
49
 
  
 
50
 
  
 
50
 
  
 
50
 
  
 
50
 
   
  
 
52
 
 
 
 
 
 
 

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
June 30,
 
 
December 31,
 
 
2020
 
 
2019
 
 
(unaudited)
 
 
(1)
 
Assets
 
 
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
29,458
    $
20,652
 
Short-term investments
   
106,373
     
69,986
 
Accounts receivable, net
   
7,653
     
19,113
 
Inventories, net
   
14,007
     
17,000
 
Prepaid expenses and other current assets
   
1,964
     
2,300
 
                 
Total current assets
   
159,455
     
129,051
 
Property and equipment, net
   
5,893
     
6,312
 
 
Operating lease
right-of-use
assets
   
10,901
     
11,980
 
Other
non-current
assets
   
533
     
559
 
                 
Total assets
  $
176,782
    $
147,902
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current liabilities:
   
     
 
Accounts payable
  $
2,616
    $
4,056
 
Accrued compensation
   
8,077
     
12,717
 
Other current liabilities
   
3,437
     
2,163
 
                 
Total current liabilities
   
14,130
     
18,936
 
Operating lease liabilities
   
9,645
     
10,886
 
Convertible notes, net
   
63,874
     
—  
 
Other
non-current
liabilities
   
22
     
22
 
                 
Total liabilities
   
87,671
     
29,844
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (note
9
)
   
   
 
 
 
 
 
 
 
Stockholders’ equity:
   
     
 
Preferred stock, $0.001 par value;
   
Authorized shares: 9,994 at June 30, 2020 and 10,000 at December 31, 2019;
   
Issued and outstanding shares: none
   
     
 
Series
DF-1
convertible preferred stock, $0.001 par value;
    
Authorized shares: 6 at June 30, 2020 and none at December 31, 2019;
    
Issued and outstanding shares: none
                  
Common stock, $0.001 par value;
   
Authorized shares: 150,000 at June 30, 2020 and December 31, 2019;
   
Issued and outstanding shares: 32,645 at June 30, 2020 and 32,235 at December 31, 2019
   
33
     
32
 
Additional
paid-in
capital
   
360,396
     
348,729
 
Accumulated other comprehensive 
income
   
95
     
53
 
Accumulated deficit
   
(271,413
   
(230,756
)
                 
Total stockholders’ equity
   
89,111
     
118,058
 
                 
Total liabilities and stockholders’
equity
  $
176,782
    $
147,902
 
                 
(1) Amounts have been derived from the
December
31,
2019
audited consolidated financial statements
included
in the Company’s Annual Report on Form
10-K
filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
 
3

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
   
Six Months Ended
 
 
June 30,
   
June 30,
 
 
2020
   
2019
 
 
2020
 
 
2019
 
Revenue
  $
 
 
9,780
    $
 
 
26,659
    $
 
 
29,606
    $
 
 
53,332
 
Cost of sales
   
7,357
     
5,046
     
13,767
     
9,691
 
                                 
Gross profit
   
2,423
     
21,613
     
15,839
     
43,641
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
   
     
     
     
 
Selling, general and administrative
   
19,497
     
27,611
     
45,697
     
54,818
 
Research and development
   
4,018
     
6,041
     
9,164
     
12,307
 
                                 
Total operating expenses
   
23,515
     
33,652
     
54,861
     
67,125
 
                                 
Loss from operations
   
(21,092
)    
(12,039
)
 
   
(39,022
)    
(23,484
)
Interest expense
    (486 )     —         (486     —    
Other
income
(expense)
, net
   
(1,546
   
655
     
(1,149
   
1,295
 
                                 
Net loss
   
(23,124
)    
(11,384
)
 
   
(40,657
)    
(22,189
)
Other comprehensive income:
   
     
     
     
 
Unrealized gain on short-term investments, net
   
61
     
61
     
42
     
138
 
                                 
Comprehensive loss
  $
(23,063
)   $
(11,323
)
 
  $
(40,615
)   $
(22,051
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
  $
(0.71
)   $
(0.36
)
 
  $
(1.25
)   $
(0.71
)
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares used to compute net loss per share, basic and diluted
   
32,595
     
31,362
     
32,480
     
31,141
 
                                 
See accompanying notes to condensed consolidated financial statements.
 
4

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
    
Common Stock
    
Additional

Paid-in

Capital
    
Accumulated

Other

Comprehensive
Income (Loss)
   
Accumulated

Deficit
   
Total

Stockholders’

Equity
 
    
Shares
    
Amount
 
Balance at December 31, 2019
   
32,235
    $
32
    $
348,729
    $
53
    $
(230,756
)   $
118,058
 
Issuance of common stock and exercise of stock options
   
302
     
1
     
3,100
     
—  
     
—  
     
3,101
 
Stock-based compensation expense
   
—  
     
—  
     
4,253
     
—  
     
—  
     
4,253
 
Unrealized loss on short-term investments
   
—  
     
—  
     
—  
     
(19
)    
—  
     
(19
)
Net loss
   
—  
     
—  
     
—  
     
—  
     
(17,533
)
   
(17,533
)
                                                 
Balance at March 31, 2020
   
32,537
     
33
     
356,082
     
34
     
(248,289
)    
107,860
 
Issuance of common stock and exercise of stock options
   
108
     
     
728
     
     
     
728
 
Stock-based compensation expense
   
     
     
3,586
     
     
     
3,586
 
Unrealized
gain
on short-term investments
   
     
     
     
61
     
     
61
 
Net loss
   
     
     
     
     
(23,124
   
(23,124
)
                                                 
Balance at June 30, 2020
   
32,645
    $
33
    $
360,396
    $
95
    $
(271,413
)   $
89,111
 
                                                 
                                     
    
Common Stock
    
Additional

Paid-in

Capital
    
Accumulated

Other

Comprehensive
Income (Loss)
   
Accumulated

Deficit
   
Total

Stockholders’

Equity
 
    
Shares
    
Amount
 
Balance at December 31, 2018
   
30,745
    $
31
    $
308,766
    $
(41
)   $
(187,762
)   $
120,994
 
Issuance of common stock and exercise of stock options
   
417
     
—  
     
4,467
     
—  
     
—  
     
4,467
 
Stock-based compensation expense
   
—  
     
—  
     
4,014
     
—  
     
—  
     
4,014
 
Unrealized gain on short-term investments
   
—  
     
—  
     
—  
     
77
     
—  
     
77
 
Net loss
   
—  
     
—  
     
—  
     
—  
     
(10,805
)    
(10,805
)
                                                 
Balance at March 31, 2019
   
31,162
     
31
     
317,247
     
36
     
(198,567
)    
118,747
 
Issuance of common stock and exercise of stock options
   
307
     
—  
     
4,964
     
—  
     
—  
     
4,964
 
Stock-based compensation expense
   
—  
     
—  
     
5,680
     
—  
     
—  
     
5,680
 
Unrealized gain on short-term investments
   
—  
     
—  
     
—  
     
61
     
—  
     
61
 
Net loss
   
—  
     
—  
     
—  
     
—  
     
(11,384
)    
(11,384
)
                                                 
Balance at June 30, 2019
   
31,469
    $
31
    $
327,891
    $
97
    $
(209,951
)   $
118,068
 
                                                 
See accompanying notes to condensed consolidated financial statements.
 
5

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
 
 
June 30,
 
 
2020
 
 
2019
 
Operating activities:
 
 
 
 
 
 
Net loss
  $
(40,657
)   $
(22,189
)
Adjustments to reconcile net loss to cash used in operating activities:
   
     
 
Depreciation and amortization
   
991
     
1,269
 
Amortization of
right-of-use
assets
   
1,078
     
555
 
Stock-based compensation expense
   
7,988
     
9,366
 
Amortization of net investment discount
   
(92
)    
(790
)
Amortization of debt transaction costs
 
and accretion of debt discount
     117       —    
Change in fair value of embedded derivatives
 
 
1,796
 
 
 
 
Changes in operating assets and liabilities:
   
     
 
Accounts receivable, net
   
11,460
     
4,087
 
Inventories, net
   
2,844
     
(3,774
)
Prepaid expenses and other assets
   
350
     
713
 
Accounts payable
   
(1,467
   
(1,842
)
Accrued compensation
   
(4,639
)    
(2,556
)
Other liabilities
   
33
     
(707
)
                 
Net cash used in operating activities
   
(20,198
)    
(15,868
)
 
 
 
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
 
Purchases of short-term investments
   
(86,109
)    
(69,342
)
Maturities of short-term investments
   
49,856
     
77,465
 
Purchases of property and equipment
   
(533
)    
(1,792
)
                 
Net cash provided by (used in) investing activities
   
(36,786
   
6,331
 
 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
Proceeds from debt financing, net of issuance costs
   
61,961
     
 
Proceeds from issuance of common stock and exercise of stock options
   
3,829
     
9,431
 
                 
Net cash provided by financing activities
   
65,790
     
9,431
 
                 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
   
8,806
     
(106
)
Cash and cash equivalents:
   
     
 
Beginning of the period
   
20,652
     
9,464
 
                 
End of the period
  $
29,458
    $
9,358
 
                 
 
 
 
 
 
 
 
Non-cash
investing activities:
 
 
 
 
 
 
Right-of-use
asset obtained in exchange for lease obligations
  $
    $
117
 
Property and equipment included in accounts payable
   
131
     
440
 
Lessor funded building improvements
   
     
152
 
See accompanying notes to condensed consolidated financial statements.
 
6

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.
Organization
Description of Business
Intersect ENT, Inc. (the “Company”) is incorporated in the state of Delaware and its facilities are located in Menlo Park, California. The Company is a commercial drug delivery company transforming care for patients with ear, nose and throat (“ENT”) conditions. The Company’s U.S. Food and Drug Administration (“FDA”) approved products are steroid releasing implants designed to treat patients suffering from chronic sinusitis who are managed by ENT physicians. These products include the PROPEL
®
family of products (PROPEL
®
, PROPEL
®
Mini and PROPEL
®
Contour) and the SINUVA
®
(mometasone furoate) Sinus Implant. The PROPEL family of products are used in adult patients in conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers (“ASC”) and SINUVA is designed to be used in the physician office setting of care to treat patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps. The PROPEL family of products are devices approved under the Premarket Approval (“PMA”) and SINUVA is a drug that was approved under a New Drug Application (“NDA”). In addition, the Company continues to invest in research and development of new products and product improvements.
 
2.
Summary of Significant Accounting Policies
Basis of Preparation
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
The interim financial data as of June 30, 2020, is unaudited and is not necessarily indicative of the results for the full year. In the opinion of the Company’s management, the interim data includes only normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three and six months ended June 30, 2020 and 2019. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K
(“Annual Report”) for the year ended December 31, 2019 filed with the SEC on February 27, 2020.
Reclassifications
Certain prior year amounts
 
associated with fin
i
shed goods inventory
have been reclassi
f
ied
 
to
w
ork-in-process inventory
to conform to the current year presentation. These reclassifications had no impact on net earnings or financial position.
Risks and Uncertainties
The Company is subject to risks and uncertainties resulting from the
COVID-19
pandemic. The Company cannot predict the extent or duration of the impact of the
COVID-19
pandemic on its financial and operating results, as the information regarding the current environment is evolving rapidly. The Company’s business has and will be impacted by its
patients’
decisions to undergo sinus surgeries as  ENT ASC and office procedure volumes recover
and
the
 
Company resumes its manufacturing operations as a result of the
ease of certain restrictions of the
shelter-in-place
orders issued by
local
and
federal authorities
. Furthermore, the
COVID-19
pandemic has led to severe disruption and volatility in global capital markets and increased economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe.
The magnitude of the impact of the
COVID-19
pandemic on the Company’s business will depend on a number of factors, including, but not limited to: the duration and severity of the pandemic is unknown and could continue longer, and be more severe, than the Company currently expects; the duration, extent and
re-occurrence
of the
shelter-in-place
orders impacting its manufacturing operations; the unknown state of the U.S. economy following the pandemic; the level of demand for the Company’s products as the pandemic subsides; and the time it will take for the economy to recover from the pandemic. As of the date of these condensed consolidated financial statements, the extent to which the
COVID-19
pandemic may materially adversely impact the Company’s financial results, operating results, or liquidity is uncertain.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its revenue related allowances, the allowance for doubtfu
l
 accounts, inventory, common stock valuation and related stock-based compensation expense, leases, valuation of embedded derivatives
associated with the C
o
mpany’s Convertible Notes (see Note 8)
as well as certain accrued liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the currently anticipated impact of the
COVID-19
pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
 
7

Recent Accounting Pronouncements
Effective January 1, 2020, the Company adopted ASU No.
 2016-13,
Measurement of Credit Losses on Financial Instruments
(“ASU
2016-13”).
ASU
2016-13
requires that credit losses be presented as an allowance rather than as a write-down for
available-for-sale
debt securities and allows for the reversal of estimated credit losses in the current period, aligning the income statement recognition of credit losses with the reporting period in which changes occur. ASU
2016-13
also broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. The adoption of the standard did not result in a material impact to the Company’s condensed consolidated financial statements.
Significant Accounting Policies
There have been no significant changes to the accounting policies during the six months ended June 30, 2020, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in its Annual Report on Form
10-K
for the year ended December 31, 2019, except as described below:
Inventories
Inventories are valued at the lower of cost, computed on
a first-in,
first-out
basis, or net realizable value. The allocation of production overhead to inventory costs is based on normal production capacity. Abnormal amounts of idle facility expense, freight, handling costs, and consumption are expensed as incurred, and not included in overhead. During the three and six months ended June 30, 2020, as a result of a shut-down in production associated with the
COVID-19
pandemic for part of the first quarter and throughout the second quarter, the
Company
 
recorded
$
4.4
 million and $
5.5
 million,
respectively, for idle facility expense due to its inability to use its manufacturing facility due to the
shelter-in-place
orders and the Company’s decision to suspend production until the third quarter of 2020. While the manufacturing remains shut-down or is below the Company’s normal capacity, the Company will continue to incur idle facility charges in future periods. The Company maintains provisions for excess and obsolete inventory based on its estimates of forecasted demand and, where applicable, product expiration. Due to a decline in projected product sales, the Company also increased its reserve for excess and obsolete inventory
by $
0.8
 million
during the six months ended June 30, 2020.
 
There was no reserve for excess and obsolete inventory recorded in the three months ended June 30, 2020
.
The Company will continue to monitor the effect of the
COVID-19
pandemic on the business and will continue to reassess the need for inventory reserves in future periods.
Credit Losses
The Company is exposed to credit losses primarily through receivables from customers and collaborators and through its
available-for-sale
debt securities. The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status, and the financial condition of its customers. Specific allowance amounts are established to record the appropriate allowance for customers that have an identified specific risk of default. General allowance amounts are established based upon the Company’s assessment of expected credit losses for its receivables by aging category. Balances are written off when they are ultimately determined to be uncollectible. The Company’s expected loss allowance methodology for the debt securities is developed by reviewing the extent of the unrealized loss, the size, term, geographical location, industry of the issuer, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The Company considered the current and expected future economic and market conditions surrounding the
COVID-19
pandemic and increased the overall reserve for credit losses by $0.1 million for the six months ended June 30, 2020
.
Restructuring Activities
During the three months ended June 30, 2020, as a response to the
COVID-19
pandemic, the Company took
pre-emptive
actions to curtail spending as its business, revenues, and cash flows were and are expected to be significantly impacted due to the suspension of medical procedures involving its products. These actions included reducing its workforce by 96 employees, or approximately 25% of its workforce. In addition, the Company furloughed 18 employees, or approximately 5% of its workforce, and provided for the cost of certain benefits for those employees while furloughed. The charges related to these actions, including severance benefits for terminated employees and the benefits for furloughed employees, were approximately $0.2 million for the three months ended June 30, 2020. The restructuring activities are substantially complete and there are no remaining accrued liabilities related to restructuring activities as of June 30, 2020.
 
8

Embedded Derivatives Related to Convertible Debt Instruments
Embedded derivatives that are required to be bifurcated
from
their host contract are evaluated and valued separately from the debt instrument and classified accordingly depending on the specific terms of the agreement. The embedded features are remeasured to fair value at each balance sheet date with a resulting gain or loss related to the change in the fair value being recorded to “Other Income (Expense), net” on the condensed consolidated statement of operations. Changes in the Company’s assumptions, such as the estimated probability of triggering events, used to value the embedded derivatives could result in material changes in the valuation in future period
s
.
 
3.
Composition of Certain Financial Statement Items
Accounts Receivabl
e
 (in thousands):
 
June 30,
2020
 
 
December 31,
2019
 
Accounts receivable
  $
 
 
7,925
    $
  19,244
 
Allowance for doubtful accounts
   
(272
   
(131
)
                 
  $
7,653
    $
19,113
 
                 
Inventories, net (in thousands):
 
 
June 30,
2020
 
 
December 31,
2019
 
Raw materials
  $
  1,782
    $
2,830
 
Work-in-process
   
5,601
     
5,878
 
Finished goods
   
6,624
     
8,292
 
                 
  $
14,007
    $
17,000
 
                 
Capitalized stock-based compensation expense of $0.7 million and $0.9 million was included in inventory as of June 30, 2020 and December 31, 2019, respectively.
Operating lease liabilities (in thousands):
 
 
  
June 30,
2020
   
December 31,
2019
 
Current portion presented in other current liabilities
  
$
2,414
 
 
$
1,336
 
Noncurrent portion presented in operating lease liabilities
  
 
9,645
 
 
 
10,886
 
 
  
 
 
 
  
 
 
 
 
  
$
12,059
 
 
$
12,222
 
 
  
 
 
 
  
 
 
 
Revenue (in thousands):
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
PROPEL family of products
  $
9,481
    $
25,563
    $
 
28,571
    $
 
51,295
 
SINUVA
   
299
     
1,096
     
1,035
     
2,037
 
                                 
  $
9,780
    $
26,659
    $
29,606
    $
53,332
 
                                 
 
4.
Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments and embedded derivative liabilities. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-
 
9

Table of Contents
based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
 
      
 
Level 1 –
 
Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
Level 2 –
 
Other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data.
 
 
Level 3 –
 
Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions.
 
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair value of debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s estimated market rate
 
as well as a convertible lattice model for the embedded features
. As of June 30, 2020, the
fair
value of the Company’s Convertible Notes (see Note 8) was 
$70.7 million
.
Cash, Cash Equivalents and Short-term Investments
The following is a summary of cash, cash equivalents and short-term investments, by type of instrument measured at fair value on a recurring basis (in thousands):
 
                        
Reported as:
 
 
  
Amortized

Cost
    
Gross Unrealized
   
Estimated

Fair
 
V
alue
    
Cash and cash

equivalents
    
Short-term
investments
 
June 30, 2020
  
Gains
    
Losses
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
  $
7,500
   
$
 
   
$
 
    $
7,500
    $
7,500
    $
 
Money market funds
   
16,959
     
     
     
16,959
     
16,959
     
 
                                                 
   
24,459
     
     
     
24,459
     
24,459
     
 
                                                 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury bills
   
64,424
     
5
     
(1
   
64,428
     
4,999
     
59,429
 
Corporate debt securities
   
21,999
     
61
     
(6
   
22,054
     
     
22,054
 
U.S. government agency bonds
     11,395        —          —         11,395        —          11,395  
Commercial paper
     13,459        36        —         13,495        —          13,495  
                                                 
   
111,277
     
102
     
(7
   
111,372
     
4,999
     
106,373
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
  $
135,736
    $
102
    $
(7
  $
135,831
    $
29,458
    $
106,373
 
                                                 
 
                        
Reported as:
 
 
  
Amortized

Cost
    
Gross Unrealized
   
Estimated

Fair Value
    
Cash and cash

equivalents
    
Short-term

investments
 
December 31, 2019
  
Gains
    
Losses
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
  $
11,885
    $
 —  
    $
 —  
    $
11,885
    $
11,885
    $
—  
 
Money market funds
   
8,767
     
—  
     
—  
     
8,767
     
8,767
     
—  
 
                                                 
   
20,652
     
—  
     
—  
     
20,652
     
20,652
     
—  
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
   
50,137
     
33
     
(1
)    
50,169
     
—  
     
50,169
 
Commercial paper
   
19,796
     
21
     
—  
     
19,817
     
—  
     
19,817
 
                                                 
   
69,933
     
54
     
(1
)    
69,986
     
—  
     
69,986
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  $
90,585
    $
54
    $
(1
)   $
90,638
    $
20,652
    $
69,986
 
                                                 
There were no transfers in and out of Level 1 and Level 2 during the six months ended June 30, 2020 and year ended December 31, 2019.
 
10

Table of Contents
As of June 30, 2020 and December 31, 2019, the Company had no investments with a contractual maturity of greater than one year.
Based on an evaluation of securities that have been in a loss position, the Company did not recognize any other-than-temporary impairment charges during the six months ended June 30, 2020 and year ended December 31, 2019. The Company considered various factors which included a credit and liquidity assessment of the underlying securities and the Company’s intent and ability to hold the underlying securities until the estimated date of recovery of its amortized cost. The Company concluded that any unrealized losses on investments as of June 30, 2020 were not attributed to credit.
Convertible Notes Embedded Derivatives
The Convertible Notes due in 2025 (see Note 8) have embedded features which were required to be bifurcated upon issuance and then periodically remeasured separately as embedded derivatives. These embedded features include additional make-whole interest payments which may become payable to the lender upon certain events, such as a change in control, upon optional redemption by the Company, or a sale of all or substantially all of the Company’s assets. The embedded features also include additional shares depending on the time to maturity and the stock price which may be added to an early conversion upon certain events. The Company has utilized a convertible lattice model to determine the fair value of the embedded features, which utilizes inputs including the common stock price, volatility of common stock, credit rating, probability of certain triggering events and time to maturity. The fair value measurements of the embedded derivatives are classified as Level 3 financial instruments. At June 30, 2020, the fair value of the embedded features was $3.6 million and has been presented together with the Convertible Notes host instrument on the condensed consolidated balance sheet. Changes in the fair value of the Company’s Level 3 liabilities were as follows:
 
 
  
June 30,
2020
 
Balance at December 31, 2019
  
$
  
 
Additions
  
 
1,800
 
Fair value adjustment
  
 
1,796
 
 
  
 
 
 
Balance at June 30, 2020
  
$
 3,596
 
 
  
 
 
 
 
5.
Stockholders’ Equity
Series
DF-1
Convertible Preferred Stock
The Company’s board of directors has designated 6,310 shares of the authorized 10,000,000 shares of preferred stock, $0.001 par value per share, as Series
DF-1
Convertible Preferred Stock (the “Series
DF-1
Preferred Stock”). Each share of Series
DF-1
Preferred Stock is
non-voting
and convertible to 1,000 shares of the Company’s Common Stock.
There is an aggregate of 6,309,459 shares of common stock issuable upon conversion of the Series
DF-1
Preferred Stock. The Series
DF-1
Preferred Stock does not have voting rights but is eligible for dividends or distributions on an
as-converted
basis.
 
6
.
Stock-based Compensation Expense
2014 Equity Incentive Plan
In July 2014, the Company’s board of directors approved the 2014 Equity Incentive Plan (the “2014 Plan”). The number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015, and continuing through and including January 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors. On January 1, 2020, the total number of shares of common stock reserved for issuance increased by 967,064 shares to 9,934,768 shares reserved since the inception of the 2014 Plan. At June 30, 2020, 3,414,261 shares remained available for issuance.
 
11

Table of Contents
A summary of the Company’s stock option activity and related information (options in thousands):
 
Six Months Ended
 
 
June 30, 2020
 
 
 
 
Weighted Average
 
 
Options
 
 
Exercise Price
 
Outstanding, beginning of period
   
3,636
    $
23.71
 
Granted
   
645
     
23.96
 
Exercised
   
(187
)    
16.76
 
Forfeited
   
(611
)    
27.44
 
                 
Outstanding, end of period
   
3,483
     
23.47
 
                 
Exercisable
   
1,724
     
22.41