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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
___________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(State or other jurisdiction of
incorporation or organization)
1555 Adams Drive
Menlo Park, California
(Address of principal executive offices)
20-0280837
(I.R.S. Employer
Identification Number)
94025
(Zip Code)

Registrant’s telephone number, including area code: (650) 641-2100
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 valueXENTThe 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  x    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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer¨
Non-accelerated filer¨Smaller reporting company
Emerging growth company


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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  x
Shares of common stock outstanding as of October 26, 2020 were 32,719,014.



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INTERSECT ENT, INC.
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended September 30, 2020
TABLE OF CONTENTS
Page



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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
2020
December 31,
2019
(unaudited)(1)
Assets
Current assets:
Cash and cash equivalents$56,891 $20,652 
Short-term investments73,815 69,986 
Accounts receivable, net11,880 19,113 
Inventories, net11,158 17,000 
Prepaid expenses and other current assets2,921 2,300 
Total current assets156,665 129,051 
Property and equipment, net5,555 6,312 
Operating lease right-of-use assets10,357 11,980 
Other non-current assets560 559 
Total assets$173,137 $147,902 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$4,589 $4,056 
Accrued compensation10,839 12,717 
Other current liabilities4,349 2,163 
Total current liabilities19,777 18,936 
Operating lease liabilities8,985 10,886 
Convertible notes, net62,975  
Other non-current liabilities22 22 
Total liabilities91,759 29,844 
Commitments and contingencies (note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized shares: 9,994 at September 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 September 30, 2020 and none at December 31, 2019; Issued and outstanding shares: none
  
Common stock, $0.001 par value; Authorized shares: 150,000; Issued and outstanding shares: 32,716 at September 30, 2020 and 32,235 at December 31, 2019
33 32 
Additional paid-in capital364,201 348,729 
Accumulated other comprehensive income22 53 
Accumulated deficit(282,878)(230,756)
Total stockholders’ equity81,378 118,058 
Total liabilities and stockholders’ equity
$173,137 $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.
4

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue$22,720 $24,056 $52,326 $77,388 
Cost of sales7,845 4,876 21,612 14,567 
Gross profit14,875 19,180 30,714 62,821 
Operating expenses:
Selling, general and administrative21,702 26,429 67,399 81,247 
Research and development4,551 6,145 13,715 18,452 
Total operating expenses26,253 32,574 81,114 99,699 
Loss from operations(11,378)(13,394)(50,400)(36,878)
Interest expense(886) (1,372) 
Other income (expense), net799 546 (350)1,841 
Net loss(11,465)(12,848)(52,122)(35,037)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments, net(73)(3)(31)135 
Comprehensive loss$(11,538)$(12,851)$(52,153)$(34,902)
Net loss per share, basic and diluted$(0.35)$(0.41)$(1.60)$(1.12)
Weighted average common shares used to compute net loss per share, basic and diluted
32,695 31,483 32,552 31,256 
See accompanying notes to condensed consolidated financial statements.
5

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201932,235 $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, 202032,537 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, 202032,645 33 360,396 95 (271,413)89,111 
Issuance of common stock and exercise of stock options
71 — 276 — — 276 
Stock-based compensation expense
— — 3,529 — — 3,529 
Unrealized loss on short-term investments— — — (73)— (73)
Net loss— — — — (11,465)(11,465)
Balance at September 30, 202032,716 $33 $364,201 $22 $(282,878)$81,378 


























6

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (cont'd)
(in thousands)
(unaudited)

Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201830,745 $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, 201931,162 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, 201931,469 31 327,891 97 (209,951)118,068 
Issuance of common stock and exercise of stock options
41 1 407 — — 408 
Stock-based compensation expense
— — 5,258 — — 5,258 
Unrealized loss on short-term investments— — — (3)— (3)
Net loss— — — — (12,848)(12,848)
Balance at September 30, 201931,510 $32 $333,556 $94 $(222,799)$110,883 
See accompanying notes to condensed consolidated financial statements.
7

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20202019
Operating activities:
Net loss$(52,122)$(35,037)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization1,467 1,986 
Non-cash lease expense1,623 853 
Stock-based compensation expense11,642 14,615 
Amortization of net investment premium (discount)71 (1,050)
Amortization of debt transaction costs and accretion of debt discount
339  
Change in fair value of embedded derivatives795  
Changes in operating assets and liabilities:
Accounts receivable, net7,233 6,373 
Inventories, net5,568 (4,997)
Prepaid expenses and other assets(634)(1,066)
Accounts payable555 (771)
Accrued compensation(1,878)374 
Other liabilities287 (1,238)
Net cash used in operating activities(25,054)(19,958)
Investing activities:
Purchases of short-term investments(108,831)(97,863)
Maturities of short-term investments70,106 111,485 
Proceeds from sale of short-term investments34,794  
Purchases of property and equipment(722)(2,613)
Net cash provided by (used in) investing activities(4,653)11,009 
Financing activities:
Proceeds from debt financing, net of issuance costs61,841  
Proceeds from issuance of common stock and exercise of stock options4,105 9,839 
Net cash provided by financing activities65,946 9,839 
Net increase in cash and cash equivalents36,239 890 
Cash and cash equivalents:
Beginning of the period20,652 9,464 
End of the period$56,891 $10,354 
Non-cash investing activities:
Right-of-use asset obtained in exchange for lease obligations$ $117 
Property and equipment included in accounts payable82 370 
Lessor funded building improvements 152 
See accompanying notes to condensed consolidated financial statements.
8

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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 a 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 September 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 nine months ended September 30, 2020 and 2019. Certain information and 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 finished goods inventory have been reclassified to work-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 been and will be impacted by its patients’ decisions to undergo sinus surgeries as ENT ASC and office procedure volumes recover, and as the Company resumed 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.
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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 doubtful accounts, inventory, common stock valuation and related stock-based compensation expense, leases, valuation of embedded derivatives associated with the Company’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.
Accounting Pronouncements
Recently Adopted Accounting Standards
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.

Recent Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarified and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in 2021. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2019-12 on its condensed consolidated financial statements, but does not expect the adoption to have a material impact.

In August 2020, the FASB issued ASU No. 2020-06, Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"). ASU 2020-06 modifies and simplifies accounting for convertible instruments. The new guidance eliminates certain separation models that require separating embedded conversion features from convertible instruments. ASU 2020-06 also addresses how convertible instruments are accounted for in the diluted earnings per share calculation. ASU 2020-06 will become effective for the Company beginning in 2022. Early adoption is permitted, but no earlier than the beginning of 2021. The Company is evaluating the impact of the adoption of ASU 2020-06 on its condensed consolidated financial statements, but does not expect the adoption to have a material impact.

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables- Nonrefundable Fees and Other Costs ("ASU 2020-08"). ASU 2020-08 clarifies the accounting for the amortization period for certain purchased callable debt securities held at a premium by giving consideration to securities which have multiple call dates. ASU 2020-08 will become effective for the Company beginning in 2021. Early adoption is not permitted. The Company is evaluating the impact of the adoption of ASU 2020-08 on its condensed consolidated financial statements, but does not expect the adoption to have a material impact.
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Significant Accounting Policies
There have been no significant changes to the accounting policies during the nine months ended September 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 allocable overhead. During the first half of 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 $5.5 million 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. When production resumed, the Company recorded an additional $0.6 million in idle facility expense in the third quarter of 2020 due to subnormal production levels. In periods where the manufacturing is below the Company’s normal capacity, the Company will record idle facility charges. 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 first quarter of 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 distribution partners 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 nine months ended September 30, 2020.
Restructuring Activities
During the nine months ended September 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 have been and are expected to be significantly impacted by 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 nine months ended September 30, 2020. The restructuring activities are substantially complete and there are no remaining accrued liabilities related to restructuring activities as of September 30, 2020.
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 statements of operations. Changes in the Company’s assumptions, such as the estimated probability of triggering events and its stock price, used to value the embedded derivatives could result in material changes in the valuation in future periods.
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3.    Composition of Certain Financial Statement Items
Accounts receivable, net (in thousands):
September 30,
2020
December 31,
2019
Accounts receivable$12,093 $19,244 
Allowance for doubtful accounts(213)(131)
$11,880 $19,113 
Inventories, net (in thousands):
September 30,
2020
December 31,
2019
Raw materials$1,626 $2,830 
Work-in-process4,199 5,878 
Finished goods5,333 8,292 
$11,158 $17,000 
Capitalized stock-based compensation expense of $0.6 million and $0.9 million was included in inventory as of September 30, 2020 and December 31, 2019, respectively.
Operating lease liabilities (in thousands):
September 30,
2020
December 31,
2019
Current portion presented in other current liabilities$2,493 $1,336 
Noncurrent portion presented in operating lease liabilities8,985 10,886 
$11,478 $12,222 
Revenue (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
PROPEL family of products$21,051 $22,962 $49,622 $74,257 
SINUVA1,669 1,094 2,704 3,131 
$22,720 $24,056 $52,326 $77,388 

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-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.
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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 September 30, 2020, the fair value of the Company’s Convertible Notes (see Note 8) was $78.7 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 UnrealizedEstimated
Fair Value
Cash and cash
equivalents
Short-term
investments
September 30, 2020GainsLosses
Level 1:
Cash$47,313 $— $— $47,313 $47,313 $— 
Money market funds9,578 — — 9,578 9,578 — 
56,891 — — 56,891 56,891 — 
Level 2:
U.S. treasury bills40,912 7  40,919 — 40,919 
Corporate debt securities8,379 4  8,383 — 8,383 
U.S. government agency bonds23,007 6  23,013 — 23,013 
Commercial paper1,495 5  1,500 — 1,500 
73,793 22  73,815 — 73,815 
$130,684 $22 $ $130,706 $56,891 $73,815 
Reported as:
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
Cash and cash
equivalents
Short-term
investments
December 31, 2019GainsLosses
Level 1:
Cash$11,885 $— $— $11,885 $11,885 $— 
Money market funds8,767 — — 8,767 8,767 — 
20,652 — — 20,652 20,652 — 
Level 2:
Corporate debt securities50,137 33 (1)50,169 — 50,169 
Commercial paper19,796 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 nine months ended September 30, 2020 and year ended December 31, 2019.
As of September 30, 2020 and December 31, 2019, the Company had no investments with a remaining 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 nine months ended September 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 September 30, 2020 were not attributed to credit.
Convertible Notes Embedded Derivatives
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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 September 30, 2020, the fair value of the embedded features was $2.6 million and has been presented together with the Convertible Notes host instrument on the condensed consolidated balance sheets. Changes in the fair value of the Company’s Level 3 liabilities were as follows:
September 30,
2020
Balance at December 31, 2019$ 
Additions1,800 
Fair value adjustment795 
Balance at September 30, 2020$2,595 

The change in fair value of embedded derivatives for the three and nine months ended September 30, 2020 was a $1.0 million gain and $0.8 million loss, respectively, which was recorded in "Other Income (Expense), net" on the Company's condensed consolidated statements of operations.
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 September 30, 2020, 3,391,263 shares remained available for issuance.
A summary of the Company’s stock option activity and related information (options in thousands):
Nine Months Ended
September 30, 2020
OptionsWeighted Average
Exercise Price
Outstanding, beginning of period3,636 $23.71 
Granted895 21.87 
Exercised(208)16.49 
Forfeited(823)27.89 
Outstanding, end of period3,500 22.68 
Exercisable1,754 22.17 
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As of September 30, 2020, included in the outstanding options was an option subject to both service and market-based vesting conditions to purchase 427,147 shares of the Company’s common stock with an exercise price of $20.44. As of September 30, 2020, these stock options remain unvested.
The aggregate pre-tax intrinsic value of options outstanding was $2.8 million and options outstanding and exercisable was $2.1 million, the weighted-average remaining contractual term of options outstanding was 7.8 years and options outstanding and exercisable was 6.6 years. The aggregate pre-tax intrinsic value of options exercised was $1.3 million and $8.8 million during the nine months ended September 30, 2020 and 2019, respectively.
A summary of the Company’s RSU activity and related information (RSUs in thousands):
Nine Months Ended
September 30, 2020
RSUsWeighted Average
Fair Value
Outstanding, beginning of period511 $25.62 
Awarded294 24.03 
Vested(202)24.18 
Forfeited(119)28.39 
Outstanding, end of period484 24.57 
As of September 30, 2020, the aggregate pre-tax intrinsic value of RSUs outstanding was $7.9 million, calculated based on the closing price of the Company’s common stock at the end of the period, and the weighted-average remaining vesting term of RSUs outstanding was 1.9 years.
The Company also offers Performance Stock Units (“PSUs”), subject to both service and market-based vesting conditions. A summary of the Company’s PSU activity and related information (PSUs in thousands):
Nine Months Ended
September 30, 2020
PSUsWeighted Average
Fair Value
Outstanding, beginning of period89 $14.22 
Awarded103 17.28 
Forfeited(19)17.28 
Outstanding, end of period173 15.70 
As of September 30, 2020, the aggregate pre-tax intrinsic value of PSUs outstanding was $2.8 million, calculated based on the closing price of the Company’s common stock at the end of the period, and the weighted-average remaining vesting term of PSUs outstanding was 2.3 years.
Total stock-based compensation expense recognized is as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Cost of sales$446 $354 $1,221 $836 
Selling, general and administrative2,790 4,021 9,204 11,435 
Research and development417 874 1,217 2,344 
$3,653 $5,249 $11,642 $14,615 
As of September 30, 2020, the amount of unearned stock-based compensation currently estimated to be expensed through the year 2024 related to unvested employee stock-based awards was $28.0 million and the weighted average period over which the unearned stock-based compensation is expected to be recognized was 2.4 years.
2014 Employee Stock Purchase Plan
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In July 2014, the Company’s board of directors approved the 2014 Employee Stock Purchase Plan (“2014 ESPP”). A total of 496,092 shares were initially reserved for issuance under the 2014 ESPP. In June 2018, the Company’s stockholders approved the Amended and Restated 2014 ESPP, increasing the total number of shares of common stock reserved for issuance under the 2014 ESPP by 1,200,000 shares to a total of 1,696,092 shares (the “Amended and Restated 2014 ESPP”) since the inception of the 2014 ESPP. At September 30, 2020, 959,970 shares remained available for issuance and a total of 70,817 shares were issued during the nine months ended September 30, 2020.
7.    Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and common stock equivalent shares from dilutive stock options, employee stock purchases and restricted stock units outstanding during the period. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods as all potentially dilutive securities were antidilutive in those periods.
The following potentially dilutive securities outstanding have been excluded from the computations of weighted average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares, in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Common stock options3,073 3,817 3,073 3,817 
Market-based performance stock options427 427 427 427 
Restricted stock units484 606 484 606 
Market-based performance stock units173  173  
Employee stock purchase plan shares72 75 72 75 
Stock issuable upon conversion of convertible note6,309  6,309  
10,538 4,925 10,538 4,925 
The Company uses the if-converted method for calculating any potential dilutive effects of the convertible note. The Company did not adjust the net loss for the three and nine months ended September 30, 2020 to eliminate any interest expense related to the Convertible Notes (see Note 8) in the computation of diluted loss per share, or calculate the potential common shares from conversion, as the effects would have been anti-dilutive. The shares presented above represent the maximum number of convertible shares which can be issued subject to the make-whole increase to the conversion rate upon certain events.
8.    Convertible Notes
On May 11, 2020, in order to finance the Company’s commercial activities as well as for general corporate purposes, the Company entered into a Facility Agreement (the “Facility Agreement”) by and among the Company, as borrower, and Deerfield Partners, L.P. (“Deerfield”), as agent for itself and the lenders, providing for the issuance and sale by the Company to Deerfield of $65.0 million of principal amount of 4.0% unsecured senior convertible notes (the “Convertible Notes”) upon the terms and conditions set forth in the Facility Agreement (the “Deerfield Financing”). The $65.0 million principal amount of the Convertible Notes is not payable until the maturity date of May 9, 2025, unless earlier converted or redeemed. The Convertible Notes are convertible into shares of the Company’s common stock, at a conversion rate of 64.3501 shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of $15.54. The net proceeds from the sale of the Convertible Notes were approximately $61.8 million after deducting the expenses payable by the Company.
The Convertible Notes bear interest at 4.0% per annum, payable quarterly in arrears on July 1, October 1, January 1 and April 1 of each year, commencing July 1, 2020. The Convertible Notes are convertible at any time at the option of the holders thereof, provided that Deerfield is prohibited from converting the Convertible Notes into shares of common stock if, as a result of such conversion, the converting holder (together with certain affiliates and “group” members) would beneficially own more than 4.985% of the total number of shares of common stock then issued and outstanding (the “Beneficial Ownership Cap”). Pursuant to the Convertible Notes, the holders of the Convertible Notes have the option to demand repayment of all outstanding principal, any unpaid interest accrued thereon, and make-whole interest in connection with a Major Transaction (as defined in the Convertible Notes), which shall include, among others, any acquisition or other change of control of the Company; the sale
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or transfer of assets of the Company equal to more than 50% of the Enterprise Value (as defined in the Convertible Notes) of the Company; a liquidation, bankruptcy or other dissolution of the Company; or if at any time shares of the Company’s common stock are not listed on an Eligible Market (as defined in the Convertible Notes). The Facility Agreement contains certain specified events of default, the occurrence of which would entitle the holders of the Convertible Notes to immediately demand repayment of all outstanding principal and accrued interest on the Convertible Notes, together with a make-whole payment as determined pursuant to the Facility Agreement. Such events of default include, among others, failure to make any payment under the Convertible Notes when due, failure to observe or perform any covenant under the Facility Agreement or the other transaction documents related thereto (subject in certain cases to specified cure periods), the failure of the Company to be able to pay debts as they come due, the commencement of bankruptcy or insolvency proceedings against the Company, a material judgment levied against the Company and a material default by the Company under other indebtedness.
On or after the date that is the second anniversary of the issuance date, the Company may redeem up to $32.5 million of the principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 150% of the conversion price.
On or after the date that is the third anniversary of the issuance date, the Company may redeem up to the entire $65.0 million original principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 200% of the conversion price.
The Company is obligated to notify the holders of the Convertible Notes no less than ten trading days nor more than sixty calendar days prior to any such redemption. During the period from the date on which the Company delivers an optional redemption notice until the date the optional redemption price is paid to holders, if a holder elects to convert its Convertible Notes, it will receive the shares otherwise issuable upon conversion of the Convertible Notes, plus an additional number of shares determined in accordance with the Convertible Notes. To the extent the holder would be prohibited due to the Beneficial Ownership Cap to convert its Convertible Notes during such period, such holder would be entitled to convert all or any portion of its Convertible Notes into shares of Series DF-1 Preferred Stock of the Company (such conversion, a “Preferred Stock Conversion”). The number of Series DF-1 Preferred Stock issuable upon a Preferred Stock Conversion shall be determined by dividing the number of shares of common stock of the Company that it would be entitled to receive from such conversion by 1,000. See Note 5 for discussion on the rights and privileges of Series DF-1 Preferred Stock. Upon any conversion of the Convertible Notes in connection with a major transaction, redemption of the Convertible Notes in connection with a major transaction or an optional redemption, holders of the Convertible Notes will also be entitled to a make-whole increase to the conversion rate or make-whole interest provision.
The Company is subject to a number of affirmative and restrictive covenants pursuant to the Facility Agreement, including covenants regarding compliance with applicable laws and regulations, maintenance of property, payment of taxes, maintenance of insurance, business combinations, incurrence of additional indebtedness, prepayments of other unsecured indebtedness and transactions with affiliates, among other covenants. The Company is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions.
Certain features in the Convertible Notes are accounted for as embedded derivatives bifurcated from the principal balance of the Convertible Notes. See Note 4 for further discussion on the valuation of the embedded derivatives.
Upon issuance, the fair value of the embedded derivatives was $1.8 million. A corresponding convertible debt discount and transaction costs of $1.8 million and $3.0 million, respectively were recorded on the issuance date and are netted against the principal amount of the convertible notes. During the three months ended September 30, 2020, an additional $0.2 million of transaction costs were recorded and netted against the principal amount of the convertible notes. Transaction costs related to the issuance of the convertible notes primarily comprised of underwriters’, legal, accounting and other professional fees.
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As of September 30, 2020, the net carrying amount of the convertible notes is as follows:
September 30,
2020
Outstanding principal amount of convertible notes$65,000 
Unamortized debt discount and transaction costs(4,620)
Fair value of embedded derivatives2,595 
Convertible notes, net$62,975 
The convertible debt discount and transaction costs are being amortized to expense over the term of the Notes. For the three and nine months ended September 30, 2020, the accretion of the convertible debt discount and amortization of debt issuance costs was $0.2 million and $0.3 million, respectively, and was included in “Interest expense” in the condensed consolidated statements of operations. The accrued interest on the outstanding principal of $65.0 million as of September 30, 2020 was $0.7 million and was included in “Other current liabilities” on the condensed consolidated balance sheets.
9.    Commitments and Contingencies
Litigation
The Company may at times be involved in litigation and other legal claims in the ordinary course of business. When appropriate in the Company’s estimation, it may record reserves in its financial statements for pending litigation and other claims.
In May 2019, a purported stockholder of the Company, Avi Yaron, filed a putative class action complaint in the United States District Court for the Northern District of California, entitled Yaron v. Intersect ENT, Inc., et al.,Case No. 4:19-cv-02647, against the Company and certain individual officers and directors alleging violations of the Securities Exchange Act of 1934. The complaint alleges that the Company and the individual officers made false and/or misleading statements about the Company’s business and seeks unspecified damages and attorney’s fees. The Court appointed the lead plaintiff and set a schedule for initial motions and pleadings. By order dated June 19, 2020, the Court granted the Company’s motion to dismiss the amended complaint with leave to amend. On July 29, 2020, the plaintiff filed an amended complaint. The Company believes this lawsuit is without merit and intends to vigorously defend against it. As of September 30, 2020, the Company has accrued anticipated settlement costs associated with this lawsuit of $0.4 million which is recorded in "Other current liabilities" on the condensed consolidated balance sheets.
10.    Subsequent Events
On October 2, 2020, in accordance with the terms of the sale and purchase agreement (the "Purchase Agreement"), the Company acquired Fiagon AG Medical Technologies ("Fiagon"). Fiagon develops, and commercializes globally, innovative electromagnetic surgical navigation systems and an associated suite of surgical tools targeted to the ENT surgical space. Pursuant to the terms of the Purchase Agreement, the Company indirectly acquired all of the outstanding equity interests of subsidiaries of Fiagon, including Fiagon GmbH and Fiagon NA Corporation (such subsidiaries, together with Fiagon, the "Fiagon Group" and, such acquisition, the "Acquisition").
The aggregate consideration payable in exchange for all of the outstanding equity interests of the Fiagon Group is €60.0 million, subject to adjustments set forth in the Purchase Agreement (the "Cash Consideration"). Under the terms of the Purchase Agreement, the Company made an initial €15.0 million payment at the time of closing of the Acquisition, and the Company committed to make €15.0 million annual payments for each of the subsequent three years.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. All forward-looking statements are based upon our current expectations and various assumptions. In addition, forward-looking statements include the impact that the COVID-19 pandemic will have on our business, and our belief that we will be able to return to revenue growth as the current crisis subsides. Further, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These forward-looking statements and statements regarding our beliefs involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in these statements. Such risks and uncertainties include: the duration and severity of the COVID-19 pandemic is unknown and could continue, and be more severe than we currently expect; the unknown state of the U.S. economy following the pandemic; the level of demand for our products as the pandemic subsides, and the time it will take for the economy to recover from the pandemic; and among others, those discussed in “Part II — Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q as well as in our condensed consolidated financial statements, related notes and the other information appearing elsewhere in this report and our other filings with the SEC. We do not intend, and undertake no obligation, to update any of these statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such statements. You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report, as well as our financial statements and related notes included in our Annual Report on Form 10-K, or Annual Report, filed with the SEC on February 27, 2020.
When we refer to “we,” “our,” “us” or “Intersect ENT” in this Quarterly Report on Form 10-Q, we mean Intersect ENT, Inc., unless otherwise expressly stated or the context otherwise requires.
Overview
We are a commercial drug delivery company transforming care for patients with ear, nose and throat (“ENT”) conditions. Our U.S. Food and Drug Administration (“FDA”) approved products are steroid releasing implants designed to treat adult patients suffering from chronic sinusitis who are managed by ENT physicians. These products include our 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 adult 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 a Premarket Approval (“PMA”) and SINUVA is a drug that was approved under a New Drug Application (“NDA”).
While our primary commercial focus is the U.S. market, both PROPEL and PROPEL Mini received CE Markings, permitting them to be marketed in Europe. Approximately 450,000 and 250,000 functional endoscopic sinus surgery (“FESS”) procedures are performed annually in the Asia Pacific and European regions, respectively. Our commercialization strategy will consider several factors including regulatory requirements, reimbursement coverage for our products, and key opinion leader support. Our initial focus is on Germany and the United Kingdom, where we are working to build our capabilities and develop the market. Going forward, we will continue to assess our capability to penetrate additional markets in Europe, the Asia Pacific and Japan.
Our PROPEL family of steroid releasing implants are clinically proven to improve outcomes for chronic sinusitis patients following sinus surgery. PROPEL implants mechanically prop open the sinuses and release mometasone furoate, an advanced corticosteroid with anti-inflammatory properties, directly into the sinus lining, and then dissolve. PROPEL’s safety and effectiveness is supported by Level 1a clinical evidence from multiple clinical trials, which demonstrates that PROPEL implants reduce inflammation and scarring after surgery, thereby reducing the need for postoperative oral steroids and repeat surgical interventions. Approximately 350,000 patients have been treated with PROPEL products to-date.
PROPEL is a self-expanding implant designed to conform to and hold open the surgically enlarged sinus while gradually releasing an anti-inflammatory steroid over a period of approximately 30 days and is absorbed into the
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body over a period of approximately six weeks. PROPEL clinical outcomes have been reported in a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies to improve surgical outcomes, demonstrating a 35% relative reduction in the need for postoperative interventions compared to surgery alone. A physician may treat a patient with PROPEL by inserting it into the ethmoid sinuses.
PROPEL Mini is a smaller version of PROPEL and is approved for use in both the ethmoid and frontal sinuses. PROPEL Mini is preferentially used by physicians compared with PROPEL when treating smaller anatomies or following less extensive procedures. PROPEL Mini has also been shown by our clinical studies to reduce the need for postoperative interventions, including a 38% relative reduction in the need for postoperative interventions in the frontal sinus, compared to surgery alone with standard postoperative care.
PROPEL Contour is designed to facilitate treatment of the frontal and maxillary sinus ostia, or openings, of the dependent sinuses in procedures performed in both the operating room and in the office setting of care. PROPEL Contour’s lower profile, hourglass shape and malleable delivery system are designed for use in the narrow and difficult to access sinus ostia. In PROPEL Contour’s pivotal clinical study, the product demonstrated a 65% relative reduction in the need for postoperative interventions in the frontal sinus ostia compared to surgery alone with standard postoperative care as well as a 63% reduction in occlusion and 73% reduction in the need for surgical interventions.
SINUVA, when placed during a routine physician office visit, expands into the sinus cavity and delivers an anti-inflammatory steroid directly to the site of polyp disease for approximately 90 days. We have studied SINUVA in five clinical trials in over 400 patients to-date. Results from the pivotal RESOLVE II randomized clinical trial demonstrated a 74% relative reduction in bilateral polyp grade (a measurement of the extent of ethmoid polyp disease) and a 30% relative reduction in nasal obstruction and congestion for patients treated with SINUVA compared to a control group treated with a sham procedure, receiving no implant. Patients in both arms of the study were required to use an intranasal steroid spray daily. In addition, the study demonstrated a 61% reduction in the proportion of patients indicated for revision surgery at day 90. To supplement clinical trials performed with SINUVA to-date, in which one course of SINUVA treatment was evaluated, we commenced the ENCORE study in November 2017. ENCORE was a 50-patient multicenter, open-label study focused on evaluation of the safety of a repeat placement of SINUVA in a population of chronic sinusitis patients with nasal polyps. Study findings showed no serious adverse events related to the implants during the measurement period and no serious adverse events related to a repeat placement during the interval studied.
Our PROPEL family of products are used almost exclusively in the operating room of a hospital or ASC. These providers receive a facility fee for the sinus surgery procedure which is intended to pay for supplies used in this procedure, including the PROPEL family of products. SINUVA is a physician administered drug, used almost exclusively in the office setting. We applied to the Centers for Medicare & Medicaid Services (“CMS”), for a product-specific J code for SINUVA, and in July 2019, the CMS announced their final decision to establish a new J code described as “J7401 Mometasone furoate sinus implant, 10 micrograms.” This new J code became effective on October 1, 2019. The CMS also made a final decision to eliminate the S1090 code, which was previously assigned to PROPEL, because they view it as duplicative to J7401. Subsequently, the CMS approved SINUVA for transitional pass-through payment status for reimbursement under the Hospital Outpatient Prospective Payment System (“OPPS”) and ASC Payment System. The new C code described as “C9122 Mometasone furoate, sinus implant, 10 micrograms”, took effect on July 1, 2020. Pass-Through status lasts for three years. Prior to October 1, 2019, reimbursement submissions to cover the cost of SINUVA were reported to payors using the unassigned Healthcare Common Procedure Coding System (“HCPCS”) code J3490.
We continue to invest in research and development of new products and product improvements. We commenced a clinical trial in December 2018 of a new pipeline product, the investigational ASCEND drug-coated sinus balloon. The ASCEND study was a prospective, randomized, blinded, multi-center trial of 70 patients that assessed the safety and efficacy of our ASCEND product. The ASCEND product was randomized against an uncoated balloon and, similar to clinical studies for our PROPEL family of products, the primary endpoint was evaluated at 30 days. This study assessed the ASCEND product’s ability to improve patency rates, as well as a number of other endoscopic parameters. As the first trial of its kind for this product platform, we recognized that the outcomes of the ASCEND trial could require further clinical study to support a PMA approval with the FDA. The trial did not meet its primary endpoint of frontal sinus patency grade at day 30, as judged by an independent reviewer. The ASCEND study was designed to analyze the secondary endpoints if the primary endpoint passed, to help with the interpretation of the data and for use designing the subsequent pivotal study. The secondary endpoints were analyzed. The ASCEND product showed significant differences in several important secondary endpoints favoring the treatment side including reduction in inflammation and polypoid edema at all timepoints through day 30, as assessed by both the clinical investigators and the independent reviewer. There was also a notable reduction in the need for oral steroid interventions at day 30, as determined by the independent reviewer. There were no adverse events related to the drug component of the ASCEND balloon, and no device-related serious adverse events observed in the study. This study gives us valuable insight into the
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performance of our novel drug-coated balloon, enabling us to refine our clinical and regulatory pathway. We plan to initiate the pivotal clinical study in 2021.
On October 2, 2020, in accordance with the terms of the sale and purchase agreement (the "Purchase Agreement"), which is filed as an exhibit to this Quarterly Report on Form 10-Q, we acquired Fiagon AG Medical Technologies ("Fiagon"). Fiagon develops, and commercializes globally, innovative electromagnetic surgical navigation systems and an associated suite of surgical tools targeted to the ENT surgical space. In addition, in August 2020, Fiagon received U.S. FDA 510(k) clearance for a navigable sinuplasty balloon. The combination of the Intersect ENT and Fiagon portfolios allows us to deliver more comprehensive surgical solutions across the sinusitis care continuum regardless of site of care. The aggregate consideration payable in exchange for all of the outstanding equity interests of the Fiagon is €60.0 million. Under the terms of the Purchase Agreement, we made an initial €15.0 million ($17.5 million) payment at the time of closing of the acquisition and will make €15.0 million annual payments for each of the subsequent three years. We also placed €15.0 million ($17.5 million) in escrow with the seller as beneficiary. The acquisition is expected to be accretive to revenue growth in the first year post close.
Impact of the COVID-19 Pandemic
Prior to the COVID-19 pandemic, our efforts to enhance commercial execution and improve market access infrastructure were beginning to yield benefits as sales until the end of February 2020 were consistent with our expectations. However, sales declined towards the end of the first quarter and throughout the second quarter as the various COVID-19 restrictions were implemented and remained in effect. However, we began to see meaningful change in the business environment towards the end of May with increased procedure volumes as select areas of the country emerged from shelter-in-place orders and restrictions on elective medical procedures were eased. This trend continued in June and throughout the third quarter as we continued to see improvements in the elective procedure market. Our business has been and will be impacted by our patients’ decisions to undergo sinus surgeries as ENT ASC and office procedure volumes begin to recover and we resume our manufacturing operations as a result of the ease of certain restrictions of the shelter-in-place orders issued by local and federal authorities. We continue to remain flexible in our approach to continuing our operations in light of rapidly developing laws and restrictions surrounding the COVID-19 pandemic. While the third quarter did provide an improving business environment, the COVID-19 pandemic may continue to create severe disruptions and volatility in global capital markets and increase economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe.
As a result of the COVID-19 pandemic and the impact of the various restrictions implemented, we have taken the following actions:
Protect Health and Safety: Virtually all roles where physical presence for manufacturing operations is not required remain working from home, based on state and county guidelines, and non-essential business travel is limited.
Maintain Customer Focus: All patient-support teams remain available to assist customers and patients, while strictly adhering to applicable restrictions, safety precautions and procedures.
Reduce Costs: In response to the COVID-19 pandemic, we took pre-emptive actions in the first quarter of 2020 to curtail spending and to reduce use of cash as revenues are and will continue to be materially impacted. We have also considered the incremental costs of business operations during the pandemic and expect these costs to remain until the current crisis subsides. The cost reduction actions included a) reducing our workforce by approximately 25% and furloughing an additional 5% of our workforce, b) substantially reducing new hiring, c) suspending near-term production, d) reducing discretionary operating expenses and capital expenditures, and e) delaying clinical research projects. In total, these cost reduction activities were expected to yield $40.0 million in cash savings; however, higher revenues and costs associated with those higher revenues are expected to result in lower savings as well as a lower rate of cash use in operations than previously expected.
Components of Our Results of Operations
Revenue
Our revenue has been derived almost exclusively from the sales of our PROPEL family of products, with limited sales of SINUVA beginning in March 2018. While performance until the end of February 2020 was relatively consistent with our expectations, our revenue substantially declined toward the end of the first quarter and throughout the second quarter as the various COVID-19 restrictions were implemented. As office-based procedures began to increase in May, our performance had a positive upward trend toward the end of the second quarter and throughout the third quarter. While our business has been and will be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits, we anticipate revenue growth for the remainder of 2020 based on the increased elective procedure volumes and enrollment trends in the third quarter. Once the disruption from the COVID-19 pandemic subsides, we expect our revenue to increase as we continue to expand our
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sales, marketing and reimbursement efforts in order to increase usage of our products. We also expect revenue from our PROPEL family of products to fluctuate from quarter to quarter due to the impact of the COVID-19 pandemic as well as seasonal variations in the volume of sinus surgery procedures performed, which has been impacted historically by factors including the status of patient healthcare insurance plan deductibles and the seasonal nature of allergies which can impact sinus-related symptoms. Revenue from SINUVA is recognized net of estimated product sales discounts, rebates, returns and other allowances as a reduction of revenue in the same period the related revenue is recognized. We will adjust these estimates if actual allowances vary from our estimates, which would affect revenue in the period such variances become known.
Our revenue is almost entirely derived from within the United States and no single customer accounted for more than 10% of our revenue during the three and nine months ended September 30, 2020 and 2019.
Cost of Sales and Gross Profit
We manufacture our PROPEL family of products and SINUVA in our facility in Menlo Park, California. Cost of sales consists primarily of manufacturing overhead costs, material costs, direct labor and other direct costs such as shipping costs. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include compensation, including stock-based compensation and other operating expenses associated with the cost of quality assurance, material procurement, inventory control, facilities, information technology, equipment and operations supervision and manufacturing and warehouse management. Once the disruption from the COVID-19 pandemic subsides, we expect cost of sales to increase in absolute dollars again primarily as, and to the extent, our revenue grows, or we make additional investments in our manufacturing capabilities.
Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing costs and average selling prices. Towards the end of the first quarter and throughout the second quarter, manufacturing costs were negatively impacted by the mandatory shelter-in-place order in effect in San Mateo County, California, which prevented us from using our manufacturing facility and our decision to suspend production until the third quarter of 2020. Production resumed during the third quarter of 2020, but below our normal capacity. Idle facility expenses are charged to cost of goods sold in the period incurred. Manufacturing cost will change as our production volume and product mix changes. The per unit allocation of our manufacturing overhead costs may increase and our gross margin may decline as, and to the extent, production volume decreases.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling, marketing, finance, market access, reimbursement, business development, legal and human resource functions as well as costs related to any post-market studies. Additional SG&A expenses include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit and compliance expenses, insurance costs and general corporate expenses including allocated facilities and information technology expenses.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of compensation for personnel, including stock-based compensation, related to product development, regulatory affairs, clinical and medical affairs, and allocated facilities and information technology expenses. R&D expenses also may include expenses for clinical studies related to clinical trial design, site reimbursement, data management, travel expenses and the cost of manufacturing products for clinical trials. Finally, R&D expenses also include expenses related to the development of products and technologies such as consulting services and supplies.
Interest Expense
Interest expense consists primarily of the interest expense, accretion expense of debt discounts, and amortization of debt issuance costs associated with our Convertible Notes.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on our cash and cash equivalents, changes in the fair value of embedded derivatives, and the effects of foreign exchange.
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
We believe that the accounting policies discussed in our Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2020, as compared to the critical accounting policies described in our 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 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 allocable overhead. During the first half of 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, we recorded $5.5 million for idle facility expense due to our inability to use our manufacturing facility due to the shelter-in-place orders and our decision to suspend production until the third quarter of 2020. Production resumed in the third quarter and we recorded an additional $0.6 million in idle facility expense in the third quarter of 2020 due to subnormal production levels. In periods where the manufacturing is below normal capacity, we will record idle facility charges. We maintain provisions for excess and obsolete inventory based on our estimates of forecasted demand and, where applicable, product expiration. Due to a decline in projected product sales, we increased our reserve for excess and obsolete inventory by $0.8 million during the first quarter of 2020. We 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.
Embedded Derivatives Related to Convertible Debt Instruments
The Convertible Notes due in May 2025 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 our company, or a sale of all or substantially all of our 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. We have 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 embedded features will be 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 statements of operations. Changes in our assumptions, such as the estimated probability of triggering events and our stock price, used to value the embedded derivatives could result in material changes in the valuation in future periods. At September 30, 2020, the fair value of the embedded derivatives was $2.6 million and has been presented together with the Convertible Notes host instrument on the condensed consolidated balance sheets.
Accounting Pronouncements
See Note 2 of the condensed consolidated financial statements under the heading “Accounting Pronouncements” for new accounting pronouncements or changes to the recent accounting pronouncements during the nine months ended September 30, 2020.
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Results of Operations
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(in thousands, expect percentages)
Revenue$22,720 $24,056 $52,326 $77,388 
Cost of sales7,845 4,876 21,612 14,567 
Gross profit14,875 19,180 30,714 62,821 
Gross margin65 %80 %59 %81 %
Operating expenses:
Selling, general and administrative21,702 26,429 67,399 81,247 
Research and development4,551 6,145 13,715 18,452 
Total operating expenses26,253 32,574 81,114 99,699 
Loss from operations(11,378)(13,394)(50,400)(36,878)
Interest expense(886)— (1,372)— 
Other income (expense), net799 546 (350)1,841 
Net loss$(11,465)$(12,848)$(52,122)$(35,037)
Comparison of the Three and Nine Months ended September 30, 2020 and 2019
Revenue
Three Months Ended
September 30,
Nine Months Ended
September 30,
Three Months EndedNine Months Ended
Change ($)Change (%)Change ($)Change (%)
20202019202020192020 to 20192020 to 20192020 to 20192020 to 2019
(in thousands, except percentages)
PROPEL family of products
$21,051 $22,962 $49,622 $74,257 $(1,911)(8)%$(24,635)(33)%
SINUVA1,669 1,094 2,704 3,131 575 53 %(427)(14)%
$22,720 $24,056 $52,326 $77,388 $(1,336)(6)%$(25,062)(32)%
Revenue decreased by $1.3 million, or 6%, to $22.7 million during the three months ended September 30, 2020, compared to $24.1 million during the three months ended September 30, 2019. The decrease in revenue for the three months ended September 30, 2020 was due to a 8% decline in PROPEL sales, partially offset by a 53% increase in SINUVA sales. Lower PROPEL revenue for the three months ended September 30, 2020 resulted from a 10% decrease in unit sales, slightly offset by a 2% increase in average selling price. SINUVA unit sales increased by 44% during the three months ended September 30, 2020, along with a 6% increase in net revenue per unit from the three months ended September 30, 2019. The increase in unit sales for SINUVA during the three months ended September 30, 2020 was due to a shift of procedures from hospitals and ASCs to the physician office setting of care, as well as sales under a new distributor agreement entered into during the quarter.
Revenue decreased by $25.1 million, or 32%, to $52.3 million during the nine months ended September 30, 2020, compared to $77.4 million during the nine months ended September 30, 2019. The decrease in revenue for the nine months ended September 30, 2020 was due to a 33% decline in PROPEL sales as well as a 14% decline in SINUVA sales. Lower PROPEL revenue for the nine months ended September 30, 2020 resulted from a 35% decrease in unit sales, slightly offset by a 3% increase in average selling price. The decrease in unit sales for PROPEL was driven by a reduction in demand due to the impact of the COVID-19 pandemic. SINUVA unit sales decreased by 15% during the nine months ended September 30, 2020, partially offset by a 1% increase in net revenue per unit from the nine months ended September 30, 2019. The decrease in unit sales for SINUVA during the nine months ended September 30, 2020 was driven by an overall reduction in demand due to the impact of the COVID-19 pandemic.
Based on current elective procedure volumes and enrollment trends, as well as the acquisition of Fiagon, we expect revenue growth for the remainder of 2020. While we cannot predict the extent or duration of the impact of
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the COVID-19 pandemic on our financial and operating results, we believe that a recovery in procedures will continue, and that most patients will return for treatment.
Cost of Sales and Gross Margin
Cost of sales increased by $3.0 million, or 61%, to $7.8 million during the three months ended September 30, 2020, compared to $4.9 million during the three months ended September 30, 2019, and increased by $7.0 million, or 48%, to $21.6 million during the nine months ended September 30, 2020, compared to $14.6 million during the nine months ended September 30, 2019. The increased cost of sales for the three months ended September 30, 2020 was primarily due to the unfavorable impact of higher per unit manufacturing costs and $0.6 million of idle facility expense as a result of lower production volumes, partially offset by manufacturing charges in the prior period related to a writeoff of a single PROPEL production lot as well as decreases in headcount as a result of cost reduction measures taken in the first quarter of 2020. Also, for the nine months ended September 30, 2020, the increase was attributable to $0.8 million in additional charges related to excess and obsolete inventory in response to the estimated impact of the COVID-19 pandemic. There was no reserve for excess and obsolete inventory recorded in the three months ended September 30, 2020. For both periods, the increases were partially offset by lower PROPEL unit sales.
Gross margin for the three months ended September 30, 2020, decreased to 65%, compared to 80% for the three months ended September 30, 2019, and decreased to 59% compared to 81% for the nine months ended September 30, 2019. While the gross margin for our products through the end of February 2020 was relatively consistent with our expectations, the decrease in gross margin during the second and third quarter of 2020 was attributable to the unfavorable impact of higher per unit manufacturing costs as well as the charges related to the impact of COVID-19. The amount of these charges was approximately $6.9 million, representing an effect on our gross margin of approximately 13% for the nine months ended September 30, 2020. Our gross margin recovered during the third quarter relative to previous quarters as we resumed our production and generated revenue.
As a result of the increase in procedure volumes and enrollments during the third quarter, we anticipate that there will be sequential revenue growth for the remainder of 2020 from current quarter levels. With the expected increase in demand and resumption of our manufacturing activities in the third quarter, we do not expect idle facility expense to be incurred in the remainder of 2020. However, idle facility expense could still be incurred in future periods until the current crisis subsides. We cannot reliably estimate the extent to which the COVID-19 pandemic will impact the cost of sales and gross margin for our products beyond 2020.
Selling, General and Administrative Expenses
SG&A expenses decreased by $4.7 million, or 18%, to $21.7 million during the three months ended September 30, 2020, compared to $26.4 million during the three months ended September 30, 2019, and decreased by $13.8 million, or 17%, to $67.4 million during the nine months ended September 30, 2020, compared to $81.2 million during the nine months ended September 30, 2019. The decreases in SG&A expenses were primarily due to decreases in headcount and related expenses as a result of cost reduction measures taken in the first quarter of 2020, in addition to lower sales commissions from reduced sales, partially offset by an increase in transaction costs associated with the acquisition of Fiagon of $1.5 million and $1.9 million for the three and nine months ended September 30, 2020, respectively, which consisted largely of professional fees.
Our spending in the first quarter of 2020 reflected normal business activities while certain spending decreased in the second and third quarter of 2020 as a result of a reduction in demand and the impact of the cost reduction measures put in place in the first quarter. We expect cost control measures to remain in place until the current crisis subsides. However, we will still continue to support our customers, physicians and patients and will incur additional SG&A expenses as a result of the acquisition of Fiagon.
Research and Development Expenses
R&D expenses decreased by $1.6 million, or 26%, to $4.6 million during the three months ended September 30, 2020, compared to $6.1 million during the three months ended September 30, 2019, and decreased by $4.7 million, or 26%, to $13.7 million during the nine months ended September 30, 2020, compared to $18.5 million during nine months ended September 30, 2019. The decreases in R&D expenses were primarily due to decreases in headcount and related expenses as a result of cost reduction measures taken in the first quarter of 2020, as well as a delay of clinical efforts.
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Our cost control measures will stay in effect for the remainder of 2020 as a result of the uncertainty related to the timing of resuming our clinical trials due to the COVID-19 pandemic; however, we will incur additional R&D expenses as a result of the acquisition of Fiagon.
Interest Expense
The increases in interest expense of $0.9 million and $1.4 million, respectively, for the three and nine months ended September 30, 2020 were attributable to convertible notes entered into during the second quarter of 2020.
Other Income (Expense), Net
Other income (expense), net, increased by $0.3 million to $0.8 million during the three months ended September 30, 2020, compared to $0.5 million during the three months ended September 30, 2019, and decreased by $2.2 million to $(0.4) million during the nine months ended September 30, 2020, compared to $1.8 million during the nine months ended September 30, 2019. The increase in other income (expense), net during the three months ended September 30, 2020 was attributable to a $1.0 million decrease in fair value of our embedded derivative liability, partially offset by significantly lower interest rates earned on investments. The decrease in other income (expense), net during the nine months ended September 30, 2020 was attributable to a $0.8 million increase in fair value of our embedded derivative liability as well as significantly lower interest rates earned on investments.
Liquidity and Capital Resources
Overview
As of September 30, 2020, we had cash, cash equivalents and short-term investments of $130.7 million, compared to cash, cash equivalents and short-term investments of $90.6 million as of December 31, 2019.
Cash Flows
Nine Months Ended
September 30,
20202019
(in thousands)
Net cash provided by (used in):
Operating activities$(25,054)$(19,958)
Investing activities(4,653)11,009 
Financing activities65,946 9,839 
Net increase in cash and cash equivalents$36,239 $890 
Net Cash Used in Operating Activities
During the nine months ended September 30, 2020, net cash used in operating activities was $25.1 million, consisting primarily of a net loss of $52.1 million, offset by a decrease in net operating assets of $11.1 million and non-cash charges of $15.9 million. The net loss is primarily attributable to the ongoing funding of our sales, marketing and product development activities in order to attain future growth. The non-cash charges primarily consisted of stock-based compensation expense, change in fair value of embedded derivatives, and depreciation and amortization expense. The decrease in net operating assets is primarily attributable to a decrease in accounts receivable due to collections and a decrease in inventory due to the temporary suspension of our manufacturing activities. The decrease was partially offset by a decrease in accrued compensation due to the payout of annual corporate bonuses.
During the nine months ended September 30, 2019, net cash used in operating activities was $20.0 million, consisting primarily of a net loss of $35.0 million and an increase in net operating assets of $1.3 million, partially offset by non-cash charges of $16.3 million. The cash used in operations was primarily due to an increase in headcount and related expenses to support the ongoing commercialization of our PROPEL family of products and the launch of SINUVA in March 2018. The non-cash charges primarily consisted of stock-based compensation expense and depreciation and amortization. The contribution to operating cash flow from the change in net operating assets is primarily due to a reduction of accounts receivable, partially offset by an increase in inventory, prepaid expenses and other assets, and a decrease in other liabilities and accounts payable.
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Net Cash Provided by (Used in) Investing Activities
During the nine months ended September 30, 2020, net cash used in investing activities was $4.7 million, consisting of net purchases of short-term investments of $38.7 million and purchases of property and equipment of $0.7 million, partially offset by proceeds from the sale of short-term investments of $34.7 million.
During the nine months ended September 30, 2019, net cash provided by investing activities was $11.0 million, consisting of net maturities of short-term investments, of $13.6 million, partially offset by purchases of property and equipment of $2.6 million.
Net Cash Provided by Financing Activities
During the nine months ended September 30, 2020, net cash provided by financing activities was $65.9 million, consisting of net proceeds from the issuance of convertible debt of $61.8 million and $4.1 million of net proceeds from common stock upon exercises of employee stock options and purchases under our employee stock purchase plan.
During the nine months ended September 30, 2019, net cash provided by financing activities was $9.8 million, consisting of net proceeds from the issuance of common stock upon exercises of employee stock options and purchases under our employee stock purchase plan.
Liquidity
We believe that our existing cash, cash equivalents and short-term investments as of September 30, 2020, will be sufficient to fund our working capital needs, capital expenditures, payments associated with the Fiagon acquisition, interest payments on long-term debt and lease arrangements through 2022. However, as a result of the COVID-19 pandemic, our rate of cash consumption compared to the prior year has increased as a result of decreased revenues, and may continue to do so. Also, in response to the COVID-19 pandemic, we took pre-emptive actions to curtail spending and to reduce the use of cash as revenues are and will continue to be materially impacted. These cost reduction actions included a) furloughing and reducing our workforce by approximately 25%, b) substantially reducing new hiring, c) suspending near-term production in the second quarter of 2020, d) reducing discretionary operating expenses and capital expenditures, and e) delaying clinical research projects. In total, these cost reduction activities were expected to yield $40.0 million in cash savings; however, higher revenues and costs associated with those higher revenues are expected to result in lower savings as well as a lower rate of cash use in operations than previously expected. In addition, during the second quarter of 2020, we entered into a Facility Agreement, providing for the issuance and sale of a $65.0 million principal amount of 4% Convertible Unsecured Senior Notes due in 2025. The net proceeds from the offering were $61.8 million after deducting the issuance costs payable by us. Through the third quarter, we have realized substantial savings and revenues have grown at a higher rate than was expected when the cost reduction actions were taken. As a result, cash was used in operations during the second and third quarters at a lower rate than expected and is expected to remain at a reduced level for the remainder of the year, including impacts from the acquisition of Fiagon.
Under the terms of the Purchase Agreement for the acquisition of Fiagon, we made an initial €15.0 million ($17.5 million) payment upon closing in October 2020 and will make €15.0 million annual payments for each of the subsequent three years. We also placed €15.0 million ($17.5 million) in escrow with the seller as beneficiary.
If our current sources of liquidity are insufficient, we may seek to sell additional equity or debt securities or obtain credit facilities. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products.
Off-Balance Sheet Arrangements
As of September 30, 2020 and December 31, 2019, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
On May 11, 2020, we entered into a facility agreement with Deerfield Partners L.P. (“Deerfield”) providing for the issuance and sale by our company to Deerfield of $65.0 million of principal amount of 4.0% unsecured senior convertible notes
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(the “Convertible Notes”). The Convertible Notes will mature on May 9, 2025 unless earlier converted or redeemed and are convertible into shares or our company’s common stock. The Convertible Notes bear interest at 4.0% per annum, payable quarterly in arrears on July 1, October 1, January 1 and April 1 of each year, commencing July 1, 2020. Apart from this transaction, our contractual obligations as of September 30, 2020, have not materially changed outside the ordinary course of business from December 31, 2019.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk as of September 30, 2020, has not materially changed from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2019, except as follows:
Interest Rate Risk
We are exposed to market risk for changes in interest rates applicable to the $65.0 million of principal amount of Convertible Notes, bearing interest at 4.0% per annum with interest payable quarterly. The Convertible Notes will mature on May 9, 2025, unless earlier converted or redeemed in accordance with their terms. As of September 30, 2020, the entire principal amount was outstanding as well as $0.7 million in accrued interest. For our Convertible Notes, any changes in market interest rates will generally affect the fair value of the instrument, but not our earnings or cash flows.
Foreign Currency Risk
The majority of our revenue, expenses, and capital expenditures are transacted in U.S. dollars. However, our operating results are exposed to foreign currency risk, in particular the Euro, due to our acquisition of Fiagon. Furthermore, our financial position and operating results will be exposed to foreign currency risk as a result of consolidating Fiagon’s balance sheet and operating results. To mitigate these risks, we may enter into foreign exchange forward contracts or other hedging arrangements to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 20