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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 March 31, 2021
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 filer¨Accelerated filerx
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 May 3, 2021 were 33,140,573.



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INTERSECT ENT, INC.
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended March 31, 2021
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)
March 31,
2021
December 31,
2020
(unaudited)(1)
Assets
Current assets:
Cash and cash equivalents$14,365 $13,521 
Short-term investments56,159 74,506 
Accounts receivable, net14,581 14,592 
Inventories, net13,217 12,054 
Prepaid expenses and other current assets3,965 3,494 
Total current assets102,287 118,167 
Property and equipment, net5,242 5,624 
Operating lease right-of-use assets16,813 17,151 
Intangible assets, net20,312 21,193 
Goodwill46,639 46,639 
Restricted cash18,345 17,500 
Other non-current assets801 1,107 
Total assets$210,439 $227,381 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$6,943 $6,042 
Accrued compensation10,917 13,559 
Deferred acquisition related consideration, current20,149 21,071 
Other current liabilities5,529 3,575 
Total current liabilities43,538 44,247 
Operating lease liabilities15,913 17,736 
Convertible notes, net64,216 63,650 
Deferred acquisition related consideration, non-current32,206 33,167 
Deferred tax liability1,367 1,569 
Other non-current liabilities942  
Total liabilities158,182 160,369 
Commitments and contingencies (note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized shares: 9,994; Issued and outstanding shares: none
  
Series DF-1 convertible preferred stock, $0.001 par value; Authorized shares: 6; Issued and outstanding shares: none
  
Common stock, $0.001 par value; Authorized shares: 150,000; Issued and outstanding shares: 33,136 at March 31, 2021 and 32,936 at December 31, 2020
33 33 
Additional paid-in capital375,315 370,053 
Accumulated other comprehensive income15 1 
Accumulated deficit(323,106)(303,075)
Total stockholders’ equity52,257 67,012 
Total liabilities and stockholders’ equity$210,439 $227,381 
(1)Amounts have been derived from the December 31, 2020 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
March 31,
20212020
Revenue$24,328 $19,826 
Cost of sales8,455 6,410 
Gross profit15,873 13,416 
Operating expenses:
Selling, general and administrative28,077 26,200 
Research and development6,370 5,146 
Total operating expenses34,447 31,346 
Loss from operations(18,574)(17,930)
Interest expense(1,375) 
Other income (expense), net(504)397 
Loss before income taxes(20,453)(17,533)
Provision for income tax (benefit)(422) 
Net loss(20,031)(17,533)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments, net14 (19)
Comprehensive loss$(20,017)$(17,552)
Net loss per share, basic and diluted$(0.61)$(0.54)
Weighted average common shares used to compute net loss per share, basic and diluted
33,022 32,365 
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
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202032,936 $33 $370,053 $1 $(303,075)$67,012 
Issuance of common stock and exercise of stock options
200 — 1,121 — — 1,121 
Stock-based compensation expense
— — 4,141 — — 4,141 
Unrealized gain on short-term investments— — — 14 — 14 
Net loss— — — — (20,031)(20,031)
Balance at March 31, 202133,136 $33 $375,315 $15 $(323,106)$52,257 



Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
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 





See accompanying notes to condensed consolidated financial statements.
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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
20212020
Operating activities:
Net loss$(20,031)$(17,533)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization1,202 496 
Non-cash lease expense481 538 
Stock-based compensation expense4,061 4,356 
Amortization of net investment premium (discount)265 (83)
Amortization of debt transaction costs and accretion of debt discount
220  
Impairment of property, equipment, and intangible assets575  
Interest expense on deferred acquisition related costs504  
Loss on foreign currency forward contracts2,287  
Foreign currency remeasurement gain(1,973) 
Change in fair value of embedded derivatives346  
Provision for income tax benefit(422) 
Changes in operating assets and liabilities:
Accounts receivable, net(172)8,807 
Inventories, net(1,083)(151)
Prepaid expenses and other assets(1,167)(368)
Accounts payable1,070 634 
Accrued compensation(2,614)(2,327)
Other liabilities(321)(325)
Net cash used in operating activities(16,772)(5,956)
Investing activities:
Purchases of short-term investments (7,339)
Maturities of short-term investments18,096 23,872 
Purchases of property and equipment(467)(137)
Net cash provided by investing activities17,629 16,396 
Financing activities:
Proceeds from issuance of common stock and exercise of stock options1,121 3,101 
Net cash provided by financing activities1,121 3,101 
Effect of exchange rates on cash, cash equivalents, and restricted cash(196) 
Net increase in cash, cash equivalents, and restricted cash1,782 13,541 
Cash, cash equivalents, and restricted cash:
Beginning of the period31,021 20,652 
End of the period$32,803 $34,193 
Non-cash investing activities:
Right-of-use asset obtained in exchange for lease obligations$144 $ 
Property and equipment included in accounts payable55 321 
Lessor funded building improvements46  
See accompanying notes to condensed consolidated financial statements.
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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 is headquartered in Menlo Park, California. The Company is a global ear, nose and throat (“ENT”) medical technology leader dedicated to transforming patient care. The Company’s U.S. Food and Drug Administration (“FDA”) approved products are steroid releasing implants designed to treat patients suffering from chronic rhinosinusitis (“CRS”) 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 conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers ("ASC") and increasingly in the physician office setting of care in conjunction with balloon dilation and following post-surgical debridement. 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. In October 2020, the Company acquired Fiagon AG Medical Technologies (“Fiagon”), a global leader in electromagnetic surgical navigation solutions with an expansive portfolio of ENT product offerings, including the VENSURE sinus dilation balloon (“VENSURE”) and CUBE surgical navigation tools (“CUBE”), that complement the Company’s PROPEL and SINUVA sinus implants and extend its geographic reach. The PROPEL family of products are combination products regulated as devices approved under a Premarket Approval (“PMA”) and SINUVA is a combination product regulated as a drug that was approved under a New Drug Application (“NDA”). The VENSURE products received 510(k) clearance in August 2020. In addition, the Company continues to invest in research and development in order to expand its portfolio of products and improve its existing products.
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 subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
The interim financial data as of March 31, 2021, 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 months ended March 31, 2021 and 2020. 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, 2020 filed with the SEC on March 9, 2021.
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. Due to the COVID-19 pandemic, the Company’s business has been and will continue to be impacted by patients’ decisions whether or not to undergo sinus surgeries and, as a result, ENT ASC and office procedure volumes may fluctuate. The Company’s operations may be further impacted by COVID-19 due to changes in its manufacturing operations as a result of the easing 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.
8

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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, inventory, common stock valuation and related stock-based compensation, leases, business combinations, embedded derivatives, 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, 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
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 became effective for the Company beginning in 2021. The adoption of the standard did not result in a material impact to the Company’s condensed consolidated financial statements.
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 became effective for the Company beginning in 2021. The adoption of the standard had no impact to the Company’s condensed consolidated financial statements.
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. The Company early adopted this standard and became effective beginning in 2021. The adoption of the standard had no impact to the Company’s condensed consolidated financial statements.
Significant Accounting Policies
There have been no significant changes to the accounting policies during the three months ended March 31, 2021, 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, 2020, except as follows:
Cost of sales
Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor. A significant portion of the Company’s 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. Cost of sales also includes depreciation expense for production equipment, amortization of intangible assets associated with acquired product technologies and processes, maintenance of operational processes, and certain direct costs such as shipping costs.

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Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Maintenance and repairs are charged to operations as incurred. During the three months ended March 31, 2021, the Company recognized impairment expense of $0.4 million related to certain property and equipment, which was recorded in selling, general and administrative expense in the condensed consolidated statements of operations.
3.    Composition of Certain Financial Statement Items
Accounts receivable, net (in thousands):
March 31,
2021
December 31,
2020
Accounts receivable$14,927 $15,079 
Allowance for doubtful accounts(346)(487)
$14,581 $14,592 
Inventories, net (in thousands):
March 31,
2021
December 31,
2020
Raw materials$2,922 $2,865 
Work-in-process2,908 3,411 
Finished goods7,387 5,778 
$13,217 $12,054 
Capitalized stock-based compensation expense of $0.4 million and $0.3 million was included in inventory as of March 31, 2021 and December 31, 2020, respectively.
Operating lease liabilities (in thousands):
March 31,
2021
December 31,
2020
Current portion presented in other current liabilities$2,238 $762 
Non-current portion presented in operating lease liabilities15,913 17,736 
$18,151 $18,498 
Revenue (in thousands):
Three Months Ended
March 31,
20212020
PROPEL family of products$20,442 $19,090 
SINUVA2,435 736 
VENSURE, CUBE, and accessories1,451  
$24,328 $19,826 

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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 convertible debt embedded derivatives. 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.
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 marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
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 March 31, 2021, the fair value of the Company’s Convertible Notes (see Note 9) was $101.0 million.
Cash, Cash Equivalents, Short-term Investments, and Restricted Cash
The following is a summary of cash, cash equivalents, and restricted cash (in thousands):
March 31, 2021March 31, 2020
Cash and cash equivalents$14,365 $34,193 
Restricted cash 18,345  
Restricted cash presented in prepaid and other current assets93  
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows$32,803 $34,193 

In association with the acquisition of Fiagon, the Company held $18.3 million and $17.5 million as of March 31, 2021 and December 31, 2020, respectively, with an escrow agent with the seller as beneficiary. These balances are presented as restricted cash on the Company’s condensed consolidated balance sheets. The restricted cash balance presented in prepaid and other current assets at March 31, 2021 represents a rent deposit held in escrow.









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The following is a summary of the Company’s unrealized gains and losses related to its short-term investments in marketable securities designated available-for-sale (in thousands):
Reported as:
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
Cash and cash
equivalents
Short-term
investments
March 31, 2021GainsLosses
Level 1:
Cash$10,128 $— $— $10,128 $10,128 $— 
Money market funds4,237 — — 4,237 4,237 — 
14,365 — — 14,365 14,365 — 
Level 2:
U.S. treasury bills39,523 10  39,533 — 39,533 
U.S. government agency bonds16,621 5  16,626 — 16,626 
56,144 15  56,159 — 56,159 
$70,509 $15 $ $70,524 $14,365 $56,159 

Reported as:
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
Cash and cash
equivalents
Short-term
investments
December 31, 2020GainsLosses
Level 1:
Cash$9,755 $— $— $9,755 $9,755 $— 
Money market funds2,762 — — 2,762 2,762 — 
12,517 — — 12,517 12,517 — 
Level 2:
U.S. treasury bills49,698 4 (3)49,699 1,004 48,695 
Corporate debt securities6,307  (2)6,305 — 6,305 
U.S. government agency bonds19,504 3 (1)19,506 — 19,506 
75,509 7 (6)75,510 1,004 74,506 
$88,026 $7 $(6)$88,027 $13,521 $74,506 
There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2021 and year ended December 31, 2020.
As of March 31, 2021 and December 31, 2020, 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 three months ended March 31, 2021 and year ended December 31, 2020. 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 March 31, 2021 were not attributed to credit.
Convertible Notes Embedded Derivatives
The Convertible Notes due in 2025 (see Note 9) 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
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financial instruments. At March 31, 2021, the fair value of the embedded features was $3.4 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:
March 31,
2021
Balance at December 31, 2020$3,048 
Additions 
Fair value adjustment346 
Balance at March 31, 2021$3,394 

The change in fair value of embedded derivatives for the three months ended March 31, 2021 was a $0.3 million loss, which was recorded in other income (expense), net in the Company's condensed consolidated statements of operations.

Derivative Financial Instruments
The Company’s deferred purchase consideration related to the Fiagon acquisition exposed it to foreign currency exchange risk between rate fluctuations of the U.S. dollar and the Euro. To manage this risk, the Company entered into a series of foreign currency exchange forward contracts. In general, gains and losses related to these contracts are expected to be substantially offset by corresponding gains and losses on the remeasurement of the deferred purchase consideration each reporting period. The risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (e.g., those contracts that have a positive fair value) at the date of default. The Company does not enter into derivative contracts for trading purposes.
The derivative instruments the Company uses to hedge this exposure are not designated as hedges and, as a result, changes in their fair value are recorded in other income (expense), net in its condensed consolidated statements of operations. The derivative assets and liabilities are measured using Level 2 fair value inputs.
The Company had gross notional amounts (in EUR) on foreign currency exchange contracts not designated as hedging instruments outstanding as of March 31, 2021 and December 31, 2020 as follows (in thousands):
March 31,
2021
December 31,
2020
Notional amounts:
Forward contracts45,000 45,000 
Gross fair value recorded in:
Prepaid expenses and other current assets$ $275 
Other non-current assets$ $558 
Other current liabilities$511 $ 
Other non-current liabilities$942 $ 

The following table summarizes the effect of the Company’s foreign currency exchange contracts on its condensed consolidated statements of operations recognized in other income (expense), net (in thousands):
Three Months Ended
March 31, 2021
Recognized losses$(2,287)
Foreign exchange gain on remeasurement of deferred acquisition related consideration$2,384 
5.    Business Combinations
On October 2, 2020, the Company acquired all of the outstanding equity interests of Fiagon and its subsidiaries. Fiagon develops, and commercializes globally, innovative electromagnetic surgical navigation systems and an associated suite of surgical tools and sinus dilation balloons targeted to the ENT surgical space. The transaction increases the Company’s product portfolio as well as its ability to serve customers and patients in the U.S., Europe and elsewhere. Assets and operations acquired included developed technologies, a distribution network, customer relationships, trademarks, certain personnel, and net tangible
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assets, which collectively met the definition of a business. Under the terms of the Purchase Agreement for the acquisition of Fiagon, the Company made an initial €15.0 million ($17.6 million) payment upon closing in October 2020 and will make €15.0 million annual payments for each of the subsequent three years, plus an estimated €2.2 million purchase price adjustment due in October 2021. The total purchase consideration is denominated in Euros with an equivalent value of $68.9 million which included an upfront cash payment of $17.6 million, and deferred payments of $51.3 million, of which $17.5 million (€15.0 million equivalent) of cash was placed in escrow with the seller as beneficiary. The amount placed in escrow is required to be adjusted to the equivalent of €15.0 million on January 15th and July 15th of each year based on the end of the prior month's five-day trailing exchange rate. The restrictions on cash held in escrow will be released upon payment of the last deferred purchase payment due in October 2023. In addition, the Company entered into agreements to pledge the shares of Fiagon and its intellectual property as security for the deferred payments. The share pledge expires upon payment of the last deferred purchase payment due in October 2023 and the intellectual property pledge expires upon payment of the second installment due in October 2021.
The Company recorded $4.6 million of tangible assets, primarily consisting of $2.2 million of inventory, offset by liabilities assumed of $4.2 million, including deferred tax liabilities of $2.2 million. In addition, the Company recorded $21.9 million of intangible assets and $46.6 million in residual goodwill. Goodwill arising from the business combination consists largely of the synergies and economies of scale expected from combining the operations of the Company and Fiagon, as well as the value of Fiagon’s assembled workforce. Intangible assets included patents and developed technology, a distribution network, customer relationships, and trademarks. The Company’s management utilized a specialist to assist in the valuation. Key assumptions included in the valuation were (1) the amount and timing of future revenues, expenses, and other cash flows, and (2) the discount rate used to determine the present value of these cash flows. The goodwill is not amortizable for income tax purposes. The estimated fair value of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date. Measurement period adjustments could reflect new information pertaining to the purchase price consideration, deferred tax impacts and goodwill. Purchase price consideration is pending final agreement regarding the purchase price adjustment to be included in the installment payment due in October 2021. Deferred taxes are pending the results of a tax examination of pre-acquisition periods and preparation of 2020 foreign tax returns by the acquired companies.
During the three months ended March 31, 2021, the Company recognized impairment expense of $0.2 million, related to the remaining trademarks value as a result of a decision to rebrand the associated products, which was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations.
6.    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.
7.    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, 2021, the total number of shares of common stock reserved for issuance increased by 988,070 shares to 10,922,838 shares reserved since the inception of the 2014 Plan. At March 31, 2021, 3,173,483 shares remained available for issuance.
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A summary of the Company’s stock option activity and related information (options in thousands):
Three Months Ended
March 31, 2021
OptionsWeighted Average
Exercise Price
Outstanding, beginning of period3,599 $22.01 
Granted691 23.03 
Exercised(101)11.10 
Forfeited(104)27.01 
Outstanding, end of period4,085 22.33 
Exercisable1,666 23.09 
As of March 31, 2021, 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 March 31, 2021, these stock options remain unvested.
The aggregate pre-tax intrinsic value of options outstanding was $6.9 million and options outstanding and exercisable was $3.9 million, the weighted-average remaining contractual term of options outstanding was 8.0 years and options outstanding and exercisable was 6.5 years. The aggregate pre-tax intrinsic value of options exercised was $1.2 million during each of the three months ended March 31, 2021 and 2020.
A summary of the Company’s RSU activity and related information (RSUs in thousands):
Three Months Ended
March 31, 2021
RSUsWeighted Average
Fair Value
Outstanding, beginning of period488 $23.88 
Awarded277 23.07 
Vested(99)29.98 
Forfeited(32)21.37 
Outstanding, end of period634 22.70 
As of March 31, 2021, the aggregate pre-tax intrinsic value of RSUs outstanding was $13.2 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 2.3 years.
The Company also offers Performance Stock Units (“PSUs”), subject to service, performance, and market-based vesting conditions. A summary of the Company’s PSU activity and related information (PSUs in thousands):
Three Months Ended
March 31, 2021
PSUsWeighted Average
Fair Value
Outstanding, beginning of period130 $15.94 
Awarded167 25.35 
Forfeited(7)17.28 
Outstanding, end of period290 21.31 
As of March 31, 2021, the aggregate pre-tax intrinsic value of PSUs outstanding was $6.1 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 2.1 years.
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Total stock-based compensation expense recognized is as follows (in thousands):
Three Months Ended
March 31,
20212020
Cost of sales$321 $441 
Selling, general and administrative3,091 3,552 
Research and development649 363 
$4,061 $4,356 
As of March 31, 2021, the total compensation expense related to unvested stock option, RSU, and PSU grants under the Company’s 2014 plan not yet recognized was $41.5 million and is currently estimated to be expensed through the year 2025. This expense will be amortized on a straight-line basis over a weighted average period of 2.7 years and will be adjusted for subsequent forfeitures.
2014 Employee Stock Purchase Plan
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 March 31, 2021, 893,829 shares remained available for issuance and no shares were issued during the three months ended March 31, 2021.
8.    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
March 31,
20212020
Common stock options3,658 3,372 
Market-based performance stock options427 427 
Restricted stock units634 596 
Market-based performance stock units290 192 
Employee stock purchase plan shares63 70 
Stock issuable upon conversion of convertible note6,309  
11,381 4,657 
The Company uses the if-converted method for calculating any potentially dilutive effects of the Convertible Notes. The Company did not adjust the net loss for the three months ended March 31, 2021 to eliminate any interest expense related to the Convertible Notes (see Note 9) 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.
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9.    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 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
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1,000. See Note 6 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 $3.2 million, respectively were recorded on the issuance date and are 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.
As of March 31, 2021, the net carrying amount of the Convertible Notes is as follows:
March 31,
2021
Outstanding principal amount of convertible notes$65,000 
Unamortized debt discount and transaction costs(4,178)
Fair value of embedded derivatives3,394 
Convertible notes, net$64,216 
The convertible debt discount and transaction costs are being amortized to expense over the term of the Notes. For the three months ended March 31, 2021, the accretion of the convertible debt discount and amortization of debt issuance costs was $0.2 million 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 March 31, 2021 was $0.6 million and was included in other current liabilities on the condensed consolidated balance sheets.
10.    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.
On May 15, 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 a second amended complaint. The Company moved to dismiss the second amended complaint on September 18, 2020. By order dated January 22, 2021, the Court granted the Company’s motion to dismiss the second amended complaint with leave to amend. Although the Company continues to believe this lawsuit is without merit, on March 4, 2021, the Company agreed with the plaintiff to a settlement-in-principle that, if approved, will resolve the litigation in its entirety. The plaintiff’s motion for preliminary approval of the proposed settlement is due on May 11, 2021. As of this filing, the Court has not yet set a date for the preliminary approval hearing. As of March 31, 2021, the Company has accrued anticipated settlement costs associated with this lawsuit of $0.3 million which is recorded in other current liabilities on the condensed consolidated balance sheets.
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11.    Income Taxes
The provision for income taxes in the periods presented is based upon the loss before income taxes (in thousands):
Three Months Ended
March 31,
20212020
Provision for income tax (benefit)$(422)$ 

The Company’s income tax benefit in the three months ended March 31, 2021 was primarily related to the amortization of acquired intangible assets in foreign jurisdictions.
Due to historical losses, management believes it is more likely than not that the net deferred tax assets are not recognizable and will not be recognizable until the Company has sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If management’s assessment of the deferred tax assets of the corresponding valuation allowance were to change, the Company would record the related adjustment to net loss during the period in which management makes the determination.
As of March 31, 2021, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2020.
12.    Subsequent Event
On April 26, 2021, the Company was notified by a European Notified Body of deficiencies in certain in-house competencies and training relative to policies and processes after an audit at the Company’s Menlo Park, California facility. As a result of the deficiencies, the Company’s CE Marks for PROPEL and PROPEL Mini have been suspended while it completes necessary remediation activities and submits the response. During the suspension, the Company remains permitted to sell existing inventory located in the European Union. On May 7, 2021, the Company completed its formal response and will be submitting that response in a filing to the Notified Body on May 10, 2021. Prior to that filing, the Company received positive feedback relative to the submission content from the inspector and the Company expects to meet all regulatory filing requirements in a timely manner. While the CE Marks are suspended, the Company believes it remains compliant in all other jurisdictions and no other aspects of the business, including the Fiagon products, have been impacted. For the three months ended March 31, 2021, revenue from PROPEL and PROPEL Mini in Europe was approximately $0.4 million.
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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. 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. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management's beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements may turn out to be inaccurate. Factors that could materially affect our business operations and financial performance and condition include, but are not limited to: 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 those discussed in “Part I — Item 1A. Risk Factors” and “Part IV - Consolidated Financial Statements” of our Annual Report on Form 10-K, or Annual Report, filed with the SEC on March 9, 2021. Unless required by law, 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.
In addition, 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 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 statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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 global ear, nose and throat (“ENT”) medical technology leader dedicated to transforming patient care. Our U.S. Food and Drug Administration (“FDA”) approved steroid releasing products are designed to provide mechanical spacing and deliver targeted therapy (mometasone furoate) to the site of disease. 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 to reduce inflammation and maintain patency following sinus surgery primarily in hospitals and ambulatory surgery centers (“ASC”) and has increasing applications in the physician office setting of care in conjunction with balloon dilation and following post-surgical debridement. SINUVA is a physician administered drug, 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. In October 2020, we acquired Fiagon AG Medical Technologies (“Fiagon”), a global leader of electromagnetic surgical navigation solutions with an expansive portfolio of ENT product offerings, including the VENSURE sinus dilation platform (“VENSURE”) and CUBE surgical navigation system and instrumentation (“CUBE”), that complement our PROPEL and SINUVA sinus implants across all settings of care and extend our geographic reach. The PROPEL family of products are combination products regulated as devices approved under a Premarket Approval (“PMA”) and SINUVA is a combination product regulated as a drug that was approved under a New Drug Application (“NDA”). The VENSURE products received 510(k) clearance in August 2020. CUBE and VENSURE are both regulated as medical devices.
While our primary commercial focus is the U.S, we are also expanding the global reach of our products. 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
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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 rhinosinusitis 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 over time. 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 399,000 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 body over a period of approximately six weeks.
PROPEL Mini is a smaller version of PROPEL and is approved for use in both the ethmoid and frontal sinuses. PROPEL Mini is used preferentially by physicians compared with PROPEL when treating smaller anatomies or following less extensive procedures.
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.
The Straight Delivery System (“SDS”) is an extension of the PROPEL family of implants. It is specifically engineered for precise, consistent and easy delivery of the PROPEL Mini Implant into the ethmoid sinus for maximum tissue apposition. In February 2021, we announced the U.S. availability of the SDS packaged with the PROPEL Mini after the combined packaging received FDA approval.
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.
Our PROPEL family of products are used primarily in the operating room of a hospital or ambulatory surgery center. 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 physician office setting. VENSURE provides for complementary use with PROPEL Contour for dilation and localized drug delivery. CUBE navigation supports surgery and balloon dilation in all settings of care. We applied to the Centers for Medicare & Medicaid Services (“CMS”) for a product-specific J-code for SINUVA, and in July 2019, 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. 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, 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 and allows us to place SINUVA in the ASC and hospital settings. Moreover, in January 2021, CMS approved a revised coding application for our PROPEL family of products and established a separate code for PROPEL, S1091 “Stent, non-coronary, temporary, with delivery system (propel)”. CMS also made updates to the current SINUVA J-code to J7402 “Mometasone furoate sinus implant, (sinuva), 10 micrograms” and attached an average selling price (“ASP”) to the code, providing predictability, transparency, and confidence of reimbursement for providers and payers going forward. The new PROPEL and SINUVA codes took effect April 1, 2021. 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.
Our VENSURE Navigable and Stand-alone balloon offerings are used to access and treat the frontal, sphenoid sinus and maxillary ostia in adults using a trans-nasal approach. The VENSURE Navigation balloon is intended for use in conjunction with the CUBE navigation system during sinus procedures when surgical navigation or image-guided surgery may be necessary to locate and displace bone, or cartilaginous tissue surrounding the drainage pathways of the frontal, maxillary, and sphenoid sinuses to facilitate dilation of the sinus ostia.
Our CUBE Navigation System is an innovative virtual guidance platform for high precision ENT and ENT related skull-base surgeries. The system’s unique photo registration technology, VirtuEye™, enhances the user’s navigation experience and improves pre-surgery efficiency. This novel 3D-imaging technology mitigates common tactile tracing errors by collecting thousands of patient reference points in one camera shot. The entire photo registration process can be achieved in under 30 seconds without touching the patient.
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We also continue to perform research and development activities and clinical trials in order to expand our portfolio of products and improve our existing products. We plan to initiate the EXPAND study in the second quarter of 2021, which will assess the potential to improve patency and other outcomes through localized drug delivery following balloon dilation utilizing PROPEL Contour and the VENSURE balloon. In support of our focus on expanding our global reach, we plan to make clinical and regulatory investments in PROPEL in Europe. A PROPEL OPEN registry trial is planned to fulfill EU Medical Device Regulation (“MDR”) requirements and collect local data in support of our commercial efforts. Other clinical trials initiated in the past include our investigational ASCEND drug-coated sinus balloon study initiated in December 2018.
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 of 2020 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 remainder of 2020 as we continued to see improvements in the elective procedure market. Our business has been and will be impacted by patients’ decisions to undergo sinus surgeries and as ENT ASC and office procedure volumes begin to recover. 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 second half of 2020 and the beginning of 2021 provided 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 and may impact our operations and financial results.
Components of Our Results of Operations
Revenue
We have derived our revenue almost exclusively from the sales of our PROPEL family of products, with limited sales of SINUVA beginning in March 2018, as well as sales of CUBE and VENSURE products beginning in the fourth quarter of 2020 with the acquisition of Fiagon. While our business has been and may continue to be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits for an extended period of time, we anticipate revenue growth in 2021, based on the increased elective procedure volumes and enrollment trends towards the end of 2020. Once the disruption from the COVID-19 pandemic subsides, we expect our revenue to increase as we continue to expand our 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 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.
We have predominantly derived our revenue from within the United States and no single customer accounted for more than 10% of our revenue during the three months ended March 31, 2021 and 2020.
Cost of Sales and Gross Profit
We manufacture our PROPEL family of products and SINUVA in our facility in Menlo Park, California. We manufacture CUBE navigation equipment and instruments in Hennigsdorf, Germany, and procure VENSURE sinus dilation balloons are from a third-party manufacturer. Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor. 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. Cost of sales also includes depreciation expense for production equipment, amortization of intangible assets associated with acquired product technologies and processes, maintenance of operational processes, and certain direct costs such as shipping costs. 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 improvements in our manufacturing capabilities.
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Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing costs, product mix, and average selling prices. Toward the end of the first quarter and throughout the second quarter of 2020, 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, as well as our decision to suspend production until the third quarter of 2020. Production resumed during the third quarter of 2020, but below normal capacity. We charge idle facility costs 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 compliance expenses, insurance costs, amortization of intangible assets associated with acquired customer and distributor relationships, 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 purchase obligations, and amortization of debt issuance costs associated with our convertible notes, as well as imputed interest on deferred payments for the acquisition of Fiagon.
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, including changes in the fair value of foreign currency forward contracts.
Provision for Income Tax Benefit
Provision for income tax benefit consists of an estimate of federal, state and foreign income taxes based on enacted federal, state and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law. Due to the level of historical losses, we maintain a valuation allowance against U.S. federal and state deferred tax assets as we have concluded it is more likely than not that these deferred tax assets will not be realized.
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 on Form 10-K are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and
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estimates. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2021, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 three months ended March 31, 2021.
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Results of Operations
Three Months Ended
March 31,
20212020
(in thousands, expect percentages)
Revenue$24,328 $19,826 
Cost of sales8,455 6,410 
Gross profit15,873 13,416 
Gross margin65 %68 %
Operating expenses:
Selling, general and administrative28,077 26,200 
Research and development6,370 5,146 
Total operating expenses34,447 31,346 
Loss from operations(18,574)(17,930)
Interest expense(1,375)— 
Other income (expense), net(504)397 
Loss before income taxes(20,453)(17,533)
Provision for income tax (benefit)(422)— 
Net loss$(20,031)$(17,533)
Comparison of the Three Months ended March 31, 2021 and 2020
Revenue
Three Months Ended
March 31,
Three Months Ended
Change ($)Change (%)
202120202021 to 20202021 to 2020
(in thousands, except percentages)
PROPEL family of products
$20,442 $19,090 $1,352 %
SINUVA2,435 736 1,699 231 %
VENSURE, CUBE, and Accessories1,451 — 1,451 N/A
$24,328 $19,826 $4,502 23 %
Revenue increased by $4.5 million, or 23%, to $24.3 million during the three months ended March 31, 2021, compared to $19.8 million during the three months ended March 31, 2020. The increase in revenue for the three months ended March 31, 2021 was due to a 7% increase in PROPEL and a significant increase in SINUVA sales. Increased PROPEL revenue for the three months ended March 31, 2021 resulted from a 5% increase in unit sales and a 2% increase in average selling price. The increase in unit sales for PROPEL was driven by a recovery in demand from the impact of the COVID-19 pandemic as certain areas of the United States resumed elective procedures. SINUVA unit sales increased by 187% during the three months ended March 31, 2021, and average selling price increased 4% per unit from the three months ended March 31, 2020. The increase in unit sales for SINUVA during the three months ended March 31, 2021 was due to the improvement in reimbursement, continued adoption of the technology, and the ongoing shift of procedures from hospitals and ASC to the physician office setting of care. SINUVA sales also benefited from the expansion of our Market Access infrastructure and the addition and expansion of our distributor relationships during the year ended December 31, 2020. Furthermore, revenue for the three months ended March 31, 2021 also included $1.5 million of sales from the CUBE navigation equipment, instruments, and accessories and VENSURE sinus dilation balloons.
Based on current elective procedure volumes and enrollment trends, as well as the acquisition of Fiagon, we expect revenue growth for the remainder of 2021. While we cannot predict the extent or duration of the impact of 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.

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Cost of Sales and Gross Margin
Cost of sales increased by $2.0 million, or 32%, to $8.5 million during the three months ended March 31, 2021, compared to $6.4 million during the three months ended March 31, 2020. The increased cost of sales for the three months ended March 31, 2021 was primarily due to increased product sales. In addition, cost of sales was impacted by amortization of intangible assets, production related period costs, and project costs, collectively $1.0 million. The increase was partially offset by approximately $1.9 million of charges related to the impacts of COVID-19 incurred in the prior period which were not incurred during the current quarter as production volumes returned to normal capacity.
Gross margin for the three months ended March 31, 2021, decreased to 65%, compared to 68% for the three months ended March 31, 2020. Gross margin was unfavorably impacted by amortization of intangible assets, production related period costs, and project costs, collectively representing approximately 4% of revenues. The decrease was partially offset by approximately $1.9 million of charges related to the impacts of COVID-19 incurred in the prior period which were not incurred during the current quarter as production volumes returned to normal capacity.
Consistent with the expected increase in procedure volumes in 2021, we anticipate that there will be sequential revenue growth for the remainder of 2021 from current levels. With the expected increase in demand and our operation at full capacity, we do not expect idle facility expense to be incurred in 2021. 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 2021.
Selling, General and Administrative Expenses
SG&A expenses increased by $1.9 million, or 7%, to $28.1 million during the three months ended March 31, 2021, compared to $26.2 million during the three months ended March 31, 2020. The increase in SG&A expenses was primarily due to increased commissions from increased sales, $0.6 million of impairment expense related to certain property, equipment, and intangible assets, incremental SG&A expense as a result of the acquisition of Fiagon, as well as costs associated with the ongoing integration of Fiagon of $1.9 million, which consisted largely of professional fees. This increase was partially offset by decreased headcount and related expenses.
We will continue to monitor our SG&A expenses in light of the uncertainties related to the COVID-19 pandemic; however, we will still continue to support our customers, physicians and patients and will continue to incur additional SG&A expenses as a result of the acquisition of Fiagon.
Research and Development Expenses
R&D expenses increased by $1.2 million, or 24%, to $6.4 million during the three months ended March 31, 2021, compared to $5.1 million during the three months ended March 31, 2020. The increase in R&D expenses was primarily due to increased headcount and related expenses as a result of the acquisition of Fiagon, and professional fees pertaining to R&D projects.
We will continue to monitor our R&D expenses in light of the uncertainty related to the COVID-19 pandemic; however, we will continue to incur additional R&D expense as a result of the acquisition of Fiagon and fees pertaining to R&D projects.
Interest Expense
The interest expense of $1.4 million for the three months ended March 31, 2021 was attributable to convertible notes entered into during the second quarter of 2020 as well as imputed interest on deferred payments for the acquisition of Fiagon. There was no similar expense in the comparative period.
Other Income (Expense), Net
Other income (expense), net, decreased by $0.9 million to other expense of $0.5 million during the three months ended March 31, 2021, compared to other income of $0.4 million during the three months ended March 31, 2020. The decrease in other income (expense), net during the three months ended March 31, 2021 was attributable to the increase in fair value of our embedded derivative liability, an increase in amortization expense of net investment premiums, and the overall effects of foreign exchange remeasurement.

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Provision for Income Tax Benefit
Provision for income tax benefit of $0.4 million for the three months ended March 31, 2021 was attributable to the foreign tax impact associated with the operations of Fiagon. There were no similar benefits in the comparative period.
Liquidity and Capital Resources
Overview
As of March 31, 2021, we had cash, cash equivalents, short-term investments, and restricted cash of $89.0 million, compared to cash, cash equivalents, short-term investments, and restricted cash of $105.5 million as of December 31, 2020.
Cash Flows
Three Months Ended
March 31,
(in thousands)20212020
Net cash provided by (used in):
Operating activities$(16,772)$(5,956)
Investing activities17,629 16,396 
Financing activities1,121 3,101 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(196)— 
Net increase in cash, cash equivalents, and restricted cash$1,782 $13,541 
Net Cash Used in Operating Activities
During the three months ended March 31, 2021, net cash used in operating activities was $16.8 million, consisting primarily of a net loss of $20.0 million and an increase in net operating assets of $4.3 million, offset by non-cash charges of $7.5 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, the impacts of foreign exchange, impairment of property, equipment, and intangible assets, as well as depreciation and amortization expense. The increase in net operating assets is primarily attributable to an increase in inventory, prepaid expenses and other assets, partially offset by an increase in accounts payable as well as a decrease in accrued compensation due to the payout of annual corporate bonuses.
During the three months ended March 31, 2020, net cash used in operating activities was $6.0 million, consisting primarily of a net loss of $17.5 million and a decrease in net operating assets of $6.3 million, and non-cash charges of $5.3 million. The non-cash charges primarily consisted of stock-based compensation expense. The decrease in net operating assets is primarily due to a decrease in accounts receivable due to collections and an increase in accounts payable, partially offset by a decrease in accrued compensation due to the payout of annual corporate bonuses.
Net Cash Provided by Investing Activities
During the three months ended March 31, 2021, net cash provided by investing activities was $17.6 million, consisting of net maturities of short-term investments of $18.1 million, partially offset by purchases of property and equipment of $0.5 million.
During the three months ended March 31, 2020, net cash provided by investing activities was $16.4 million, consisting of net maturities of short-term investments of $16.5 million and purchases of property and equipment of $0.1 million.
Net Cash Provided by Financing Activities
During the three months ended March 31, 2021, net cash provided by financing activities was $1.1 million, consisting of net proceeds from common stock upon exercises of employee stock options and purchases under our employee stock purchase plan.
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During the three months ended March 31, 2020, net cash provided by financing activities was $3.1 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
Based on our current expectations of the operating environment in 2021 and 2022, we believe we have adequate cash and other resources to operate for at least twelve months from the issuance of this Quarterly Report on Form 10-Q, including funding our working capital needs, capital expenditures, payments associated with the Fiagon acquisition, interest payments on long-term debt and lease payments. However, the extent to which the COVID-19 pandemic may continue to materially adversely impact our liquidity is uncertain.
Under the terms of the Purchase Agreement for the acquisition of Fiagon totaling €62.2 million, we made an initial €15.0 million ($17.6 million) payment upon closing in October 2020 and will make three annual payments of €15.0 million in each October of the subsequent three years, plus an estimated €2.2 million purchase price adjustment due in October 2021. In accordance with the terms of the Purchase Agreement, we were required to place $17.5 million (€15.0 million) in escrow with the seller as beneficiary. The amount placed in escrow is required to be adjusted to the equivalent of €15.0 million on January 15th and July 15th of each year based on the end of the prior month’s five-day trailing exchange rate.
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 March 31, 2021 and December 31, 2020, 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
Our contractual obligations as of March 31, 2021, have not materially changed outside the ordinary course of business from December 31, 2020.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk as of March 31, 2021, has not materially changed from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 10 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Risk Factors Summary
You should carefully consider the information set forth below before deciding whether to invest in our securities. Below is a summary of the principal risks associated with an investment in our securities.
The impact of COVID-19, and the various medical, social and economic measures being implemented to combat its proliferation, has had and will continue to have a material adverse effect on our business, financial condition, results of operations, and liquidity.
We have incurred significant operating losses since inception and may not be able to achieve profitability.
Our revenue is primarily generated from our PROPEL® family of products and, to a lesser extent, SINUVA® , VENSURE, and CUBE. Our revenue is dependent on the success of these products, and if these products fail to grow or to continue experiencing expanded adoption, our business will suffer.
A track record of adequate coverage and reimbursement is important for sales of our products in the office setting of care. Inadequate coverage and negative reimbursement policies for our products could affect their adoption and our future revenue.
We utilize third-party, single source suppliers and service providers for many of the components, materials and services used in the production of our steroid releasing implants, and the loss of, or disruption by, any of these suppliers or service providers could harm our business.
We rely on specialty pharmacies and specialty distributors for distribution of SINUVA in the United States, and the failure of those specialty pharmacies and specialty distributors to distribute SINUVA effectively would adversely affect sales of SINUVA.
Our long-term growth depends on our ability to develop and commercialize additional ENT products.
Consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.
We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
If our facilities or the facility of a supplier or customer become inoperable, we will be unable to continue to research, develop, manufacture, commercialize and sell our products and, as a result, our business will be harmed until we are able to secure a new facility.
As our company diversifies its portfolio of products and expands its international reach, we continue to expand the complexity of our operations. We may encounter difficulties in managing this expansion, which could disrupt our business.
If clinical studies of our future products or product indications do not produce results necessary to support regulatory clearance or approval in the United States or, with respect to our current or future products, elsewhere, we will be unable to commercialize these products.
Reimbursement in international markets may require us to undertake country-specific reimbursement activities, including additional clinical studies, which could be time-consuming and expensive and may not yield acceptable reimbursement rates.
Pricing for pharmaceutical products has come under increasing scrutiny by governments, legislative bodies and enforcement agencies. These activities may result in actions that have the effect of reducing our revenue or harming our business or reputation.
If we elect to pursue but fail to successfully acquire or effectively and efficiently integrate new third-party businesses, products, and/or technologies, we may not realize expected benefits of the transaction or our existing business may be harmed by the distraction, resource demands or unforeseen consequences of the endeavor.
We expect gross profit margins to vary over time, and changes in our gross profit margins could adversely affect our financial condition or results of operations.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.
If we experience significant disruptions in our information technology systems, our business may be adversely affected.
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Our products are subject to extensive regulation by the FDA, and other agencies, including the requirement to obtain approval prior to commercializing our products and the requirement to report adverse events and other ongoing reporting requirements. If we fail to obtain necessary FDA or other agency device or drug approvals for our products or are subject to regulatory enforcement action as a result of our failure to properly report adverse events or otherwise comply with regulatory requirements, our commercial operations would be harmed.
We cannot predict whether or when we will obtain regulatory approval to commercialize product candidates and we cannot, therefore, predict the timing of any future revenue from product candidates. Regulatory approval of a product candidate is not guaranteed, and the approval process is expensive, uncertain and lengthy.
If we participate in but fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program, or other governmental pricing programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition and results of operations.
If we materially modify our approved products, we may need to seek and obtain new approvals, which, if not granted, would prevent us from selling our modified products.
We may fail to obtain foreign regulatory approvals to market our products in other countries.
If we, our suppliers or service providers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
If the third parties on which we rely to conduct our clinical trials do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize such product candidates.
We may be subject to enforcement action if we engage in improper marketing or promotion of our products.
If we fail to comply with U.S. federal and state healthcare regulatory laws and applicable international healthcare regulatory laws, we could be subject to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of our operations, any of which could adversely impact our reputation and business operations.
Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory approval of new products and to produce, market and distribute our products after approval is obtained.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.
Changes in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.
Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.
We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.
Our debt obligations under our facility agreement with Deerfield could impair our financial condition and limit our operating flexibility.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

For a more complete discussion of the material risks that could impact our business, see below.

Risks Related to COVID-19 Pandemic
The impact of COVID-19, and the various medical, social and economic measures being implemented to combat its proliferation, has had and will continue to have a material adverse effect on our business, financial condition, results of operations, and liquidity.
Our business has been materially and adversely impacted by the Novel Coronavirus Disease 2019 (“COVID-19”) and we are subject to continuing risks related to the COVID-19 pandemic. The extent and duration of the pandemic is currently unknown. As a result of the COVID-19 pandemic and the associated medical, social and economic restrictions that have been put in place, our customers suspended performing elective procedures in hospitals, which is where the majority of our products are utilized, and although there has been a partial lifting of these suspensions in some jurisdictions, it is currently unknown when these suspensions will be fully lifted. As a result, our sales have been materially and adversely affected. Further, our business has and will be impacted by hospitals continuing to suspend elective surgical procedures and reduced ear, nose and throat (“ENT”) Ambulatory Surgery Centers (“ASC”) and office procedures. While we have taken several measures in response to COVID-19 and its effects on our employees, customers, their patients and our business, a prolonged duration and the
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ultimate impact of COVID-19, as well as many of the measures implemented to address the threat posed by COVID-19, has and will continue to materially affect our business.
Our sales are being, and we expect will continue to be, materially adversely impacted by COVID-19.
We are a medical technology company that provides products used primarily for ENT elective procedures. As a result of COVID-19, numerous state and local jurisdictions have imposed shelter-in-place orders, and federal medical, health and safety governmental organizations, like the Centers for Disease Control and the Centers (“CDC”) for Medicare and Medicaid Services (“CMS”) have issued guidelines which have led to, among other measures, the severe limitation or curtailment of elective procedures. Although certain measures have been relaxed, increases in the rate of COVID-19 cases may cause a tightening of these restrictions. We cannot predict when federal, state and local governments will lift these restrictions, nor when the CDC and other federal medical agencies will lift restrictions on elective procedures. These restrictions have caused, and we expect will continue to cause, severe reductions in demand for our products and corresponding sales revenue until the pandemic abates and the shelter-in-place orders are lifted, and perhaps afterwards as people take time to resume normal activities.
A prolonged curtailment of operations related to COVID-19 may materially adversely impact our liquidity.
We have implemented numerous capital preservation initiatives in response to COVID-19, including a reduction in force and the furloughing of other employees throughout our organization. Although we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our current capital needs for the foreseeable future, a prolonged duration and resulting impact of COVID-19 could materially adversely alter our current cash position and affect our liquidity.
Our business may continue to be materially adversely impacted after COVID-19 medical, social and economic restrictions are lifted.
Even as shelter-in-place orders and other restrictions are lifted, it is uncertain as to when elective procedures will return to their original levels or if they will return to their original levels at all. Further, some physicians may not feel comfortable performing, and some patients may not feel comfortable undergoing, such procedures. Alternatively, at the point that restrictions are lifted, in whole or in part, there may be an increased demand for our products as delayed procedures are scheduled and performed. We may face challenges as we continue our manufacturing and distribution operations, including the risk of further potential outbreaks of COVID-19 cases.
Our ability to raise capital may be materially adversely impacted by COVID-19.
The COVID-19 pandemic has led to severe disruption and volatility in global capital markets and increased economic uncertainty and instability. The macroeconomic impact on the global economy has been and may continue to be severe. Any sustained disruption may increase our cost of capital and adversely affect our ability to access the capital markets in the future.
The enrollment of our clinical studies has been and may continue to be materially adversely impacted by COVID-19.
Our future business prospects are highly dependent on generating, collecting and disseminating data pursuant to clinical trials. As a result of the cessation of elective procedures, we have been required to delay the initiation of clinical trials on a global basis. These and other clinical trials may continue to be materially impacted by COVID-19 as hospitals and physicians prioritize treating existing patients and creating capacity. Additionally, patients may be less willing to participate in clinical trials as a result of the COVID-19 pandemic. Delays in the initiation of sites or enrollment of patients in these and other clinical studies, may have a material adverse effect on our results of operations and the timing of the development and commercialization of future products.
In addition to the above, the effects of the COVID-19 pandemic may exacerbate the effects of many of the risks discussed below.
Financial and Operational Risks
We have incurred significant operating losses since inception and may not be able to achieve profitability.
We have incurred net losses since our inception in 2003. We incurred net losses of $20.0 million for the three months ended March 31, 2021, and $72.3 million and $43.0 million for the years ended December 31, 2020 and 2019, respectively. As of March 31, 2021, we had an accumulated deficit of $323.1 million. To date, we have financed our operations primarily
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through sales of our capital stock, certain debt-related financing arrangements, and from sales of our approved products. We have devoted substantially all of our resources to research and development of our products, including clinical and regulatory initiatives to obtain approvals for our products, and sales and marketing activities. Our ability to generate sufficient revenue from our existing products or from any of our product candidates in development, and to transition to profitability and generate consistent positive cash flows is uncertain. We expect that our operating expenses will continue to increase as we continue to build our commercial infrastructure, develop, enhance and commercialize new products and incur additional operational costs associated with our growth. As a result, we expect to continue to incur operating losses for the foreseeable future and may never achieve profitability.
Our revenue is generated primarily from our PROPEL® family of products and, to a lesser extent, SINUVA®, VENSURE, and CUBE. Our revenue is dependent on the success of these products, and if these products fail to grow or to continue experiencing expanded adoption, our business will suffer.
We expect that sales of the PROPEL family of products, together with SINUVA, VENSURE, and CUBE, will account for a large portion of our revenue for the foreseeable future. In addition, our ability to become profitable will depend upon the commercial success of these products. We market our products primarily to ENT physicians who may be slow or fail to adopt our products or who may use our products in only a small percentage of their eligible patients for a variety of reasons, including, among others:
lack of experience with our products;
lack of adequate reimbursement or cost to the patient;
lack of conviction regarding evidence supporting cost benefits or cost effectiveness of our products over existing alternatives;
lack of clinical data supporting longer-term patient benefits or, in the case of SINUVA, repeated use;
new technologies that may be competitive to our products; and
liability risks generally associated with the use of new products and procedures.
If we are unable to effectively demonstrate to ENT physicians and patients the benefits of our products or our products fail to achieve growing market acceptance, our future revenue will be adversely impacted.
Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict the extent to which we will continue to generate revenue from our products or the timing for when or the extent to which we will become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.
Pricing pressure from our hospital and ASC customers due to cost sensitivities resulting from healthcare cost containment pressures and reimbursement changes could decrease demand for our products, the prices that customers are willing to pay and the frequency of use of our products, which could have an adverse effect on our business.
Hospitals and ASC that purchase our products typically bill various third-party payors for a facility fee to cover the costs of supplies, including our PROPEL family of products, used in sinus surgery procedures. Because there is often no separate reimbursement for supplies used in surgical procedures, the additional cost associated with the use of our steroid releasing implants can impact the profit margin of the hospital or surgery center where the sinus surgery is performed. Some of our target customers may be unwilling to adopt or use broadly our steroid releasing implants in light of the additional associated cost. Further, any decline in the amount payors reimburse our customers for sinus surgery procedures could make it difficult for existing customers to continue using, or to adopt, our steroid releasing implants. This could create additional pricing pressure for us.
All third-party payors, whether governmental or commercial, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods include prospective payment systems, bundled payment models, value-based payment models, capitated arrangements, group purchasing, benefit redesign, prior authorization processes and requirements for second opinions prior to major surgery. These cost-control methods also potentially limit the amount that healthcare providers may be willing to pay for medical devices.
Effective January 1, 2017, CMS assigned upper airway procedures, which includes sinus surgery, to a comprehensive Ambulatory Payment Classification (“APC”), for procedures performed in the hospital outpatient department setting. With this assignment, the reimbursement per case was set at a fixed amount regardless of the number of procedures performed during that
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encounter. As a result, for Medicare patients, while payment increased for encounters involving one or two procedures, payment for encounters with three or more procedures, which are commonly associated with the use of our products, declined significantly below the prior average reimbursement amount. Some commercial payors may peg their rates directly to Medicare rates or use these rates as a reference for facility contract negotiations. If, as a result of this CMS ruling, hospitals are unable to receive adequate reimbursement to support the use of our products, or if we are forced to lower the price we charge for our products, this will negatively impact our revenues and our gross margins will decrease, which will adversely affect our ability to invest in and grow our business. We cannot predict how pending and future healthcare legislation and regulations will impact our business and any changes that further restricts coverage of our products or lowers reimbursement for procedures using our products could materially affect our business.
A track record of adequate coverage and reimbursement is important for sales of our products in the office setting of care. Inadequate coverage and negative reimbursement policies for our products could affect their adoption and our future revenue.
We are early in our commercialization of SINUVA for use in the office setting of care. SINUVA is designated as a drug by the FDA and as such, providers or specialty pharmacies have been seeking reimbursement for the product using an unassigned J-Code. We applied for a product-specific J-code in the 2018 process, but it was not granted, and we reapplied in the 2019 process. In July 2019, 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. 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, 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 and allows us to place SINUVA in the ASC and hospital settings. Moreover, in January 2021, CMS approved a revised coding application for our PROPEL family of products and established a separate code for PROPEL, S1091 “Stent, non-coronary, temporary, with delivery system (propel)”. CMS also made updates to the current SINUVA J-code to J7402 “Mometasone furoate sinus implant, (sinuva), 10 micrograms.” The new PROPEL and SINUVA codes took effect April 1, 2021. We have limited experience with these reimbursements and do not know how effective these approaches will be over time in securing reimbursement from payors to cover the cost of SINUVA or if the level of reimbursement will be sufficient to support usage. While the reimbursement codes are used for submission of claims for reimbursement, the payment is determined by and at the discretion of the payor. Reimbursement related factors that will impact adoption of SINUVA, and may change at any time, include:
payors adoption of positive medical policies covering SINUVA or including SINUVA on their formularies;
payors providing product reimbursement;
physicians being able to secure payment for their time through appropriate procedural codes;
patients’ willingness to make any required co-pay or co-insurance payments; and
physician’s willingness to purchase the product directly and seek reimbursement from payors and patient co-pay for that expense, as is required by some payors. Such payments may or may not be received by the physician or may not fully cover the cost of the product.
The degree to which each of these factors is realized will impact SINUVA adoption and our ability to grow revenue.
Our PROPEL family of products are used primarily in the operating room setting in hospitals and ASC where the cost of these products is paid for out of the reimbursed facility fee associated with sinus surgery. Should this fee be reduced by commercial payors or government agencies or should the occurrence of procedures shift significantly to lower cost centers of care with lower reimbursement, our ability to sell our PROPEL family of products may be limited. At present, there is very little usage of PROPEL products in the office setting of care because sinus surgery is more typically performed in the operating room and because there is limited reimbursement for the PROPEL family of products available in the office setting of care. While there are a few payors that may provide such coverage, that can change, and the majority of payors consider this usage experimental and investigational and therefore would not cover reimbursement claims.
Our future growth depends on physician awareness and adoption of our steroid releasing implants and other products.
We focus our sales, marketing and education efforts primarily on ENT physicians. We train physicians on the patient population included in our labeling. Some physicians may choose to utilize our products on a subset of their patients such as patients with severe polyp disease that they deem at higher risk for postoperative complications. If we are not able to effectively
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demonstrate to those physicians that our products are beneficial in a broad range of patients on which they operate, their adoption of our products will be limited.
We train our physician customers on the proper techniques in using our devices to achieve the intended outcome. The successful use of our steroid releasing implants and other products depends in large part on the physician’s adherence to the techniques that they are provided in our product labeling. In the event that physicians do not adhere to these techniques or if they perceive that our products are too cumbersome for them to use, we may have difficulty facilitating adoption. Additionally, physicians may develop their own techniques for use of our products during insertion and during the period in which the drug is delivered and is absorbed. For example, we are aware some physicians are removing our steroid releasing implants before all of the drug has been released into the surrounding tissue. While physicians were allowed to remove the implant at any time at their discretion in our clinical studies, early removal could lead to suboptimal outcomes. In addition, if physicians utilize our products in a manner that is inconsistent with how they were studied clinically, their outcomes may not be consistent with the outcomes achieved in our clinical studies, which may impact their perception of patient benefit and limit their adoption of our products.
Our clinical studies were designed to demonstrate the safety and efficacy of our steroid releasing implants based on FDA requirements and may not be seen as compelling to physicians. Any subsequent clinical studies that are conducted and published may not be positive or consistent with our existing data, which would affect the rate of adoption of our products.
Our success depends on the medical community’s acceptance of our steroid releasing implants as tools that are useful to ENT physicians treating patients with chronic rhinosinusitis. We have sponsored twelve multicenter, prospective studies of over 900 patients to track outcomes of treatment with our steroid releasing implants across multiple sinuses and settings of care. These clinical data have resulted in the highest level of evidence generated for any medical device used to improve the outcomes of sinus surgery. While the results of these studies collectively indicate a favorable safety and efficacy profile, the study designs and results may not be viewed as compelling to our physician customers. If physicians do not find our data compelling, they may choose not to use our products or limit their use. Additionally, the long-term effects of sinus interventions in conjunction with our steroid releasing implants beyond six months are not known. Certain ENT physicians, hospitals and surgery centers may prefer to see longer term efficacy data than we have produced. We cannot assure that any data that we or others generate will be consistent with that observed in these studies or meet the endpoints, nor that the results will be maintained beyond the time points studied. We also cannot assure that any data that may be collected will be compelling to the medical community because the data may not be scientifically meaningful and may not demonstrate that sinus procedures using our steroid releasing implants are an attractive option when compared against data from alternative treatments.
Each ENT physician’s individual experience with our steroid releasing implants will vary, and we believe that physicians will compare actual long-term outcomes in their own practices using our steroid releasing implants against sinus surgery used in conjunction with traditional sinus packing techniques. A long-term, adequately-controlled clinical study comparing sinus surgery performed in conjunction with our steroid releasing implants against sinus surgery performed in conjunction with the variety of traditional sinus packing techniques incorporated by physicians would be expensive and time-consuming and we have not conducted such a study. If the experience of physicians indicates that the use of our steroid releasing implants in functional endoscopic sinus surgery (“FESS”) is not as safe or effective as other treatment options or does not provide a lasting solution to patients with chronic rhinosinusitis, adoption of our products may suffer, and our business would be harmed.
We utilize third-party, single source suppliers and service providers for many of the components, materials and services used in the production of our steroid releasing implants, and the loss of, or disruption by, any of these suppliers or service providers could harm our business.
The active pharmaceutical ingredient (“API”) and a number of our critical components used in our steroid releasing implants are supplied to us from single source suppliers. We rely on single source suppliers for some of our polymer materials, some extrusions and molded components, and some off-the-shelf components. If a supplier delivers products of insufficient quality, it could lead to lot issues, failures or recalls. Our ability to supply our products commercially and to develop our product candidates depends, in part, on our ability to obtain these components in accordance with regulatory requirements and in sufficient quantities and quality for commercialization and clinical testing. We have entered into manufacturing, supply or service agreements with a number of our single source suppliers pursuant to which they supply the components we need. We are not certain that our single source suppliers will be able to meet our demand for their products, either because of the nature of our agreements with those suppliers, our limited experience with those suppliers or our relative importance as a customer to those suppliers. It may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. While our suppliers have generally met our demand for their products on a timely basis in the past, they may subordinate our needs in the future to their other customers.
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Establishing additional or replacement suppliers for the API or any of the components or processes used in our products, if required, may not be accomplished quickly. If we are able to find a replacement supplier, the replacement supplier would need to be qualified and may require additional regulatory authority approval, or design which could result in further delay. For example, the FDA, could require additional supplemental data if we rely upon a new supplier for the API used in our products. While we seek to maintain adequate inventory of the single source components and materials used in our products, any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.
If our third-party suppliers fail to deliver the required commercial quantities of materials or provide required services, on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, the continued commercialization of our products and the development of our product candidates would be impeded, delayed, limited or prevented, which could harm our business, results of operations, financial condition and prospects.
We rely on specialty pharmacies and specialty distributors for distribution of SINUVA in the United States, and the failure of those specialty pharmacies and specialty distributors to distribute SINUVA effectively would adversely affect sales of SINUVA.
We have historically relied on our internal sales channel to sell our products. However, we rely on specialty pharmacies and specialty distributors for the distribution of SINUVA in the United States. A specialty pharmacy is a pharmacy that specializes in the dispensing, and a specialty distributor that specializes in the distribution, of medications for complex or chronic conditions, which often require a high level of patient education, physician administration and ongoing management. The use of specialty pharmacies and specialty distributors involves certain risks, including, but not limited to, risks that these specialty entities will:
not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products;
reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support our products;
not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
engage in unlawful or inappropriate business practices that result in legal or regulatory enforcement activity which could result in liability to the company or damage its goodwill with customers; or
be unable to satisfy financial obligations to us or others.
In the event that any of the specialty pharmacies or specialty distributors whom we work with do not fulfill their contractual obligations to us or refuses to or fail to adequately serve patients, or the agreements are terminated without adequate notice, shipments of SINUVA, and associated revenues, would be adversely affected.
Our long-term growth depends on our ability to develop and commercialize additional ENT products.
It is important to our business that we continue to build a more complete product offering within the ENT market. We are using our drug releasing bioabsorbable technology to develop new products for use in the physician office setting. Developing additional products is expensive and time-consuming and could divert management’s attention away from our current sinus surgery products and harm our business. Even if we are successful in developing additional products, the success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
properly identify and anticipate ENT physician and patient needs;
receive adequate reimbursement for such products;
develop and introduce new products or product enhancements in a timely manner;
avoid infringing upon the intellectual property rights of third parties;
demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;
obtain the necessary regulatory clearances or approvals for new products or product enhancements;
be fully FDA-compliant with marketing and manufacturing of new devices or modified products;
provide adequate training to potential users of our products; and
develop an effective and FDA-compliant, dedicated sales and marketing team.
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If we are unsuccessful in developing and commercializing additional products in other areas of ENT, our ability to increase our revenue may be impaired.
Consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past several decades, which has driven numerous cost reform initiatives by legislators, regulators and third-party payors. Cost reform has elicited a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for hospitals and ASC. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of our products and may adversely impact our business, results of operations, financial condition and prospects.
We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of the companies developing or marketing ENT products are publicly traded companies, including Medtronic, Olympus, Johnson & Johnson, Stryker, Lyra Therapeutics, and Smith & Nephew Group PLC. These companies could develop drug releasing products that could compete with our products and most of these companies enjoy several competitive advantages, including:
greater financial and human capital resources;
significantly greater name recognition;
established relationships with ENT physicians, referring physicians, customers and third-party payors;
additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage; and
established sales, marketing and worldwide distribution networks.
In addition, there are and have been venture companies seeking to develop competitive products. Companies may also market alternatives to current modes of treatment, such as OptiNose. Finally, there are established pharmaceutical companies evaluating monoclonal antibodies for the treatment of chronic rhinosinusitis, such as Regeneron Pharmaceuticals, Inc., who recently received FDA approval to market Dupixent for chronic rhinosinusitis with nasal polyposis.
If another company successfully develops an approach for the treatment of chronic rhinosinusitis, including alternative device, drug delivery or pharmaceutical agent, our business could be significantly and adversely affected.
If physicians treat more patients in their offices instead of performing surgery in the operating room, our ability to sell our PROPEL family of products may be harmed.
The prevalence of sinus procedures being performed in the office has increased since sinus dilation products for use in the office setting received Category I Current Procedural Terminology (“CPT”) codes in 2011. As a result, the number of companies selling sinus dilation products has increased and well-known companies such as Medtronic, Stryker and Johnson & Johnson have begun to sell sinus dilation products. We entered this market in October 2020 with the acquisition of Fiagon AG Medical Technologies (“Fiagon”). This has led to increased marketing investments to sell these sinus dilation products in an attempt to not only grow the overall sinus procedure market but also to shift procedures from the operating room to the office. If more patients are treated for chronic rhinosinusitis in a physician office with a sinus dilation product rather than through FESS procedures in the operating room, the volume of FESS procedures performed may not grow as anticipated and our ability to sell our products may be harmed.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices and drug products. This risk exists even if a device or product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA, such as the case with our PROPEL family of products and SINUVA, or an applicable foreign regulatory authority. Our products and product candidates are designed to
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affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our product candidates could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our steroid releasing implants cause, or merely appear to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against us. Product liability claims may be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
costs of litigation;
distraction of management’s attention from our primary business;
the inability to commercialize our products or, if approved, our product candidates;
decreased demand for our products or, if approved, product candidates;
impairment of our business reputation;
product recall or withdrawal from the market;
withdrawal of clinical trial participants;
substantial monetary awards to patients or other claimants; or
loss of revenue.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse effect on our business.
In addition, although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.
The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
The products we currently market have been approved by the FDA for specific treatments. We train our marketing and direct sales force to not promote our products for uses outside of the FDA-approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using our products off-label, when in the physician’s independent professional medical judgment, he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those approved by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. In addition, if the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties,
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including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.
If we were to lose any of our executive management, it could adversely impact our future operations.
A significant leadership change is inherently risky, may cause disruption to our business, may cause concerns from third parties with whom we do business and may increase the likelihood of turnover of other key officers and employees. The loss of services of one or more other members of senior management or the inability to attract qualified permanent replacements could have a material adverse effect on our business. We may be unable to manage these transitions smoothly which could adversely impact our future strategy and ability to function or execute and could materially and adversely affect our business, financial condition and results of operations.
If our facilities or the facility of a supplier or customer become inoperable, we will be unable to continue to research, develop, manufacture, commercialize and sell our products and, as a result, our business will be harmed until we are able to secure a new facility.
We do not have redundant facilities. In the United States, we perform the majority of our research and development, manufacturing and commercialization activity and maintain most of our raw material and a significant portion of our finished goods inventory in a single location in Menlo Park, California. Menlo Park is situated on or near earthquake fault lines. Outside of the United States, CUBE navigation equipment and instruments are manufactured at a single facility in Hennigsdorf, Germany. Our facilities and equipment would be costly to replace and could require substantial lead time to repair or replace. The facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, earthquakes, flooding, fire, water shortages and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of raw materials and finished product reserve, may result in the inability to continue manufacturing our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all. In addition, while we have a limited amount of inventory at a third-party storage and fulfillment centers, that inventory may not be sufficient to continue our operations if our primary facility is damag