xent-20210630
FALSE2021Q2000127121412-31P2Y.064350100012712142021-01-012021-06-30xbrli:shares00012712142021-07-30iso4217:USD00012712142021-06-3000012712142020-12-31iso4217:USDxbrli:shares0001271214us-gaap:ConvertiblePreferredStockMember2021-06-300001271214us-gaap:ConvertiblePreferredStockMember2020-12-3100012712142021-04-012021-06-3000012712142020-04-012020-06-3000012712142020-01-012020-06-300001271214us-gaap:CommonStockMember2020-12-310001271214us-gaap:AdditionalPaidInCapitalMember2020-12-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001271214us-gaap:RetainedEarningsMember2020-12-310001271214us-gaap:CommonStockMember2021-01-012021-03-310001271214us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-3100012712142021-01-012021-03-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310001271214us-gaap:RetainedEarningsMember2021-01-012021-03-310001271214us-gaap:CommonStockMember2021-03-310001271214us-gaap:AdditionalPaidInCapitalMember2021-03-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001271214us-gaap:RetainedEarningsMember2021-03-3100012712142021-03-310001271214us-gaap:CommonStockMember2021-04-012021-06-300001271214us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-012021-06-300001271214us-gaap:RetainedEarningsMember2021-04-012021-06-300001271214us-gaap:CommonStockMember2021-06-300001271214us-gaap:AdditionalPaidInCapitalMember2021-06-300001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-300001271214us-gaap:RetainedEarningsMember2021-06-300001271214us-gaap:CommonStockMember2019-12-310001271214us-gaap:AdditionalPaidInCapitalMember2019-12-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001271214us-gaap:RetainedEarningsMember2019-12-3100012712142019-12-310001271214us-gaap:CommonStockMember2020-01-012020-03-310001271214us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100012712142020-01-012020-03-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001271214us-gaap:RetainedEarningsMember2020-01-012020-03-310001271214us-gaap:CommonStockMember2020-03-310001271214us-gaap:AdditionalPaidInCapitalMember2020-03-310001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001271214us-gaap:RetainedEarningsMember2020-03-3100012712142020-03-310001271214us-gaap:CommonStockMember2020-04-012020-06-300001271214us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300001271214us-gaap:RetainedEarningsMember2020-04-012020-06-300001271214us-gaap:CommonStockMember2020-06-300001271214us-gaap:AdditionalPaidInCapitalMember2020-06-300001271214us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300001271214us-gaap:RetainedEarningsMember2020-06-3000012712142020-06-300001271214xent:MergerAgreementIntersectENTIncMemberus-gaap:SubsequentEventMemberxent:MedtronicIncMember2021-08-060001271214srt:MinimumMember2021-01-012021-06-300001271214srt:MaximumMember2021-01-012021-06-3000012712142020-01-012020-12-310001271214xent:PropelFamilyOfProductsMember2021-04-012021-06-300001271214xent:PropelFamilyOfProductsMember2020-04-012020-06-300001271214xent:PropelFamilyOfProductsMember2021-01-012021-06-300001271214xent:PropelFamilyOfProductsMember2020-01-012020-06-300001271214xent:SinuvaMember2021-04-012021-06-300001271214xent:SinuvaMember2020-04-012020-06-300001271214xent:SinuvaMember2021-01-012021-06-300001271214xent:SinuvaMember2020-01-012020-06-300001271214xent:VenSureCUBEAndAccessoriesMember2021-04-012021-06-300001271214xent:VenSureCUBEAndAccessoriesMember2020-04-012020-06-300001271214xent:VenSureCUBEAndAccessoriesMember2021-01-012021-06-300001271214xent:VenSureCUBEAndAccessoriesMember2020-01-012020-06-300001271214xent:CUBEMember2021-04-012021-06-300001271214xent:CUBEMember2021-01-012021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:CashMember2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2021-06-300001271214us-gaap:USTreasuryBillSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasuryBondSecuritiesMemberus-gaap:FairValueInputsLevel2Member2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMember2021-06-300001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:CashMember2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:MoneyMarketFundsMember2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2020-12-310001271214us-gaap:USTreasuryBillSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateDebtSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasuryBondSecuritiesMemberus-gaap:FairValueInputsLevel2Member2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2020-12-310001271214us-gaap:FairValueMeasurementsRecurringMember2020-12-310001271214us-gaap:FairValueInputsLevel3Member2020-12-310001271214us-gaap:FairValueInputsLevel3Member2021-01-012021-06-300001271214us-gaap:FairValueInputsLevel3Member2021-06-30iso4217:EUR0001271214us-gaap:ForeignExchangeContractMemberus-gaap:NondesignatedMember2021-06-300001271214us-gaap:ForeignExchangeContractMemberus-gaap:NondesignatedMember2020-12-310001271214us-gaap:ForeignExchangeContractMemberus-gaap:PrepaidExpensesAndOtherCurrentAssetsMemberus-gaap:NondesignatedMember2021-06-300001271214us-gaap:ForeignExchangeContractMemberus-gaap:PrepaidExpensesAndOtherCurrentAssetsMemberus-gaap:NondesignatedMember2020-12-310001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherNoncurrentAssetsMemberus-gaap:NondesignatedMember2021-06-300001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherNoncurrentAssetsMemberus-gaap:NondesignatedMember2020-12-310001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherCurrentLiabilitiesMemberus-gaap:NondesignatedMember2021-06-300001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherCurrentLiabilitiesMemberus-gaap:NondesignatedMember2020-12-310001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherNoncurrentLiabilitiesMemberus-gaap:NondesignatedMember2021-06-300001271214us-gaap:ForeignExchangeContractMemberus-gaap:OtherNoncurrentLiabilitiesMemberus-gaap:NondesignatedMember2020-12-310001271214us-gaap:ForeignExchangeContractMember2021-04-012021-06-300001271214us-gaap:ForeignExchangeContractMember2021-01-012021-06-300001271214xent:FiagonAGMedicalMember2020-10-022020-10-020001271214srt:ScenarioForecastMemberxent:FiagonAGMedicalMember2021-10-012021-10-310001271214xent:FiagonAGMedicalMember2020-10-020001271214srt:MinimumMember2021-04-012021-06-300001271214srt:MaximumMember2021-04-012021-06-300001271214us-gaap:TrademarksMemberxent:FiagonAGMedicalMember2021-01-012021-03-310001271214us-gaap:ConvertiblePreferredStockMember2020-06-30xbrli:pure00012712142014-07-012014-07-3100012712142020-01-012020-01-0100012712142020-01-010001271214us-gaap:EmployeeStockOptionMember2020-12-310001271214us-gaap:EmployeeStockOptionMember2021-01-012021-06-300001271214us-gaap:EmployeeStockOptionMember2021-06-300001271214xent:MarketBasedVestingOptionMember2021-01-012021-06-300001271214us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2020-12-310001271214us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2021-06-300001271214us-gaap:PerformanceSharesMember2020-12-310001271214us-gaap:PerformanceSharesMember2021-01-012021-06-300001271214us-gaap:PerformanceSharesMember2021-06-300001271214us-gaap:CostOfSalesMember2021-04-012021-06-300001271214us-gaap:CostOfSalesMember2020-04-012020-06-300001271214us-gaap:CostOfSalesMember2021-01-012021-06-300001271214us-gaap:CostOfSalesMember2020-01-012020-06-300001271214us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-04-012021-06-300001271214us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-04-012020-06-300001271214us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-01-012021-06-300001271214us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-01-012020-06-300001271214us-gaap:ResearchAndDevelopmentExpenseMember2021-04-012021-06-300001271214us-gaap:ResearchAndDevelopmentExpenseMember2020-04-012020-06-300001271214us-gaap:ResearchAndDevelopmentExpenseMember2021-01-012021-06-300001271214us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-06-300001271214us-gaap:EmployeeStockMember2014-07-310001271214us-gaap:EmployeeStockMember2018-06-012018-06-300001271214us-gaap:EmployeeStockMember2018-06-300001271214us-gaap:EmployeeStockMember2021-06-300001271214us-gaap:EmployeeStockMember2021-01-012021-06-300001271214us-gaap:EmployeeStockOptionMember2021-04-012021-06-300001271214us-gaap:EmployeeStockOptionMember2020-04-012020-06-300001271214us-gaap:EmployeeStockOptionMember2021-01-012021-06-300001271214us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001271214xent:MarketBasedPerformaceStockOptionsMember2021-04-012021-06-300001271214xent:MarketBasedPerformaceStockOptionsMember2020-04-012020-06-300001271214xent:MarketBasedPerformaceStockOptionsMember2021-01-012021-06-300001271214xent:MarketBasedPerformaceStockOptionsMember2020-01-012020-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2021-04-012021-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2020-04-012020-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-06-300001271214us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-06-300001271214xent:MarketBasedPerformaceStockUnitsMember2021-04-012021-06-300001271214xent:MarketBasedPerformaceStockUnitsMember2020-04-012020-06-300001271214xent:MarketBasedPerformaceStockUnitsMember2021-01-012021-06-300001271214xent:MarketBasedPerformaceStockUnitsMember2020-01-012020-06-300001271214us-gaap:EmployeeStockMember2021-04-012021-06-300001271214us-gaap:EmployeeStockMember2020-04-012020-06-300001271214us-gaap:EmployeeStockMember2021-01-012021-06-300001271214us-gaap:EmployeeStockMember2020-01-012020-06-300001271214us-gaap:ConvertibleDebtSecuritiesMember2021-04-012021-06-300001271214us-gaap:ConvertibleDebtSecuritiesMember2020-04-012020-06-300001271214us-gaap:ConvertibleDebtSecuritiesMember2021-01-012021-06-300001271214us-gaap:ConvertibleDebtSecuritiesMember2020-01-012020-06-300001271214us-gaap:ConvertibleDebtMember2020-05-110001271214us-gaap:DebtInstrumentRedemptionPeriodOneMemberus-gaap:ConvertibleDebtMember2020-05-11xent:day0001271214us-gaap:DebtInstrumentRedemptionPeriodOneMemberus-gaap:ConvertibleDebtMember2020-05-112020-05-110001271214us-gaap:DebtInstrumentRedemptionPeriodTwoMemberus-gaap:ConvertibleDebtMember2020-05-110001271214us-gaap:DebtInstrumentRedemptionPeriodTwoMemberus-gaap:ConvertibleDebtMember2020-05-112020-05-110001271214srt:MinimumMemberus-gaap:ConvertibleDebtMember2020-05-112020-05-110001271214srt:MaximumMemberus-gaap:ConvertibleDebtMember2020-05-112020-05-110001271214us-gaap:EmbeddedDerivativeFinancialInstrumentsMember2020-05-110001271214us-gaap:ConvertibleDebtMember2021-06-300001271214us-gaap:ConvertibleDebtMember2020-12-310001271214us-gaap:ConvertibleDebtMember2021-04-012021-06-300001271214us-gaap:ConvertibleDebtMember2021-01-012021-06-300001271214us-gaap:ConvertibleDebtMember2020-04-012020-06-300001271214us-gaap:ConvertibleDebtMember2020-01-012020-06-300001271214us-gaap:ConvertibleDebtMember2020-05-112020-05-110001271214us-gaap:SeniorLoansMemberus-gaap:SubsequentEventMember2021-07-220001271214us-gaap:SeniorLoansMemberus-gaap:DebtInstrumentRedemptionPeriodOneMemberus-gaap:SubsequentEventMember2021-07-220001271214us-gaap:DebtInstrumentRedemptionPeriodTwoMemberus-gaap:SeniorLoansMemberus-gaap:SubsequentEventMember2021-07-220001271214us-gaap:SeniorLoansMemberus-gaap:DebtInstrumentRedemptionPeriodThreeMemberus-gaap:SubsequentEventMember2021-07-220001271214us-gaap:SeniorLoansMemberus-gaap:SubsequentEventMember2021-07-222021-07-22
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
___________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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,” “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


Table of Contents
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 July 30, 2021 were 33,314,586.



Table of Contents
INTERSECT ENT, INC.
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended June 30, 2021
TABLE OF CONTENTS
Page



Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30,
2021
December 31,
2020
(unaudited)(1)
Assets
Current assets:
Cash and cash equivalents$21,364 $13,521 
Short-term investments36,406 74,506 
Accounts receivable, net15,993 14,592 
Inventories, net15,059 12,054 
Prepaid expenses and other current assets3,546 3,494 
Total current assets92,368 118,167 
Property and equipment, net5,427 5,624 
Operating lease right-of-use assets16,317 17,151 
Intangible assets, net19,618 21,193 
Goodwill47,035 46,639 
Restricted cash18,346 17,500 
Other non-current assets1,749 1,107 
Total assets$200,860 $227,381 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,629 $6,042 
Accrued compensation11,970 13,559 
Deferred acquisition related consideration, current20,845 21,071 
Other current liabilities4,951 3,575 
Total current liabilities45,395 44,247 
Operating lease liabilities15,375 17,736 
Convertible notes, net63,783 63,650 
Deferred acquisition related consideration, non-current33,103 33,167 
Deferred tax liability876 1,569 
Other non-current liabilities697  
Total liabilities159,229 160,369 
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: 33,261 at June 30, 2021 and 32,936 at December 31, 2020
33 33 
Additional paid-in capital381,300 370,053 
Accumulated other comprehensive income5 1 
Accumulated deficit(339,707)(303,075)
Total stockholders’ equity41,631 67,012 
Total liabilities and stockholders’ equity$200,860 $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

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Revenue$27,349 $9,780 $51,677 $29,606 
Cost of sales8,332 7,357 16,787 13,767 
Gross profit19,017 2,423 34,890 15,839 
Operating expenses:
Selling, general and administrative28,731 19,497 56,808 45,697 
Research and development6,360 4,018 12,730 9,164 
Total operating expenses35,091 23,515 69,538 54,861 
Loss from operations(16,074)(21,092)(34,648)(39,022)
Interest expense(1,409)(486)(2,784)(486)
Other income (expense), net442 (1,546)(62)(1,149)
Loss before income taxes(17,041)(23,124)(37,494)(40,657)
Provision for income tax (benefit)(440) (862) 
Net loss(16,601)(23,124)(36,632)(40,657)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments, net(10)61 4 42 
Comprehensive loss$(16,611)$(23,063)$(36,628)$(40,615)
Net loss per share, basic and diluted$(0.50)$(0.71)$(1.11)$(1.25)
Weighted average common shares used to compute net loss per share, basic and diluted
33,185 32,595 33,104 32,480 
See accompanying notes to condensed consolidated financial statements.
5

Table of Contents

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 
Issuance of common stock and exercise of stock options
125 — 1,390 — — 1,390 
Stock-based compensation expense
— — 4,595 — — 4,595 
Unrealized loss on short-term investments— — — (10)— (10)
Net loss— — — — (16,601)(16,601)
Balance at June 30, 202133,261 $33 $381,300 $5 $(339,707)$41,631 



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 
Issuance of common stock and exercise of stock options
108 — 728 — — 728 
Stock-based compensation expense
— — 3,586 — — 3,586 
Unrealized gain on short-term investments— — — 61 — 61 
Net loss— — — — (23,124)(23,124)
Balance at June 30, 202032,645 $33 $360,396 $95 $(271,413)$89,111 




See accompanying notes to condensed consolidated financial statements.
6

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
20212020
Operating activities:
Net loss$(36,632)$(40,657)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization2,380 991 
Non-cash lease expense978 1,078 
Stock-based compensation expense8,638 7,988 
Amortization of net investment premium (discount)462 (92)
Amortization of debt transaction costs and accretion of debt discount
446 117 
Impairment of property, equipment, and intangible assets575  
Interest expense on deferred acquisition related costs1,030  
Loss on foreign currency forward contracts1,876  
Foreign currency remeasurement gain(1,425) 
Change in fair value of embedded derivatives(313)1,796 
Provision for income tax benefit(862) 
Changes in operating assets and liabilities:
Accounts receivable, net(1,518)11,460 
Inventories, net(2,907)2,844 
Prepaid expenses and other assets(1,619)350 
Accounts payable1,453 (1,467)
Accrued compensation(1,565)(4,639)
Other liabilities(1,385)33 
Net cash used in operating activities(30,388)(20,198)
Investing activities:
Purchases of short-term investments (86,109)
Maturities of short-term investments37,642 49,856 
Purchases of property and equipment(867)(533)
Net cash provided by (used in) investing activities36,775 (36,786)
Financing activities:
Proceeds from debt financing, net of issuance costs 61,961 
Proceeds from issuance of common stock and exercise of stock options2,512 3,829 
Net cash provided by financing activities2,512 65,790 
Effect of exchange rates on cash, cash equivalents, and restricted cash(116) 
Net increase in cash, cash equivalents, and restricted cash8,783 8,806 
Cash, cash equivalents, and restricted cash:
Beginning of the period31,021 20,652 
End of the period$39,804 $29,458 
Non-cash investing activities:
Right-of-use asset obtained in exchange for lease obligations$144 $ 
Property and equipment included in accounts payable232 131 
Lessor funded building improvements83  
See accompanying notes to condensed consolidated financial statements.
7

Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.    Organization
Description of Business
Intersect ENT, Inc. (the “Company”) is incorporated in the state of Delaware and 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. 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 PROPEL family of products have also received CE Markings, permitting them to be marketed in the European Economic Area.
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”), CUBE Navigation System (“CUBE”), and instruments that complement the Company’s PROPEL and SINUVA sinus implants and extend its geographic reach. The VenSure products received 510(k) clearance in August 2020 and the latest version of the CUBE Navigation System received 510(k) clearance in July 2021. In addition, some of the Fiagon products are registered in other countries including the Asia Pacific.
The Company continues to invest in research and development in order to expand its portfolio of products and improve its existing products.
Pending Acquisition
On August 6, 2021 the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Medtronic, Inc., a Minnesota corporation and wholly-owned subsidiary of Medtronic public limited company (“Medtronic”), and Project Kraken Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Medtronic (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Medtronic. The Company will call a special meeting of its stockholders to present the Merger Agreement to its stockholders for adoption.
Under the terms of the Merger Agreement, Medtronic will acquire all outstanding shares of the Company’s common stock in exchange for consideration of $28.25 per share in cash. The Merger Agreement contains representations and warranties customary for transactions of this type. The closing of the Merger is subject to approval of the Company’s stockholders and the satisfaction or waiver of a number of closing conditions. The Merger Agreement provides Medtronic and the Company with certain termination rights and, under certain circumstances, may require that Medtronic or the Company pay a termination fee.
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 June 30, 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 and six months ended June 30, 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.
8

Table of Contents
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. 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.
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.
9

Table of Contents
Significant Accounting Policies
There have been no significant changes to the accounting policies during the six months ended June 30, 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:
Multiple-Element Arrangements
The Company enters into lease arrangements with certain qualified customers in connection with commitments to purchase consumable products to accompany the use of the equipment. Leases have terms that generally range from 24 to 48 months and are usually collateralized by a security interest in the underlying assets.
Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices. Contract interpretation and analysis is required to determine the appropriate accounting including: (1) the amount of total consideration; (2) whether the arrangement contains an embedded lease and if so, the respective lease classification; (3) the identification of the distinct performance obligations contained within the arrangement; (4) how the arrangement consideration should be allocated to each performance obligation; and (5) when to recognize revenue on the performance obligation. Lease elements include a CUBE Navigation System, while non-lease elements generally include service, consumable products such as the VenSure sinus dilation balloon and PROPEL, instruments, and accessories. Lease arrangements transfer the ownership, contingent upon attainment of contractual commitments, or provide the customer with a right to purchase the system leased at the end of the lease term.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether the lease transfers ownership of the asset to the lessee; (2) whether the lease grants the lessee a purchase option which is reasonably certain of being exercised; (3) whether the lease term is for a major part of the asset’s remaining economic life; (4) whether the present value of the lease payments is substantially all of the asset’s fair value; and (5) whether the asset is so specialized, it is expected to have no alternative use to the Company at the end of the lease term.
The Company recognizes revenue from sales-type lease arrangements at the time the system is delivered and when the lease payments are probable of collection. If revenue recognition criteria have not been met, lease-related cash collections are deferred as a deposit liability, which is recorded in other current liabilities on the condensed consolidated balance sheets. Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or as consumable sales are made, not to exceed the straight-line amount.
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.
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 two 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.
10

Table of Contents
3.    Composition of Certain Financial Statement Items
Accounts receivable, net (in thousands):
June 30,
2021
December 31,
2020
Accounts receivable$16,387 $15,079 
Allowance for doubtful accounts(394)(487)
$15,993 $14,592 
Inventories, net (in thousands):
June 30,
2021
December 31,
2020
Raw materials$3,237 $2,865 
Work-in-process5,119 3,411 
Finished goods6,703 5,778 
$15,059 $12,054 
Capitalized stock-based compensation expense of $0.4 million and $0.3 million was included in inventory as of June 30, 2021 and December 31, 2020, respectively.
Operating lease liabilities (in thousands):
June 30,
2021
December 31,
2020
Current portion presented in other current liabilities$2,276 $762 
Non-current portion presented in operating lease liabilities15,375 17,736 
$17,651 $18,498 
Revenue (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
PROPEL family of products$23,059 $9,481 $43,501 $28,571 
SINUVA2,686 299 5,121 1,035 
VenSure, CUBE, and accessories1,604  3,055  
$27,349 $9,780 $51,677 $29,606 
During the three and six months ended June 30, 2021, total revenue from multiple-element arrangements that include CUBE equipment leases was approximately $0.4 million and $0.6 million, respectively and is included in revenue in the consolidated statement of operations.
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.
11

Table of Contents
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 June 30, 2021, the fair value of the Company’s Convertible Notes (see Note 9) was $86.7 million.
Cash, Cash Equivalents, Short-term Investments, and Restricted Cash
The following is a summary of cash, cash equivalents, and restricted cash (in thousands):
June 30,
20212020
Cash and cash equivalents$21,364 $29,458 
Restricted cash 18,346  
Restricted cash presented in prepaid and other current assets94  
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows$39,804 $29,458 
In association with the acquisition of Fiagon, the Company held $18.3 million and $17.5 million as of June 30, 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 as of June 30, 2021 represents a rent deposit held in escrow.

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
June 30, 2021GainsLosses
Level 1:
Cash$13,207 $— $— $13,207 $13,207 $— 
Money market funds8,157 — — 8,157 8,157 — 
21,364 — — 21,364 21,364 — 
Level 2:
U.S. treasury bills28,390 5  28,395 — 28,395 
U.S. government agency bonds8,011   8,011 — 8,011 
36,401 5  36,406 — 36,406 
$57,765 $5 $ $57,770 $21,364 $36,406 

12

Table of Contents
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 six months ended June 30, 2021 and year ended December 31, 2020.
As of June 30, 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 six months ended June 30, 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 had no unrealized losses as of June 30, 2021 and concluded that any unrealized losses on investments as of December 31, 2020 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 financial instruments. At June 30, 2021, the fair value of the embedded features was $2.7 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:
June 30,
2021
Balance at December 31, 2020$3,048 
Fair value adjustment(313)
Balance at June 30, 2021$2,735 

The change in fair value of embedded derivatives for the three and six months ended June 30, 2021 was a $0.7 million gain and a $0.3 million gain, respectively, compared to a $1.8 million loss for both the three and six months ended June 30, 2020, 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
13

Table of Contents
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 June 30, 2021 and December 31, 2020 as follows (in thousands):
June 30,
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$345 $ 
Other non-current liabilities$697 $ 

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 EndedSix Months Ended
June 30, 2021June 30, 2021
Recognized gains (losses) on foreign currency exchange contracts$411 $(1,876)
Foreign exchange gain (loss) on remeasurement of deferred acquisition related consideration$(671)$1,713 
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 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 approximately €2.5 million purchase price adjustment due in October 2021. The total purchase consideration is denominated in Euros with an equivalent value of $69.3 million which included an upfront cash payment of $17.6 million, and deferred payments of $51.7 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
14

Table of Contents
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. During the three months ended June 30, 2021, the Company finalized its purchase accounting and recorded a measurement period adjustment to increase goodwill and purchase consideration by $0.4 million, to $47.0 million upon agreement with the Sellers of the installment payment due in October 2021, and as a result of completing its assessment of tax exposure related to pre-acquisition periods.
In addition, 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 June 30, 2021, 3,310,745 shares remained available for issuance.
The following is a summary of the Company’s stock option activity and related information (options in thousands):
Six Months Ended
June 30, 2021
OptionsWeighted Average
Exercise Price
Outstanding, beginning of period3,599 $22.01 
Granted844 22.27 
Exercised(145)11.36 
Forfeited(387)25.52 
Outstanding, end of period3,911 22.11 
Exercisable1,555 23.04 
Outstanding options as of June 30, 2021 includes 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 June 30, 2021, these stock options remain unvested.
As of June 30, 2021, the aggregate pre-tax intrinsic value of options outstanding was $2.4 million and options outstanding and exercisable was $1.7 million, the weighted-average remaining contractual term of options outstanding was 7.9 years, and options outstanding and exercisable was 6.5 years. The aggregate pre-tax intrinsic value of options exercised was $1.4 million and $1.2 million during the six months ended June 30, 2021 and 2020, respectively.
15

Table of Contents
The following is a summary of the Company’s RSU activity and related information (RSUs in thousands):

Six Months Ended
June 30, 2021
RSUsWeighted Average
Fair Value
Outstanding, beginning of period488 $23.88 
Awarded290 22.78 
Vested(122)26.54 
Forfeited(64)22.82 
Outstanding, end of period592 22.91 
As of June 30, 2021, the aggregate pre-tax intrinsic value of RSUs outstanding was $10.1 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 RSUs outstanding was 2.0 years.
The Company has granted Performance Stock Units (“PSUs”) which are subject to service, performance, and market-based vesting conditions. The following is a summary of the Company’s PSU activity and related information (PSUs in thousands):
Six Months Ended
June 30, 2021
PSUsWeighted Average
Fair Value
Outstanding, beginning of period130 $15.94 
Awarded187 24.99 
Forfeited(15)21.84 
Outstanding, end of period302 21.25 
As of June 30, 2021, the aggregate pre-tax intrinsic value of PSUs outstanding was $5.2 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 PSUs outstanding was 2.0 years.
Total stock-based compensation expense recognized is as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Cost of sales$401 $334 $722 $775 
Selling, general and administrative3,590 2,862 6,681 6,414 
Research and development586 436 1,235 799 
$4,577 $3,632 $8,638 $7,988 
As of June 30, 2021, the total compensation expense related to unvested stock option, RSU, and PSU grants under the Company’s 2014 plan not yet recognized was $37.4 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 2.5 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
16

Table of Contents
inception of the 2014 ESPP. At June 30, 2021, 836,075 shares remained available for issuance and 57,754 shares were issued during the six months ended June 30, 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
June 30,
Six Months Ended
June 30,
2021202020212020
Common stock options3,484 3,056 3,484 3,056 
Market-based performance stock options427 427 427 427 
Restricted stock units592 546 592 546 
Market-based performance stock units302 177 302 177 
Employee stock purchase plan shares59 72 59 72 
Stock issuable upon conversion of convertible note6,309 6,309 6,309 6,309 
11,173 10,587 11,173 10,587 
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 and six months ended June 30, 2021 and 2020 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.
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
17

Table of Contents
demand repayment of all outstanding principal and accrued interest on the Convertible Notes, together with a make-whole payment as determined pursuant to the Facility Agreement. Such events of default include, among others, failure to make any payment under the Convertible Notes when due, failure to observe or perform any covenant under the Facility Agreement or the other transaction documents related thereto (subject in certain cases to specified cure periods), the failure of the Company to be able to pay debts as they come due, the commencement of bankruptcy or insolvency proceedings against the Company, a material judgment levied against the Company and a material default by the Company under other indebtedness.
On or after the date that is the second anniversary of the issuance date, the Company may redeem up to $32.5 million of the principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 150% of the conversion price.
On or after the date that is the third anniversary of the issuance date, the Company may redeem up to the entire $65.0 million original principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 200% of the conversion price.
The Company is obligated to notify the holders of the Convertible Notes no less than ten trading days nor more than sixty calendar days prior to any such redemption. During the period from the date on which the Company delivers an optional redemption notice until the date the optional redemption price is paid to holders, if a holder elects to convert its Convertible Notes, it will receive the shares otherwise issuable upon conversion of the Convertible Notes, plus an additional number of shares determined in accordance with the Convertible Notes. To the extent the holder would be prohibited due to the Beneficial Ownership Cap to convert its Convertible Notes during such period, such holder would be entitled to convert all or any portion of its Convertible Notes into shares of Series DF-1 Preferred Stock of the Company (such conversion, a “Preferred Stock Conversion”). The number of Series DF-1 Preferred Stock issuable upon a Preferred Stock Conversion shall be determined by dividing the number of shares of common stock of the Company that it would be entitled to receive from such conversion by 1,000. See Note 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.
18

Table of Contents
As of June 30, 2021 and December 31, 2020, the net carrying amount of the Convertible Notes was as follows:

June 30,
2021
December 31,
2020
Outstanding principal amount of convertible notes$65,000 $65,000 
Unamortized debt discount and transaction costs(3,952)(4,398)
Fair value of embedded derivatives2,735 3,048 
Convertible notes, net$63,783 $63,650 
The convertible debt discount and transaction costs are being amortized to expense over the term of the Notes. For the three and six months ended June 30, 2021, the accretion of the convertible debt discount and amortization of debt issuance costs was $0.2 million and $0.4 million, respectively, compared to $0.1 million for both the three and six months ended June 30, 2020, 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 June 30, 2021 was $0.7 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 filed its motion for preliminary approval of the proposed settlement on May 14, 2021. On June 22, 2021, the Court granted the plaintiff's motion for preliminary approval and set a final settlement approval hearing for October 22, 2021. As of June 30, 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.
19

Table of Contents
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
June 30,
Six Months Ended
June 30,
2021202020212020
Provision for income tax (benefit)$(440)$ $(862)$ 

The Company’s income tax benefit for the three and six months ended June 30, 2021 was primarily related to the deferred taxes 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 June 30, 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 Events
On July 22, 2021, the Company entered into a Facility Agreement (the “Facility Agreement”) with Deerfield, providing for the issuance and sale by the Company to Deerfield of senior secured loans of an aggregate principal amount of up to $60.0 million under a Facility Agreement (the “Credit Facility”). This is in addition to the existing Convertible Notes described in Note 9. The proceeds are to be made available as follows (i) $20.0 million upon the closing date, (ii) $20.0 million to be disbursed at the option of the Company upon the earlier of the date of any prepayment of the remaining Fiagon acquisition payments (“Fiagon Payoff Date”) and September 15, 2022, and (iii) $20.0 million upon the earlier of the Fiagon Payoff Date and September 15, 2023. The Credit Facility bears interest at 7.5% per annum, payable quarterly in arrears, commencing on October 15, 2021 and on the 15th business day of each January, April, July, and October thereafter. The Loans will mature on July 22, 2026. The Company estimates that the initial net proceeds from the sale of the Loans were approximately $19.7 million after deducting the estimated expenses payable by the Company.
On August 6, 2021 the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Medtronic, Inc., a Minnesota corporation and wholly-owned subsidiary of Medtronic public limited company (“Medtronic”), Project Kraken Merger Sub, Inc., a Delaware corporation and wholly- owned subsidiary of Medtronic (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Medtronic. As a result of the Merger, each share of common stock, par value $0.001 per share, of the Company issued and outstanding immediately prior to the effective time of the Merger (other than shares, if any, held by the Company, Medtronic, Merger Sub or any of their subsidiaries, shares held in treasury, and shares with respect to which dissenters rights have been properly demanded in accordance with the Delaware General Corporation Law) will be converted into the right to receive $28.25 in cash, without interest, per share. The Merger is subject to the satisfaction or waiver of customary closing conditions, including the approval of the Merger by the Company's stockholders and receipt of governmental approvals.
20

Table of Contents
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. 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 PROPEL family of products have also received CE Markings, permitting them to be marketed in the European Economic Area.
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 Navigation System (“CUBE”), and instruments that complement our PROPEL and SINUVA sinus implants across all settings of care and extend our geographic reach. The VenSure products received 510(k) clearance in August 2020 and the latest version of the CUBE Navigation System received 510(k) clearance in July 2021. In addition, some of the Fiagon products are registered in other countries including the Asia Pacific.
21

Table of Contents
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. For the PROPEL family of products, our initial focus is on Germany and the United Kingdom, where we are working to build our capabilities and develop the market. Going forward, we will continue to assess our capability to penetrate additional markets in Europe, the Asia Pacific and Japan.
Our PROPEL family of steroid releasing implants are clinically proven to improve outcomes for chronic rhinosinusitis (“CRS”) 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 through the end of 2020. Our primary PROPEL® products are as follows:
PROPEL, 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, a smaller version of PROPEL which 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, 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. PROPEL Contour is approved for use in the frontal and maxillary sinus openings in the U.S. and for use in the frontal sinus opening in the European Union (“EU”).
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. 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. SINUVA is currently approved for use in the U.S.
Our PROPEL family of products are used primarily in the operating room of a hospital or ASC. These providers receive a facility fee for the sinus surgery procedure which is intended to pay for supplies used in this procedure, including the PROPEL family of products. SINUVA is a physician administered drug, used almost exclusively in the physician office setting. VenSure provides for complementary use with PROPEL Contour for dilation and localized drug delivery. The CUBE Navigation System supports surgery and balloon dilation in all settings of care. The Centers for Medicare & Medicaid Services (“CMS”) approved SINUVA for transitional pass-through payment status for reimbursement under the Hospital Outpatient Prospective Payment System (“OPPS”) and ASC Payment System. Pass-Through status lasts for three years and allows us to place SINUVA in the ASC and hospital settings. We applied to CMS in September 2020 and asked to separate the J7401 code from SINUVA and PROPEL. 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. The new PROPEL and SINUVA codes took effect April 1, 2021. We are also committed to expanding our market development efforts for PROPEL in the physician office setting of care as well as market access outside of the U.S.
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.
22

Table of Contents
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. In the second quarter of 2021, we initiated the EXPAND study to assess the potential to improve frontal sinus ostia size 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.

Pending Acquisition
On August 6, 2021 we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Medtronic, Inc., a Minnesota Corporation and wholly-owned subsidiary of Medtronic public company limited company (“Medtronic”), and Project Kraken Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Medtronic (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Medtronic. We will call a special meeting of our stockholders to present the Merger Agreement to our stockholders for adoption.
Under the terms of the Merger Agreement, Medtronic will acquire all outstanding shares of our common stock in exchange for consideration of $28.25 per share in cash. The Merger Agreement contains representations and warranties customary for transactions of this type. The closing of the Merger is subject to approval of our stockholders and the satisfaction or waiver of a number of closing conditions, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Merger Agreement provides Medtronic and us with certain termination rights and, under certain circumstances, may require that Medtronic or we pay a termination fee.
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 well as the first half of 2021 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 developing laws and restrictions surrounding the COVID-19 pandemic. While the second half of 2020 and the first half 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 continued revenue growth in 2021, based on the increased elective procedure volumes and enrollment trends towards the end of 2020 and during the first half of 2021. 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. In addition to standalone sales of CUBE and VenSure products, we enter into lease arrangements of CUBE navigation equipment with certain qualified customers in connection with commitments to purchase VenSure and other consumable products to accompany the use of the equipment. Leases have terms that generally range from 24 to 48 months and are usually collateralized by a security interest in the underlying assets. Lease
23

Table of Contents
arrangements transfer the ownership or provide the customer with a right to purchase the system leased at the end of the lease term.
We have derived our revenue predominantly from within the United States and no single customer accounted for more than 10% of our revenue during the three and six months ended June 30, 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 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.
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 the carrying value of our deferred acquisition related consideration.
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, changes in the fair value of foreign currency forward contracts and the effects of foreign exchange, including on the carrying value of our deferred acquisition related consideration.
24

Table of Contents
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