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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
___________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
Shares of common stock outstanding as of October 26, 2021 were 33,461,658.



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INTERSECT ENT, INC.
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended September 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)
September 30,
2021
December 31,
2020
(unaudited)(1)
Assets
Current assets:
Cash and cash equivalents$59,183 $13,521 
Short-term investments21,813 74,506 
Accounts receivable, net14,402 14,592 
Inventories, net20,057 12,054 
Prepaid expenses and other current assets4,406 3,494 
Total current assets119,861 118,167 
Property and equipment, net5,416 5,624 
Operating lease right-of-use assets16,038 17,151 
Intangible assets, net18,923 21,193 
Goodwill47,035 46,639 
Restricted cash17,978 17,500 
Other non-current assets2,715 1,107 
Total assets$227,966 $227,381 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$10,249 $6,042 
Accrued compensation14,555 13,559 
Deferred acquisition related consideration, current20,338 21,071 
Other current liabilities5,646 3,575 
Total current liabilities50,788 44,247 
Operating lease liabilities15,101 17,736 
Long-term debt111,661 63,650 
Deferred acquisition related consideration, non-current32,806 33,167 
Deferred tax liability565 1,569 
Other non-current liabilities831  
Total liabilities211,752 160,369 
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: 33,455 as of September 30, 2021 and 32,936 as of December 31, 2020
33 33 
Additional paid-in capital387,738 370,053 
Accumulated other comprehensive income (loss)(1)1 
Accumulated deficit(371,556)(303,075)
Total stockholders’ equity16,214 67,012 
Total liabilities and stockholders’ equity$227,966 $227,381 
(1)Amounts have been derived from the December 31, 2020 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
4

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Revenue$24,400 $22,720 $76,077 $52,326 
Cost of sales5,087 7,845 21,874 21,612 
Gross profit19,313 14,875 54,203 30,714 
Operating expenses:
Selling, general and administrative29,473 21,702 86,281 67,399 
Research and development6,719 4,551 19,449 13,715 
Total operating expenses36,192 26,253 105,730 81,114 
Loss from operations(16,879)(11,378)(51,527)(50,400)
Interest expense(1,760)(886)(4,544)(1,372)
Other income (expense), net(13,654)799 (13,716)(350)
Loss before income taxes(32,293)(11,465)(69,787)(52,122)
Provision for income tax (benefit)(444) (1,306) 
Net loss(31,849)(11,465)(68,481)(52,122)
Other comprehensive loss:
Unrealized loss on short-term investments, net(6)(73)(2)(31)
Comprehensive loss$(31,855)$(11,538)$(68,483)$(52,153)
Net loss per share, basic and diluted$(0.95)$(0.35)$(2.06)$(1.60)
Weighted average common shares used to compute net loss per share, basic and diluted
33,352 32,695 33,187 32,552 
See accompanying notes to condensed consolidated financial statements.
5

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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance as of 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 as of 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 as of June 30, 202133,261 33 381,300 5 (339,707)41,631 
Issuance of common stock and exercise of stock options
194 — 2,469 — — 2,469 
Stock-based compensation expense
— — 3,969 — — 3,969 
Unrealized loss on short-term investments— — — (6)— (6)
Net loss— — — — (31,849)(31,849)
Balance as of September 30, 202133,455 $33 $387,738 $(1)$(371,556)$16,214 


























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

Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance as of 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 as of 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 as of June 30, 202032,645 33 360,396 95 (271,413)89,111 
Issuance of common stock and exercise of stock options
71 — 276 — — 276 
Stock-based compensation expense
— — 3,529 — — 3,529 
Unrealized loss on short-term investments— — — (73)— (73)
Net loss— — — — (11,465)(11,465)
Balance as of September 30, 202032,716 $33 $364,201 $22 $(282,878)$81,378 












See accompanying notes to condensed consolidated financial statements.
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INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20212020
Operating activities:
Net loss$(68,481)$(52,122)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization3,579 1,467 
Non-cash lease expense1,474 1,623 
Stock-based compensation expense12,627 11,642 
Amortization of net investment premium583 71 
Amortization of debt transaction costs and accretion of debt discount
689 339 
Impairment of property, equipment, and intangible assets708  
Interest expense on deferred acquisition related costs1,548  
Loss on foreign currency forward contracts2,484  
Foreign currency remeasurement gain(2,219) 
Change in fair value of embedded derivatives12,721 795 
Provision for income tax (benefit)(1,306) 
Changes in operating assets and liabilities:
Accounts receivable, net(20)7,233 
Inventories, net(7,924)5,568 
Prepaid expenses and other assets(3,478)(634)
Accounts payable3,977 555 
Accrued compensation1,029 (1,878)
Other liabilities(1,745)287 
Net cash used in operating activities(43,754)(25,054)
Investing activities:
Purchases of short-term investments(3,533)(108,831)
Maturities of short-term investments55,642 70,106 
Proceeds from sale of short-term investments 34,794 
Purchases of property and equipment(1,505)(722)
Net cash provided by (used in) investing activities50,604 (4,653)
Financing activities:
Proceeds from debt financing, net of issuance costs34,588 61,841 
Proceeds from issuance of common stock and exercise of stock options4,980 4,105 
Net cash provided by financing activities39,568 65,946 
Effect of exchange rates on cash, cash equivalents, and restricted cash(278) 
Net increase in cash, cash equivalents, and restricted cash46,140 36,239 
Cash, cash equivalents, and restricted cash:
Beginning of the period31,021 20,652 
End of the period$77,161 $56,891 
Non-cash investing activities:
Right-of-use assets obtained in exchange for lease obligations$362 $ 
Property and equipment included in accounts payable336 82 
Lessor funded building improvements201  
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.    Organization
Description of Business
Intersect ENT, Inc. (the “Company”) is incorporated in the state of Delaware and is headquartered in Menlo Park, California. The Company is a global ear, nose and throat (“ENT”) medical technology leader dedicated to transforming patient care. The Company’s U.S. Food and Drug Administration (“FDA”) approved products are steroid releasing implants designed to treat patients suffering from chronic rhinosinusitis (“CRS”) who are managed by ENT physicians. These products include the PROPEL® family of products (PROPEL®, PROPEL® Mini and PROPEL® Contour) and the SINUVA® (mometasone furoate) Sinus Implant. The PROPEL family of products are used in conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers (“ASC”) and increasingly in the physician office setting of care in conjunction with balloon dilation and following post-surgical debridement. SINUVA is designed to be used in the physician office setting of care to treat patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps. 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 in Asia Pacific and South America.
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. On October 8, 2021, the Company’s stockholders adopted the Merger Agreement at a special meeting of its stockholders.
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 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 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 September 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 nine months ended September 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.
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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 clarifies 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.
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Significant Accounting Policies
There have been no significant changes to the accounting policies during the nine months ended September 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 may, from time to time, enter 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. For the three and nine months ended September 30, 2021, revenue from these arrangements was not material.
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 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 and nine months ended September 30, 2021, the Company recognized impairment expense of $0.1 million and $0.5 million related to certain property and equipment, which was recorded in selling, general and administrative expense in the condensed consolidated statements of operations.
3.    Composition of Certain Financial Statement Items
Accounts receivable, net (in thousands):
September 30,
2021
December 31,
2020
Accounts receivable$14,796 $15,079 
Allowance for doubtful accounts(394)(487)
$14,402 $14,592 
Inventories, net (in thousands):
September 30,
2021
December 31,
2020
Raw materials$4,307 $2,865 
Work-in-process6,205 3,411 
Finished goods9,545 5,778 
$20,057 $12,054 
Capitalized stock-based compensation expense of $0.4 million and $0.3 million was included in inventory as of September 30, 2021 and December 31, 2020, respectively.
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Operating lease liabilities (in thousands):
September 30,
2021
December 31,
2020
Current portion presented in other current liabilities$2,351 $762 
Non-current portion presented in operating lease liabilities15,101 17,736 
$17,452 $18,498 
Revenue (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
PROPEL family of products$20,870 $21,051 $64,371 $49,622 
SINUVA1,980 1,669 7,101 2,704 
VenSure, CUBE, and accessories1,550  4,605  
$24,400 $22,720 $76,077 $52,326 
4.    Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments, and convertible debt embedded derivatives. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1    —    Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2    —    Other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data.
Level 3    —    Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair value of marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Cash, Cash Equivalents, Short-term Investments, and Restricted Cash
The following is a summary of cash, cash equivalents, and restricted cash (in thousands):
September 30, 2021December 31, 2020September 30, 2020
Cash and cash equivalents$59,183 $13,521 $56,891 
Restricted cash 17,978 17,500  
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows$77,161 $31,021 $56,891 
In association with the acquisition of Fiagon, the Company held $17.9 million and $17.5 million as of September 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.
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The following is a summary of the Company’s unrealized gains and losses related to its short-term investments in marketable securities designated available-for-sale (in thousands):
Reported as:
Amortized
Cost
Gross UnrealizedEstimated
Fair Value
Cash and cash
equivalents
Short-term
investments
September 30, 2021GainsLosses
Level 1:
Cash$44,143 $— $— $44,143 $44,143 $— 
Money market funds15,040 — — 15,040 15,040 — 
59,183 — — 59,183 59,183 — 
Level 2:
U.S. treasury bills17,282   17,282 — 17,282 
Corporate debt securities3,532  (2)3,530 — 3,530 
U.S. government agency bonds1,001   1,001 — 1,001 
21,815  (2)21,813 — 21,813 
$80,998 $ $(2)$80,996 $59,183 $21,813 

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 nine months ended September 30, 2021 and year ended December 31, 2020.
As of September 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 nine months ended September 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 concluded that any unrealized losses on investments as of September 30, 2021 and December 31, 2020, respectively, 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 of 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
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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. As of September 30, 2021, the fair value of the embedded features was $15.8 million and has been presented together with the Convertible Notes host instrument on the condensed consolidated balance sheets. Changes in the fair value of the Company’s Level 3 liabilities were as follows:
September 30,
2021
Balance as of December 31, 2020$3,048 
Fair value adjustment12,721 
Balance as of September 30, 2021$15,769 

The change in fair value of embedded derivatives for the three and nine months ended September 30, 2021 was a $13.0 million loss and a $12.7 million loss, respectively, compared to a $1.0 million gain and $0.8 million loss for the three and nine months ended September 30, 2020, respectively, which was recorded in other income (expense), net in the Company’s condensed consolidated statements of operations. The increase in the fair value of the embedded derivative liability during the three and nine months ended September 30, 2021 was due to the increased probability of triggering events as a result of the pending acquisition with Medtronic.

Derivative Financial Instruments
The Company’s deferred purchase consideration related to the Fiagon acquisition exposed it to foreign currency exchange risk between rate fluctuations of the U.S. dollar and the Euro. To manage this risk, the Company entered into a series of foreign currency exchange forward contracts. In general, gains and losses related to these contracts are expected to be substantially offset by corresponding gains and losses on the remeasurement of the deferred purchase consideration each reporting period. The risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (e.g., those contracts that have a positive fair value) at the date of default. The Company does not enter into derivative contracts for trading purposes. During the three months ended September 30, 2021, one of the foreign currency forward contracts was exercised in order to make the first anniversary payment for the Fiagon acquisition.
The derivative instruments the Company uses to economically hedge this exposure are not designated as accounting 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 September 30, 2021 and December 31, 2020 as follows (in thousands):
September 30,
2021
December 31,
2020
Notional amounts:
Forward contracts30,000 45,000 
Gross fair value recorded in:
Prepaid expenses and other current assets$ $275 
Other non-current assets$ $558 
Other current liabilities$825 $ 
Other non-current liabilities$825 $ 

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 EndedNine Months Ended
September 30, 2021September 30, 2021
Recognized losses on foreign currency exchange contracts$(608)$(2,484)
Foreign exchange gains on remeasurement of deferred acquisition related consideration$1,322 $3,035 
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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 working capital 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 third installment due in October 2022.
The Company recorded $4.6 million of tangible assets, primarily consisting of $2.2 million of inventory, offset by liabilities assumed of $4.2 million, including deferred tax liabilities of $2.2 million. In addition, the Company recorded $21.9 million of intangible assets and $46.6 million in residual goodwill. Goodwill arising from the business combination consists largely of the synergies and economies of scale expected from combining the operations of the Company and Fiagon, as well as the value of Fiagon’s assembled workforce.
Intangible assets included patents and developed technology, a distribution network, customer relationships, and trademarks. The Company’s management utilized a specialist to assist in the valuation. Key assumptions included in the valuation were (1) the amount and timing of future revenues, expenses, and other cash flows, and (2) the discount rate used to determine the present value of these cash flows. The goodwill is not amortizable for income tax purposes. 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.
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. In addition, during the three months ended September 30, 2021, the Company completed its annual goodwill impairment test and determined that no impairment existed. As of September 30, 2021, there has been no impairment of goodwill.
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
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issuance increased by 988,070 shares to 10,922,838 shares reserved since the inception of the 2014 Plan. As of September 30, 2021, 3,435,598 shares remained available for issuance.
The following is a summary of the Company’s stock option activity and related information (options in thousands):
Nine Months Ended
September 30, 2021
OptionsWeighted Average
Exercise Price
Outstanding, beginning of period3,599 $22.01 
Granted943 22.52 
Exercised(287)14.34 
Forfeited(586)25.32 
Outstanding, end of period3,669 22.21 
Exercisable1,565 23.36 
Outstanding options as of September 30, 2021 include an option subject to both service and market-based vesting conditions to purchase 427,147 shares of the Company’s common stock with an exercise price of $20.44. As of September 30, 2021, these stock options remain unvested.
As of September 30, 2021, the aggregate pre-tax intrinsic value of options outstanding was $21.3 million and options outstanding and exercisable was $8.3 million, the weighted-average remaining contractual term of options outstanding was 7.8 years, and options outstanding and exercisable was 6.5 years. The aggregate pre-tax intrinsic value of options exercised was $2.8 million and $1.3 million during the nine months ended September 30, 2021 and 2020, respectively.
The following is a summary of the Company’s RSU activity and related information (RSUs in thousands):

Nine Months Ended
September 30, 2021
RSUsWeighted Average
Fair Value
Outstanding, beginning of period488 $23.88 
Awarded331 22.80 
Vested(175)24.69 
Forfeited(104)23.33 
Outstanding, end of period540 23.06 
As of September 30, 2021, the aggregate pre-tax intrinsic value of RSUs outstanding was $14.7 million, calculated based on the closing price of the Company’s common stock at the end of the period, and the weighted-average remaining vesting term of RSUs outstanding was 1.9 years.
The Company 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):
Nine Months Ended
September 30, 2021
PSUsWeighted Average
Fair Value
Outstanding, beginning of period130 $15.94 
Awarded187 24.99 
Forfeited(40)22.07 
Outstanding, end of period277 21.16 
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As of September 30, 2021, the aggregate pre-tax intrinsic value of PSUs outstanding was $7.5 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 1.7 years.
Total stock-based compensation expense recognized is as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Cost of sales$421 $446 $1,142 $1,221 
Selling, general and administrative3,093 2,790 10,001 9,204 
Research and development475 417 1,484 1,217 
$3,989 $3,653 $12,627 $11,642 
2014 Employee Stock Purchase Plan
In July 2014, the Company’s Board of Directors approved the 2014 Employee Stock Purchase Plan (“2014 ESPP”). A total of 496,092 shares were initially reserved for issuance under the 2014 ESPP. In June 2018, the Company’s stockholders approved the Amended and Restated 2014 ESPP, increasing the total number of shares of common stock reserved for issuance under the 2014 ESPP by 1,200,000 shares to a total of 1,696,092 shares (the “Amended and Restated 2014 ESPP”) since the inception of the 2014 ESPP. As of September 30, 2021, 836,075 shares remained available for issuance and 57,754 shares were issued during the nine months ended September 30, 2021. In connection with the proposed transaction with Medtronic, the ESPP will remain in effect until November 15, 2021, which is the final purchase date, subsequent to which the ESPP will no longer be offered.

As of September 30, 2021, the total compensation expense not yet recognized for both the 2014 Plan and 2014 ESPP was $32.2 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 2.4 years and will be adjusted for subsequent forfeitures.
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
September 30,
Nine Months Ended
September 30,
2021202020212020
Common stock options3,242 3,073 3,242 3,073 
Market-based performance stock options427 427 427 427 
Restricted stock units540 484 540 484 
Performance stock units277 173 277 173 
Employee stock purchase plan shares59 72 59 72 
Stock issuable upon conversion of convertible notes6,309 6,309 6,309 6,309 
10,854 10,538 10,854 10,538 
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 nine months ended September 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
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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.    Long-Term Debt

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 $65.0 million principal amount of the Convertible Notes is not payable until the maturity date of May 9, 2025, unless earlier converted or redeemed. The Convertible Notes are convertible into shares of the Company’s common stock, at a conversion rate of 64.3501 shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of $15.54. The net proceeds from the sale of the Convertible Notes were approximately $61.8 million after deducting the expenses payable by the Company.
The Convertible Notes bear interest at 4.0% per annum, payable quarterly in arrears on July 1, October 1, January 1 and April 1 of each year, commencing July 1, 2020. The Convertible Notes are convertible at any time at the option of the holders thereof, provided that Deerfield is prohibited from converting the Convertible Notes into shares of common stock if, as a result of such conversion, the converting holder (together with certain affiliates and “group” members) would beneficially own more than 4.985% of the total number of shares of common stock then issued and outstanding (the “Beneficial Ownership Cap”). Pursuant to the Convertible Notes, the holders of the Convertible Notes have the option to demand repayment of all outstanding principal, any unpaid interest accrued thereon, and make-whole interest in connection with a Major Transaction (as defined in the Convertible Notes), which shall include, among others, any acquisition or other change of control of the Company; the sale or transfer of assets of the Company equal to more than 50% of the Enterprise Value (as defined in the Convertible Notes) of the Company; a liquidation, bankruptcy or other dissolution of the Company; or if at any time shares of the Company’s common stock are not listed on an Eligible Market (as defined in the Convertible Notes). The Facility Agreement contains certain specified events of default, the occurrence of which would entitle the holders of the Convertible Notes to immediately demand repayment of all outstanding principal and accrued interest on the Convertible Notes, together with a make-whole payment as determined pursuant to the Facility Agreement. Such events of default include, among others, failure to make any payment under the Convertible Notes when due, failure to observe or perform any covenant under the Facility Agreement or the other transaction documents related thereto (subject in certain cases to specified cure periods), the failure of the Company to be able to pay debts as they come due, the commencement of bankruptcy or insolvency proceedings against the Company, a material judgment levied against the Company and a material default by the Company under other indebtedness.
On or after the date that is the second anniversary of the issuance date, the Company may redeem up to $32.5 million of the principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 150% of the conversion price.
On or after the date that is the third anniversary of the issuance date, the Company may redeem up to the entire $65.0 million original principal amount of Convertible Notes if:
the volume weighted average price of the common stock on each of any twenty (20) trading days during a period of thirty (30) consecutive trading days ending on the date which an optional redemption notice is delivered;
the volume weighted average price of the common stock on the last trading day of such period; and
the closing price of the common stock on the last trading day of such period, in each case, are greater than 200% of the conversion price.
The Company is obligated to notify the holders of the Convertible Notes no less than ten trading days nor more than sixty calendar days prior to any such redemption. During the period from the date on which the Company delivers an optional redemption notice until the date the optional redemption price is paid to holders, if a holder elects to convert its Convertible
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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.
As of September 30, 2021 and December 31, 2020, the net carrying amount of the Convertible Notes recorded within long-term debt on the condensed consolidated balance sheets was as follows:

September 30,
2021
December 31,
2020
Outstanding principal amount of convertible notes$65,000 $65,000 
Unamortized debt discount and transaction costs(3,720)(4,398)
Fair value of embedded derivatives