UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
___________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-36545
___________________________
(Exact name of registrant as specified in its charter)
___________________________
(State or other jurisdiction of
incorporation or organization)
(Address of principal executive offices)
(I.R.S. Employer
Identification Number)
(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: | ||||||||||||
___________________________
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 | ¨ | x | |||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Shares of common stock outstanding as of April 27, 2022 were 33,813,722 .
INTERSECT ENT, INC.
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended March 31, 2022
TABLE OF CONTENTS
| Page | |||||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| (unaudited) | (1) | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Assets held for sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Restricted cash | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Deferred acquisition related consideration, current | |||||||||||
| Liabilities held for sale | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred acquisition related consideration, non-current | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (note 10) | |||||||||||
| Stockholders’ deficit: | |||||||||||
Preferred stock, $ | |||||||||||
Series DF-1 convertible preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ deficit | ( | ( | |||||||||
| Total liabilities and stockholders’ deficit | $ | $ | |||||||||
(1)Amounts have been derived from the December 31, 2021 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
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Loss on assets held for sale | |||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Interest expense | ( | ( | |||||||||
| Other income (expense), net | ( | ( | |||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax (benefit) | ( | ||||||||||
| Net loss | ( | ( | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized gain (loss) on short-term investments, net | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
| Net loss per share, basic and diluted | $ | ( | $ | ( | |||||||
Weighted average common shares used to compute net loss per share, basic and diluted | |||||||||||
See accompanying notes to condensed consolidated financial statements.
5
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
Issuance of common stock and exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Unrealized loss on short-term investments | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Issuance of common stock and exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Unrealized gain on short-term investments | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash lease expense | |||||||||||
| Stock-based compensation expense | |||||||||||
| Amortization of net investment premium | |||||||||||
Amortization of debt transaction costs and accretion of debt discount | |||||||||||
| Impairment of property, equipment, and intangible assets | |||||||||||
| Loss on assets held for sale | |||||||||||
| Interest expense on deferred acquisition related costs | |||||||||||
| Loss on foreign currency forward contracts | |||||||||||
| Foreign currency remeasurement gain | ( | ( | |||||||||
| Change in fair value of embedded derivatives | |||||||||||
| Income tax (benefit) | ( | ||||||||||
| Changes in operating assets and liabilities, net of held for sale: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventories, net | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued compensation | ( | ( | |||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities: | |||||||||||
| Purchases of short-term investments | ( | ||||||||||
| Maturities of short-term investments | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing activities: | |||||||||||
| Proceeds from debt financing, net of issuance costs | |||||||||||
| Proceeds from issuance of common stock and exercise of stock options | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash: | |||||||||||
| Beginning of the period | |||||||||||
| Reclassification from assets held for sale during the period | |||||||||||
| End of the period | $ | $ | |||||||||
| Non-cash investing activities: | |||||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | |||||||||
| Property and equipment included in accounts payable | |||||||||||
| Lessor funded building improvements | |||||||||||
See accompanying notes to condensed consolidated financial statements.
7
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, including all vested and unvested awards, in exchange for consideration of $28.25 per share in cash. Vested and unvested stock options will be redeemed for the difference between $28.25 per option and the respective exercise price. 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.
In connection with the Merger, the Company intends to divest the business currently operated by (i) Intersect ENT International GmbH and its subsidiary, Intersect ENT GmbH, and (ii) Fiagon NA LLC (collectively “Fiagon”). The Company and Hemostasis LLC, a Delaware limited liability company (“Hemostasis”), have agreed on the material terms of a Sale and Purchase Agreement that the parties intend to execute, pursuant to which, among other things, Hemostasis would agree to acquire the Fiagon Business from the Company for a cash payment at closing, subject to certain purchase price adjustments for debt, cash and transaction expenses. The Sale and Purchase Agreement is also expected to contain customary representations, warranties, covenants and indemnification by the Company. The Company and Medtronic also anticipate providing certain transition services in connection with the sale of Fiagon. The consummation of the sale of Fiagon to Hemostasis would be expressly cross-conditioned on the closing of the Merger. If the sale of Fiagon is completed under the anticipated terms of the Sale and Purchase Agreement, such transaction is expected to close immediately prior to the time the Merger is consummated. Therefore, the Company has presented the related assets and liabilities of Fiagon as held for sale on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
8
2. Summary of Significant Accounting Policies
Basis of Preparation
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
The interim financial data as of March 31, 2022 is unaudited and is not necessarily indicative of the results for the full year. In the opinion of the Company’s management, the interim data includes only normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three months ended March 31, 2022 and 2021. Certain information and disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2021 filed with the SEC on March 8, 2022.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings or financial position.
Risks and Uncertainties
The Company is subject to risks and uncertainties resulting from the COVID-19 pandemic. The Company cannot predict the extent or duration of the impact of the COVID-19 pandemic on its financial and operating results, as the information regarding the current environment is evolving. 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 any future regulations or guidance 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 restrictions 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.
9
Accounting Pronouncements
The Company has implemented all new pronouncements that are in effect which may impact its condensed consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued which may have a material impact on its condensed consolidated financial statements.
Significant Accounting Policies
There have been no significant changes to the accounting policies during the three months ended March 31, 2022, 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, 2021.
3. Composition of Certain Financial Statement Items
Accounts receivable, net (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Accounts receivable | $ | $ | |||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| $ | $ | ||||||||||
Inventories, net (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Capitalized stock-based compensation expense of $0.1
Operating lease liabilities (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Current portion presented in other current liabilities | $ | $ | |||||||||
| Non-current portion presented in operating lease liabilities | |||||||||||
| $ | $ | ||||||||||
Revenue (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| PROPEL family of products | $ | $ | |||||||||
| SINUVA | |||||||||||
| VenSure, CUBE, and accessories | |||||||||||
| $ | $ | ||||||||||
10
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.
If the carrying value of a definite-lived or indefinite-lived intangible asset is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the estimated fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine the fair value.
Cash, Cash Equivalents, Short-term Investments, and Restricted Cash
The following is a summary of cash, cash equivalents, and restricted cash (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | |||||||||
In association with the acquisition of Fiagon, the Company held approximately $17.0 million and $17.9 million as of March 31, 2022 and December 31, 2021, 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.
11
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 Unrealized | Estimated Fair Value | Cash and cash equivalents | Short-term investments | ||||||||||||||||||||||||||||||||||
| March 31, 2022 | Gains | Losses | ||||||||||||||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | |||||||||||||||||||||||||||||
| Money market funds | — | — | — | |||||||||||||||||||||||||||||||||||
| — | — | — | ||||||||||||||||||||||||||||||||||||
| Level 2: | ||||||||||||||||||||||||||||||||||||||
| U.S. treasury bills | ( | |||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | |||||||||||||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||||||||||||||
| ( | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Reported as: | ||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Estimated Fair Value | Cash and cash equivalents | Short-term investments | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | Gains | Losses | ||||||||||||||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | |||||||||||||||||||||||||||||
| Money market funds | — | — | — | |||||||||||||||||||||||||||||||||||
| — | — | — | ||||||||||||||||||||||||||||||||||||
| Level 2: | ||||||||||||||||||||||||||||||||||||||
| U.S. treasury bills | ( | |||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | |||||||||||||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||||||||||||||
| ( | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2022 and year ended December 31, 2021.
The following table summarizes the contractual maturity of the Company’s cash equivalents and short-term investments as of March 31, 2022 (excluding cash and money-market funds):
| Amortized Cost | Fair Value | ||||||||||
| Maturity in less than one year | $ | $ | |||||||||
| Maturity in one to five years | |||||||||||
| Total | $ | $ | |||||||||
Actual maturities may differ from contractual maturities, because certain borrowers have the right to call or prepay certain obligations.
Based on an evaluation of securities that have been in a loss position, the Company did not recognize any other-than-temporary impairment charges during the three months ended March 31, 2022 and year ended December 31, 2021. The Company considered various factors which included a credit and liquidity assessment of the underlying securities and the Company’s intent and ability to hold the underlying securities until the estimated date of recovery of its amortized cost. The Company concluded that any unrealized losses on investments as of March 31, 2022 and December 31, 2021, respectively, were not attributed to credit.
12
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 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 March 31, 2022 and December 31, 2021, the fair value of the embedded features was $16.2
Derivative Financial Instruments
The Company’s deferred purchase consideration related to the Fiagon acquisition exposed it to foreign currency exchange risk between rate fluctuations of the U.S. dollar and the Euro. To manage this risk, the Company entered into a series of foreign currency exchange forward contracts. In general, gains and losses related to these contracts are expected to be substantially offset by corresponding gains and losses on the remeasurement of the deferred purchase consideration each reporting period. The risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (e.g., those contracts that have a positive fair value) at the date of default. The Company does not enter into derivative contracts for trading purposes.
The derivative instruments the Company uses to 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 and comprehensive loss. The derivative assets and liabilities are measured using Level 2 fair value inputs.
The Company had gross notional amounts (in EUR) with USD equivalents of $36.9
| March 31, 2022 | December 31, 2021 | ||||||||||
| Notional amounts: | |||||||||||
| Forward contracts | € | € | |||||||||
| Gross fair value recorded in: | |||||||||||
| Other current liabilities | $ | $ | |||||||||
| Other non-current liabilities | $ | $ | |||||||||
The following table summarizes the effect of the Company’s foreign currency exchange contracts on its condensed consolidated statements of operations and comprehensive loss recognized in other income (expense), net (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Recognized losses on foreign currency exchange contracts | $ | ( | $ | ( | |||||||
| Foreign exchange gains on remeasurement of deferred acquisition related consideration | $ | $ | |||||||||
5. Stockholders’ Equity
Series DF-1 Convertible Preferred Stock
The Company’s Board of Directors has designated 6,310 shares of the authorized 10,000,000 shares of preferred stock, $0.001 par value per share, as Series DF-1 Convertible Preferred Stock (the “Series DF-1 Preferred Stock”). Each share of Series DF-1 Preferred Stock is non-voting and convertible to 1,000 shares of the Company’s Common Stock. There is an aggregate of 6,309,459 shares of common stock issuable upon conversion of the Series DF-1 Preferred Stock. The Series DF-1 Preferred Stock does not have voting rights but is eligible for dividends or distributions on an as-converted basis.
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6. Stock-based Compensation Expense
2014 Equity Incentive Plan
In July 2014, the Company’s Board of Directors approved the 2014 Equity Incentive Plan (the “2014 Plan”). The number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015, and continuing through and including January 1, 2024, by 3 % of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s Board of Directors. On January 1, 2022, the total number of shares of common stock reserved for issuance increased by 1,009,227 shares to 11,932,065 shares reserved since the inception of the 2014 Plan. As of March 31, 2022, 4,099,079 shares remained available for issuance.
The following is a summary of the Company’s stock option activity and related information (options in thousands):
| Three Months Ended March 31, 2022 | |||||||||||
| Options | Weighted Average Exercise Price | ||||||||||
| Outstanding, beginning of period | $ | ||||||||||
| Exercised | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding, end of period | |||||||||||
| Exercisable | |||||||||||
Outstanding options as of March 31, 2022 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 March 31, 2022, these stock options remain unvested.
As of March 31, 2022, the aggregate pre-tax intrinsic value of options outstanding was $20.9 million and options outstanding and exercisable was $9.8 million, the weighted-average remaining contractual term of options outstanding was 7.4 years, and options outstanding and exercisable was 6.5 years. The aggregate pre-tax intrinsic value of options exercised was $0.3 million and $1.2 million during the three months ended March 31, 2022 and 2021, respectively.
The following is a summary of the Company’s RSU activity and related information (RSUs in thousands):
| Three Months Ended March 31, 2022 | |||||||||||
| RSUs | Weighted Average Fair Value | ||||||||||
| Outstanding, beginning of period | $ | ||||||||||
| Awarded | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding, end of period | |||||||||||
As of March 31, 2022, the aggregate pre-tax intrinsic value of RSUs outstanding was $28.7 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 2.5 years.
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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):
| Three Months Ended March 31, 2022 | |||||||||||
| PSUs | Weighted Average Fair Value | ||||||||||
| Outstanding, beginning and end of period | $ | ||||||||||
As of March 31, 2022, 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 1.3 years.
Total stock-based compensation expense recognized is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cost of sales | $ | $ | |||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| $ | $ | ||||||||||
As of March 31, 2022, the total compensation expense not yet recognized for the 2014 Plan was $37.5 million and is currently estimated to be expensed through the year 2025. This expense will be amortized on a straight-line basis over a weighted average period of 2.5 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 inception of the 2014 ESPP. As of March 31, 2022, 786,727 shares remained available for issuance. In connection with the proposed transaction with Medtronic, the ESPP remained in effect until November 15, 2021, which was the final purchase date, and subsequently no longer offered.
7. Net Loss per Share
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The following potentially dilutive securities outstanding have been excluded from the computations of weighted average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares, in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Common stock options | |||||||||||
| Market-based performance stock options | |||||||||||
| Restricted stock units | |||||||||||
| Performance stock units | |||||||||||
| Employee stock purchase plan shares | |||||||||||
| Stock issuable upon conversion of convertible notes | |||||||||||
The Company uses the if-converted method for calculating any potential dilutive effects of the Convertible Notes. The Company did not adjust the net losses for the three months ended March 31, 2022 and 2021 to eliminate any interest expense related to the Convertible Notes (see Note 9) in the computation of diluted loss per share, or calculate the potential common shares from conversion, as the effects would have been anti-dilutive. The shares presented above represent the maximum number of convertible shares which can be issued subject to the make-whole increase to the conversion rate upon certain events.
8. Assets and Liabilities Held for Sale
During the three months ended March 31, 2022, in connection with the announcement of the anticipated Merger with Medtronic and with respect to antitrust considerations, the Company and Hemostasis have agreed on the material terms of a Sale and Purchase Agreement for the Fiagon business. The Company concluded that as of March 31, 2022 and December 31, 2021, respectively, Fiagon met all of the held for sale criteria. The Company’s management does not consider this to be a strategic shift that will have a major effect on the Company’s operations and financial results, and therefore does not qualify for reporting as a discontinued operation.
During the year ended December 31, 2021, the Company recognized an impairment loss of $67.8 million in the consolidated statements of operations and comprehensive loss to adjust the carrying value of the disposal group to fair value less costs to sell. The impairment is a result of the circumstances surrounding the pending transaction with Medtronic, which have led to a plan to sell that is outside of the normal course of business in terms of timing and value expectations. Additionally, as part of the ongoing evaluation of the composition and value of the disposal group, the Company recognized an additional loss of $3.1 million during the three months ended March 31, 2022.
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| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets held for sale | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Restricted cash | |||||||||||
| Total assets held for sale | |||||||||||
| Liabilities held for sale | |||||||||||
| Accounts payable | |||||||||||
| Accrued compensation | |||||||||||
| Other current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Total liabilities held for sale | |||||||||||
| Net assets held for sale | $ | $ | |||||||||
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
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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 (May 11, 2022), 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 (May 11, 2023), the Company may redeem up to the entire $65.0 million original principal amount of Convertible Notes if:
•the volume weighted average price of the common stock on each of any twenty (20 ) trading days during a period of thirty (30 ) consecutive trading days ending on the date which an optional redemption notice is delivered;
•the volume weighted average price of the common stock on the last trading day of such period; and
•the closing price of the common stock on the last trading day of such period, in each case, are greater than 200 % of the conversion price.
The Company is obligated to notify the holders of the Convertible Notes no less than ten trading days nor more than sixty calendar days prior to any such redemption. During the period from the date on which the Company delivers an optional redemption notice until the date the optional redemption price is paid to holders, if a holder elects to convert its Convertible Notes, it will receive the shares otherwise issuable upon conversion of the Convertible Notes, plus an additional number of shares determined in accordance with the Convertible Notes. To the extent the holder would be prohibited due to the Beneficial Ownership Cap to convert its Convertible Notes during such period, such holder would be entitled to convert all or any portion of its Convertible Notes into shares of Series DF-1 Preferred Stock of the Company (such conversion, a “Preferred Stock Conversion”). The number of Series DF-1 Preferred Stock issuable upon a Preferred Stock Conversion shall be determined by dividing the number of shares of common stock of the Company that it would be entitled to receive from such conversion by 1,000. See Note 5 for discussion on the rights and privileges of Series DF-1 Preferred Stock. Upon any conversion of the Convertible Notes in connection with a major transaction, redemption of the Convertible Notes in connection with a major transaction or an optional redemption, holders of the Convertible Notes will also be entitled to a make-whole increase to the conversion rate or make-whole interest provision.
The Company is subject to a number of affirmative and restrictive covenants pursuant to the Facility Agreement, including covenants regarding compliance with applicable laws and regulations, maintenance of property, payment of taxes, maintenance of insurance, business combinations, incurrence of additional indebtedness, prepayments of other unsecured indebtedness and transactions with affiliates, among other covenants. The Company is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. As of March 31, 2022, the Company was in compliance with all covenants pertaining to the Convertible Notes.
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.
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As of March 31, 2022 and December 31, 2021, the net carrying amount of the Convertible Notes recorded within long-term debt on the condensed consolidated balance sheets was as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Outstanding principal amount of convertible notes | $ | $ | |||||||||
| Unamortized debt discount and transaction costs | ( | ( | |||||||||
| Fair value of embedded derivatives | |||||||||||
| Convertible notes, net | $ | $ | |||||||||
The convertible debt discount and transaction costs are being amortized to expense over the term of the Notes. For each of the three months ended March 31, 2022 and 2021, the accretion of the convertible debt discount and amortization of debt issuance costs was $0.2 65.0 million was $0.6 million and $0.7 million as of March 31, 2022 and December 31, 2021, respectively, and was included in other current liabilities on the condensed consolidated balance sheets.
The fair value of debt is based on the amount of future cash flows associated with the instrument discounted using the Company’s estimated market rate as well as a convertible lattice model for the embedded features. As of March 31, 2022, there was no material change to the fair value of the Company’s Convertible Notes from December 31, 2021.
Deerfield Loans
On July 22, 2021, the Company entered into an additional agreement with Deerfield, providing for the issuance and sale by the Company to Deerfield of senior secured loans of an aggregate principal of up to $60.0 million (the “Deerfield Loans”). The Deerfield Loans will mature on July 22, 2026, unless earlier repaid or accelerated. The agreement provides for the disbursement of the Deerfield Loans in three tranches of $20.0
The Deerfield Loans bear interest at 7.5 % per annum, payable quarterly in arrears on October 15, January 15, April 15, and July 15 of each year, commencing October 15, 2021, as well as a 0.25 % charge on undrawn tranches. The Company’s obligations under the Deerfield Loans are required to be guaranteed by all of its existing and future subsidiaries (other than certain excluded and immaterial subsidiaries). The Company’s and each subsidiary guarantor’s obligations under the Deerfield Loans and agreement are secured by substantially all of the Company’s and each subsidiary guarantor’s assets, which includes springing control of the Company’s primary deposit and security accounts pursuant to a Deposit Account Control Agreement and Security Account Control Agreement. Deerfield has the ability to exercise exclusive control of these accounts by providing a Notice of Exclusive Control in response to an event of default. As of March 31, 2022, no such notice has been received as the Company was in full compliance with the terms of the Deerfield Loans. The Deerfield Loans will not be permitted to be prepaid prior to 30 months after the Closing Date (the “No Call Date”), except in connection with a change of control.
The Company will have the right, but not the obligation, to prepay the Deerfield Loans at any time after the No Call Date, together with accrued and unpaid interest on the principal amount prepaid, plus an exit fee equal to 1.75 % of the principal amount of the Deerfield Loans to be prepaid, plus a prepayment premium equal to (a) 0.75 % of the principal amount of the Deerfield Loans to be prepaid, if such prepayment occurs after the No Call Date but on or prior to the fourth anniversary of the Closing Date and (b) 0.50 % of the principal amount of the Deerfield Loans to be prepaid, if such prepayment occurs after the fourth anniversary of the Closing Date but prior to the fifth anniversary of the Closing Date; provided that upon any prepayment in connection with a change of control, in lieu of such prepayment premium and the exit fee, the Company will be required to pay a prepayment premium equal to 9.75 % of the principal amount being prepaid and the principal amount of any prepayments made within three months of such change of control (the “Change of Control/Acceleration Premium”). The Change of Control/Acceleration Premium is also payable upon any acceleration of the Deerfield Loans upon an event of default. In addition, if a change of control occurs, the Company enters into any definitive agreement the consummation of which would result in a change of control of the Company or announces any prospective change of control, in each case within three months of any prepayment or prepayment in full of the Deerfield Loans prior to the maturity date, then, upon the consummation of such change of control, the Company will be required to pay an additional amount equal to the Change of Control/Acceleration
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Premium applicable to the principal amount of Deerfield Loans prepaid within three months of such change of control, less any prepayment premiums and exit fees paid in connection with such prior prepayments.
The Company is subject to a number of affirmative and restrictive covenants pursuant to the agreement, including covenants regarding minimum cash and minimum revenue, compliance with applicable laws and regulations, maintenance of property, payment of taxes, maintenance of insurance, business combinations, incurrence of additional indebtedness, prepayments of other 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. The Deerfield Loans contain certain specified events of default, the occurrence of which would entitle the holders of the Deerfield Loans to immediately demand repayment of all outstanding principal and accrued interest on the Loans, together with a prepayment premium equal to 9.75 % of the outstanding principal amount of the Deerfield Loans to be prepaid. Such events of default include, among others, failure to make any payment under the Loans 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, a material default by the Company under other indebtedness, and the occurrence of a change of control. As of March 31, 2022, the Company was in compliance with all covenants pertaining to the Deerfield Loans.
As of March 31, 2022 and December 31, 2021, the net carrying amount of the Deerfield Loans recorded within long-term debt on the condensed consolidated balance sheets was as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Outstanding principal amount of loans | $ | $ | |||||||||
| Unamortized debt discount and transaction costs | ( | ( | |||||||||
| Accrued exit fee | |||||||||||
| Deerfield loans, net | $ | $ | |||||||||
The debt discount and transaction costs associated with the Deerfield Loans are being amortized to interest expense over the term of the Deerfield Loans. For the three months ended March 31, 2022, the accretion of the debt discount and amortization of debt issuance costs was immaterial. The accrued interest on the outstanding principal of $20.0 million as of March 31, 2022 was $0.3 million and was included in other current liabilities on the condensed consolidated balance sheets. As of March 31, 2022, the fair value of Deerfield Loans approximated its carrying value.
Medtronic Financing
On September 25, 2021, the Company entered into a financing arrangement with Medtronic (the “Medtronic Financing”), providing for unsecured subordinated loans of an aggregate principal amount of up to $75.0 million to the Company upon the terms and conditions of the Medtronic Financing. The Medtronic Financing will mature one hundred eighty (180 ) days following the earlier of (x) the Maturity Date of the Deerfield Loans and (y) the date on which the Deerfield Loans have been fully paid in cash and are terminated, unless earlier repaid or accelerated. The Medtronic Financing provides for the draw of funds by the Company in up to five tranches of $15.0
The Medtronic Financing accrues interest at 5.0 % per annum with accrued interest to be paid at maturity. The Company’s obligations under the Medtronic Financing are required to be guaranteed by all of its existing and future subsidiaries (other than certain excluded and immaterial subsidiaries). The Medtronic Financing may be prepaid in part or in full prior to maturity without any penalty or premium. Further, the Medtronic Financing may no longer be due and payable upon a termination in accordance with the Merger Agreement.
The Company is subject to a number of affirmative and restrictive covenants pursuant to the Medtronic Financing, including covenants regarding compliance with applicable laws and regulations, maintenance of property, payment of taxes, maintenance of insurance, business combinations, incurrence of additional indebtedness and prepayments of other 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. The Medtronic Financing contains certain specified events of default, the occurrence of which would entitle Medtronic to immediately demand repayment of all outstanding
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principal and accrued interest on the Medtronic Financing. Such events of default include, among others, failure to make any payment under the Deerfield Loans when due, failure to observe or perform any covenant under the Medtronic Financing 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, a material default by the Company under other indebtedness, and the occurrence of a change of control outside of the pending Merger. As of March 31, 2022, the Company was in compliance with all covenants pertaining to the Medtronic Financing.
As of March 31, 2022 and December 31, 2021, the Medtronic Financing net carrying amounts of $45.0 million and $30.0 million, respectively, were recorded within long-term debt on the condensed consolidated balance sheets. The accrued interest associated with the Medtronic Financing was $0.7 million and $0.2 million as of March 31, 2022 and December 31, 2021, respectively and recorded within other non-current liabilities on the condensed consolidated balance sheets. The fair value of the Medtronic Financing approximates its carrying value as of March 31, 2022.
10. Commitments and Contingencies
Retention Bonus Program
On September 1, 2021, the Compensation Committee of the Company’s Board of Directors approved the implementation of a retention program that covers substantially all employees of the Company. The program provides for the payment of up to $15.0 million, payable in cash. The timing and amounts of the payments related to this program will depend on the timing of the anticipated Merger and employees remaining active through the earnings dates. The Company is currently recognizing program costs in its condensed consolidated financial statements ratably over the period of service from September 1, 2021 through July 31, 2022. During the three months ended March 31, 2022, total costs for the retention plans were $2.4 million. As of March 31, 2022, accrued retention bonuses payable of $5.0 million was presented in accrued compensation on the condensed consolidated balance sheets.
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.
Stockholder Litigation Related to the Merger
Beginning on September 1, 2021, seven civil actions were filed challenging the adequacy of certain public disclosures made by the Company concerning the Merger with Medtronic. On September 1, 2021, Elaine Wang, a purported stockholder of the Company, commenced an action in the United States District Court for the Southern District of New York, captioned Elaine Wang v. Intersect ENT, Inc., et al., Case No. 1:21-cv-7348, against the Company and current members of its Board of Directors (the “Wang Complaint”). On September 9, 2021, Marc Waterman, a purported stockholder of the Company, commenced an action in the United States District Court for the Southern District of New York, captioned Marc Waterman v. Intersect ENT, Inc., et al., Case No. 1:21-cv-7552, against the Company and current members of its Board of Directors (the “Waterman Complaint”). On September 15, 2021, Carla Lawson, a purported stockholder of the Company, commenced an action in the United States District Court for the Northern District of California, captioned Carla Lawson v. Intersect ENT, Inc., et al., Case No. 3:21-cv-7150, against the Company, five members of its current Board of Directors, and one former member of its Board of Directors (the “Lawson Complaint”). On September 22, 2021, Brian Jones, a purported stockholder of the Company, commenced an action in the United States District Court for the District of Delaware, captioned Brian Jones v. Intersect ENT, Inc., et al., Case No. 1:21-cv-1339, against the Company and current members of its Board of Directors (the “Jones Complaint”). On September 23, 2021, two other purported stockholders of the Company filed lawsuits against the Company and current members of its Board of Directors: Richard Lawrence commenced an action in the United States District Court for the Northern District of California, captioned Richard Lawrence v. Intersect ENT, Inc., et al., Case No. 3:21-cv-7405 (the “Lawrence Complaint”); and Alex Ciccotelli commenced an action in the United States District Court for the Eastern District of Pennsylvania, captioned Alex Ciccotelli v. Intersect ENT, Inc., et al., Case 2:21-cv-4202 (the “Ciccotelli Complaint”). On September 29, 2021, Michael Kent, a purported stockholder of the Company, commenced an action in the United States District Court for the Southern District of New York, captioned Michael Kent v. Intersect ENT, Inc., et al., Case No. 1:21-cv-8066, against the Company and current members of its Board of Directors (the “Kent Complaint,” collectively with the Wang Complaint, Waterman Complaint, Lawson Complaint, Jones Complaint, Lawrence Complaint, and Ciccotelli Complaint, the “Merger Complaints”). The Merger Complaints assert claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and seek, among other things, an injunction preventing consummation of the proposed transaction with Medtronic, rescission of the proposed transaction or rescissory damages in the event it is consummated, declaratory relief, an accounting by the defendants for all damages caused to the plaintiffs, and the award of attorneys’ fees and expenses.
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While, the Company believes the claims asserted in the Merger Complaints are without merit and denies any wrongdoing in connection with the statements made by the Company concerning the Merger with Medtronic, the Company agreed to a financial settlement with respect to the complaints and accrued $0.2 million as of March 31, 2022 within accounts payable. As set forth below, the Merger Complaints have all been dismissed:
•On October 1, 2021, Elaine Wang dismissed the Wang Complaint with prejudice;
•On October 5, 2021, Michael Kent dismissed the Kent Complaint without prejudice;
•On October 7, 2021, Brian Jones dismissed the Jones Complaint without prejudice;
•On October 12, 2021, Marc Waterman dismissed the Waterman Complaint without prejudice, and Alex Ciccotelli dismissed the Ciccotelli Complaint without prejudice; and
•On October 13, 2021, Carla Lawson dismissed the Lawson Complaint without prejudice, and Richard Lawrence dismissed the Lawrence Complaint without prejudice.
Additional lawsuits may be filed against the Company or its directors and offers in connection with the Merger. Defending such lawsuits could require the Company to incur significant costs and divert the attention of management. Such legal proceedings could delay or prevent the closing of the Merger from occurring within the contemplated timeframe. The Company cannot predict the outcome of any lawsuit that might be filed subsequent to the date of filing this Quarterly Report on Form 10-Q and cannot reasonably estimate the possible losses with respect to these matters.
Patent Matters
11. Income Taxes
The provision for income taxes in the periods presented is based upon the loss before income taxes (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Income tax (benefit) | $ | $ | ( | ||||||||
The Company’s income tax benefit for the three months ended March 31, 2021 was primarily related to the amortization of acquired intangible assets in foreign jurisdictions. No such amortization expense was recorded for the three months ended March 31, 2022 due to the write-off of the related intangible assets during the fourth quarter of 2021.
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.
12. Subsequent Event
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. In addition, forward-looking statements include the impact that the COVID-19 pandemic will have on our business, and our belief regarding the impact on revenue 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 8, 2022. 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”), 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 in Asia Pacific and South America.
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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, 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 456,000 patients have been treated with PROPEL products through the end of 2021. 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 physician 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 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 VenSure Navigable and Stand-alone balloon offerings are used to access and treat the frontal, recess sphenoid sinus ostia, maxillary ostia/ethmoid infundibula 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 4D-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.
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 dilation of the sinus ostia. 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.
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We also continue to perform research and development activities and clinical trials in order to expand our portfolio of products and improve our existing products. In the second quarter of 2021, we initiated the EXPAND study to assess the potential to improve frontal sinus ostia patency and other outcomes through localized drug delivery following balloon dilation utilizing PROPEL Contour and the VenSure balloon. In support of our focus on expanding our global reach, we plan to make clinical and regulatory investments in PROPEL in Europe.
Debt Financings
On May 11, 2020, to finance our commercial activities as well as for general corporate purposes, we entered into a Facility Agreement (the “Facility Agreement”) with Deerfield Partners, L.P. (“Deerfield”), as agent for itself and the lenders, providing for the issuance and sale by us 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 our common stock.
On July 22, 2021, we entered into an additional agreement with Deerfield, providing for the issuance and sale by us to Deerfield of 7.5% senior secured loans of an aggregate principal of up to $60.0 million (the “Deerfield Loans”). The Deerfield Loans will mature on July 22, 2026, unless earlier repaid or accelerated. The agreement provides for the disbursement of the Deerfield Loans in three tranches of $20.0 million, with the initial tranche disbursed on the closing date of the transaction, the second tranche to be disbursed at our option on the earlier of the date of any prepayment of the remaining Fiagon acquisition payments and September 15, 2022, and the third tranche to be disbursed at our option on the earlier of the date of any prepayment of the remaining Fiagon acquisition payments and September 15, 2023. As of March 31, 2022, we had only borrowed the first $20.0 million under the Deerfield Loans.
On September 25, 2021, we entered into a financing arrangement with Medtronic (the “Medtronic Financing”), providing for 5.0% unsecured subordinated loans of an aggregate principal amount of up to $75.0 million to us upon the terms and conditions of the Medtronic Financing. The Medtronic Financing will mature 180 days following the earlier of (x) the maturity date of the Deerfield Loans and (y) the date on which the Deerfield Loans have been fully paid in cash and are terminated, unless earlier repaid or accelerated. As of March 31, 2022, borrowings on the Medtronic Financing had a net carrying amount of $45.0 million. Additionally, in April 2022, we amended the Medtronic Financing providing for an incremental $15.0 million subject to the same interest rate and maturity as the original Medtronic Financing.
See Note 9. Long-Term Debt of Notes to our condensed consolidated financial statements for a further description of these loan arrangements.
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 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 Intersect ENT (the “Merger”), with Intersect ENT surviving the Merger as a wholly-owned subsidiary of Medtronic. On October 8, 2021, our stockholders adopted the Merger Agreement at a special meeting of our stockholders.
Under the terms of the Merger Agreement, Medtronic will acquire all outstanding shares of our common stock, including all vested and unvested awards, in exchange for consideration of $28.25 per share in cash. Vested and unvested stock options will be redeemed for the difference between $28.25 per option and the respective exercise price. 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 us with certain termination rights and, under certain circumstances, may require that Medtronic or we pay a termination fee.
In connection with the Merger, we intend to divest the business currently operated by (i) Intersect ENT International GmbH and its subsidiary, Intersect ENT GmbH, and (ii) Fiagon NA LLC (collectively “Fiagon”). Our company and Hemostasis LLC, a Delaware limited liability company (“Hemostasis”), have agreed on the material terms of a Sale and Purchase Agreement that the parties intend to execute, pursuant to which, among other things, Hemostasis would agree to acquire the Fiagon Business from our company for a cash payment at closing, subject to certain purchase price adjustments for debt, cash and transaction expenses. The Sale and Purchase Agreement is also expected to contain customary representations, warranties, covenants and indemnification by our company. Our company and Medtronic also anticipate providing certain transition services in connection with the sale of Fiagon. The consummation of the sale of Fiagon to Hemostasis would be
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expressly cross-conditioned on the closing of the Merger. If the sale of Fiagon is completed under the anticipated terms of the Sale and Purchase Agreement, such transaction is expected to close immediately prior to the time the Merger is consummated. We have presented the related assets and liabilities of Fiagon as held for sale on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.
The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and restricting us from taking certain specified actions absent Medtronic’s prior written consent. Accordingly, our ability to advance our business during the pendency of the Merger is subject to these restrictions.
Impact of the COVID-19 Pandemic
While the COVID-19 pandemic unfavorably impacted our business environment during 2020, we began to see meaningful change in the business environment throughout 2021 as we continued to see improvements in the elective procedure market. Our business has been and will continue to be impacted by patients’ decisions to undergo sinus surgeries and as ENT ASC and office procedure volumes continue to recover to pre-pandemic levels. We continue to remain flexible in our approach to continuing our operations in light of developing laws, new COVID variants, and restrictions surrounding the COVID-19 pandemic. While we have seen an improving business environment to date, the COVID-19 pandemic may continue to create severe disruptions and volatility in global capital markets and increase economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe and may impact our operations and financial results.
Components of Our Results of Operations
Revenue
We have derived our revenue almost exclusively from the sales of our PROPEL family of products, with limited sales of SINUVA beginning in March 2018, as well as sales of CUBE and VenSure products beginning in the fourth quarter of 2020 with the acquisition of Fiagon. While our business has been and may continue to be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits for an extended period of time, we anticipate revenue growth in 2022 based on the increased elective procedure volumes and enrollment trends throughout 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. We recognize revenue from SINUVA net of estimated product sales discounts, rebates, returns and other allowances as a reduction of revenue in the same period we recognize revenue. 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, from time to time, 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 arrangements transfer the ownership or provide the customer with a right to purchase the equipment 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 months ended March 31, 2022 and 2021.
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 located in the U.S. Cost of sales consists primarily of manufacturing overhead costs, material costs, and direct labor. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include compensation, including stock-based compensation and other operating expenses associated with the cost of quality assurance, material procurement, inventory control, facilities, information technology, equipment and operations supervision and manufacturing and warehouse management. Cost of sales also includes depreciation expense for production equipment, amortization of intangible assets associated with acquired product technologies and processes, maintenance of operational processes, and certain direct costs such as shipping costs. Once the disruption from the COVID-19 pandemic subsides, we expect cost of sales to increase in absolute dollars again primarily as, and to the extent, our revenue grows, or we make additional improvements in our manufacturing capabilities.
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Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing costs, production and sales volume, product mix, and average selling prices. 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.
Loss on Assets Held for Sale
In anticipation of the Merger with Medtronic, we have committed to a plan to divest of Fiagon by agreeing on the material terms of a Sale and Purchase Agreement with Hemostasis, and, as a result, have presented the assets and liabilities of Fiagon as held for sale on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively. During the year ended December 31, 2021, we recorded an impairment charge of $67.8 million in the consolidated statements of operations and comprehensive loss relating to goodwill, intangible assets, property equipment, right-of-use assets, and inventory, representing the difference between the carrying value of the assets and liabilities of Fiagon and the fair value less selling costs as of December 31, 2021. During the three months ended March 31, 2022, as a result of the ongoing evaluation of the composition and value of the disposal group, an additional $3.1 million loss was recorded. We believe there will be an additional loss of approximately $15.0 million to $20.0 million contingent upon completing the sale of the business.
Interest Expense
Interest expense consists primarily of the interest expense, accretion expense of debt discounts, and amortization of debt issuance costs associated with debt facilities, as well as imputed interest on the carrying value of 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, transaction costs incurred outside the ordinary course of business related to business combinations and our capital structure, 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.
Income Tax Benefit
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, state, and foreign deferred tax assets as we have concluded it is more likely than not that these deferred tax assets will not be realized.
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Critical Accounting Policies, Significant Judgments, and Use of and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
We believe that the accounting policies discussed in our Annual Report on Form 10-K are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2022, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021.
Accounting Pronouncements
See Note 2 of the condensed consolidated financial statements under the heading “Accounting Pronouncements” for new accounting pronouncements or changes to the recent accounting pronouncements during the three months ended March 31, 2022.
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Results of Operations
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands, expect percentages) | |||||||||||
| Revenue | $ | 21,575 | $ | 24,328 | |||||||
| Cost of sales | 7,690 | 8,455 | |||||||||
| Gross profit | 13,885 | 15,873 | |||||||||
| Gross margin | 64.4 | % | 65.2 | % | |||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 28,028 | 28,077 | |||||||||
| Research and development | 9,395 | 6,370 | |||||||||
| Loss on assets held for sale | 3,136 | — | |||||||||
| Total operating expenses | 40,559 | 34,447 | |||||||||
| Loss from operations | (26,674) | (18,574) | |||||||||
| Interest expense | (2,054) | (1,375) | |||||||||
| Other income (expense), net | (76) | (504) | |||||||||
| Loss before income taxes | (28,804) | ||||||||||