Company Quick10K Filing
Intersect Ent
Price22.78 EPS-1
Shares32 P/E-18
MCap718 P/FCF-36
Net Debt-89 EBIT-40
TEV629 TEV/EBIT-16
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-02-27
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-08-05
10-Q 2019-03-31 Filed 2019-05-07
10-K 2018-12-31 Filed 2019-02-28
10-Q 2018-09-30 Filed 2018-11-05
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-31 Filed 2018-05-03
10-K 2017-12-31 Filed 2018-02-28
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-04
10-Q 2017-03-31 Filed 2017-05-05
10-K 2016-12-31 Filed 2017-02-28
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-08
10-Q 2016-03-31 Filed 2016-05-09
10-K 2015-12-31 Filed 2016-02-25
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-11
10-K 2014-12-31 Filed 2015-03-11
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-09-04
8-K 2020-06-09
8-K 2020-06-04
8-K 2020-05-11
8-K 2020-04-13
8-K 2020-02-24
8-K 2020-01-20
8-K 2020-01-13
8-K 2019-12-02
8-K 2019-11-26
8-K 2019-11-01
8-K 2019-08-01
8-K 2019-07-22
8-K 2019-06-24
8-K 2019-06-04
8-K 2019-05-07
8-K 2019-05-06
8-K 2019-02-25
8-K 2019-02-01
8-K 2019-01-16
8-K 2019-01-07
8-K 2018-11-05
8-K 2018-10-26
8-K 2018-08-01
8-K 2018-06-05
8-K 2018-05-01
8-K 2018-02-27
8-K 2018-01-17
8-K 2018-01-08

XENT 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 1A. Risk Factors" of This Quarterly Report on Form
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 d843603dex101.htm
EX-10.2 d843603dex102.htm
EX-31.1 d843603dex311.htm
EX-31.2 d843603dex312.htm
EX-32.1 d843603dex321.htm

Intersect Ent Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.20.10.10.0-0.0-0.12014201620182020
Assets, Equity
0.10.10.0-0.0-0.1-0.12014201620182020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12014201620182020
Ops, Inv, Fin

10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
Commission file number:
001-36545
 
INTERSECT ENT, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
20-0280837
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
     
1555 Adams Drive
Menlo Park, California
 
94025
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
Registrant’s telephone number, including area code: (650)
 641-2100
Securities registered pursuant to Section 12(b) of the Act:
         
Title of Each Class:
 
Trading
symbol(s)
 
Name of Exchange
on Which registered:
Common Stock, 0.001 par value
 
XENT
 
The Nasdaq Global Market
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    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 
 
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, an emerging growth company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
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  
Shares of common stock outstanding as of May 4, 2020 were 32,559,239.
 
 

Table of Contents
INTERSECT ENT, INC.
Form
10-Q
– QUARTERLY REPORT
For the Quarter Ended March 31, 2020
TABLE OF CONTENTS
         
 
Page
 
 
 
3
 
 
 
3
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
14
 
 
 
20
 
 
 
20
 
 
 
 
 
 
 
 
21
 
 
 
21
 
 
 
21
 
 
 
48
 
 
 
48
 
 
 
48
 
 
 
49
 
 
 
49
 
 
 
 
 
 
 
 
50
 
 
 
 
 

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
March 31,
 
 
December 31,
 
 
 
2020
   
2019
 
 
 
(unaudited)
 
 
(1)
 
Assets
 
 
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
34,193
    $
20,652
 
Short-term investments
   
53,517
     
69,986
 
Accounts receivable, net
   
10,306
     
19,113
 
Inventories, net
   
17,048
     
17,000
 
Prepaid expenses and other current assets
   
2,547
     
2,300
 
                 
Total current assets
   
117,611
     
129,051
 
Property and equipment, net
   
6,165
     
6,312
 
Operating lease right-of-use assets
   
11,442
     
11,980
 
Other non-current assets
   
684
     
559
 
                 
Total assets
  $
135,902
    $
147,902
 
                 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current liabilities:
   
     
 
Accounts payable
  $
4,907
    $
4,056
 
Accrued compensation
   
10,390
     
12,717
 
Other current liabilities
   
2,442
     
2,163
 
                 
Total current liabilities
   
17,739
     
18,936
 
Operating lease liabilities
   
10,281
     
10,886
 
Other non-current liabilities
   
22
     
22
 
                 
Total liabilities
   
28,042
     
29,844
 
                 
Commitments and contingencies (note
7
)
   
     
 
                 
Stockholders’ equity:
   
     
 
Preferred stock, $0.001 par value;
   
     
 
Authorized shares: 10,000 at March 31, 2020 and December 31, 2019;
   
     
 
Issued and outstanding shares: none
   
     
 
Common stock, $0.001 par value;
   
     
 
Authorized shares: 150,000 at March 31, 2020 and December 31, 2019;
   
     
 
Issued and outstanding shares: 32,537 at March 31, 2020 and 32,235 at December 31, 2019
   
33
     
32
 
Additional paid-in capital
   
356,082
     
348,729
 
Accumulated other comprehensive loss
   
34
     
53
 
Accumulated deficit
   
(248,289
)    
(230,756
)
                 
Total stockholders’ equity
   
107,860
     
118,058
 
                 
Total liabilities and stockholders’ equity
  $
135,902
    $
147,902
 
                 
(1) Amounts have been derived from the December 31, 2019 audited consolidated financial statements included in the Company’s Annual Report on Form
10-K
filed with the Securities and Exchange Commission.
See accompanying notes to condensed consolidated financial statements.
3

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
                 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
 
2019
 
Revenue
  $
19,826
    $
26,673
 
Cost of sales
   
6,410
     
4,645
 
                 
Gross profit
   
13,416
     
22,028
 
 
 
 
 
 
 
 
Operating expenses:
   
     
 
Selling, general and administrative
   
26,200
     
27,207
 
Research and development
   
5,146
     
6,266
 
                 
Total operating expenses
   
31,346
     
33,473
 
                 
Loss from operations
   
(17,930
)    
(11,445
)
Interest income and other, net
   
397
     
640
 
                 
Net loss
   
(17,533
)    
(10,805
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized (loss) gain on short-term investments, net
 
 
(19
)
 
 
77
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
(17,552
)
 
(10,728
)
 
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
  $
(0.54
)   $
(0.35
)
                 
Weighted average common shares used to compute net loss per share, basic and diluted
   
32,365
     
30,918
 
                 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Total
 
 
 
Common Stock
   
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income (Loss)
 
 
Deficit
 
 
Equity
 
Balance at December 31, 2019
   
32,235
   
$
32
   
$
348,729
   
$
53
   
$
(230,756
)  
$
118,058
 
Issuance of common stock and exercise of stock options
   
302
     
1
     
3,100
     
—  
     
—  
     
3,101
 
Stock-based compensation expense
   
—  
     
—  
     
4,253
     
—  
     
—  
     
4,253
 
Unrealized loss on short-term investments
   
—  
     
—  
     
—  
     
(19
)
   
—  
     
(19
)
Net loss
   
—  
     
—  
     
—  
     
—  
     
(17,533
)
   
(17,533
)
                                                 
Balance at March 31, 2020
   
32,537
   
$
33
   
$
356,082
   
$
34
   
$
(248,289
)  
$
107,860
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
   
30,745
   
$
31
   
$
308,766
   
$
(41
)  
$
(187,762
)  
$
120,994
 
Issuance of common stock and exercise of stock options
   
417
     
—  
     
4,467
     
—  
     
—  
     
4,467
 
Stock-based compensation expense
   
—  
     
—  
     
4,014
     
—  
     
—  
     
4,014
 
Unrealized gain on short-term investments
   
—  
     
—  
     
—  
     
77
     
—  
     
77
 
Net loss
   
—  
     
—  
     
—  
     
—  
     
(10,805
)    
(10,805
)
                                                 
Balance at March 31, 2019
   
31,162
   
$
31
   
$
317,247
   
$
36
   
$
(198,567
)  
$
118,747
 
                                                 
See accompanying notes to condensed consolidated financial statements.
5

Table of Contents
INTERSECT ENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
 
2019
 
Operating activities:
 
 
 
 
 
 
Net loss
  $
(17,533
  $
(10,805
)
Adjustments to reconcile net loss to cash used in operating activities:
   
     
 
Depreciation and amortization
   
496 
     
588
 
Amortization of
right-of-use
assets
   
538 
     
266
 
Stock-based compensation expense
   
4,356
     
3,869
 
Amortization of net investment discount
   
(83
   
(377
)
Changes in operating assets and liabilities:
   
     
 
Accounts receivable, net
   
8,807
     
2,285
 
Inventories, net
   
(151
   
(2,184
)
Prepaid expenses and other assets
   
(368
   
182
 
Accounts payable
   
634
     
(1,295
)
Accrued compensation
   
(2,327
   
899
 
Other liabilities
   
(325
   
(320
)
                 
Net cash used in operating activities
   
(5,956
   
(6,892
)
                 
Investing activities:
 
 
 
 
 
 
Purchases of short-term investments
   
(7,339
   
(42,539
)
Maturities of short-term investments
   
23,872
     
45,310
 
Purchases of property and equipment
   
(137
   
(1,217
)
                 
Net cash provided by investing activities
   
16,396
     
1,554
 
                 
Financing activities:
 
 
 
 
 
 
Proceeds from issuance of common stock and exercise of stock options
   
3,101
     
4,467
 
                 
Net cash provided by financing activities
   
3,101
     
4,467
 
                 
Net increase (decrease) in cash and cash equivalents
   
13,541
     
(871
)
Cash and cash equivalents:
   
     
 
Beginning of the period
   
20,652
     
9,464
 
                 
End of the period
  $
34,193
    $
8,593
 
                 
Non-cash
investing activities:
 
 
 
 
 
 
Right-of-use
asset obtained in exchange for lease obligations
  $
    $
117
 
Property and equipment included in accounts payable
   
321
     
346
 
Lessor funded building improvements
   
     
152
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Organization
 
 
 
 
 
 
Description of Business
Intersect ENT, Inc. (the “Company”) is incorporated in the state of Delaware and its facilities are located in Menlo Park, California. The Company is a commercial drug delivery company transforming care for patients with ear, nose and throat (“ENT”) conditions. The Company’s U.S. Food and Drug Administration (“FDA”) approved products are steroid releasing implants designed to treat patients suffering from chronic sinusitis who are managed by ENT physicians. These products include the PROPEL
®
family of products (PROPEL
®
, PROPEL
®
Mini and PROPEL
®
Contour) and the SINUVA
®
(mometasone furoate) Sinus Implant. The PROPEL family of products are used in adult patients in conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers (“ASC”) and SINUVA is designed to be used in the physician office setting of care to treat patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps. The PROPEL family of products are devices approved under the Premarket Approval (“PMA”) and SINUVA is a drug that was approved under a New Drug Application (“NDA”). In addition, the Company continues to invest in research and development of new products and product improvements.
2.
Summary of Significant Accounting Policies
Basis of Preparation
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
The interim financial data as of March 31, 2020, is unaudited and is not necessarily indicative of the results for the full year. In the opinion of the Company’s management, the interim data includes only normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three months ended March 31, 2020 and 2019. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K
(“Annual Report”) for the year ended December 31, 2019 filed with the SEC on February 27, 2020.
Risks and Uncertainties
The Company is subject to risks and uncertainties resulting from the
COVID-19
pandemic. The Company cannot predict the extent or duration of the impact of the
COVID-19
pandemic on its financial and operating results, as the information regarding the current environment is evolving rapidly. The Company’s business has and will be impacted by its customers continuing to suspend elective procedures, reduced ENT ASC and office procedures, as well as the
shelter-in-place
order issued by San Mateo County and the State of California, where the Company’s manufacturing operations and corporate headquarters are located. Furthermore, the
COVID-19
pandemic has led to severe disruption and volatility in global capital markets and increased economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe.
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, and be more severe, than the Company currently expects; the duration, extent and
re-occurrence
of the
shelter-in-place
orders impacting its manufacturing operations; the unknown state of the U.S. economy following the pandemic; the level of demand for the Company’s products as the pandemic subsides; and the time it will take for the economy to recover from the pandemic. As of the date of these condensed consolidated financial statements, the extent to which the
COVID-19
pandemic may materially adversely impact the Company’s financial results, operating results, or liquidity is uncertain.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its revenue related allowances, the allowance for doubtful accounts, inventory, common stock valuation and related stock-based compensation expense, leases as well as certain accrued liabilities.
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Table of Contents
Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the anticipated impact of the
COVID-19
pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Effective January 1, 2020, the Company adopted ASU No.
 2016-13,
Measurement of Credit Losses on Financial Instruments
(“ASU
2016-13”).
ASU
2016-13
requires that credit losses be presented as an allowance rather than as a write-down for
available-for-sale
debt securities and allows for the reversal of estimated credit losses in the current period, aligning the income statement recognition of credit losses with the reporting period in which changes occur. ASU
2016-13
also broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. The adoption of the standard did not result in a material impact to the Company’s condensed consolidated financial statements.
Significant Accounting Policies
There have been no significant changes to the accounting policies during the three months ended March 31, 2020, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019, except as described below:
Inventories
Inventories are valued at the lower of cost, computed on a
 first-in,
first-out
basis, or net realizable value. The allocation of production overhead to inventory costs is based on normal production capacity. Abnormal amounts of idle facility expense, freight, handling costs, and consumption are expensed as incurred, and not included in overhead. During the three months ended March 31, 2020, as a result of a shut
-
down in production associated with the COVID-19 pandemic, the Company recorded $1.1 million for idle facility expense due to its inability to use its manufacturing facility for a part of the quarter due to the shelter-in-place orders. While the manufacturing remains shut-down, the Company will continue to incur idle facility charges in future periods. The Company maintains provisions for excess and obsolete inventory based on its estimates of forecasted demand and, where applicable, product expiration. Due to a decline in projected product sales, the Company also increased its reserve for excess and obsolete inventory by $0.8 million during the three months ended March 31, 2020. The Company will continue to monitor the effect of the COVID-19 pandemic on the business and will continue to reassess the need for inventory reserves in future periods.
Credit Losses
The Company is exposed to credit losses primarily through receivables from customers and collaborators and through its
available-for-sale
debt securities. The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status, and the financial condition of its customers. Specific allowance amounts are established to record the appropriate allowance for customers that have an identified specific risk of default. General allowance amounts are established based upon the Company’s assessment of expected credit losses for its receivables by aging category. Balances are written off when they are ultimately determined to be uncollectible. The Company’s expected loss allowance methodology for the debt securities is developed by reviewing the extent of the unrealized loss, the size, term, geographical location, industry of the issuer, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The Company considered the current and expected future economic and market conditions surrounding the
COVID-19
pandemic and increased the overall reserve for credit losses by $0.1 million for the three months ended March 31, 2020.
3.
Composition of Certain Financial Statement Items
Accounts Receivable (in thousands):
                 
 
March 31,
 
 
December 31,
 
 
2020
 
 
2019
 
Accounts receivable
  $
10,554
    $
19,244
 
Allowance for doubtful accounts
   
(248
)    
(131
)
                 
  $
10,306
    $
19,113
 
                 
 
 
 
 
 
 
 
 
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Table of Contents
Inventory (in thousands):
                 
 
March 31,
 
 
December 31,
 
 
2020
 
 
2019
 
Raw materials
 
$
1,788
    $
2,830
 
Work-in-process
   
340
     
283
 
Finished goods
   
14,920
     
13,887
 
                 
  $
17,048
    $
17,000
 
                 
 
 
 
 
Capitalized stock-based compensation expense of $0.8
 
million and $0.9 million w
as
 included in inventory as of March 31, 2020 and December 31, 2019, respectively.
Revenue (in thousands):
                 
 
Three Months Ended
 
 
March 31,
 
 
 
2020
 
 
2019
 
PROPEL family of products
  $
19,090
    $
25,732
 
SINUVA
   
736
     
941
 
                 
  $
19,826
    $
26,673
 
                 
 
 
 
 
 
 
 
 
4.
Fair Value of Financial Instruments
 
 
 
 
 
 
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and short-term investments. 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.
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Table of Contents
Cash, Cash Equivalents and Short-term Investments
The following is a summary of cash, cash equivalents and short-term investments, by type of instrument measured at fair value on a recurring basis (in thousands):
                                                 
 
 
 
 
 
 
 
 
 
Reported as:
 
March 31, 2020
 
Amortized
Cost
 
 
Gross Unrealized
   
Estimated
Fair Value
 
 
Cash and cash
equivalents
 
 
Short-term
investments
 
Gains
 
 
Losses
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
  $
8,630
    $
 —  
    $
 —  
    $
8,630
    $
8,630
    $
—  
 
Money market funds
   
25,563
     
—  
     
—  
     
25,563
     
25,563
     
—  
 
 
                                               
   
34,193
     
—  
     
—  
     
34,193
     
34,193
     
—  
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
   
39,340
     
15
     
(20
)    
39,335
     
—  
     
39,335
 
Commercial paper
   
14,143
     
39
     
—  
     
14,182
     
—  
     
14,182
 
                                                 
   
53,483
     
54
     
(20
)    
53,517
     
—  
     
53,517
 
                                                 
  $
87,676
    $
54
    $
(20
)   $
87,710
    $
34,193
    $
53,517
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reported as:
 
December 31, 2019
 
Amortized
Cost
 
 
Gross Unrealized
   
Estimated
Fair Value
 
 
Cash and cash
equivalents
 
 
Short-term
investments
 
 
Gains
 
 
Losses
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
  $
11,885
    $
—  
    $
—  
    $
11,885
    $
11,885
    $
—  
 
Money market funds
   
8,767
     
—  
     
—  
     
8,767
     
8,767
     
—  
 
   
20,652
     
—  
     
—  
     
20,652
     
20,652
     
—  
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
   
50,137
     
33
     
(1
)    
50,169
     
—  
     
50,169
 
Commercial paper
   
19,796
     
21
     
—  
     
19,817
     
—  
     
19,817
 
   
69,933
     
54
     
(1
)    
69,986
     
—  
     
69,986
 
  $
90,585
    $
54
    $
(1
)   $
90,638
    $
20,652
    $
69,986
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
There were no transfers in and out of Level 1 and Level 2 during the three months ended March 31, 2020 and year ended December 31, 2019.
As of March 31, 2020 and December 31, 2019, the Company had no investments with a contractual maturity of greater than one year.
Based on an evaluation of securities that have been in a loss position, the Company did not recognize any other-than-temporary impairment charges during the three months ended March 31, 2020 a
nd year ended December 31
, 2019
. The Company considered various factors which included a credit and liquidity assessment of the underlying securities and the Company’s intent and ability to hold the underlying securities until the estimated date of recovery of its amortized cost.
 
The Company concluded that any unrealized losses on investments as of March 31
, 2020
were not attributed to credit.
5.
Stock-based Compensation Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Equity Incentive Plan
In July 2014, the Company’s board of directors approved the 2014 Equity Incentive Plan (the “2014 Plan”). The number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015, and continuing through and including January 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors. On January 1, 2020, the total number of shares of common stock reserved for issuance increased by 967,064 shares to 9,934,768
 
shares reserved since the inception of the 2014 Plan. At March 31, 2020, 3,070,479 shares remained available for issuance.
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Table of Contents
A summary of the Company’s stock option activity and related information (options in thousands):
                 
 
 
Three Months Ended
 
 
 
March 31, 2020
 
 
 
 
 
 
Weighted Average
 
 
 
Options
 
 
Exercise Price
 
Outstanding, beginning of period
   
3,636
    $
23.71
 
Granted
   
559
     
25.88
 
Exercised
   
(179
)    
17.30
 
Forfeited
   
(217
)    
27.51
 
                 
Outstanding, end of period
   
3,799
     
24.11
 
                 
Exercisable
   
1,725
     
22.47
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2020, included in the outstanding options was an option subject to both service and market-based vesting conditions to purchase 427,147 shares of the Company’s common stock with an exercise price of $20.44. As
of
March 31, 2020, these stock options remain unvested.
The aggregate
pre-tax
intrinsic value of options outstanding was $0.7 million and options outstanding and exercisable was $0.7 million, the weighted-average remaining contractual term of options outstanding was 8.1 years and options outstanding and exercisable was 6.9 years. The aggregate
pre-tax
intrinsic value of options exercised was $1.2 million and $5.1 million during the three months ended March 31, 2020 and 2019, respectively.
A summary of the Company’s RSU activity and related information (RSUs in thousands):
                 
 
Three Months Ended
 
 
March 31, 2020
 
 
 
 
 
 
Weighted Average
 
 
RSUs
 
 
Fair Value
 
Outstanding, beginning of period
   
511
    $
25.62
 
Awarded
   
248
     
26.18
 
Vested
   
(123
)    
26.89
 
Forfeited
   
(40
)    
28.97
 
                 
Outstanding, end of period
   
596
     
25.36
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2020, the aggregate
pre-tax
intrinsic value of RSUs outstanding was $7.0 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 2.4 years.
A summary of the Company’s Performance Stock Unit (PSU) activity and related information (PSUs in thousands):
                 
 
Three Months Ended
 
 
March 31, 2020
 
 
 
 
Weighted Average
 
 
PSUs
 
 
Fair Value
 
Outstanding, beginning of period
   
89
    $
14.22
 
Awarded
   
103
     
17.28
 
Vested
   
—  
     
—  
 
Forfeited
   
—  
     
—  
 
                 
Outstanding, end of period
   
192
     
15.86
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2020, the aggregate
pre-tax
intrinsic value of PSUs outstanding was $2.3 million, calculated based on the closing price of the Company’s common stock at the end of the period, and the weighted-average remaining vesting term of PSUs outstanding was 2.8 years.
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Table of Contents
Total stock-based compensation expense recognized is as follows (in thousands):
                 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
 
2019
 
Cost of sales
 
$
441
 
 
$
236
 
Selling, general and administrative
 
 
3,552
 
 
 
2,974
 
Research and development
 
 
363
 
 
 
659
 
                 
 
$
4,356
 
 
$
3,869
 
                 
 
 
 
 
 
 
 
As of March 31, 2020, the amount of unearned stock-based compensation currently estimated to be expensed through the year 2024 related to unvested employee stock-based awards
was $38.9 million
and the weighted average period over which the unearned stock-based compensation is expected to be recognized
 was 2.7 years. 
2014 Employee Stock Purchase Plan
In July 2014, the Company’s board of directors approved the 2014 Employee Stock Purchase Plan (“2014 ESPP”). A total of 496,092 shares were initially reserved for issuance under the 2014 ESPP. In June 2018, the Company’s stockholders approved the Amended and Restated 2014 ESPP, increasing the total number of shares of common stock reserved for issuance under the 2014 ESPP by 1,200,000 shares to a total of 1,696,092
 
shares (“the “Amended and Restated 2014 ESPP”) since the inception of the 2014 ESPP. At March 31, 2020, 1,030,787 shares remained available for issuance and no shares were issued during the three months ended March 31, 2020.
 
6.
Net Loss per Share
 
 
 
 
 
 
 
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and common stock equivalent shares from dilutive stock options, employee stock purchases and restricted stock units outstanding during the period. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods as all potentially dilutive securities were antidilutive in those periods.
The following potentially dilutive securities outstanding have been excluded from the computations of weighted average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares, in thousands):
                 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
 
2019
 
Common stock options
   
3,372
     
4,142
 
Market-based performance stock options
   
427
     
—  
 
Restricted stock units
   
596
     
408
 
Market-based performance stock units
   
192
     
—  
 
Employee stock purchase plan shares
   
70
     
74
 
                 
   
4,657
     
4,624
 
                 
 
 
 
 
 
 
 
7.
Commitments and Contingencies
 
 
 
 
 
 
 
Contingencies
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such amounts can be reasonably estimated.
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Table of Contents
Indemnification
The Company’s amended and restated certificate of incorporation contains provisions limiting the liability of directors, and its amended and restated bylaws provide that the Company will indemnify each of its directors to the fullest extent permitted under Delaware law. The Company’s amended and restated certificate of incorporation and amended and restated bylaws also provide its board of directors with discretion to indemnify its officers and employees when determined appropriate by the board. In addition, the Company has entered and expects to continue to enter into agreements to indemnify its directors and executive officers.
Litigation
The Company may at times be involved in litigation and other legal claims in the ordinary course of business. When appropriate in the Company’s estimation, it may record reserves in its financial statements for pending litigation and other claims.
In May 2019, a purported stockholder of the Company, Avi Yaron, filed a putative class action complaint in the United States District Court for the Northern District of California, entitled
Yaron v. Intersect ENT, Inc., et al.,
Case No.
4:19-cv-02647,
against the Company and certain individual officers and directors alleging violations of the Securities Exchange Act of 1934. The complaint alleges that the Company and the individual officers made false and/or misleading statements about the Company’s business and seeks unspecified damages and attorney’s fees. The Court has appointed the lead plaintiff and has set a schedule for initial motions and pleadings. The Company believes this lawsuit is without merit and intends to vigorously defend against it. As of March 31, 2020, the Company has not recorded a contingent liability associated with this lawsuit, as the Company has not determined that a loss is probable. In addition, any possible loss or range of loss, cannot be reasonably estimated at this time.
8.
Subsequent Events
 
 
 
 
 
Response to COVID-19
In April 2020, as a response to the
COVID-19
pandemic, the Company took
pre-emptive
actions to curtail spending as its business, revenues and cash flows are expected to be significantly impacted due to the suspension of medical procedures involving its products. These actions included reducing its workforce by 96 employees, or approximately 25% of its workforce. In addition, the Company has furloughed 18 employees
, or approxima
t
ely 5% of its workforce,
and will be providing for the cost of certain benefits for those employees while furloughed. The Company is also suspending near-term production, reducing discretionary operating expenses and capital expenditures, and delaying clinical research projects. The charges related to these actions, including severance benefits for terminated employees and the benefits for furloughed employees, are expected to be approximately $0.3 million and the material portion of the incurred expense is expected to be substantially complete by June 30, 2020.
Completion of Private Placement
On May 11, 2020, the Company entered into a Facility Agreement (the “Facility Agreement”) by and among the Company, as borrower, certain of the Company’s subsidiaries from time to time party thereto as guarantors and Deerfield Partners, L.P. (“Deerfield”), as agent for itself and the lenders, providing for the issuance and sale by the Company to Deerfield of $65.0 million of principal amount of 4.0% unsecured senior convertible notes (the “Convertible Notes”) upon the terms and conditions set forth in the Facility Agreement (the “Deerfield Financing”). The Convertible Notes will mature on May 9, 2025, unless earlier converted or redeemed, and are convertible into shares of the Company’s common stock, at an initial conversion price of $15.54, representing an approximately 15% premium over the Company’s closing stock price of $13.49 per share on May 8, 2020.
 
The Company estimates that the net proceeds from the
sale of the Convertible Notes were
 
approximately $
62.5
million after deducting the estimated expenses payable by the Company.
The Convertible Notes bear interest at 4.0% per annum, payable quarterly in arrears on July 1, October 1, January 1 and April 1 of each year, commencing July 1, 2020. The Convertible Notes are convertible at any time at the option of the holders thereof, provided that Deerfield is prohibited from converting the Convertible Notes into shares of common stock if, as a result of such conversion, the converting holder (together with certain affiliates and “group” members) would beneficially own more than 4.985% of the total number of shares of common stock then issued and outstanding (the “Beneficial Ownership Cap”). Pursuant to the Convertible Notes, the holders of the Convertible Notes have the option to demand repayment of all outstanding principal,
any unpaid interest accrued thereon, and make whole interest, in connection with a Major Transaction (as defined in the Convertible Notes), which shall include, among others, any acquisition or other change of control of the Company; the sale or transfer of assets of the Company equal to more
than 50% of the Enterprise Value (as defined in the Convertible Notes) of the Company; a liquidation, bankruptcy or other dissolution of the Company; or if at any time shares of the Company’s common stock are not listed on an Eligible Market (as defined in the Convertible Notes). The Facility Agreement contains certain specified events of default, the occurrence of which would entitle the holders of the Convertible Notes to immediately demand repayment of all outstanding principal and accrued interest on the Convertible Notes, together with a make-whole payment as determined pursuant to the Facility Agreement. Such events of default include, among others, failure to make any payment under the Convertible Notes when due, failure to observe or perform any covenant under the Facility Agreement or the other transaction documents related thereto (subject in certain cases to specified cure periods), the failure of the Company to be able to pay debts as they come due, the commencement of bankruptcy or insolvency proceedings against the Company, a material judgment levied against the Company and a material default by the Company under other indebtedness.
On or after the date that is the second anniversary of the issuance date, the Company may redeem up to $32.5 million of principal amount of Convertible Notes if (1) 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, (2) the volume weighted average price of the common stock on the last trading day of such period and (3) the closing price of the common stock on the last trading day of such period, in each case, are greater than 150% of the conversion price. On or after the date that is the third anniversary of the issuance date,
the Company may redeem up to the entire
$65.0 million
original
principal amount of Convertible Notes if (1) 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, (2) the volume weighted average price of the common stock on the last trading day of such period and (3) 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. 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.
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.
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. All forward-looking statements are based upon our current expectations and various assumptions. In addition, forward-looking statements include the impact that the
COVID-19
pandemic will have on our business, and our belief that we will be able to return to growth as the current crisis subsides. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include: the duration and severity of the
COVID-19
pandemic is unknown and could continue, and be more severe than we currently expect; the unknown state of the U.S. economy following the pandemic, the level of demand for our products as the pandemic subsides, and the time it will take for the economy to recover from the pandemic; and among others, those discussed in “Part II
Item 1A. Risk Factors” of this Quarterly Report on Form
10-Q
as well as in our condensed consolidated financial statements, related notes and the other information appearing elsewhere in this report and our other filings with the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking 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 forward-looking statements. You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report, as well as our financial statements and related notes included in our Annual Report on Form
10-K,
or Annual Report, filed with the SEC on February 27, 2020.
When we refer to “we,” “our,” “us” or “Intersect ENT” in this Quarterly Report on Form
10-Q,
we mean Intersect ENT, Inc., unless otherwise expressly stated or the context otherwise requires.
Overview
We are a commercial drug delivery company transforming care for patients with ear, nose and throat (“ENT”) conditions. Our U.S. Food and Drug Administration, or FDA, approved products are steroid releasing implants designed to treat adult patients suffering from chronic sinusitis, who are managed by ENT physicians. These products include our PROPEL
®
family of products (PROPEL
®
, PROPEL
®
Mini and PROPEL
®
Contour) and the SINUVA
®
(mometasone furoate) Sinus Implant. The PROPEL family of products are used in adult patients in conjunction with sinus surgery primarily in hospitals and ambulatory surgery centers (“ASC”) and SINUVA is designed to be used in the physician office setting of care to treat adult patients who have had ethmoid sinus surgery yet suffer from recurrent sinus obstruction due to polyps. The PROPEL family of products are devices approved under a Premarket Approval, or PMA and SINUVA is a drug that was approved under a New Drug Application, or NDA. While our primary commercial focus is the U.S. market, both PROPEL and PROPEL Mini received CE Markings, permitting them to be marketed in Europe. Approximately 450,000 and 250,000 FESS procedures are performed annually in the Asia Pacific and European regions, respectively. Our commercialization strategy will consider several factors including regulatory requirements, reimbursement coverage for our products, and key opinion leader support. Our initial focus is on Germany and the United Kingdom, where we are working to build our capabilities and develop the market. Going forward, we will continue to assess our capability to penetrate additional markets in Europe, the Asia Pacific and Japan.
Our PROPEL family of steroid releasing implants are clinically proven to improve outcomes for chronic sinusitis patients following sinus surgery. PROPEL implants mechanically prop open the sinuses and release mometasone furoate, an advanced corticosteroid with anti-inflammatory properties, directly into the sinus lining, and then dissolve. PROPEL’s safety and effectiveness is supported by Level 1a clinical evidence from multiple clinical trials, which demonstrates that PROPEL implants reduce inflammation and scarring after surgery, thereby reducing the need for postoperative oral steroids and repeat surgical interventions. Approximately 350,000 patients have been treated with PROPEL products
to-date.
  PROPEL is a self-expanding implant designed to conform to and hold open the surgically enlarged sinus while gradually releasing an anti-inflammatory steroid over a period of approximately 30 days and is absorbed into the body over a period of approximately six weeks. PROPEL clinical outcomes have been reported in a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies to improve surgical outcomes, demonstrating a 35% relative reduction in the need for postoperative interventions compared to surgery alone. A physician may treat a patient with PROPEL by inserting it into the ethmoid sinuses.
  PROPEL Mini is a smaller version of PROPEL and is approved for use in both the ethmoid and frontal sinuses. PROPEL Mini is preferentially used by physicians compared with PROPEL when treating smaller anatomies or following less extensive procedures. PROPEL Mini has also been shown by our clinical studies to reduce the need for postoperative interventions, including a 38% relative reduction in the need for postoperative interventions in the frontal sinus, compared to surgery alone with standard postoperative care.
  PROPEL Contour is designed to facilitate treatment of the frontal and maxillary sinus ostia, or openings, of the dependent sinuses in procedures performed in both the operating room and in the office setting of care.
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  PROPEL Contour’s lower profile, hourglass shape and malleable delivery system are designed for use in the narrow and difficult to access sinus ostia. In PROPEL Contour’s pivotal clinical study, the product demonstrated a 65% relative reduction in the need for postoperative interventions in the frontal sinus ostia compared to surgery alone with standard postoperative care as well as a 63% reduction in occlusion and 73% reduction in surgical interventions.
SINUVA, when placed during a routine physician office visit, expands into the sinus cavity and delivers an anti-inflammatory steroid directly to the site of polyp disease for approximately 90 days. We have studied SINUVA in five clinical trials in over 400 patients
to-date.
Results from the pivotal RESOLVE II randomized clinical trial demonstrated a 74% relative reduction in bilateral polyp grade (a measurement of the extent of ethmoid polyp disease) and a 30% relative reduction in nasal obstruction and congestion for patients treated with SINUVA compared to a control group treated with a sham procedure, receiving no implant. Patients in both arms of the study were required to use an intranasal steroid spray daily. In addition, the study demonstrated a 61% reduction in the proportion of patients indicated for revision surgery at day 90. To supplement clinical trials performed with SINUVA
to-date,
in which one course of SINUVA treatment was evaluated, we commenced the ENCORE study in November 2017. ENCORE was a
50-patient
multicenter, open-label study focused on evaluation of the safety of a repeat placement of SINUVA in a population of chronic sinusitis patients with nasal polyps. Study findings showed no serious adverse events related to the implants during the measurement period and no serious adverse events related to a repeat placement during the interval studied.
Our PROPEL family of products are used almost exclusively in the operating room of a hospital or ASC. These providers receive a facility fee for the sinus surgery procedure which is intended to pay for supplies used in this procedure, including the PROPEL family of products. SINUVA is a physician administered drug, used almost exclusively in the office setting. We applied to the Centers for Medicare & Medicaid Services, or CMS, for a product-specific J code for SINUVA, and in July 2019, CMS announced their final decision to establish a new J code described as “J7401 Mometasone furoate sinus implant, 10 micrograms.” This new J code became effective on October 1, 2019. CMS also made a final decision to eliminate the S1090 code, which was previously assigned to PROPEL, because they view it as duplicative to J7401. Prior to October 1, 2019, reimbursement submissions to cover the cost of SINUVA were reported to payors using the unassigned Healthcare Common Procedure Coding System, or HCPCS, code J3490.
We continue to invest in research and development of new products and product improvements. We commenced a clinical trial in December 2018 of a new pipeline product, the investigational ASCEND drug-coated sinus balloon. The ASCEND study was a prospective, randomized, blinded, multi-center trial of 70 patients that assessed the safety and efficacy of our ASCEND product. The ASCEND product was randomized against an uncoated balloon and, similar to clinical studies for our PROPEL family of products, the primary endpoint was evaluated at 30 days. This study assessed the ASCEND product’s ability to improve patency rates, as well as a number of other endoscopic parameters. As the first trial of its kind for this product platform, we recognized that the outcomes of the ASCEND trial could require further clinical study to support a PMA approval with the FDA. The trial did not meet its primary endpoint of statistically significant improvement in the frontal sinus patency grade at day 30, as judged by an independent reviewer. The ASCEND study was designed to analyze the secondary endpoints if the primary endpoint passed, to help with the interpretation of the data and for use designing the subsequent pivotal study. The secondary endpoints were analyzed. The ASCEND product showed significant differences in several important secondary endpoints favoring the treatment side including reduction in inflammation and polypoid edema at all timepoints through day 30, as assessed by both the clinical investigators and the independent reviewer. There was also a notable reduction in the need for oral steroid interventions at day 30, as determined by the independent reviewer. There were no adverse events related to the drug component of the ASCEND balloon, and no device-related serious adverse events observed in the study. This study gives us valuable insight into the performance of our novel drug-coated balloon, enabling us to refine our clinical and regulatory pathway. We will continue to analyze the ASCEND study findings to inform our clinical and regulatory strategy.
Impact of the COVID-19 Pandemic
Prior to the
COVID-19
pandemic, our efforts to enhance commercial execution and improve market access infrastructure were beginning to yield benefits as sales until the end of February 2020 were consistent with our expectations. However, sales declined throughout March as the various
COVID-19
restrictions were implemented. Our business has and will be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits as well as by the
shelter-in-place
order issued by San Metro County and the State of California, where our manufacturing operations and corporate headquarters are located. Furthermore, the
COVID-19
pandemic has led to severe disruption and volatility in global capital markets and increased economic uncertainty and instability. The impact of this on the global economy has been and may continue to be severe.
As a result of the COVID-19 pandemic and the impact of the various restrictions implemented, we have taken the following actions:
 
Protect Health and Safety:
Virtually all roles remain working from home, based on state and county guidelines, and non-essential business travel is limited.
 
Maintain Customer Focus:
All patient-support teams remain available to assist customers and patients, while strictly adhering to applicable restrictions, safety precautions and procedures.
 
Reduce Costs:
In response to the
COVID-19
pandemic, we took
pre-emptive
actions to curtail spending as revenues are and will continue to be materially impacted. These cost reduction actions include a) reducing our workforce by approximately 25% and furloughing an additional 5% of our workforce, b) substantially reducing new hiring, c) suspending near-term production, d) reducing discretionary operating expenses and capital expenditures, and e) delaying clinical research projects. The anticipated cost savings from these actions are expected to be approximately $40.0 million for the remainder of the year and does not include significant non-cash items. The anticipated cost savings will impact all expense categories with a proportionally higher impact on manufacturing operations and research and development expenses, driven by the near-term suspension of production and the delay in clinical research projects. However, in absolute dollars, the largest cost savings will be realized in selling, general and administrative expenses.
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Components of Our Results of Operations
Revenue
Our revenue has been derived almost exclusively from the sales of our PROPEL family of products, with limited sales of SINUVA beginning in March 2018. While performance until the end of February 2020 was relatively consistent with our expectations, our revenue substantially declined throughout March as the various
COVID-19
restrictions were implemented. Our business has and will be impacted by hospitals suspending elective surgical procedures and reduced ENT office visits. Under current conditions, we do not expect a meaningful amount of revenue in the second quarter of 2020. Once the disruption from the
COVID-19
pandemic subsides, we expect our revenue to increase as we continue to expand our sales, marketing and reimbursement efforts in order to increase usage of our products. We also expect revenue from our PROPEL family of products to fluctuate from quarter to quarter due to the impact of the
COVID-19
pandemic as well as seasonal variations in the volume of sinus surgery procedures performed, which has been impacted historically by factors including the status of patient healthcare insurance plan deductibles and the seasonal nature of allergies which can impact sinus-related symptoms. Revenue from SINUVA is recognized net of estimated product sales discounts, rebates, returns and other allowances as a reduction of revenue in the same period the related revenue is recognized. We will adjust these estimates if actual allowances vary from our estimates, which would affect revenue in the period such variances become known.
Our revenue is almost entirely derived from within the United States and no single customer accounted for more than 10% of our revenue during the three months ended March 31, 2020 and 2019.
Cost of Sales and Gross Profit
We manufacture our PROPEL family of products and SINUVA in our facility in Menlo Park, California. Cost of sales consists primarily of manufacturing overhead costs, material costs, direct labor and other direct costs such as shipping costs. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include compensation, including stock-based compensation and other operating expenses associated with the cost of quality assurance, material procurement, inventory control, facilities, information technology, equipment and operations supervision and manufacturing and warehouse management. Once the disruption from the
COVID-19
pandemic subsides, we expect cost of sales to increase in absolute dollars again primarily as, and to the extent, our revenue grows, or we make additional investments in our manufacturing capabilities.
Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing costs and average selling prices. In the near-term, manufacturing costs will also be negatively impacted by the mandatory
shelter-in-place
order in effect in Menlo Park, California, which prevents us from using our manufacturing facility. Idle facility expenses are not capitalized into inventory and are charged to cost of goods sold in the period incurred. Manufacturing cost will change as our production volume and product mix changes. The per unit allocation of our manufacturing overhead costs may increase and our gross margin may decline as, and to the extent, production volume decreases.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling, marketing, finance, market access, reimbursement, business development, legal and human resource functions as well as costs related to any post-market studies. Additional SG&A expenses include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit and compliance expenses, insurance costs and general corporate expenses including allocated facilities and information technology expenses.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of compensation for personnel, including stock-based compensation, related to product development, regulatory affairs, clinical and medical affairs, and allocated facilities and information technology expenses. R&D expenses also may include expenses for clinical studies related to clinical trial design, site reimbursement, data management, travel expenses and the cost of manufacturing products for clinical trials. Finally, R&D expenses also include expenses related to the development of products and technologies such as consulting services and supplies.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of
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these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
We believe that the accounting policies discussed in our Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2020, as compared to the critical accounting policies described in our Annual Report on Form
10-K
for the year ended December 31, 2019, except as described below:
Inventories
Inventories are valued at the lower of cost, computed on a
 first-in,
first-out
basis, or net realizable value. The allocation of production overhead to inventory costs is based on normal production capacity. Abnormal amounts of idle facility expense, freight, handling costs, and consumption are expensed as incurred, and not included in overhead. During the three months ended March 31, 2020, as a result of a shut-down in production associated with the COVID-19 pandemic, we recorded $1.1 million for idle facility expense due to our inability to use our manufacturing facility for a part of the quarter due to the shelter-in-place orders. While the manufacturing remains shut-down, we will continue to incur idle facility charges in future periods. We maintain provisions for excess and obsolete inventory based on our estimates of forecasted demand and, where applicable, product expiration. Due to a decline in projected product sales, we also increased our reserve for excess and obsolete inventory by $0.8 million during the three months ended March 31, 2020. We will continue to monitor the effect of the COVID-19 pandemic on the business and will continue to reassess the need for inventory reserves in future periods.
Recent Accounting Pronouncements
See Note 2 of the Condensed Consolidated Financial Statements under the heading “Recent Accounting Pronouncements” for new accounting pronouncements or changes to the recent accounting pronouncements during the three months ended March 31, 2020.
Results of Operations
                 
 
Three Months Ended
 
 
March 31,
 
 
2020