INTERSECT ENT, INC. 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 theU.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 theSEC onMarch 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 meanIntersect 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 theU.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 onGermany and theUnited 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 inEurope ,Asia Pacific andJapan . 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 theU.S. and for use in the frontal sinus opening in theEuropean 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. InFebruary 2021 , we announced theU.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 theU.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. TheCenters 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 inSeptember 2020 and asked to separate the J7401 code from SINUVA and PROPEL. InJanuary 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 effectApril 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 theU.S. 25
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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 theVenSure balloon. In support of our focus on expanding our global reach, we plan to make clinical and regulatory investments in PROPEL inEurope .
Debt Financings
OnMay 11, 2020 , to finance our commercial activities as well as for general corporate purposes, we entered into a Facility Agreement (the "Facility Agreement") withDeerfield 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 ofMay 9, 2025 , unless earlier converted or redeemed. The Convertible Notes are convertible into shares of our common stock. OnJuly 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 onJuly 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 andSeptember 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 andSeptember 15, 2023 . As ofMarch 31, 2022 , we had only borrowed the first$20.0 million under the Deerfield Loans. OnSeptember 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 ofMarch 31, 2022 , borrowings on the Medtronic Financing had a net carrying amount of$45.0 million . Additionally, inApril 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
OnAugust 6, 2021 we entered into an Agreement and Plan of Merger (the "Merger Agreement") withMedtronic, Inc. , aMinnesota Corporation and wholly-owned subsidiary of Medtronic public limited company ("Medtronic"), andProject Kraken Merger Sub, Inc. , aDelaware corporation and wholly-owned subsidiary of Medtronic ("Merger Sub"), providing for the merger of Merger Sub with and intoIntersect ENT (the "Merger"), withIntersect ENT surviving the Merger as a wholly-owned subsidiary of Medtronic. OnOctober 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 andHemostasis LLC , aDelaware 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 26
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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 ofMarch 31, 2022 andDecember 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 asENT 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 inMarch 2018 , as well as sales of CUBE andVenSure 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 andVenSure products, from time to time, we enter into lease arrangements of CUBE navigation equipment with certain qualified customers in connection with commitments to purchaseVenSure 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
Cost of Sales and Gross Profit
We manufacture our PROPEL family of products and SINUVA in our facility inMenlo Park, California . We manufacture CUBE navigation equipment and instruments inHennigsdorf, Germany , and procureVenSure sinus dilation balloons from a third-party manufacturer located in theU.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. 27
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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 ofMarch 31, 2022 andDecember 31, 2021 , respectively. During the year endedDecember 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 ofDecember 31, 2021 . During the three months endedMarch 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 againstU.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. 28
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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 withU.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 endedMarch 31, 2022 , as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year endedDecember 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 endedMarch 31, 2022 . 29
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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) (20,453)
Provision for income tax (benefit) - (422)
Net loss $ (28,804) $ (20,031) Comparison of the Three Months ended
Revenue
Three Months Ended Three Months Ended
March 31, Change ($) Change (%)
2022 2021 2022 to 2021 2022 to 2021
(in thousands, except percentages)
PROPEL family of products $ 18,903 $ 20,442 $ (1,539) (8) %
SINUVA 868 2,435 (1,567) (64) %
VenSure, CUBE, and Accessories 1,804 1,451 353 24 %
$ 21,575 $ 24,328 $ (2,753) (11) %
Revenue decreased by $2.8 million , or 11%, to $21.6 million during the three
months ended March 31, 2022 , compared to $24.3 million during the three months
ended March 31, 2021 . The decrease in revenue for the three months ended
March 31, 2022 was due to an 8% decline in PROPEL sales and 64% decline in
SINUVA sales, partially offset by a 24% increase in VenSure , CUBE, and
Accessories sales. The decline in PROPEL revenue for the three months ended
March 31, 2022 resulted from a 13% decrease in unit sales, partially offset by a
6% increase in average selling price. SINUVA unit sales decreased by 68% during
the three months ended March 31, 2022 , partially offset by an increased average
selling price of 11% per unit compared to the three months ended March 31, 2021 .
The decreases in unit sales for PROPEL and SINUVA for the current period were
due to turnover in our sales force, as well as continued customer uncertainty
with respect to the pending Merger with Medtronic. The increase in VenSure ,
CUBE, and Accessories was due to increased unit sales associated with multiple
element arrangements.
While we cannot predict the extent or duration of the impact of
the COVID-19 pandemic on our financial and operating results, we believe that a
recovery in procedures will continue, and that most patients will return for
treatment.
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Cost of Sales and Gross Margin
Cost of sales decreased by$0.8 million , or 9%, to$7.7 million during the three months endedMarch 31, 2022 , compared to$8.5 million during the three months endedMarch 31, 2021 . The decreased cost of sales for the three months endedMarch 31, 2022 was primarily due to lower unit sales of PROPEL and SINUVA as well as$0.5 million in amortization of intangible assets recorded in the prior period, partially offset by lot failures and increased unit sales ofVenSure , CUBE, and Accessories. Gross margin for the three months endedMarch 31, 2022 , decreased to 64.4%, compared to 65.2% for the three months endedMarch 31, 2021 . The decrease for the period was attributable to a shift in product mix towards PROPEL compared to the three months endedMarch 31, 2021 , partially offset by$0.5 million in amortization of intangible assets recorded in the prior period. Consistent with the expected increase in procedure volumes in 2022, we anticipate that there will be revenue growth for the full year 2022 compared to the prior year. With the expected increase in demand and our operation near full capacity, we do not expect significant idle facility expense to be incurred in 2022. However, idle facility expense could still be incurred in future periods until the current crisis subsides. We cannot reliably estimate the extent to which the COVID-19 pandemic will impact the cost of sales and gross margin for our products beyond the end of 2022.
Selling, General and Administrative Expenses
SG&A expenses during the three months endedMarch 31, 2022 were consistent overall with the three months endedMarch 31, 2021 . Increases in SG&A expense for the period were attributable to the accrual of retention bonuses, increased professional fees associated with the pending Merger and plan to divest of the Fiagon business, and increased software subscription costs. These increases were almost entirely offset by lower sales commissions as a result of decreased sales, lower depreciation and amortization expense due to assets held for sale, and a decrease in stock-based compensation expense.
We will continue to monitor our SG&A expenses in light of the uncertainties related to the COVID-19 pandemic; however, we will still continue to support our customers, physicians and patients.
Research and Development Expenses
R&D expenses increased by$3.0 million , or 47%, to$9.4 million during the three months endedMarch 31, 2022 , compared to$6.4 million during the three months endedMarch 31, 2021 . The increase in R&D expenses was primarily due to increased headcount and related expenses compared to the prior period as a result of the accrual of retention bonuses as well as professional fees pertaining to R&D projects in the current period. We will continue to monitor our R&D expenses in light of the uncertainty related to the COVID-19 pandemic; however, we will continue to invest in our products through R&D projects.
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. In recording the asset and liabilities of Fiagon as held for sale, which requires presenting them at fair value less selling costs as ofMarch 31, 2022 , we recorded a loss of$3.1 million as part of the ongoing evaluation of the composition and value of the disposal group. This is in addition to the$67.8 million impairment charge for the year endedDecember 31, 2021 . There were no similar charges in the prior period. 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 was$2.1 million for the three months endedMarch 31, 2022 compared to$1.4 million for the three months endedMarch 31, 2021 . Interest expense for the three months endedMarch 31, 2022 was attributable to Convertible Notes interest, imputed interest on deferred payments for the acquisition of Fiagon, as well as Deerfield Term Loans and Medtronic Financing interest, while interest expense during the three months endedMarch 31, 2021 only pertained to Convertible Notes interest and imputed interest on deferred payments for the acquisition of Fiagon. 31
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Other Income (Expense), Net
Other income (expense), net, decreased by$0.4 million to other expense of$0.1 million during the three months endedMarch 31, 2022 , compared to other expense of$0.5 million during the three months endedMarch 31, 2021 . The decrease in other income (expense), net during the three months endedMarch 31, 2022 was primarily attributable to no adjustment in fair value of our embedded derivative liability in the current period as well as the overall effects of foreign exchange remeasurement, partially offset by lower interest income earned on our cash and cash equivalents. Income Tax Benefit There was no income tax benefit for the three months endedMarch 31, 2022 . The income tax benefit for the three months endedMarch 31, 2021 was attributable to the foreign deferred tax impact associated with foreign operations.
Liquidity and Capital Resources
Overview
As ofMarch 31, 2022 , we had cash, cash equivalents, short-term investments, and restricted cash of$67.6 million , compared to cash, cash equivalents, short-term investments, and restricted cash of$78.9 million as ofDecember 31, 2021 . Cash Flows Three Months Ended March 31, (in thousands) 2022 2021 Net cash provided by (used in): Operating activities$ (26,860) $ (16,772) Investing activities (2,704) 17,629 Financing activities 15,822 1,121
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(82) (196)
Reclassification from assets held for sale during the period 121 -
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(13,703)
During the three months endedMarch 31, 2022 , net cash used in operating activities was$26.9 million , consisting primarily of a net loss of$28.8 million and an increase in net operating assets of$5.9 million , offset by non-cash charges of$7.9 million . The net loss is primarily attributable to the ongoing funding of our sales, marketing and product development activities in order to attain future growth, as well as transaction costs principally associated with the Medtronic merger agreement. The non-cash charges primarily consisted of stock-based compensation expense, the impacts of foreign exchange, loss on assets held for sale, non-cash lease expense, as well as depreciation and amortization expense. The increase in net operating assets is primarily attributable to a decrease in accounts payable and a decrease in accrued compensation due to the payout of annual and retention bonuses, partially offset by a decrease in accounts receivable and a decrease in prepaid expenses and other assets. During the three months endedMarch 31, 2021 , net cash used in operating activities was$16.8 million , consisting primarily of a net loss of$20.0 million and an increase in net operating assets of$4.3 million , offset by non-cash charges of$7.5 million . The net loss is primarily attributable to the ongoing funding of our sales, marketing and product development activities in order to attain future growth. The non-cash charges primarily consisted of stock-based compensation expense, change in fair value of embedded derivatives, the impacts of foreign exchange, impairment of property, equipment, and intangible assets, as well as depreciation and amortization expense. The increase in net operating assets is primarily attributable to an increase in inventory, prepaid expenses, and other assets as well as a decrease in accrued compensation due to the payout of annual corporate bonuses, partially offset by an increase in accounts payable.
Net Cash Provided by (Used in) Investing Activities
During the three months ended
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During the three months ended
Net Cash Provided by Financing Activities
During the three months endedMarch 31, 2022 , net cash provided by financing activities was$15.8 million , consisting of net proceeds from the Medtronic Financing of$15.0 million as well as$0.8 million of net proceeds from common stock upon exercises of employee stock options. During the three months endedMarch 31, 2021 , net cash provided by financing activities was$1.1 million , consisting of net proceeds from common stock upon exercises of employee stock options and purchases under our employee stock purchase plan.
Liquidity
Based on our current expectations of the operating environment in 2022, as well as the Deerfield Loans obtained inJuly 2021 and the Medtronic Financing obtained during 2021 andApril 2022 , we believe we have adequate cash and other resources to operate for at least twelve months as a standalone entity from the issuance of this Quarterly Report on Form 10-Q, including funding our working capital needs, capital expenditures, payments associated with the Fiagon acquisition, interest payments on long-term debt, lease payments, and other known commitments and contingent liabilities. However, the extent to which the COVID-19 pandemic may continue to materially adversely impact our liquidity is uncertain. Our obligations under the Deerfield Loans are secured by substantially all of our assets, which includes springing control of our 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 ofMarch 31, 2022 , no such notice has been received as we were in full compliance with the terms of the Deerfield Loans. Under the terms of the Purchase Agreement for the acquisition of Fiagon totaling €62.5 million, we made an initial €15.0 million ($17.6 million ) payment upon closing, a €15.0 million payment plus a €2.5 million purchase price adjustment inOctober 2021 , and will make two annual payments of €15.0 million in each October of 2022 and 2023. In accordance with the terms of the Purchase Agreement, we were required to place$17.5 million (€15.0 million) in escrow with the seller as beneficiary. The amount placed in escrow is required to be adjusted to the equivalent of €15.0 million onJanuary 15th andJuly 15th of each year based on the end of the prior month's five-day trailing exchange rate.
Other known contractual obligations have not changed materially from our 2021 Annual Report on Form 10-K.
If the proposed Merger with Medtronic is not executed and our current sources of
liquidity are insufficient, we may seek to raise additional capital. If we raise
additional funds by issuing equity securities, our stockholders would experience
dilution. Any additional capital that we raise may contain terms that are not
favorable to us or our stockholders. Additional financing may not be available
at all, or in amounts or on terms unacceptable to us. If we are unable to obtain
additional financing, we may be required to delay the development,
commercialization and marketing of our products.
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