Form 8-K ENTELLUS MEDICAL INC For: Sep 25
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 25, 2017
ENTELLUS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 001-36814 | 20-4627978 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) | ||
3600 Holly Lane North, Suite 40 Plymouth, Minnesota |
55447 | |||
(Address of principal executive offices) | (Zip Code) |
(763) 463-1595
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).
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. ☐
EXPLANATORY NOTE
On July 13, 2017, Entellus Medical, Inc. (Entellus) acquired Spirox, Inc. (Spirox), a privately held medical device company that develops, manufactures and markets the LATERA Absorbable Nasal Implant which is a minimally invasive option to treat nasal airway obstruction.
On July 14, 2017, Entellus filed a Current Report on Form 8-K with the Securities and Exchange Commission (the SEC) reporting the Spirox acquisition, and on September 25, 2017, filed an amendment to the Current Report on Form 8-K to include: (1) historical audited financial statements of Spirox as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015; (2) unaudited interim financial statements of Spirox as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016; and (3) pro forma condensed combined financial information as of and for the year ended December 31, 2016 and as of and for the three months ended March 31, 2017.
The purpose of this Current Report on Form 8-K is to provide additional unaudited updated financial information for Spirox.
Item 8.01 | Other Events. |
The unaudited interim financial statements of Spirox as of June 30, 2017 and December 31, 2016 and for the six months ended June 30, 2017 and 2016 are filed as Exhibit 99.1 to this Current Report on Form 8-K and incorporated herein by reference. The unaudited pro forma condensed combined balance sheet of Entellus as of June 30, 2017 and unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2017 and the notes to such unaudited pro forma condensed combined financial statements are attached hereto as Exhibit 99.2 and incorporated herein by reference.
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: September 25, 2017 | ENTELLUS MEDICAL, INC. | |||||
By: | /s/ Brent A. Moen | |||||
Name: | Brent A. Moen | |||||
Title: | Chief Financial Officer |
Exhibit 99.1
Spirox, Inc.
Balance Sheets
June 30, 2017 |
December 31, 2016 |
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ASSETS | ||||||||
Current Assets |
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Cash and cash equivalents |
$ | 20,045,040 | $ | 15,423,476 | ||||
Accounts receivable |
1,511,652 | 854,974 | ||||||
Investments |
13,981,524 | 30,867,133 | ||||||
Inventory |
339,659 | 314,995 | ||||||
Prepaid expenses and other current assets |
702,499 | 155,829 | ||||||
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Total current assets |
36,580,374 | 47,616,407 | ||||||
Property and Equipment, net |
989,320 | 672,969 | ||||||
Investments, net of current portion |
1,000,860 | | ||||||
Deposit |
211,464 | | ||||||
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Total assets |
$ | 38,782,018 | $ | 48,289,376 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current Liabilities |
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Accounts payable |
$ | 371,225 | $ | 659,469 | ||||
Accrued expenses |
1,997,300 | 2,137,213 | ||||||
Customer rebate liability |
61,168 | | ||||||
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Total current liabilities |
2,429,693 | 2,796,682 | ||||||
Deferred Rent |
15,426 | | ||||||
Preferred Stock Warrant Liability |
24,278 | 25,397 | ||||||
Commitment (Note 8) |
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Stockholders Equity |
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Series C convertible preferred stock, $0.0001 par value; 28,002,489 shares authorized, 27,939,010 shares issued and outstanding (aggregate liquidation preference of $44,897,989) |
2,794 | 2,794 | ||||||
Series B convertible preferred stock, $0.0001 par value; 14,799,998 shares authorized, issued and outstanding (aggregate liquidation preference of $18,499,998) |
1,480 | 1,480 | ||||||
Series A-1 convertible preferred stock, $0.0001 par value; 5,517,526 shares authorized, issued and outstanding (aggregate liquidation preference of $6,289,980) |
552 | 552 | ||||||
Series A convertible preferred stock, $0.0001 par value; 1,148,000 shares authorized, 1,100,000 shares issued and outstanding (aggregate liquidation preference of $1,100,000) |
110 | 110 | ||||||
Common stock, $0.0001 par value; 70,000,000 shares authorized, 1,440,156 shares issued and outstanding (1,400,000 shares at December 31, 2016) |
144 | 140 | ||||||
Additional paid-in capital |
71,158,404 | 70,945,641 | ||||||
Accumulated other comprehensive income loss |
(30,610 | ) | (30,885 | ) | ||||
Accumulated deficit |
(34,820,253 | ) | (25,452,535 | ) | ||||
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Total stockholders equity |
36,312,621 | 45,467,297 | ||||||
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Total liabilities and stockholders equity |
$ | 38,782,018 | $ | 48,289,376 | ||||
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See Notes to Financial Statements
- 1 -
Spirox, Inc.
Statements of Operations and Comprehensive Loss
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
STATEMENTS OF OPERATIONS | ||||||||
Revenue |
$ | 4,885,070 | $ | 41,790 | ||||
Cost of Revenue |
1,739,306 | 8,926 | ||||||
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3,145,764 | 32,864 | |||||||
Operating Expenses |
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Research and development |
4,753,755 | 3,575,636 | ||||||
General and administrative |
2,331,879 | 1,438,758 | ||||||
Sales and marketing |
5,513,157 | 1,503,177 | ||||||
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12,598,791 | 6,517,571 | |||||||
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Loss from Operations |
(9,453,027 | ) | (6,484,707 | ) | ||||
Interest Income |
122,598 | 62,380 | ||||||
Other Expense, net |
(37,289 | ) | (18,231 | ) | ||||
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Net Loss |
$ | (9,367,718 | ) | $ | (6,440,558 | ) | ||
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STATEMENTS OF COMPREHENSIVE LOSS | ||||||||
Net Loss |
$ | (9,367,718 | ) | $ | (6,440,558 | ) | ||
Other Comprehensive Income |
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Unrealized gain on investments |
275 | 34,688 | ||||||
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Comprehensive Loss |
$ | (9,367,443 | ) | $ | (6,405,870 | ) | ||
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See Notes to Financial Statements
- 2 -
Spirox, Inc.
Statements of Cash Flows
Six Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities |
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Net loss |
$ | (9,367,718 | ) | $ | (6,440,558 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation |
203,130 | 117,135 | ||||||
Depreciation and amortization |
158,398 | 158,272 | ||||||
Preferred stock warrant revaluation |
(1,119 | ) | 2,179 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(656,678 | ) | (42,536 | ) | ||||
Inventory |
(24,664 | ) | (95,893 | ) | ||||
Prepaid expenses and other current assets |
(546,670 | ) | (46,473 | ) | ||||
Accounts payable |
(288,244 | ) | 215,721 | |||||
Accrued expenses |
(139,913 | ) | 507,620 | |||||
Customer rebate liability |
61,168 | | ||||||
Deferred rent |
15,426 | | ||||||
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Net cash used in operating activities |
(10,586,884 | ) | (5,624,533 | ) | ||||
Cash Flows from Investing Activities |
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Purchase of investments |
(36,588,430 | ) | (49,946,970 | ) | ||||
Proceeds from sale and maturity of investments |
52,473,454 | | ||||||
Purchase of property and equipment |
(474,749 | ) | (256,034 | ) | ||||
Deposit |
(211,464 | ) | | |||||
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Net cash provided by (used in) investing activities |
15,198,811 | (50,203,004 | ) | |||||
Cash Flows from Financing Activities |
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Proceeds from exercise of common stock options |
9,637 | | ||||||
Proceeds from issuance of convertible preferred stock, net of issuance costs |
| 44,670,647 | ||||||
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Net cash provided by financing activities |
9,637 | 44,670,647 | ||||||
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Net Increase (Decrease) in Cash and Cash Equivalents |
4,621,564 | (11,156,890 | ) | |||||
Cash and Cash Equivalents, beginning of period |
15,423,476 | 15,305,114 | ||||||
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Cash and Cash Equivalents, end of period |
$ | 20,045,040 | $ | 4,148,224 | ||||
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Supplemental Disclosure of Cash Flow Information |
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Cash paid for income taxes |
$ | 38,408 | $ | 16,052 | ||||
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Supplemental Schedule of Non-Cash Investing Activities |
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Unrealized gain on investments |
$ | 275 | $ | 34,688 | ||||
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See Notes to Financial Statements
- 3 -
Spirox, Inc.
Statement of Stockholders Equity
Six Months Ended June 30, 2017 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Convertible | Additional | Other | Total | |||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||
Balances, December 31, 2016 |
49,356,534 | $ | 4,936 | 1,400,000 | $ | 140 | $ | 70,945,641 | $ | (30,885 | ) | $ | (25,452,535 | ) | $ | 45,467,297 | ||||||||||||||||
Exercise of common stock options |
| | 40,156 | 4 | 9,633 | | | 9,637 | ||||||||||||||||||||||||
Stock-based compensation |
| | | | 203,130 | | | 203,130 | ||||||||||||||||||||||||
Net loss |
| | | | | | (9,367,718 | ) | (9,367,718 | ) | ||||||||||||||||||||||
Unrealized gain on investments |
| | | | | 275 | | 275 | ||||||||||||||||||||||||
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Balances, June 30, 2017 |
49,356,534 | $ | 4,936 | 1,440,156 | $ | 144 | $ | 71,158,404 | $ | (30,610 | ) | $ | (34,820,253 | ) | $ | 36,312,621 | ||||||||||||||||
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See Notes to Financial Statements
- 4 -
Spirox, Inc.
Statement of Stockholders Equity
Six Months Ended June 30, 2016 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Convertible | Additional | Other | Total | |||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||
Balances, December 31, 2015 |
21,417,524 | $ | 2,142 | 1,400,000 | $ | 140 | $ | 25,963,612 | $ | | $ | (10,606,158 | ) | $ | 15,359,736 | |||||||||||||||||
Issuance of Series C convertible preferred stock at $1.607 per share in exchange for cash, net of issuance costs |
27,939,010 | 2,794 | | | 44,667,853 | | | 44,670,647 | ||||||||||||||||||||||||
Stock-based compensation |
| | | | 117,135 | | | 117,135 | ||||||||||||||||||||||||
Net loss |
| | | | | | (6,440,558 | ) | (6,440,558 | ) | ||||||||||||||||||||||
Unrealized gain on investments |
| | | | | 34,688 | | 34,688 | ||||||||||||||||||||||||
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Balances, June 30, 2016 |
49,356,534 | $ | 4,936 | 1,400,000 | $ | 140 | $ | 70,748,600 | $ | 34,688 | $ | (17,046,716 | ) | $ | 53,741,648 | |||||||||||||||||
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See Notes to Financial Statements
- 5 -
Spirox, Inc.
Notes to Financial Statements
1. | Nature of Business |
Spirox, Inc. (the Company) was incorporated in Delaware on November 3, 2011. The Company was founded to develop and commercialize a proprietary minimally invasive technology that improves the quality of life for patients with nasal obstruction. In 2016, the Company received 510(k) clearance from the United States Food and Drug Administration for the absorbable implant and accessory delivery tool that make up the Latera platform technology and is currently selling its product in the United States.
In June 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) to sell all of its outstanding shares of capital stock to Entellus Medical, Inc. (Entellus), a publicly-traded company. Upon the closing of the transaction on July 13, 2017, the Company became a wholly-owned subsidiary of Entellus.
2. | Significant Accounting Policies |
Basis of Presentation:
These interim financial statements include all adjustments that management deems necessary for a fair presentation of the Companys results of operations. Operating results for the six month periods are not necessarily indicative of the results that may be expected for a full year.
Revenue Recognition:
The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is probable. Generally, the Company recognizes revenue when products are shipped. The Company has historically offered a rebate program to office-based customers that is based on order volume in a given quarter. As of February 28, 2017, this program is not being offered to any additional customers. The program continues for those office-based customers that were in the program prior to this change. The Company accrues for the estimated rebates at the time of sale and has recorded these rebates in other liabilities on the June 30, 2017 balance sheet.
Cost of Revenue:
The Company includes the following in cost of revenue: product costs, direct labor, and manufacturing overhead, which includes allocations from quality assurance, material procurement, inventory control, facilities, depreciation of manufacturing equipment, operations supervision and management. Cost of revenue also includes certain direct costs such as shipping costs.
- 6 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Cash and Cash Equivalents:
Cash and cash equivalents include all cash balances and highly liquid investments purchased with an original remaining maturity of three months or less. Cash equivalents consist of a money market account.
Investments:
Investments consist of United States treasury bonds, which are recorded at fair value at prices quoted on established securities exchanges. Investments with maturities of greater than three months and less than one year are classified as short-term investments on the accompanying balance sheets. The Company classifies all investments as available for sale and they are carried at fair value. Unrealized gains and losses are included as accumulated other comprehensive income (loss) in stockholders equity in the accompanying financial statements.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents, investments and accounts receivable. The Companys cash and cash equivalents are deposited with a major financial institution in the United States of America and are in excess of the insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents since inception.
The Company does not require collateral or other security for accounts receivable. The Company performs credit evaluations to reduce credit risk, as needed. To date, no credit losses have been incurred.
Inventory:
Inventory is valued at the lower of cost or market. Cost is determined using the standard cost method, which approximates the first-in, first-out method. The determination of market value involves numerous judgments, including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand, pricing for the Companys product and technological obsolescence of the Companys product. Provisions are considered, when required, to reduce excess inventory to net realizable value. As of June 30, 2017 and December 31, 2016, inventory consists primarily of finished goods.
- 7 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Property and Equipment:
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over their estimated useful lives, generally three years for computer hardware and software, and five years for furniture, fixtures and machinery and equipment. Leasehold improvements are amortized over the lesser of the assets useful lives or the remaining lease term.
Accounting for Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not recorded an expense related to impairment of long-lived assets since inception.
Product Warranty:
The Company provides for future warranty obligations at the time of sale. The warranty is generally for 90 days from delivery. The Companys liability under these warranties is to provide a replacement product to the customer when a valid claim is received and approved. As of June 30, 2017 and December 31, 2016, the Company has estimated the potential liability for future warranty obligations to be negligible and, therefore, has not recorded a liability on the accompanying balance sheets relating to product warranty.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses in the financial statements and accompanying notes. Key estimates in the financial statements include the allowance for doubtful accounts, inventory reserve, product warranty, useful lives of property and equipment, impairment of long-lived assets, certain accrued expenses, valuation allowance for deferred income tax assets and the fair value of the preferred stock warrant liability and of options granted under the Companys stock-based compensation plan. Actual results could differ from those estimates.
- 8 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Research and Development Costs:
Research and development costs are expensed as incurred and consist primarily of salary and related expenses, consulting and materials.
Comprehensive Income and Loss:
The Company accounts for comprehensive income and loss by major components and as a total separate component in stockholders equity. Comprehensive income (loss) is defined as the change in stockholders equity arising from non-owner sources. In the Companys case, other comprehensive income (loss) results includes unrealized gains and losses on investments available for sale.
Stock-Based Compensation:
The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for employee options using the fair value method and all stock-based compensation is recognized over the grantees service period.
Stock-based compensation for warrants issued or options granted to non-employees is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Stock-based compensation for options granted to non-employees is periodically re-measured as the underlying options vest.
Convertible Preferred Stock Warrant:
The Company has accounted for its outstanding warrant to purchase shares of the Companys convertible preferred stock as a liability at fair value upon issuance. The warrant is subject to measurement at each balance sheet date and any change in fair value during the period is recognized in the statements of operations as other income or expense.
- 9 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Fair Value Measurements:
The Company uses a three-level hierarchy, which prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. Fair value focuses on an exit price and is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risk associated with investing in those instruments.
The three-level hierarchy for fair value measurements is defined as follows:
Level 1: | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
An asset or liabilitys categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Companys investments were classified within Level 1 of the fair value hierarchy as of and for the six month period ended June 30, 2017 and as of and for the year ended December 31, 2016.
The Companys preferred stock warrant liability is classified within Level 3 of the fair value hierarchy at June 30, 2017 and December 31, 2016.
There have been no transfers made into or out of the Level 3 category to date.
- 10 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Fair Value Measurements: (continued)
The changes in value of the preferred stock warrant liability are summarized below:
Balance, December 31, 2016 |
$ | 25,397 | ||
Warrant revaluation |
(1,119 | ) | ||
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Balance, June 30, 2017 |
$ | 24,278 | ||
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Income Taxes:
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. A valuation allowance is provided against the Companys deferred income tax assets when their realization is not reasonably assured.
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax assets and liabilities into current and noncurrent amounts on the balance sheet. The standard requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The Company has adopted this standard as of June 30, 2017, with no impact on the financial statements.
- 11 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Recent Accounting Pronouncements Not Yet Effective:
Revenue:
In May 2014, the FASB issued Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services.
The standard will replace most existing revenue recognition guidance generally accepted in the United States of America. Topic 606 is effective for the Company as of January 1, 2019, and permits the use of either a retrospective or cumulative effect transition method. The Company has not selected a transition method and is currently evaluating the effect Topic 606 will have on its financial statements and related disclosures.
Leases:
In February 2016, the FASB issued ASU 2016-02, Leases. This standard requires all entities that lease assets with terms of more than 12 months to capitalize the assets and related liabilities on the balance sheet. The standard is effective for the Company as of January 1, 2020 and requires the use of a modified retrospective transition approach for its adoption. The Company is currently evaluating the effect ASU 2016-02 will have on its financial statements and related disclosures. Management expects the assets leased under operating leases, similar to the lease disclosed in Note 8 to the financial statements, will be capitalized together with the related lease obligations on the balance sheet upon the adoption of ASU 2016-02.
- 12 -
Spirox, Inc.
Notes to Financial Statements
2. | Significant Accounting Policies (continued) |
Recent Accounting Pronouncements Not Yet Effective: (continued)
Stock-Based Compensation:
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires recognition of the income tax effects of vested or settled awards in operations and involves several other aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard is effective for the Company as of January 1, 2018, and permits the use of either a retrospective or cumulative effect transition method. The Company has not selected a transition method and is currently evaluating the effect ASU 2016-09 will have on its financial statements and related disclosures.
3. | Property and Equipment |
Property and equipment consists of the following at:
June 30, 2017 |
December 31, 2016 |
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Machinery and equipment |
$ | 710,023 | $ | 524,894 | ||||
Furniture and fixtures |
104,454 | 64,729 | ||||||
Computer hardware and software |
347,586 | 289,053 | ||||||
Leasehold improvements |
191,362 | 106,238 | ||||||
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1,353,425 | 984,914 | |||||||
Less accumulated depreciation and amortization |
(364,105 | ) | (311,945 | ) | ||||
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$ | 989,320 | $ | 672,969 | |||||
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- 13 -
Spirox, Inc.
Notes to Financial Statements
4. | Income Taxes |
The Company applies the provisions set forth in FASB ASC Topic 740, to account for uncertainty in income taxes.
The Company uses the more likely than not criterion for recognizing the tax benefit of uncertain tax positions and establishing measurement criteria for income tax benefits. The Company has evaluated the impact of its tax positions and believes that all income tax filing positions and deductions will be sustained upon examination and, accordingly, has not recorded any reserves or related accruals for interest and penalties for uncertain income tax positions as of June 30, 2017 or December 31, 2016. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as an accrued liability and an increase to income tax expense.
Deferred income taxes result from the tax effect of transactions that are recognized in different periods for financial statement and income tax reporting purposes. The Companys net deferred income tax assets at June 30, 2017, were approximately $15,440,000 ($11,555,000 at December 31, 2016), and have been fully offset by a valuation allowance, as their realization is not reasonably assured. These deferred income tax assets consist primarily of net operating losses and income tax credits, which may be carried forward to offset future income tax liabilities. The Company has federal and state net operating loss carryforwards of $33,265,000 and $33,252,000, respectively, at June 30, 2017 ($24,399,000 and $24,397,000, respectively, at December 31, 2016), which begin to expire in 2032. Additionally, the Company has federal and state research and development income tax credits totaling $541,000 and $450,000, respectively, at June 30, 2017 ($464,000 and $467,000, respectively, at December 31, 2016). The federal income tax credits may be carried forward until 2034. The state income tax credits may be carried forward indefinitely.
Under certain 1986 Tax Reform Act provisions, the availability of the Companys net operating loss and income tax credit carryforwards are subject to limitation if it should be determined there has been a change in the ownership of more than 50% of the value of the Companys capital stock. Such a determination could substantially limit the eventual utilization of these tax carryforwards.
The Company files income tax returns in the U.S. federal jurisdiction and the state of California. The Company believes the tax years 2013 through 2016 remain open to examinations by the appropriate government agencies in the federal and state jurisdictions.
- 14 -
Spirox, Inc.
Notes to Financial Statements
5. | Capital Stock |
Common Stock:
The Company is authorized to issue 70,000,000 shares of $0.0001 par value common stock. As of June 30, 2017, the Company had 1,440,156 common shares issued and outstanding (1,400,000 shares as of December 31, 2016).
At December 31, 2016, 33,334 shares of common stock were subject to repurchase. The Company has estimated the liability related to the shares subject to repurchase and has determined it is not material to the financial statements at December 31, 2016. All shares were fully vested at June 30, 2017.
Convertible Preferred Stock:
Convertible preferred stock consists of the following at June 30, 2017 and December 31, 2016:
Shares Authorized |
Issued and Outstanding |
Aggregate Liquidation Preference |
||||||||||
Series C |
28,002,489 | 27,939,010 | $ | 44,897,989 | ||||||||
Series B |
14,799,998 | 14,799,998 | 18,499,998 | |||||||||
Series A-1 |
5,517,526 | 5,517,526 | 6,289,980 | |||||||||
Series A |
1,148,000 | 1,100,000 | 1,100,000 | |||||||||
|
|
|
|
|
|
|||||||
49,468,013 | 49,356,534 | $ | 70,787,967 | |||||||||
|
|
|
|
|
|
- 15 -
Spirox, Inc.
Notes to Financial Statements
5. | Capital Stock (continued) |
Convertible Preferred Stock: (continued)
The rights, preferences, privileges and restrictions for the holders of Series C convertible preferred stock (Series C), Series B convertible preferred stock (Series B), Series A-1 convertible preferred stock (Series A-1) and Series A convertible preferred stock (Series A), (collectively, preferred stock) are as follows:
Liquidation Preferences:
In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment is made to the holders of any Series B, Series A-1, Series A or common stock, the holders of Series C will be entitled to receive a per share amount equal to $1.607, plus all declared but unpaid dividends. Should the Companys legally available assets be insufficient to make payment in full to all holders of Series C, the funds will be distributed ratably among the holders of Series C. After the payment of the full liquidation preference of the Series C, before any distribution or payment is made to the holders of any Series A or common stock, the holders of Series B and Series A-1 will be entitled to receive a per share amount equal to $1.25 and $1.14, respectively, plus all declared but unpaid dividends. Should the Companys legally available assets be insufficient to make payment in full to all holders of Series B and Series A-1, the funds will be distributed ratably among the holders of Series B and Series A-1. After the payment of the full liquidation preference of the Series C, Series B and Series A-1, the holders of Series A will be entitled to receive a per share amount equal to $1.00, plus all declared but unpaid dividends, prior and in preference to any distribution to the holders of common stock. Should the Companys legally available assets be insufficient to make payment in full to all holders of Series A, the funds will be distributed ratably among the holders of Series A.
After the distributions described above have been paid in full, the remaining assets of the Company available for distribution will be distributed ratably among the holders of common stock and preferred stock, on an as-converted basis.
- 16 -
Spirox, Inc.
Notes to Financial Statements
5. | Capital Stock (continued) |
Convertible Preferred Stock: (continued)
Dividends:
Holders of Series C are entitled to receive non-cumulative dividends, prior and in preference to any dividends paid to the holders of Series B, Series A-1, Series A and common stock. Holders of Series C will receive dividends, if and when declared at the rate per annum of 8% of the original issuance price. After the payment in full of the dividends to Series C holders, holders of Series B and Series A-1 are entitled to receive non-cumulative dividends, prior and in preference to any dividends paid to the holders of Series A and common stock. Holders of Series B and Series A-1 will receive dividends, if and when declared, at the rate per annum of 8% and 6%, respectively, of the original issuance price. After the payment in full of the dividends to Series B and Series A-1 holders, holders of Series A are entitled to receive non-cumulative dividends, prior and in preference to any dividends paid to holders of common stock. Holders of Series A will receive dividends, if and when declared at the rate per annum of 6% of the original issuance price. In the event dividends are paid on any share of common stock, the Company will pay additional dividends on all outstanding shares of preferred stock in a per share amount equal (on an as-if-converted basis) to the amount paid or set aside for each share of common stock.
Redemption:
The preferred stock is not redeemable at the option of the holder.
Conversion:
Shares of preferred stock are convertible into common stock at any time at the option of the holder. The number of shares of common stock into which each share of preferred stock may be converted is determined by dividing the number of shares of preferred stock by the conversion price. The conversion price is equal to the original issuance price for the respective series of preferred stock, as adjusted for any stock dividends, combinations, splits and the like. Each share of outstanding preferred stock will automatically convert into shares of common stock, based on the then-effective conversion price, upon the earlier of either (i) an initial public offering with aggregate gross proceeds of at least $50,000,000, or (ii) upon the written consent from the holders of a majority of the then outstanding shares of preferred stock.
- 17 -
Spirox, Inc.
Notes to Financial Statements
5. | Capital Stock (continued) |
Convertible Preferred Stock: (continued)
Voting Rights:
Each holder of preferred stock is entitled to the number of votes equal to the number of shares of common stock into which the shares of preferred stock could be converted on the record date for the vote or consent of the stockholders, except as otherwise required by law, and have voting rights and powers equal to the voting rights and powers of the holders of common stock.
For so long as at least 100,000 shares of Series C remain outstanding, the holders of Series C, voting as a separate class, are entitled to elect two members of the Board of Directors. For so long as at least 100,000 shares of Series B remain outstanding, the holders of Series B, voting as a separate class, are entitled to elect two members of the Board of Directors. For so long as at least 100,000 shares of Series A-1 remain outstanding, the holders of Series A-1, voting as a separate class, are entitled to elect one member of the Board of Directors. For so long as at least 100,000 shares of common stock remain outstanding, the holders of common stock, voting as a separate class, are entitled to elect one member of the Board of Directors. The holders of common stock and preferred stock, voting together as a single class on an as-if-converted basis, are entitled to elect two members of the Board of Directors.
For so long as at least 5,000,000 shares of Series C remain outstanding, the Company cannot take certain actions or enter into certain transactions without the consent from the holders of a majority of the then outstanding shares of Series C. For so long as at least 5,000,000 shares of Series A-1 remain outstanding, the Company cannot take certain actions or enter into certain transactions without the consent from the holders of a majority of the then outstanding shares of Series A-1. For so long as at least 5,000,000 shares of Series B remain outstanding, the Company cannot take certain actions or enter into certain transactions without the consent from the holders of a majority of the then outstanding shares of Series B.
- 18 -
Spirox, Inc.
Notes to Financial Statements
6. | Warrant |
In connection with a loan agreement in 2012, the Company issued a warrant for the purchase of 48,000 shares of Series A with an exercise price of $1.00 per share. The warrant was immediately exercisable and expires, if not exercised, in February 2022.
At June 30, 2017, the Company determined the fair value of the warrant using the Black-Scholes option pricing model to be $24,278 ($25,397 at December 31, 2016), assuming a risk-free interest rate of 1.89% (1.93% at December 31, 2016), remaining contractual life of 4.67 years (5.16 at December 31, 2016), volatility of 60% (60% at December 31, 2016), no dividends and no forfeiture rate applied.
7. | Stock Option Plan |
In 2011, the Company adopted the 2011 Stock Plan (the Plan). The Plan provides for the granting of stock options and stock purchase rights to employees, directors and consultants of the Company. Options granted under the Plan may be either incentive stock options (ISO) or nonqualified stock options (NSO). ISOs may be granted only to Company employees and directors. NSOs may be granted to Company employees, directors and consultants. As of June 30, 2017, the Company has reserved 15,195,388 shares of common stock for issuance under the Plan.
Options under the Plan may be outstanding for periods of up to 10 years following the grant date. The exercise price of an ISO cannot be less than 100% of the estimated fair value of the shares on the date of grant, as determined by the Board of Directors. The exercise price of an ISO granted or the purchase price under the stock issuance program to a 10% stockholder cannot be less than 110% of the estimated fair value of the shares on the date of grant of issuance. The Plan allows for early exercise of options. The Company has a repurchase option for unvested options exercised early upon the voluntary or involuntary termination of the purchasers employment with, or service to, the Company for any reason.
During the six months ended June 30, 2017, the Company recognized $203,130 of employee stock-based compensation ($117,135 during the six months ended June 30, 2016). Stock-based compensation for non-employees was not material to the financial statements during the six months ended June 30, 2017 and 2016. The compensation expense is allocated on a departmental basis, based on the classification of the option holder. No income tax benefits have been recognized in the statements of operations for stock-based compensation arrangements as of June 30, 2017 or 2016, and no stock-based compensation costs have been capitalized as part of property and equipment or inventory as of June 30, 2017 or December 31, 2016.
- 19 -
Spirox, Inc.
Notes to Financial Statements
7. | Stock Option Plan (continued) |
The fair value of each award to employees is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions during the six months ended June 30, 2017: expected term of 6.08 years (6.08 years during the six months ended June 30, 2016); risk-free interest rate of 2.05% (1.72% during the six months ended June 30, 2016); expected volatility of 60% (60% during the six months ended June 30, 2016); no dividends during the expected life; and no forfeiture rate applied. Expected volatility is based on historical volatilities of public companies operating in the Companys industry. The expected life of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees historical exercise and post-vesting employment termination behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average grant date fair value of options granted to employees during the six months ended June 30, 2017 and 2016 was $0.14 per share.
Stock option activity under the Plan during the six months ended June 30, 2016 is as follows:
Options Outstanding | ||||||||||||
Options Available |
Number of Shares |
Weighted- Average Exercise Price |
||||||||||
Balances, December 31, 2015 |
193,333 | 4,935,878 | 0.18 | |||||||||
Authorized |
9,666,177 | | | |||||||||
Granted |
(5,535,000 | ) | 5,535,000 | 0.24 | ||||||||
Canceled |
50,000 | (50,000 | ) | 0.10 | ||||||||
|
|
|
|
|
|
|||||||
Balances, June 30, 2016 |
4,374,510 | 10,420,878 | $ | 0.21 | ||||||||
|
|
|
|
|
|
|||||||
Weighted-Average Remaining Contractual Life |
9.22 | |||||||||||
|
|
- 20 -
Spirox, Inc.
Notes to Financial Statements
7. | Stock Option Plan (continued) |
Stock option activity under the Plan during the six months ended June 30, 2017 is as follows:
Options Outstanding | ||||||||||||
Options Available |
Number of Shares |
Weighted- Average Exercise Price |
||||||||||
Balances, December 31, 2016 |
1,549,510 | 13,245,878 | 0.22 | |||||||||
Granted |
(718,000 | ) | 718,000 | 0.24 | ||||||||
Exercised |
| (40,156 | ) | 0.24 | ||||||||
Canceled |
138,803 | (138,803 | ) | 0.24 | ||||||||
|
|
|
|
|
|
|||||||
Balances, June 30, 2017 |
970,313 | 13,784,919 | $ | 0.22 | ||||||||
|
|
|
|
|
|
|||||||
Weighted-Average Remaining Contractual Life |
8.47 | |||||||||||
|
|
At June 30, 2017, there were 5,264,088 shares vested and exercisable (1,793,875 shares at June 30, 2016) with a weighted-average exercise price of $0.20 ($0.16 at June 30, 2016) and a weighted-average remaining contractual life of 8.00 years (8.13 years at June 30, 2016).
There was no intrinsic value for options exercised during the six months ended June 30, 2017.
Future stock-based compensation for unvested employee options granted and outstanding as of June 30, 2017 is $1,069,897 to be recognized over a remaining requisite service period of 2.72 years.
8. | Facility Leases |
The Company leased three suites at an office facility in Menlo Park, California on a month-to-month basis through May 2017. Under the terms of lease agreements, the Company was also responsible for certain insurance, property tax and maintenance expenses.
- 21 -
Spirox, Inc.
Notes to Financial Statements
8. | Facility Leases (continued) |
In January 2017, the Company entered into an agreement to sublease an office facility in Redwood City, California. The lease term began in February 2017 and will continue through October 2021. The lease provides for scheduled increases in minimum rental payments. The related rent expense for the lease is calculated on a straight line basis with the difference recorded as deferred rent. Under the terms of lease agreement, the Company is also responsible for certain insurance, property tax and maintenance expenses. The Company paid for one year of rent and expected expenses in January 2017. The amount of $447,065 is included in prepaid expenses and other current assets on the June 30, 2017 balance sheet related to this lease.
Rent expense was $380,635 for the six months ended June 30, 2017 ($117,874 for the six months ended June 30, 2016).
Future minimum lease payments required under the Redwood City lease are as follows:
Years ending June 30: |
||||
2018 |
$ | 272,000 | ||
2019 |
660,000 | |||
2020 |
680,000 | |||
2021 |
700,000 | |||
2022 |
238,000 | |||
|
|
|||
$ | 2,550,000 | |||
|
|
9. | Subsequent Events |
Subsequent events have been evaluated through September 5, 2017, which is the date the financial statements were approved by the Company and available to be issued.
- 22 -
Exhibit 99.2
ENTELLUS MEDICAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Entellus Medical, Inc. (Entellus) and the historical financial statements of Spirox Inc. (Spirox) after giving effect to Entelluss acquisition of Spirox (the Acquisition) and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The effective date of the Acquisition was July 13, 2017.
The unaudited pro forma condensed combined balance sheet as of June 30, 2017 is presented as if the Acquisition occurred on June 30, 2017. The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2017 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2016 are presented as if the Acquisition had taken place on January 1, 2016. The unaudited pro forma adjustments are based upon available information and upon certain assumptions that Entellus believes are (1) directly attributable to the Acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results.
The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon preliminary estimates. The preliminary estimated fair values of certain assets and liabilities have been determined with the assistance of a third-party valuation firm and such firms preliminary work and are based on the actual tangible and intangible assets and liabilities that existed as of the Acquisition date. Entelluss estimates and assumptions are subject to change during the measurement period (up to one year from the Acquisition date) as Entellus finalizes the valuations of certain tangible and intangible assets acquired and liabilities assumed in connection with the Acquisition. The primary areas of the purchase price allocation which are not yet finalized relate to identifiable intangible assets and goodwill.
The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the results of operations or financial position of Entellus that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future results of operations or financial position of Entellus. The unaudited pro forma condensed combined financial statements, including the notes thereto, do not reflect any potential operating efficiencies and cost savings that Entellus may achieve with respect to the combined companies. The unaudited pro forma condensed combined financial statements and notes thereto should be read in conjunction with the historical financial statements of Entellus included in the annual report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (SEC) on February 22, 2017, and in conjunction with the subsequent quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2017 filed with the SEC on August 4, 2017, and in conjunction with the historical financial statements of Spirox included in Exhibit 99.2 of Entelluss current report on Form 8-K filed on September 25, 2017 and Exhibit 99.1 to this Form 8-K.
Entellus Medical, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2017
(in thousands)
Entellus (June 30, 2017) A |
Spirox (June 30, 2017 ) A |
Pro Forma Adjustments B |
Notes | Pro Forma | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 62,872 | $ | 20,045 | $ | (18,566 | ) | D | $ | 64,351 | ||||||||||
Receivables, net |
16,146 | 1,512 | | 17,658 | ||||||||||||||||
Short-term investments |
| 13,982 | (13,982 | ) | E | | ||||||||||||||
Inventory |
7,747 | 340 | 304 | F | 8,391 | |||||||||||||||
Prepaid expenses and other current assets |
1,950 | 702 | | 2,652 | ||||||||||||||||
Accrued interest income |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
88,715 | 36,581 | (32,244 | ) | 93,052 | |||||||||||||||
Property and equipment, net |
6,660 | 989 | | 7,649 | ||||||||||||||||
Investments, net of current portion |
| 1,001 | (1,001 | ) | E | | ||||||||||||||
Deposit |
| 211 | | 211 | ||||||||||||||||
Identifiable intangibles, net |
9,484 | | 84,943 | G | 94,427 | |||||||||||||||
Goodwill |
477 | | 66,419 | G | 66,896 | |||||||||||||||
Other |
216 | | | 216 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 105,552 | $ | 38,782 | $ | 118,117 | $ | 262,451 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 2,998 | $ | 371 | $ | | $ | 3,369 | ||||||||||||
Accrued expenses |
11,940 | 1,997 | | 13,937 | ||||||||||||||||
Revolving credit facility |
7,976 | | | 7,976 | ||||||||||||||||
Customer rebate liability |
| 61 | | 61 | ||||||||||||||||
Current portion of long-term debt |
| | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
22,914 | 2,429 | | 25,343 | ||||||||||||||||
Deferred rent |
| 15 | | 15 | ||||||||||||||||
Preferred stock warrant liability |
| 24 | (24 | ) | H | | ||||||||||||||
Long-term debt, less current portion, net of debt issuance costs of $335 |
13,165 | | 26,480 | D | 39,645 | |||||||||||||||
Deferred tax liability, net |
| | 14,443 | O | 14,443 | |||||||||||||||
Other non-current liabilities |
162 | | | 162 | ||||||||||||||||
Contingent consideration |
| | 58,030 | G | 58,030 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
36,241 | 2,468 | 98,929 | 137,638 | ||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Series C convertible preferred stock |
| 3 | (3 | ) | H | | ||||||||||||||
Series B convertible preferred stock |
| 1 | (1 | ) | H | | ||||||||||||||
Series A-1 convertible preferred stock |
| 1 | (1 | ) | H | | ||||||||||||||
Series A convertible preferred stock |
| | | H | | |||||||||||||||
Common stock |
22 | | 3 | M | 25 | |||||||||||||||
Additional paid-in capital |
236,568 | 71,160 | (15,661 | ) | H, M | 292,067 | ||||||||||||||
Accumulated other comprehensive (loss) |
(110 | ) | (31 | ) | 31 | H | (110 | ) | ||||||||||||
Accumulated deficit |
(167,169 | ) | (34,820 | ) | 34,820 | H | (167,169 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
69,311 | 36,314 | 19,188 | 124,813 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 105,552 | $ | 38,782 | $ | 118,117 | $ | 262,451 | ||||||||||||
|
|
|
|
|
|
|
|
Entellus Medical, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 2016
(in thousands)
Entellus C |
Spirox C |
Pro Forma Adjustments | Notes | Pro Forma | ||||||||||||||||
Revenue |
$ | 75,184 | $ | 2,272 | $ | | $ | 77,456 | ||||||||||||
Cost of goods sold |
18,720 | 764 | | 19,484 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
56,464 | 1,508 | | 57,972 | ||||||||||||||||
Operating expenses |
||||||||||||||||||||
Selling and marketing |
56,827 | 5,398 | | 62,225 | ||||||||||||||||
Research and development |
7,792 | 5,566 | | 13,358 | ||||||||||||||||
General and administrative |
18,560 | 5,558 | 8,715 | I | 32,833 | |||||||||||||||
1,057 | J | 1,057 | ||||||||||||||||||
(1,307 | ) | K | (1,307 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
83,179 | 16,522 | 8,465 | 108,166 | ||||||||||||||||
Loss from operations |
(26,715 | ) | (15,014 | ) | (8,465 | ) | (50,194 | ) | ||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
278 | 196 | | 474 | ||||||||||||||||
Interest expense |
(2,248 | ) | | (2,653 | ) | L | (4,901 | ) | ||||||||||||
Other non-operating expense |
(39 | ) | (28 | ) | | (67 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Loss before income tax expense |
$ | (28,724 | ) | $ | (14,846 | ) | $ | (11,118 | ) | $ | (54,688 | ) | ||||||||
Income tax expense |
(6 | ) | | | (6 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net loss |
$ | (28,730 | ) | $ | (14,846 | ) | $ | (11,118 | ) | $ | (54,694 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Unrealized gain on short-term investments, net of tax |
17 | (31 | ) | | (14 | ) | ||||||||||||||
Foreign currency translation loss |
(135 | ) | | | (135 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive loss |
$ | (28,848 | ) | $ | (14,877 | ) | $ | (11,118 | ) | $ | (54,843 | ) | ||||||||
|
|
|
|
|
|
|
|
Entellus Medical, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended June 30, 2017
(in thousands)
Entellus C |
Spirox C |
Pro Forma Adjustments |
Notes | Pro Forma |
||||||||||||||||
Revenue |
$ | 41,246 | $ | 4,885 | $ | | $ | 46,131 | ||||||||||||
Cost of goods sold |
10,732 | 1,739 | | 12,471 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Gross profit |
30,514 | 3,146 | | 33,660 | ||||||||||||||||
Operating expenses |
||||||||||||||||||||
Selling and marketing |
31,286 | 5,513 | | 36,799 | ||||||||||||||||
Research and development |
4,228 | 4,754 | | 8,982 | ||||||||||||||||
General and administrative |
10,471 | 2,332 | 4,346 | I | 17,149 | |||||||||||||||
483 | J | 483 | ||||||||||||||||||
(1,189 | ) | K | (1,189 | ) | ||||||||||||||||
(1,196 | ) | N | (1,196 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
45,985 | 12,599 | 2,444 | 61,028 | ||||||||||||||||
Loss from operations |
(15,471 | ) | (9,453 | ) | (2,444 | ) | (27,368 | ) | ||||||||||||
Other income (expense): |
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Interest income |
169 | 123 | | 292 | ||||||||||||||||
Interest expense |
(1,011 | ) | | (1,326 | ) | L | (2,337 | ) | ||||||||||||
Other non-operating expense |
(62 | ) | (37 | ) | | (99 | ) | |||||||||||||
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Loss before income tax expense |
$ | (16,375 | ) | $ | (9,367 | ) | $ | (3,770 | ) | $ | (29,512 | ) | ||||||||
Income tax expense |
(6 | ) | | | (6 | ) | ||||||||||||||
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Net loss |
$ | (16,381 | ) | $ | (9,367 | ) | $ | (3,770 | ) | $ | (29,518 | ) | ||||||||
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Unrealized gain on short-term investments, net of tax |
(1 | ) | | | (1 | ) | ||||||||||||||
Foreign currency translation loss |
47 | | | 47 | ||||||||||||||||
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Comprehensive loss |
$ | (16,335 | ) | $ | (9,367 | ) | $ | (3,770 | ) | $ | (29,472 | ) | ||||||||
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Entellus Medical, Inc.
Notes To Unaudited Pro Forma Condensed Combined Financial Statements
Note 1. Basis of Pro Forma Presentation
The unaudited pro forma condensed combined balance sheet as of June 30, 2017 and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2017 and for the year ended December 31, 2016 are based on the consolidated historical financial statements of Entellus, a Delaware Corporation, and Spirox, a Delaware Corporation, after giving effect to Entelluss acquisition of Spirox and the assumptions and adjustments described in the notes herein. Certain note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted as permitted by SEC rules and regulations.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC), Topic 805, Business Combinations (ASC 805), and was based on the consolidated historical financial statements of Entellus, with Entellus treated as the accounting acquirer.
The acquisition method of accounting, provided by ASC 805, uses the fair value concepts defined in ASC Topic 820, Fair Value Measurement (ASC 820). Under this method of accounting, the assets and liabilities of Spirox are recorded by Entellus based on their estimated fair values at the date of acquisition. Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
The preliminary allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based upon preliminary estimates. The preliminary estimated fair values of certain assets and liabilities have been determined with the assistance of a third-party valuation firm and such firms preliminary work. Entelluss estimates and assumptions are subject to change during the measurement period (up to one year from the Acquisition date) as Entellus finalizes the valuations of certain tangible and intangible assets acquired and liabilities assumed in connection with the Acquisition. The primary areas of the purchase price allocation which are not yet finalized relate to identifiable intangible assets and goodwill. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the results of operations or financial position of Entellus that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future results of operations or financial position of Entellus. The unaudited pro forma condensed combined financial statements, including the notes thereto, do not reflect any potential operating efficiencies and cost savings that Entellus may achieve with respect to the combined companies.
Note 2. Spirox Acquisition
On July 6, 2017, Entellus, entered into an Agreement and Plan of Merger (the Merger Agreement) with Spirox, Stinger Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Entellus (Merger Sub), and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as representative of Spiroxs equity holders (the Equity holders Representative). Spirox is a privately held medical device company that develops, manufactures and markets the LATERA Absorbable Nasal Implant which is a minimally invasive option to treat nasal airway obstruction. On July 13, 2017, Entellus completed its acquisition of Spirox through a reverse triangular merger transaction with the terms of the Merger Agreement.
At the closing of the Acquisition, Entellus paid $25.0 million in cash and issued approximately 3.4 million shares of Entellus common stock, subject to certain adjustments and as calculated pursuant to the calculation methodology set forth in the Merger Agreement. Entellus deposited $7.5 million of the initial cash merger consideration with an escrow agent to fund payment obligations with respect to the working capital adjustment and post-closing indemnification obligations of Spiroxs former equity holders. Under the terms of the Merger Agreement, Entellus has agreed to pay additional contingent merger consideration to Spiroxs former equity holders based on Entelluss net revenue from sales of Spiroxs LATERA device, subsequent versions thereof and any other device that treats nasal valve collapse or nasal lateral wall insufficiency by increasing the mechanical strength of the nasal lateral wall through the use of a synthetic graft, evaluated annually during the four-year period following the Acquisition. Entellus has the discretion to pay the contingent consideration in shares of Entellus common stock or cash, subject to compliance with applicable rules and regulations of the Securities Act of 1933, as amended (the Securities Act), and the NASDAQ Stock Market. A portion of the contingent consideration will be subject to certain rights of set-off for any post-closing indemnification obligations of Spiroxs equity holders. Although there is no cap on the amount of contingent consideration earn-out that could be paid, Entellus does not expect the cumulative undiscounted payments to exceed $95.0 million over the four year period. Upon completion of the acquisition accounting, including the fair value assessment of the contingent consideration, Entellus will record an estimate of the present value of contingent consideration as a liability on its balance sheet and any changes to the contingent consideration will be reflected in its Consolidated Statement of Operations.
All options and warrants to acquire shares of Spirox stock were terminated in connection with the Acquisition and the holders thereof have been entitled to receive the merger consideration that would have been payable to such holders had they exercised their vested options and warrants in full immediately prior to the effective time of the Acquisition, less the applicable exercise price of such vested options and warrants.
Entelluss acquisition of Spirox has been accounted for as a business combination, and assets acquired and liabilities assumed were recorded at their estimated fair values as of July 13, 2017. Goodwill as of the acquisition date is measured as the excess of consideration transferred, which is also generally measured at fair value or the net acquisition date fair values of the assets acquired and the liabilities assumed. Total consideration transferred was $138.5 million and consisted of the preliminary purchase price of $80.5 million, consisting of $25.0 million cash and 3,410,292 shares of Entellus common stock (at a closing stock price on July 13, 2017 of $17.69 subject to certain discounts for the lock-up period resulting in an implied price of $16.27), and $58.0 million related to the fair value of potential additional earn-out payments based on Entelluss net revenue from sales of Spiroxs LATERA device, subsequent versions thereof and any other device that treats nasal valve collapse or nasal lateral wall insufficiency by increasing the mechanical strength of the nasal lateral wall through the use of a synthetic graft, evaluated annually during the four-year period following the Acquisition. The preliminary purchase price is summarized in the table below (in thousands):
Cash paid for the outstanding stock of Spirox |
$ | 25,000 | ||
Stock issuance for the outstanding stock of Spirox |
55,502 | |||
Fair value of earn-out liability |
58,030 | |||
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Total preliminary purchase price |
$ | 138,532 |
The preliminary estimated fair value of the earn-out liability was determined based on a third-party valuation. Entellus used the discounted cash flow method to measure the fair value whereby the fair value is determined based on the present value of the expected cash flows. The fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement under the fair value hierarchy.
The estimated preliminary fair value of intangible assets acquired consisted of the following (in thousands):
Developed technology |
$ | 76,620 | ||
Tradenames |
4,760 | |||
Customer relationships |
3,520 | |||
Non-compete agreements |
43 | |||
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Total preliminary intangible assets |
$ | 84,943 |
The preliminary estimated fair value of the intangible assets acquired was determined based on a third-party valuation. Entellus used an income approach to measure the fair value of the developed technology based on the multi-period excess earnings method, whereby the fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. Entellus used an income approach to measure the fair value of the trademarks based upon the relief from royalty method, whereby the fair value is estimated based upon discounting the royalty savings as well as any tax benefits related to ownership to a present value. Entellus used an income approach to measure the fair value of non-compete agreements and customer relationships, based on the with and without method, whereby value is estimated by discounting the cash flow differential as well as any tax benefits related to ownership to a present value. Entellus preliminary determination of the useful lives of these intangible assets ranges from three to twelve years. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements under the fair value hierarchy.
Inventory is measured at fair value and is determined to be a market participants selling price adjusted for the cost to sell and a reasonable profit allowance for the selling effort of the acquiring entity. A net deferred tax liability of $14.4 million was established as a result of the book versus tax differences attributable to the identifiable intangible assets, inventory step-up and other timing differences. This amount is also inclusive of $14.2 million of deferred tax assets related to Spirox net operating loss carry forwards. It is expected that the establishment of this net deferred tax liability in the Acquisition will result in a $14.4 million reversal of existing Entellus valuation allowance subsequent to the Acquisition. All remaining net tangible assets were valued at their respective carrying amounts, as Entellus believes that these amounts approximate their current fair values. The total purchase consideration has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the acquisition date. The purchase price allocation is preliminary and subject to revision as more information becomes available but will not be revised beyond twelve months after the acquisition date. The primary areas of the purchase price allocation which are not yet finalized relate to identifiable intangible assets and goodwill. Based upon a preliminary valuation, the total preliminary purchase price was allocated as follows (in thousands):
Goodwill |
$ | 66,419 | ||
Identifiable intangible assets |
84,943 | |||
Deferred tax liability, net |
(14,443 | ) | ||
Net tangible assets |
1,613 | |||
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Total preliminary purchase price |
$ | 138,532 |
Acquisition-related expenses incurred, including legal and accounting fees and other external costs directly related to the Acquisition, were expensed as incurred.
Note 3. Credit Agreement
On July 13, 2017, in connection with the closing of the Acquisition, Entellus borrowed an additional $26.5 million in term loans under that certain Loan and Security Agreement dated as of March 31, 2017 among Oxford Finance LLC, the lenders listed therein, and Entellus, as amended (the Loan Agreement), to fund the initial cash merger consideration, bringing its total term loan borrowings under the Loan Agreement to $40.0 million. Under the Loan Agreement, Entellus was permitted to borrow up to a total of $40.0 million in term loans in three tranches (each a Term Loan or, collectively, Term Loans) and up to $10.0 million under a revolving line of credit, subject to a borrowing base requirement (the Line of Credit). The Term Loans under the Loan Agreement mature and all amounts borrowed under the Loan Agreement, including the Line of Credit, become due and payable on March 1, 2022.
Note 4. Pro Forma Adjustments
The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:
A | Derived from Entelluss and Spiroxs unaudited consolidated balance sheet as of June 30, 2017. | |||
B | Represents adjustments for the acquisition of Spirox. The purchase price of $138.5 million has been allocated as follows (in thousands): |
Goodwill |
$ | 66,419 | ||
Identifiable intangible assets |
84,943 | |||
Deferred tax liability, net |
(14,443 | ) | ||
Net tangible assets |
1,613 | |||
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Total preliminary purchase price |
$ | 138,532 | ||
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Entellus allocated the purchase price of its tangible and intangible assets in accordance with ASC Topic 805, Business Combinations. | ||||
C | Derived from Entellus and Spiroxs consolidated statements of operations for the twelve months ended December 31, 2016 (audited) and six months ended June 30, 2017 (unaudited). | |||
D | Represents the net change in cash resulting from debt issuance of $26.5 million less issuance costs of $0.02 million, less the cash paid to Spirox stockholders as consideration in the Acquisition of $25.0 million. Additionally, the transaction was an asset purchase that did not include cash or debt and therefore Spirox cash of $20.0 million is eliminated. The result is a net decrease to cash of $18.5 million. | |||
E | The transaction was an asset purchase that did not include cash or debt. Represents the removal of the investment portfolio of $15.0 million which was liquidated prior to the Acquisition. | |||
F | Represents the fair value adjustment to the inventory balance at Acquisition, which resulted in a step up in fair value to $0.6 million. | |||
G | Represents the entries necessary to record the allocation of the acquisition purchase price to the opening balance sheet, which includes separately identifiable intangible assets of $84.9 million, goodwill of $66.4 million and contingent consideration of $58.0 million. | |||
H | Represents adjustments to reflect the elimination of Spirox equity and preferred stock warrant liability on consolidation. | |||
I | Represents the amortization of the intangible assets identified in the Acquisition. The non-compete, tradename, and developed technology intangible assets are amortized using the straight line method based on their respective estimated useful lives. The customer relationship is amortized using a double declining balance method based on the estimated useful life. | |||
J | Represents the incremental Entellus stock compensation expense for Spirox employees added to the existing Entellus stock compensation plan, less stock compensation paid through the Spirox plan which was terminated. | |||
K | Represents the removal of Spirox senior executive compensation for individuals no longer with Entellus as a result of the Acquisition. | |||
L | Represents the incremental interest expense incurred on the debt acquired to fund the Acquisition. | |||
M | Represents the fair value of shares of Entellus common stock issued by Entellus as part of the consideration paid in the Acquisition. $55.5 million was recorded in additional paid-in capital and $0.003 million was recorded in common stock. | |||
N | Represents the removal of transaction costs incurred to fund the Acquisition. | |||
O | A net deferred tax liability of $14.4 million was established as a result of the book versus tax differences attributable to the identifiable intangible assets, inventory step-up and other timing differences. This amount is also inclusive of $14.2 million of deferred tax assets related to Spirox net operating loss carry forwards and $2.1 million of other existing deferred tax assets. |