Form 10-Q ENTELLUS MEDICAL INC For: Sep 30

November 3, 2017 4:05 PM

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36814

 

Entellus Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-4627978

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

3600 Holly Lane North, Suite 40

Plymouth, Minnesota 55447

(Address of principal executive offices) (Zip Code)

(763) 463-1595

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

On November 1, 2017, there were 25,474,059 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding.

 

 

 


ENTELLUS MEDICAL, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

5

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

Item 4.

Mine Safety Disclosures

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

39

 

 

 

SIGNATURES

41

 

As used in this report, the terms “we,” “us,” “our,” “Entellus” and the “Company” mean Entellus Medical, Inc. and our consolidated wholly owned subsidiaries, unless the context indicates another meaning.

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements under the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” “estimates,” “plans,” “would,” “should,” “potential,” “continues,” similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) and the use of future dates identify forward-looking statements in this report. Forward-looking statements contained in this report include, but are not limited to, statements related to:

 

estimates of our future revenue, expenses, capital requirements and our needs for additional financing and our ability to obtain additional financing in the future, on favorable terms or at all;

 

the implementation of our business model, strategic plans for our products, technologies and businesses and ability to obtain success with respect to our key initiatives;

 

our ability to manage and grow our business by expanding our sales to existing customers or introducing our products to new customers;

 

the effect of our recent acquisition of Spirox, Inc., or Spirox, on our operating results and business; and

 

our expectations regarding the use of proceeds from our initial public offering and subsequent public offering.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions 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. Actual future results may vary materially from those projected, anticipated or indicated in any forward-looking statements as a result of various factors, including without limitation those set forth below and elsewhere in this report:

 

our future operating losses and ability to achieve or sustain profitability;

 

our future revenues and ability to sustain historical revenue growth rates;

 

the dependence of our revenues on our XprESS family of products;

 

future market acceptance and adoption of our products, and adequate levels of coverage or reimbursement for procedures using our products;

 

risks involved in our recent acquisition of Spirox, Inc., including the failure to achieve the revenues, cost savings, earnings, growth prospects and any or other synergies expected from the acquisition or delays in realization thereof; delays and challenges in integrating Spirox’s business and operations; operating costs and business disruption following the acquisition, including adverse effects on employee retention and on business relationships with third parties, including physicians, providers, distributors and vendors; and issues with customers securing from private health insurers and the Centers for Medicare & Medicaid Services, or CMS, routine and adequate reimbursement for nasal surgery procedures using Spirox’s Latera device;

 

the effect of Medicare’s final rule on the Hospital Outpatient Prospective Payment System, or HOPPS, for 2017 and future similar Medicare rulemaking including bundled payment models on our revenue;

 

our dependence on our license agreement with Acclarent, Inc.;

 

our ability to achieve success with respect to the following key initiatives: (1) enhanced productivity of our sales force; (2) account development activities; (3) global expansion; (4) new products and indications; and (5) integration of the Spirox sales force and operations;

 

our ability to successfully develop and commercialize new ear, nose and throat, or ENT, products;

 

not successfully competing against our existing or potential competitors;

 

the effect of consolidation in the healthcare industry or group purchasing organizations and the aggregation of purchasing power;

 

our ability to expand, manage and maintain our direct sales organization and market and sell our products in the United States and internationally and risks involved in such expansion;

 

risks and uncertainties involved in our international operations and use of international third-party distributors;

3


 

the compliance of our products with the laws and regulations of the countries in which they are marketed, which compliance may be costly and time-consuming;  

 

failure or delay in obtaining U.S. Food and Drug Administration, or FDA, or other regulatory approvals for our products or the effect of FDA or other regulatory actions on our operations, including risks associated with the FDA warning letter that we received in April 2017;

 

the use, misuse or off-label use of our products that may harm our image in the marketplace or result in injuries that may lead to product liability suits, which could be costly to our business or result in governmental sanctions;

 

inability to retain key sales representatives, independent distributors, and other personnel or to attract new talent;  

 

our ability to successfully complete future acquisitions of, or joint ventures relating to, complementary businesses, products or technologies and successfully integrate acquired businesses, products or technologies or retain any key employees related thereto;

 

our ability to manage our anticipated growth;

 

risk associated with our clinical studies;

 

the risk of future product recalls, product liability claims and litigation and inadequate insurance coverage relating thereto;

 

challenges to our intellectual property rights or inability to defend our products against the intellectual property rights of others;  

 

the loss of key suppliers, which may result in our inability to meet customer orders for our products in a timely manner or within our budget;  

 

risks associated with our manufacturing operations;

 

failures of, interruptions to, or unauthorized tampering with, our information technology systems;

 

the adverse effect of extreme weather conditions on our revenues and operating results, including recent hurricanes;

 

the adequacy of our capital resources and our ability to raise additional financing when needed and on favorable terms, especially in light of anticipated future contingent consideration payments;

 

risks associated with our outstanding indebtedness and loan and security agreement with Oxford Finance LLC; and

 

the effect of new or revised laws, rules and regulations, such as healthcare reform legislation, including the excise tax on U.S. sales of certain medical devices, and its implementation, possible additional legislation, regulation and other governmental pressure in the United States and globally, which may affect utilization, pricing, reimbursement, taxation and rebate policies of governmental agencies and private payors, which could have an adverse effect on our business, financial condition or operating results.

For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Item 1A of Part II of this report under the headings “Risk Factors.” The risks and uncertainties described above and in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Item 1A of Part II of this report under the headings “Risk Factors” are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our business, financial condition or operation results, may emerge from time to time. Readers are urged to consider these factors carefully in evaluating these forward-looking statements. Readers should also carefully review the risk factors described in other documents that we file from time to time with the Securities and Exchange Commission, or the SEC. Our forward-looking statements in this report speak only as of the date of this report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

4


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ENTELLUS MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except per share data)

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

$

51,452

 

$

21,417

 

Short-term investments

 

 

 

10,845

 

Accounts receivable, net of allowance for doubtful accounts and sales returns of $649 and $308, respectively

 

18,320

 

 

13,556

 

Inventories

 

8,618

 

 

7,226

 

Prepaid expenses and other current assets

 

2,300

 

 

1,862

 

Total current assets

 

80,690

 

 

54,906

 

Property and equipment, net

 

8,317

 

 

6,487

 

Intangible assets, net

 

89,630

 

 

9,840

 

Goodwill

 

62,772

 

 

477

 

Other non-current assets

 

427

 

 

379

 

Total assets

$

241,836

 

$

72,089

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

$

3,821

 

$

2,796

 

Accrued expenses

 

12,929

 

 

13,005

 

Current portion of contingent consideration

 

17,426

 

 

 

Revolving credit facility

 

7,943

 

 

 

Current portion of long-term debt

 

 

 

9,118

 

Total current liabilities

 

42,119

 

 

24,919

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

Long-term debt, less current portion, net of debt issuance costs of $329 and $116, respectively

 

39,671

 

 

10,766

 

Contingent consideration, less current portion

 

35,493

 

 

 

Other non-current liabilities

 

273

 

 

959

 

Total liabilities

 

117,556

 

 

36,644

 

COMMITMENTS AND CONTINGENCIES (See Note N)

 

 

 

 

 

 

STOCKHOLDERS' EQUITY (see Note J)

 

 

 

 

 

 

Preferred stock, $0.001 par value per share:

 

 

 

 

 

 

Authorized shares: 10,000 at September 30, 2017 and December 31, 2016                           Issued and outstanding shares: none

 

 

 

 

Common stock, $0.001 par value per share:

 

 

 

 

 

 

Authorized shares: 200,000 at September 30, 2017 and December 31, 2016;                          Issued and outstanding shares: 25,448 and 18,908 at September 30, 2017 and

December 31, 2016, respectively

 

25

 

 

19

 

Additional paid-in capital

 

294,740

 

 

186,370

 

Accumulated other comprehensive loss

 

(76

)

 

(156

)

Accumulated deficit

 

(170,409

)

 

(150,788

)

Total stockholders' equity

 

124,280

 

 

35,445

 

Total liabilities and stockholders' equity

$

241,836

 

$

72,089

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


ENTELLUS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

23,329

 

$

17,880

 

$

64,575

 

$

53,512

 

Cost of goods sold

 

6,555

 

 

4,648

 

 

17,287

 

 

13,107

 

Gross profit

 

16,774

 

 

13,232

 

 

47,288

 

 

40,405

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

18,457

 

 

15,364

 

 

49,743

 

 

41,857

 

Research and development

 

4,653

 

 

2,047

 

 

8,881

 

 

5,832

 

General and administrative

 

5,043

 

 

4,698

 

 

13,964

 

 

12,183

 

Amortization of intangible assets

 

1,957

 

 

109

 

 

2,313

 

 

111

 

Acquisition-related expenses

 

3,865

 

 

 

 

5,059

 

 

300

 

Total operating expenses

 

33,975

 

 

22,218

 

 

79,960

 

 

60,283

 

Loss from operations

 

(17,201

)

 

(8,986

)

 

(32,672

)

 

(19,878

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

117

 

 

75

 

 

286

 

 

228

 

Interest expense

 

(1,018

)

 

(562

)

 

(2,029

)

 

(1,686

)

Other non-operating expense

 

(20

)

 

(12

)

 

(82

)

 

(42

)

Loss before income tax expense

 

(18,122

)

 

(9,485

)

 

(34,497

)

 

(21,378

)

Income tax benefit (expense)

 

14,882

 

 

(34

)

 

14,876

 

 

(34

)

Net loss

$

(3,240

)

$

(9,519

)

$

(19,621

)

$

(21,412

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on short-term investments, net of tax

 

 

 

(39

)

 

(1

)

 

26

 

Foreign currency translation gain (loss)

 

34

 

 

(28

)

 

81

 

 

(123

)

Comprehensive loss

$

(3,206

)

$

(9,586

)

$

(19,541

)

$

(21,509

)

Net loss per share, basic and diluted

$

(0.13

)

$

(0.50

)

$

(0.87

)

$

(1.14

)

Weighted average common shares outstanding, basic and diluted

 

24,944

 

 

18,855

 

 

22,595

 

 

18,827

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


ENTELLUS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

(19,621

)

$

(21,412

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation

 

1,800

 

 

1,201

 

Amortization of intangible assets

 

2,313

 

 

111

 

Amortization, other

 

88

 

 

158

 

Fair value adjustment to contingent consideration

 

2,329

 

 

 

Deferred taxes, net

 

(14,876

)

 

34

 

Acquired inventory fair value adjustment recognized

 

326

 

 

53

 

Stock-based compensation

 

5,892

 

 

4,060

 

Other

 

601

 

 

423

 

Changes in operating assets and liabilities, net of acquired assets and liabilities:

 

 

 

 

 

 

Accounts receivables

 

(3,448

)

 

(1,454

)

Inventories

 

(924

)

 

(2,057

)

Prepaid expenses and other current assets

 

493

 

 

656

 

Other non-current assets

 

297

 

 

(283

)

Accounts payable

 

(235

)

 

1,834

 

Accrued expenses

 

(1,936

)

 

3,393

 

Net cash used in operating activities

 

(26,901

)

 

(13,283

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

(2,603

)

 

(3,469

)

Spirox acquisition

 

(24,778

)

 

 

XeroGel acquisition

 

 

 

(11,000

)

Purchase of investments

 

 

 

(32,182

)

Proceeds from maturities of short-term investments

 

10,837

 

 

46,339

 

Net cash used in investing activities

 

(16,544

)

 

(312

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from revolving credit facility

 

48,145

 

 

 

Payments on revolving credit facility

 

(40,202

)

 

 

Proceeds from long-term debt

 

40,000

 

 

 

Payments of term debt

 

(20,000

)

 

 

Payment of debt fees

 

(1,206

)

 

 

Payment of debt issuance costs

 

(132

)

 

 

Proceeds from stock plans

 

1,622

 

 

372

 

Proceeds from public offering, net of issuance costs

 

45,361

 

 

 

Net cash provided by financing activities

 

73,588

 

 

372

 

Effect of exchange rate changes on cash and cash equivalents

 

(108

)

 

(89

)

Net increase (decrease) in cash and cash equivalents

 

30,035

 

 

(13,312

)

Cash and cash equivalents - beginning of period

 

21,417

 

 

28,548

 

Cash and cash equivalents - end of period

$

51,452

 

$

15,236

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

$

1,549

 

$

1,410

 

Non-cash transactions related to investing and financing activities:

 

 

 

 

 

 

Issuance of stock related to acquisition

$

55,502

 

$

 

Contingent consideration for acquisition

$

50,590

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


ENTELLUS MEDICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE A.

BASIS OF PRESENTATION

Financial Statement Preparation

The financial statements of Entellus Medical, Inc. and its subsidiaries (collectively, the “Company” or “Entellus”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

The interim financial data as of September 30, 2017 is unaudited and is not necessarily indicative of the results for a full year. In the opinion of the Company’s management, the interim data includes only normal and recurring adjustments necessary for a fair statement of the Company’s financial results for the three and nine months ended September 30, 2017 and 2016. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. Certain amounts reported in the condensed consolidated financial statements for the previous reporting periods have been reclassified to conform to the current period presentation.

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that has been filed with the SEC.

Spirox Acquisition

On July 13, 2017, the Company completed its previously announced acquisition of Spirox, Inc (“Spirox”). Spirox was 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. Pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of July 6, 2017, Stinger Merger Sub Inc., an indirect wholly-owned subsidiary of the Company (“Merger Sub”), merged with and into Spirox, with Spirox continuing as the surviving entity and an indirect wholly-owned subsidiary of the Company (the “Spirox Acquisition”).

In the transaction, the Company paid $24.8 million in cash and issued approximately 3.4 million in shares of its common stock with an approximate combined fair value of $80.3 million, subject to certain adjustments and as calculated pursuant to the calculation methodology set forth in the Merger Agreement. The Company common stock issued in connection with the Spirox Acquisition is subject to a lock-up agreement for a period of (i) three months from the date of closing of the Spirox Acquisition in the case of 25% of the shares, (ii) six months from the date of closing of the Spirox Acquisition in the case of an additional 25% of the shares and (iii) 12 months in the case of the remaining shares. Of the $24.8 million cash consideration, $7.5 million was deposited with an escrow agent to fund payment obligations with respect to the working capital adjustment and post-closing indemnification obligations of Spirox’s former equity holders. Under the terms of the Merger Agreement, the Company has agreed to pay additional contingent consideration to Spirox’s former equity holders based on the Company’s annual revenue growth from sales of Spirox’s Latera device and related products during the four-year period following the Spirox Acquisition. Related products include subsequent versions of the Latera device and any other device that treats nasal valve collapse or nasal lateral wall insufficiency by increasing the mechanical strength of the nasal lateral wall using a synthetic graft.

The Company has the discretion to pay the contingent consideration in shares of its common stock or cash, subject to compliance with applicable law and the Listing Rules of 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 Spirox’s equity holders. Because the contingent consideration arrangement (a) embodies a conditional obligation and is not an outstanding share, (b) may be settled by delivering a variable number of common shares, and (c) has a monetary value, at inception, that is based on variations in something other than the Company’s stock price, the obligation is classified as a liability under the classification guidance in Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity. Any subsequent changes to the contingent consideration will be reflected in the Company’s consolidated statements of operations. Although there is no cap on the amount of contingent consideration earn-out that could be paid, the Company does not expect the cumulative undiscounted payments to exceed $80.0 million over the four-year period.  

All options and warrants to acquire shares of Spirox stock were terminated in connection with the Spirox 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 Spirox Acquisition, less the applicable exercise price of such vested options and warrants. See Note C. Business Acquisition.

Valuation adjustments to future contingent consideration due to the former equity holders of Spirox along with transaction and integration costs related to the Company’s 2017 acquisition of Spirox and 2016 acquisition of XeroGel are presented as “Acquisition-related expenses” on the condensed consolidated statements of operations.

8


Following the Spirox Acquisition, Company management evaluated the combined operations in light of the guidance provided by ASC 280 Segment Reporting, and determined it will continue to report its financial information in one reportable segment.  Spirox’s products represent an extension of the Company’s legacy business, and the Company is integrating Spirox’s sales force and operations into its existing operating segment. Going forward, discrete financial information concerning Spirox’s operating income and cash flows will no longer be available. The chief operating decision maker, who is the Company’s Chief Executive Officer, will regularly review consolidated financial information in deciding how to allocate resources and assess performance.

Public Offering

In February 2017, the Company completed a public offering of shares of its common stock, issuing a total of 2.9 million shares of common stock (including 0.5 million shares issued after exercise by the underwriters of their option to purchase additional shares) at an offering price of $17.00 per share. Certain existing stockholders of the Company also sold approximately 1.2 million shares of common stock in the offering. The Company received net proceeds of approximately $45.4 million, after deducting underwriting discounts and commissions of $2.9 million and offering expenses of $0.7 million payable by the Company. The Company did not receive any proceeds from the sale of shares by the selling stockholders.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.

Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 30, 2017, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.  In addition to those policies, the following significant accounting policy was adopted in connection with the Spirox Acquisition:

Valuation of Business Combinations

The fair value of consideration, including contingent consideration, transferred in acquisitions accounted for as business combinations is first allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Any excess purchase consideration is allocated to goodwill. Further, for those arrangements that involve liability classified contingent consideration, the Company records a liability equal to the fair value of the estimated additional consideration we may be obligated to make in the future on the date of acquisition. Liability classified contingent consideration is adjusted to its fair value each reporting period through earnings. Acquisition transaction costs are expensed as incurred.

The fair value of identifiable intangible assets requires management estimates and judgments based on market participant assumptions. Using alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, estimated useful lives, and probabilities surrounding the achievement of milestones could result in different fair value estimates of our net tangible and intangible assets and related amortization expense in current and future periods.

Contingent consideration is remeasured to fair value each reporting period using projected revenues, discount rates, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Increases or decreases in the fair value of the contingent consideration can result from changes in the timing and amount of revenue estimates as well as changes in discount periods and rates. Because the fair value of contingent consideration is based on management assumptions and not observable market inputs, it is considered a Level 3 measurement. Contingent consideration valuation adjustments are recorded as operating expenses or income in the period in which the change is determined.

The Company’s accounting policy is to utilize deferred tax liabilities created through purchase accounting to first offset acquired deferred tax assets. The Company then utilizes any residual net deferred tax liability as a source of taxable income that can be used to support an equivalent amount of the Company’s existing deferred tax assets.

NOTE B.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This standard will eliminate the transaction and industry specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606 – Revenue from Contracts with Customers, to clarify the Codification or to correct unintended application of guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2018. ASU 2014-09 allows for full retrospective adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of

9


initial application. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations – Reporting Revenue Gross versus Net. This ASU clarifies the revenue recognition implementation guidance for preparers on certain aspects of principal versus agent consideration. The amendments in this ASU are effective for private companies and emerging growth companies beginning after December 15, 2018. The adoption of ASU 2016-08 will be concurrently adopted with the adoption of ASU 2014-09. The Company plans to adopt the new guidance beginning January 1, 2019.

The Company has performed a review of the requirements of the new guidance and has identified which of its revenue streams will be within the scope of ASU 2014-09.  The Company is working through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to each revenue stream and comparing the results to its current accounting; an evaluation of the method of adoption; and assessing changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption of ASU 2016-08 and ASU 2014-09 on its consolidated financial statements. 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The updated guidance in this ASU is effective for private companies and emerging growth companies beginning after December 15, 2018. The Company does not expect that adoption of ASU 2016-01 will have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires that lease arrangements longer than twelve months result in an entity recognizing an asset and liability. The updated guidance in this ASU are effective for private companies and emerging growth companies beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This ASU is effective for private companies and emerging growth companies beginning after December 15, 2020; the ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statements of Cash Flows – Classifications of Certain Cash Receipts and Cash Payments to clarify how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for private companies and emerging growth companies beginning after December 15, 2018; the ASU allows for early adoption. The Company is currently assessing the impact that ASU 2016-15 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the Definition of a Business, to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This ASU is effective for private companies and emerging growth companies beginning after December 15, 2018; the ASU allows for early adoption. The Company does not believe that adoption of ASU 2017-01 will have a significant impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This guidance eliminates the requirement to determine the implied fair value of goodwill to measure an impairment of goodwill. Rather, goodwill impairment charges will be calculated as the amount by which a reporting unit's carrying amount exceeds its fair value. This ASU is effective for private companies and emerging growth companies beginning after December 15, 2020; the ASU allows for early adoption. The Company does not believe that adoption of ASU 2017-04 will have a significant impact on its consolidated financial statements. 

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. This ASU is effective for private companies and emerging growth companies beginning after December 15, 2017; the ASU allows for early adoption. The Company does not believe that adoption of ASU 2017-09 will have a significant impact on its consolidated financial statements.

 

NOTE C.

BUSINESS ACQUISITION

On July 13, 2017, Entellus completed the Spirox Acquisition. See Note A. Basis of Presentation - Spirox Acquisition, for details of the transaction.

The Spirox Acquisition 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, the date of the acquisition. Goodwill as of the acquisition date is measured

10


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 $130.9 million and consisted of the preliminary purchase price of $80.3 million, consisting of $24.8 million cash and approximately 3.4 million 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 $50.6 million related to the fair value of potential additional earn-out payments based on Entellus’s net revenue from sales of Spirox’s 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 Spirox Acquisition.

The acquisition has been accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date. A valuation of the assets and liabilities from the business acquisition was performed utilizing costs, income and market approaches resulting in $68.6 million allocated to identifiable net assets. The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired assets and liabilities assumed, including acquired deferred income tax assets and liabilities and assumed income and non-income based tax liabilities. As of the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is summarized as follows:

 

(in thousands)

Purchase Price Allocation

 

Accounts and other receivables

$

1,440

 

Prepaid expenses and other current assets

 

925

 

Inventory

 

647

 

Property and equipment

 

1,257

 

Intangible assets

 

82,103

 

Other non-current assets

 

219

 

Total assets acquired

 

86,591

 

Accounts payable

 

1,297

 

Accrued expenses and other current liabilities

 

1,835

 

Deferred tax liabilities

 

14,884

 

Total liabilities assumed

 

18,016

 

Identifiable net assets acquired

 

68,575

 

Goodwill

 

62,295

 

Net assets acquired and purchase price consideration

$

130,870

 

 

As a result of recording the assets and liabilities at fair market value for GAAP purposes, but receiving primarily carryover basis for tax purposes in the acquisition, the Company recorded a deferred tax liability of $14.9 million.

The goodwill of $62.3 million resulting from the acquisition is the excess of the purchase price over the fair value of the net assets acquired. The goodwill recorded as part of the acquisition primarily reflects the value of strengthening the Company’s strategy of offering less invasive treatment options to ENT physicians while driving procedure volumes to more cost-effective sites of care, thus meaningfully enhancing the Company’s market opportunity and growth potential. Goodwill also reflects the value of the assembled workforce as well as the value to be realized through cost synergies and integration of product lines. None of the goodwill recognized is deductible for income tax purposes as it was a stock acquisition, and as such, no deferred taxes have been recorded related to goodwill.

Revenue of $3.1 million and a net operating loss of $6.1 million attributable to the acquisition is included in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2017. Included in the operating loss for the three and nine months ended September 30, 2017 is amortization expenses of $1.8 million related to identifiable intangible assets acquired in the transaction and the full recognition of the $0.3 million of fair value adjustment of acquired inventory.

The following summarizes the intangible assets acquired, excluding goodwill. Intangible assets are amortized using methods that approximate the pattern of economic benefit provided by the utilization of the assets.

 

 

Gross Carrying Value

 

Amortization Term

 

 

(in thousands)

 

(in years)

 

Developed technology

$

73,930

 

 

10.4

 

Trade names and trademarks

 

4,630

 

 

10.4

 

Customer relationships

 

3,500

 

 

12.0

 

Non-competition arrangements

 

43

 

 

3.0

 

   Total

$

82,103

 

 

 

 

 

11


Contingent consideration is a Level 3 fair value measurement, remeasured to fair value each reporting period using projected revenues, discount rates, and projected payment dates. The Company recorded a $2.3 million valuation adjustment to the contingent consideration liability for the three and nine months ended September 30, 2017 due to the passage of time (i.e., accretion) as shown on the following Level 3 rollforward:

 

(in thousands)

Contingent Consideration

 

Fair value on July 13, 2017 (acquisition date)

 

50,590

 

Valuation adjustment

 

2,329

 

Fair value on September 30, 2017

$

52,919

 

 

The following supplemental pro forma information presents the financial results of the Company for the three and nine months ended September 30, 2017 and 2016, as if the acquisition of Spirox had occurred on January 1, 2016. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2016, nor are they indicative of any future results. The fiscal 2016 three and nine month pro forma financial information includes adjustments for additional amortization expense on intangible assets of $2.0 million and $6.1 million and additional interest expense on debt used to finance the transaction of $0.7 million and $2.0 million, respectively.  The fiscal 2017 three and nine month pro forma information includes adjustments for the removal of transaction costs of $11.4 million and $12.6 million and net severance and other compensation costs of $1.3 million and $2.0 million, partially offset by additional amortization expense on intangible assets of $1.7 million and $6.0 million and additional interest expense of $0.1 million and $1.4 million, respectively.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in millions except per share data)

2017

 

2016

 

 

2017

 

2016

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenue

$

23.7

 

$

18.6

 

 

$

69.8

 

$

54.3

 

Net loss

 

(3.9

)

 

(15.7

)

 

 

(33.4

)

 

(39.5

)

Net loss per share, basic and diluted

$

(0.15

)

$

(0.71

)

 

$

(1.34

)

$

(1.78

)

 

Total acquisition-related expenses associated with the Spirox Acquisition aggregated $3.9 million and $5.1 million for the three and nine months ended September 30, 2017, respectively.

 

NOTE D.

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

Inventories

 

 

September 30,

 

December 31,

 

(in thousands)

2017

 

2016

 

Finished goods

$

4,256

 

$

3,562

 

Work-in-process

 

1,260

 

 

536

 

Raw materials

 

3,102

 

 

3,128

 

Total

$

8,618

 

$

7,226

 

 

Property and Equipment

 

 

September 30,

 

December 31,

 

(in thousands)

2017

 

2016

 

Furniture and office equipment

$

992

 

$

873

 

Computer hardware and software

 

3,717

 

 

2,831

 

Laboratory equipment

 

6,348

 

 

4,336

 

Tooling and molds

 

1,525

 

 

1,512

 

Leasehold improvements

 

2,488

 

 

2,006

 

 

$

15,070

 

$

11,558

 

Less accumulated depreciation

 

(7,122

)

 

(5,465

)

Property and equipment in progress

 

369

 

 

394

 

Total

$

8,317

 

$

6,487

 

12


 

Depreciation expense on property and equipment was $0.8 million and $0.5 million during the three months ended September 30, 2017 and 2016, respectively, and $1.8 million and $1.2 million during the nine months ended September 30, 2017 and 2016, respectively.

 

Accrued Expenses

 

 

September 30,

 

December 31,

 

(in thousands)

2017

 

2016

 

Compensation and commissions payable

$

8,214

 

$

8,674

 

Royalty payable

 

1,795

 

 

1,851

 

Other accrued expenses

 

2,920

 

 

2,480

 

Total

$

12,929

 

$

13,005

 

 

NOTE E.LIQUIDITY AND BUSINESS RISKS

As of September 30, 2017, the Company had cash and cash equivalents of $51.5 million and an accumulated deficit of $170.4 million. In the first quarter of 2017, the Company completed a public offering of shares of its common stock, issuing a total of 2.9 million shares of common stock (including 0.5 million shares issued after exercise by the underwriters of their option to purchase additional shares) at an offering price of $17.00 per share. Certain existing stockholders of the Company also sold approximately 1.2 million shares of common stock in the offering. The Company received net proceeds of $45.4 million, after deducting underwriting discounts and commissions of $2.9 million and offering expenses of $0.7 million payable by the Company. The Company did not receive any proceeds from the sale of shares by the selling stockholders.

On March 31, 2017, the Company entered into a loan and security agreement with Oxford Financial, LLC providing for a new credit facility. Under this credit facility, the Company may borrow up to $40.0 million in term loans in three tranches and up to $10.0 million under a revolving line of credit, subject to a borrowing base requirement. The Company immediately borrowed $13.5 million under the first term loan and $8.0 million under the revolving line of credit to repay approximately $20.0 million in pre-existing outstanding indebtedness. On July 13, 2017, in connection with the closing of the Spirox Acquisition, the Company borrowed an additional $26.5 million in term loans under the loan and security agreement. As of September 30, 2017, the Company had $7.9 million outstanding under the revolving line of credit and can borrow up to an additional $2.1 million if the borrowing base requirement continues to be met. See Note I. Debt.

Prior to its February 2015 initial public offering (“IPO”), the Company financed its operations with a combination of revenue, private placements of convertible preferred securities and amounts borrowed under its credit facility. Although it is difficult to predict its future liquidity requirements, the Company expects that its existing cash and cash equivalents, anticipated revenue and remaining amounts available under its line of credit will be sufficient to meet its anticipated capital requirements, and fund its operations beyond 2018. Further capital requirements may be necessary to fund any contingent consideration due to the former Spirox equity holders. See Note C. Business Acquisitions.

 

NOTE F.

SHORT-TERM INVESTMENTS

The Company determines the appropriate classification of its investments at the time of purchase and revaluates such determinations at each balance sheet date. Marketable securities are classified as held-to-maturity when the Company has the intent and ability to hold the securities to maturity.

Marketable securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Marketable securities classified as available-for-sale are carried at fair market value, with the unrealized gains and losses included in the determination of comprehensive income and reported in stockholders’ equity.

13


The following is a summary of the available-for-sale investments by type of instrument, which are included in short-term investments in the consolidated balance sheet as of December 31, 2016. There were no available-for-sale investments as of September 30, 2017.

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

 

 

 

Gain in

 

Losses in

 

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

 

 

 

 

 

 

 

Other

 

Other

 

 

 

 

 

Amortized

 

Comprehensive

 

Comprehensive

 

Estimated

 

December 31, 2016 (in thousands)

Cost

 

Income (Loss)

 

Income (Loss)

 

Fair Value

 

Commercial paper

$

2,495

 

$

2

 

$

 

$

2,497

 

Corporate bonds

 

4,099

 

 

 

 

(2

)

 

4,097

 

Foreign assets

 

4,250

 

 

1

 

 

 

 

4,251

 

Total available-for-sale securities

$

10,844

 

$

3

 

$

(2

)

$

10,845

 

 

Based on an evaluation of securities that have been in a loss position, the Company did not recognize any other-than-temporary impairment charges during the nine months ended September 30, 2017. The Company considered various factors, including a credit and liquidity assessment of the underlying securities and the Company’s intent and ability to hold the underlying securities until the estimated date of recovery of its amortized cost. As of December 31, 2016, available-for-sale maturities as noted in the table above mature in one year or less.

 

 

NOTE G.

FAIR VALUE MEASUREMENTS

As of September 30, 2017 and December 31, 2016, the carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments. Goodwill and intangible assets acquired are stated at fair value based upon the acquisition valuation.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Includes other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the asset or liabilities.

 

Level 3: Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions.

Short-term Investments

The following is a summary of available-for-sale investments by type of instrument measured at fair value on a recurring basis at December 31, 2016. There were no available-for-sale investments as of September 30, 2017.

 

 

December 31, 2016

 

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Commercial paper

$

 

$

2,497

 

$

 

$

2,497

 

Corporate bonds

 

 

 

4,097

 

 

 

 

4,097

 

Foreign assets

 

 

 

4,251

 

 

 

 

4,251

 

Total

$

 

$

10,845

 

$

 

$

10,845

 

 

Liabilities

The following is a summary of liabilities measured at fair value on a recurring basis at September 30, 2017. There were no such liabilities as of December 31, 2016.

 

 

September 30, 2017

 

(in thousands)

Level 1

 

Level 2

 

Level 3

 

Total

 

Contingent consideration

$

 

$

 

$

52,919

 

$

52,919

 

 

14


The contingent consideration was determined based on discounted cash flow analyses that included projected net revenue assumptions and a discount rate as of September 30, 2017, which are considered significant unobservable inputs. These inputs were used in an option pricing approach in a risk-neutralized framework, using a risk-adjusted discount rate of 12% and a volatility factor of 35% based on the Company’s historical volatility. Projected net revenues developed for each contingent payment period, multiplied by their respective earnout multiples, were discounted to the valuation date using a discount rate of 8% based on the Company’s cost of debt. To the extent these assumptions were to change, the fair value of the contingent consideration could change significantly. Included in acquisition-related expenses in the condensed consolidated statements of operations for both the three and nine months ended September 30, 2017 is $2.3 million of contingent consideration valuation accretion due to the passage of time.

There were no transfers in or out of Level 1, Level 2 or Level 3 fair value measurement categories during the three and nine months ended September 30, 2017. The Company has not experienced any significant realized gains or losses on its investments in the periods presented in the consolidated statements of operations and comprehensive loss.

 

NOTE H.

GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill is as follows:

 

(in thousands)

Carrying Value

 

December 31, 2016

$

477

 

Spirox Acquisition, at acquisition date

 

62,295

 

September 30, 2017

$

62,772

 

 

Other intangible assets are as follows:

 

 

September 30, 2017

 

December 31, 2016

 

(in thousands)

Gross Carrying Amount

 

Accumulated Amortization

 

Gross Carrying Amount

 

Accumulated Amortization

 

Developed technology

$

83,630

 

$

(2,402

)

$

9,700

 

$

(342

)

Trade name

 

5,130

 

 

(141

)

 

500

 

 

(18

)

Customer relationships

 

3,500

 

 

(127

)

 

 

 

 

Noncompetition arrangements

 

43

 

 

(3

)

 

 

 

 

 

$

92,303

 

$

(2,673

)

$

10,200

 

$

(360

)

 

The weighted average useful lives of each class of intangible assets are as follows:

 

 

Useful Life (Years)

 

Developed technology

 

10.9

 

Trade name

 

10.8

 

Customer relationships

 

12.0

 

Noncompetition arrangements

 

3.0

 

 

Amortization expense on intangible assets was $2.0 million and $0.1 million during the three months ended September 30, 2017 and 2016, respectively, and $2.3 million and $0.1 million during the nine months ended September 30, 2017 and 2016, respectively. Estimated aggregate amortization expense for the next five fiscal years based on the current carrying value of definite-lived intangible assets at September 30, 2017, is as follows:

 

(in thousands)

 

 

 

Remaining 2017

$

2,216

 

2018

 

8,818

 

2019

 

8,728

 

2020

 

8,647

 

2021

 

8,577

 

2022

 

8,525

 

 

NOTE I.

DEBT

In December 2013, the Company entered into an amended and restated credit facility with Oxford Finance LLC (“Oxford”) under which the Company borrowed $20.0 million at a fixed rate of 9.40%. The facility was scheduled to mature and all amounts borrowed thereunder were due on December 1, 2018. In February 2017, the Company entered into an amendment to the amended and restated loan and security agreement to allow principal payments due on February 1, 2017 and March 1, 2017 to be deferred until

15


March 15, 2017. In March 2017, the principal payments were deferred again during renegotiations with Oxford. In March 2017, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford providing for a new credit facility.

The key terms of the new credit facility are summarized in the table below:

 

Origination date:

March 31, 2017

Maturity date:

March 1, 2022

Funding tranches:

 

First term loan

$13.5 million

Second term loan (1)

$10.0 million

Third term loan (1)

$16.5 million

Revolving line of credit: (2)

$10.0 million

Outstanding as of September 30, 2017:

 

Term loans

$40.0 million

Revolving line of credit

$7.9 million

Term loan interest rate:

Floating per annum rate equal to the greater of (1) 7.95% and (2) the sum of (i) the greater of (A) the 30-day U.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue and (B) 0.77%, plus (ii) 7.18%. The per annum rate was 8.39% as of September 30, 2017.

Revolving line of credit interest rate:

Floating per annum rate of interest is equal to the greater of (1) 4.95% and (2) the sum of (i) the greater of (A) 30-day U.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue and (B) 0.77%, plus (ii) 4.18%. The per annum rate was 5.39% as of September 30, 2017.

Final payment fee as a percentage of term loans outstanding:

4.95%

Prepayment fees:

1.00% to 3.00% of the principal amount of such Term Loan prepaid, depending upon the timing of the prepayment.

Other fees:

Customary commitment fees and unused fees and certain other customary fees related to the Oxford’s administration of the credit facility.

Security interest:

A first priority security interest in substantially all of the Company’s assets, other than its intellectual property and, under certain circumstances more than 65% of its shares in any foreign subsidiary. The Company has agreed not to pledge or otherwise encumber its intellectual property assets, except for permitted liens, as such terms are defined in the Loan Agreement and except as otherwise provided for in the Loan Agreement.

_____________________

 

(1)

Became available and was borrowed to fund the July 13, 2017 Spirox Acquisition

 

(2)

Subject to a borrowing base requirement

The first term loan of $13.5 million and $8.0 million of the revolving line of credit were borrowed immediately and used to repay approximately $20.0 million of then outstanding indebtedness, which constituted all amounts outstanding related to the prior credit facility, together with the final payment fee of $1.2 million. The new credit facility was accounted for as a modification of debt under applicable accounting guidance. The borrowings under the revolving line of credit are classified as short-term obligations as the Loan Agreement contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with Oxford.

The Loan Agreement contains affirmative and negative covenants applicable to the Company and any subsidiaries and events of default, in each case subject to grace periods, thresholds and materiality qualifiers, as more fully described in the Loan Agreement. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and material governmental approvals, deliver certain financial reports and maintain insurance coverage. The negative covenants include, among others, restrictions on the Company incurring additional indebtedness, engaging in mergers, consolidations or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and suffering a change in control. The events of default include, among other things, the Company’s failure to pay any amounts due under the credit facility, a breach of covenants under the Loan Agreement, the Company’s insolvency, a material adverse change, the occurrence of a default under certain other indebtedness and the entry of final judgments against the Company in excess of a specified amount. If an event of default occurs, Oxford is entitled to take various actions, including the acceleration of amounts due under the credit facility,

16


termination of the commitments under the credit facility and certain other actions available to secured creditors. The Company was in compliance with all required covenants as of September 30, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, the carrying amount of debt approximated fair value because the interest rate approximates current market rates of interest available in the market. The fair value of the Company’s debt is considered a Level 3 measurement.

Assuming a 60-month amortization period as stated in the Loan Agreement, the Company’s principal payments on outstanding term loans are as follows:

 

Fiscal Year

Principal Payments

(in thousands)

 

2017

$

 

2018

 

 

2019

 

10,000

 

2020

 

13,333

 

2021

 

13,333

 

2022

 

3,334

 

Total

$

40,000

 

 

NOTE J.

STOCKHOLDERS’ EQUITY

Common Stock

The Company’s amended and restated certificate of incorporation authorizes 200.0 million shares of common stock. As of September 30, 2017, 25.4 million shares of common stock were outstanding.

On July 13, 2017, the Company issued approximately 3.4 million shares of common stock in connection with the Spirox Acquisition. See Note C. Business Acquisitions.

2015 Incentive Award Plan

In December 2014, the Company’s Board of Directors adopted, and in January 2015 the Company’s stockholders approved, the Entellus Medical, Inc. 2015 Incentive Award Plan (the “2015 Plan”). The 2015 Plan became effective in connection with the IPO, at which time the Company ceased making awards under the Entellus Medical, Inc. 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2015 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and certain other awards to individuals who are employees, officers, directors or consultants of the Company. A total of 1,345,570 shares of common stock were initially reserved for issuance under the 2015 Plan. In addition, the number of shares available for issuance under the 2015 Plan is annually increased by an amount equal to the lesser of (A) 875,000 shares, (B) 4% of the outstanding shares of the Company’s common stock as of the last day of the Company’s immediately preceding fiscal year or an amount determined by the Company’s Board of Directors. Furthermore, any shares subject to awards granted under the 2006 Plan which terminate, expire or lapse without the delivery of shares to the holder thereof become available under the 2015 Plan. In the first quarter of 2017 and 2016, in accordance with this “evergreen” provision, the number of shares available under the 2015 Plan was increased in the amount of 756,339 shares and 751,750 shares, respectively. As of September 30, 2017, 320,865 shares of common stock were available for issuance under the 2015 Plan.

2017 Employee Inducement Incentive Award Plan

In connection with the Spirox Acquisition, the Board of Directors of the Company adopted the Entellus Medical, Inc. 2017 Employment Inducement Incentive Award Plan (the “Inducement Plan”), which is a non-stockholder approved plan, to facilitate the granting of equity awards as an inducement to new employees joining the Company. Under the Inducement Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and certain other awards to new employees of the Company. A total of 450,000 shares of common stock were initially reserved for issuance under the Inducement Plan.

Stock Options and RSUs Granted in Connection with the Spirox Acquisition

The Compensation Committee of the Board of Directors granted the following stock options and restricted stock units (“RSUs”) under the Inducement Plan and the 2015 Plan in connection with the Spirox Acquisition:

 

(shares in thousands)

Employee Options

 

Employee RSUs

 

Director & Non-employee Options

 

Director & Non-employee RSUs

 

Inducement Plan

 

323

 

 

-

 

 

-

 

 

-

 

2015 Plan

 

93

 

 

90

 

 

23

 

 

11

 

Total

 

416

 

 

90

 

 

23

 

 

11

 

17


 

The employee stock options and RSUs were effective as of August 4, 2017. The stock options have a ten-year term, a per share exercise price equal to the closing price of the Company’s common stock on August 4, 2017, and will vest as to one-fourth of the underlying shares on the one-year anniversary of the Spirox Acquisition closing date, and monthly thereafter over the subsequent three years, subject to the recipient’s continued service. The RSU awards will vest annually over a four-year period.

The director stock options and RSUs were effective as of July 14, 2017 and non-employee stock options and RSUs were effective as of August 4, 2017. The stock options have a ten-year term and a per share exercise price equal to the closing price of the Company’s common stock on their respective effective dates. The stock options vest quarterly over a three-year period and the RSUs vest annually over a three-year period.

Stock Options

A summary of the Company’s stock option activity and related information is as follows:

 

 

September 30, 2017

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

Aggregate

 

 

 

 

 

Weighted

 

Remaining

 

Intrinsic

 

 

Options

 

Average

 

Contractual

 

Value

 

 

(in thousands)

 

Exercise Price

 

Term

 

(in thousands)

 

Outstanding, beginning of period

 

3,349

 

$

13.06

 

7.6 years

 

$

21,863

 

Granted

 

1,479

 

 

15.30

 

 

 

 

 

Exercised

 

(213

)

 

5.68

 

 

 

 

 

Cancelled

 

 

 

-

 

 

 

 

 

Forfeited

 

(407

)

 

16.68

 

 

 

 

 

Outstanding, end of period

 

4,208

 

$

13.87

 

8.1 years

 

$

21,369

 

Exercisable, end of period

 

1,850

 

$

11.92

 

7.0 years

 

 

13,279

 

 

The aggregate pre-tax intrinsic value of options exercised was $2.4 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively. The aggregate pre-tax intrinsic value was calculated as the difference between the exercise prices of the underlying options and the estimated fair value of the common stock on the date of exercise on September 30, 2017 and 2016, as applicable. During the nine months ended September 30, 2017 and 2016, the fair value of shares vested was $5.7 million and $3.4 million, respectively. The total cash received by the Company upon the exercise of options was $1.2 million and $0.1 million during the nine months ended September 30, 2017 and 2016, respectively.

Restricted Stock Units

The Company grants time-based RSUs to directors, executive officers and certain other employees. Employee RSUs generally vest over a four-year period and director RSUs vest over a three-year period. In addition, certain key management members typically receive RSUs upon commencement of employment and may receive them annually in conjunction with their performance review. The grant date fair value of the RSU awards is determined using the closing sale price of the Company’s common stock on the date of the grant. The Company recognizes compensation expense for time-based RSUs on a straight-line basis over the vesting period.

Restricted stock unit activity during the nine months ended September 30, 2017 is summarized below:

 

 

September 30, 2017

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

RSUs

 

Grant Date

 

 

(in thousands)

 

Fair Value

 

Outstanding, beginning of period

 

12

 

$

16.99

 

Granted

 

282

 

 

 

Released

 

(3

)

 

 

Forfeited/expired

 

(28

)

 

 

Outstanding, end of period

 

263

 

$

16.90

 

 

Employee Stock Purchase Plan

In December 2014, the Company’s Board of Directors adopted, and in January 2015 the Company’s stockholders approved, the Entellus Medical, Inc. 2015 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, the Company has set two six-month offering periods during each calendar year, one beginning January 1 and ending on June 30, and the other beginning July 1 and ending on December 31, during which employees can choose to have up to 20% of their eligible compensation withheld to purchase less than

18


2,000 shares of the Company’s common stock during each offering period. The purchase price of the shares is 85% of the market price on the first or last trading day of the offering period, whichever is lower. A total of 200,000 shares of common stock were initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be annually increased on the first day of each fiscal year during the term of the ESPP, beginning with the 2016 fiscal year, by an amount equal to the lesser of (A) 1% of the shares of the Company’s common stock outstanding on the date of the adoption of the plan or (B) a lesser amount determined by the Company’s Board of Directors. In accordance with the “evergreen” provision, the number of shares available for grant in the first quarter of 2017 and 2016 increased by 16,488 shares each year, resulting in a total of 232,976 shares reserved for issuance under the ESPP as of March 31, 2017. As of September 30, 2017, 166,523 shares of common stock remained available for issuance under the ESPP.

NOTE K.

STOCK-BASED COMPENSATION EXPENSE

The following table presents the components and classification of stock-based compensation expense for stock options, RSUs and employee stock purchase plan shares recognized for the three and nine months ended September 30, 2017 and 2016:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

(in thousands)

2017

 

2016

 

2017

 

2016

 

Cost of goods sold

$

70

 

$

30

 

$

143

 

$

77

 

Selling and marketing

 

826

 

 

536

 

 

2,148

 

 

1,470

 

Research and development

 

375

 

 

149

 

 

839

 

 

413

 

General and administrative

 

900

 

 

821

 

 

2,762

 

 

2,100

 

Total

$

2,171

 

$

1,536

 

$

5,892