UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2016

OR

For the transition period from                      to                     

Commission File Number: 001-36814

 

Entellus Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 2, 2016, there were 18,864,035 shares of the Registrant’s common stock, $0.001 par value per share, issued and outstanding.

 

 

 

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ENTELLUS MEDICAL, INC.

TABLE OF CONTENTS

 

 

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

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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. Forward-looking statements are made under the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipates,” “believes,” “expects,” ”projects,”  “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:

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:

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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, 2015 under the heading “Risk Factors” and in Item 1A of Part II of this Quarterly Report on Form 10-Q. 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, 2015 under the heading “Risk Factors” and in Item 1A of Part II of this Quarterly Report on Form 10-Q 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.

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ENTELLUS MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except per share data)

 

    

(1) Amounts derived from audited financial statements of Entellus Medical, Inc. included in its Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

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ENTELLUS MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(in thousands, except per share data)

 

 

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

 

 

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ENTELLUS MEDICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

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

 

 

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ENTELLUS MEDICAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Nature of Business

Entellus Medical, Inc. (the “Company”) was incorporated in Minnesota in April 2006 and was reincorporated in Delaware in August 2006. The Company is focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of chronic and recurrent sinusitis in both adult and pediatric patients. The Company’s platform of products provides effective and easy-to-use solutions to simplify everything from diagnosis and patient selection, to complex case revisions and post-operative care. The Company’s three core product lines, XprESS™ Multi-Sinus Dilation Systems, MiniFESS™ Surgical Instruments, and FocESS™ Imaging & Navigation, are designed to enable ear, nose and throat (“ENT”) physicians to conveniently and comfortably perform a broad range of procedures in the ENT physician office and simplify operating room based treatment. The Company currently sells product through its direct sales force in the United States and United Kingdom and in a limited number of additional countries through international distributors. The Company operates in one reporting segment.

 

Basis of Preparation

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).

The interim financial data as of September 30, 2016 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, 2016 and 2015. 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.

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, 2015 that has been filed with the SEC.

Initial Public Offering

In February 2015, the Company completed its initial public offering (“IPO”) by issuing 5.3 million shares of common stock, at an offering price of $17.00 per share, for net proceeds of approximately $81.0 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company. In connection with the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into an aggregate of 11.4 million shares of common stock, and the Company’s outstanding warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase up to an aggregate of less than 0.1 million shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock warrant liability of $0.6 million to additional paid-in-capital.

1-for-4 Reverse Stock Split

In connection with the IPO, the Company’s board of directors and stockholders approved a reverse stock split of the Company’s common stock on a 1-for-4 basis. The reverse stock split became effective on January 12, 2015. The par value of the common stock was not adjusted as a result of the reverse stock split. Adjustments corresponding to the reverse stock split were made to the ratio at which the convertible preferred stock converted into common stock immediately prior to the closing of the IPO. Accordingly, all share and per share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split and adjustment of the preferred stock’s conversion ratios.

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Business Combination

On June 29, 2016, the Company acquired and entered into an exclusive license for the XeroGel™ assets with CogENT Therapeutics, LLC for $11.0 million in cash (the “XeroGel acquisition”). The excess of purchase consideration over the fair value of the net assets acquired was allocated to goodwill, which is deductible for U.S. income tax purposes. The preliminary purchase price allocation is as follows:

 

 

The Company incurred transaction costs in connection with the acquisition of approximately $0.3 million for the nine months ended September 30, 2016, which are included in general and administrative expenses.

 

The estimated fair value of the net assets acquired is preliminary and subject to change. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, the Company may record adjustments to the assets acquired, with the corresponding offset to goodwill.

Under the terms of the XeroGel acquisition agreements, the Company became the manufacturer of XeroGel and will continue to market and sell XeroGel to hospitals, offices and ambulatory surgery centers. Prior to the transaction, the Company was the exclusive distributor of XeroGel in the United States. The distribution agreement between the two parties was terminated in connection with the transaction. As a result of the XeroGel acquisition, the Company began recognizing all XeroGel revenue on a gross basis effective June 29, 2016.

The Company has concluded that the XeroGel acquisition was not material for purposes of including pro forma information in this report and therefore has not provided any such information herein.

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Intangible assets are recorded at their estimated fair value at the date of acquisition. In the year following the period in which identified intangible assets become fully amortized, the fully amortized balances are removed from the gross asset and accumulated amortization amounts. Goodwill is not amortized, but is instead subject to impairment testing. Intangible assets with finite lives are amortized using a straight-line method over their respective useful lives.

 

Goodwill Impairment Policy

 

The Company chose November 1 as the date to assess its annual goodwill for any impairment in order to closely align with the timing of its annual planning process. On an annual basis, or more frequently upon the occurrence of certain events, the Company will test for goodwill impairment using a three-step process. The first step of the goodwill impairment test is to perform a qualitative assessment before calculating the fair value of the reporting unit. If based on the qualitative factors, it is more likely than not that the fair value of the reporting unit is less than the carrying amount of the reporting unit, then the Company is required to perform the next step of the goodwill impairment test. The second step is to identify a potential impairment by comparing the calculated fair value of a reporting unit with its carrying amount. The fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires the Company to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s long-term projections. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in the Company’s impairment testing will be consistent with the Company’s internal forecasts and operating plans. The Company’s discount rate will be based on its debt and equity balances, adjusted for current market conditions and investor expectations of return on its equity. If the fair value of a reporting unit exceeds its carrying amount, there will be no impairment. If the calculated fair value is less than the carrying value, the third step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount. To the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, a write-down of the reporting unit’s goodwill would be necessary.

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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 nine months ended September 30, 2016, 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, 2015, other than the new policies described above which have become significant accounting policies for the Company as a result of the XeroGel acquisition.

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. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance, which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. A company should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, a company is required to comply with the applicable disclosures for a change in an accounting principle. The guidance only affects the presentation of debt issuance costs in the balance sheet and has no impact on results of operations. The Company applied ASU 2015-03 on January 1, 2016 and reclassified debt issuance costs from long-term assets to long-term debt. Debt issuance costs included in long-term debt in the accompanying consolidated financial statements were $0.1 million and $0.2 million at September 30, 2016 and December 31, 2015, respectively.

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. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. 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 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of the updated guidance on its consolidated financial statements.

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 annual periods beginning after December 15, 2017 and for interim periods therein. The Company is in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which is intended to simplify several 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. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.  

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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. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; 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 this standard 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. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years; the ASU allows for early adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

 

Inventories

 

Property and Equipment

 

 

Depreciation and amortization expense was $0.5 million and $0.3 million during the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $0.7 million during the nine months ended September 30, 2016 and 2015, respectively.

Intangible Assets

In connection with the XeroGel acquisition, the Company acquired the technology-based intangible assets described in the above table and the XeroGel trade name. The technologies are amortized over a useful life of approximately 14 years, based on the remaining useful life of the licenses acquired as management plans to fully utilize the technologies over the full useful life, and the trade name is amortized over a useful life of 20 years. Amortization expense was $0.1 million during the three and nine months ended September 30, 2016 and zero during the three and nine months ended September 30, 2015.    

 

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Future amortization expense related to intangible assets with definite lives is projected as follows:

(in thousands)

 

Accrued Expenses

 

 

⁽¹⁾ No individual items in “Other accrued expenses” above exceed 5% of the total other current liabilities.

 

As of September 30, 2016, the Company had cash, cash equivalents and short-term investments of $39.2 million and an accumulated deficit of $143.5 million. In February 2015, the Company completed its IPO by issuing 5.3 million shares of common stock at an offering price of $17.00 per share, for net proceeds of approximately $81.0 million, after deducting underwriting discounts and commissions and offering expenses. Prior to the IPO, the Company financed its operations with a combination of revenue, private placements of convertible preferred securities and amounts borrowed under its credit facility. The Company expects that its cash and cash equivalents, short-term investments and anticipated revenue will be sufficient to fund its operations through at least the next twelve months.

 

 

 

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 positive 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.

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 September 30, 2016 and December 31, 2015.

 

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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, 2016. 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 September 30, 2016 and December 31, 2015, available-for-sale maturities as noted in the table above mature in one year or less.

 

 

As of September 30, 2016 and December 31, 2015, 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:

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 September 30, 2016 and December 31, 2015, respectively.

There were no transfers in or out of Level 1, Level 2 or Level 3 fair value measurement during the three and nine months ended September 30, 2016.

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Convertible Preferred Stock Warranty Liability

The following table sets forth a summary of the changes in the estimated fair value of the Company’s convertible preferred stock warrants, which represent financial instruments that were categorized as Level 3, according to the three-level fair value hierarchy.

 

 

(1)In connection with the closing of the IPO in February 2015, warrants to purchase shares of convertible preferred stock were converted to warrants to purchase shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability to additional paid-in-capital.

The fair market value of the convertible preferred stock prior to the IPO was determined using the option pricing method and the probability weighted expected return method. The fair value of the convertible preferred stock warrant liability was determined using the Black-Scholes option pricing model with the following assumptions:

 

 

 

The Company has a credit facility (the “credit facility”) with Oxford Finance LLC under the terms of an amended and restated loan and security agreement, which was amended most recently in May 2015.

Under the credit facility, the Company could borrow up to a total of $25.0 million in three tranches at a fixed rate of 9.40%. The first tranche of $15.0 million, including the refinance of $7.5 million in debt previously outstanding, was borrowed in December 2013. In connection with the funding of the first tranche, the Company paid a prorated final payment fee on the original credit facility of $0.1 million. The second tranche of up to $5.0 million was available through December 31, 2014, all of which was borrowed during the three months ended December 31, 2014. The third tranche of up to $5.0 million was available at any time through December 31, 2015, subject to certain six-month revenue milestones. Although the specified revenue milestones for the third tranche were achieved, the Company elected not to borrow additional funds. The credit facility matures and all amounts borrowed thereunder are due on December 1, 2018. As a result of achieving certain funding and revenue milestones provided for in the credit facility in December 2015, the Company was permitted to extend the interest-only period through January 2017. Beginning February 2017, the Company will make 23 equal monthly payments of principal and interest in the amount of approximately $1.0 million each.

In addition to the principal and interest payments, under the credit facility the Company is required to pay a final payment fee of 7.15% on all amounts outstanding under the credit facility, which is being accrued over the credit facility term and will be due at the earlier of maturity or prepayment. If the Company repays the entire amount borrowed under the credit facility prior to maturity, the Company will also be required to pay a prepayment fee equal to 0.75% with respect to the principal amount that is prepaid.

As of September 30, 2016 and December 31, 2015, the Company had borrowed and had outstanding $20.0 million of debt under the credit facility.

As of September 30, 2016 and December 31, 2015, the carrying amount of debt approximated fair value because the fixed 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.

 

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In connection with the IPO in February 2015, 44.3 million shares of convertible preferred stock were converted into 11.4 million shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock of $91.6 million to common stock and additional paid-in-capital.

 

Preferred Stock

The Company’s amended and restated certificate of incorporation authorizes 10.0 million shares of preferred stock. As of September 30, 2016, no shares of preferred stock were outstanding.

Common Stock

The Company’s amended and restated certificate of incorporation authorizes 200.0 million shares of common stock. As of September 30, 2016, 18.9 million shares of common stock were outstanding.

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. 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 immediately preceding fiscal year or (C) an amount determined by the Company’s Board of Directors. In the first quarter of 2016, in accordance with this “evergreen” provision, the number of shares available under the 2015 Plan was increased by 751,750 shares resulting in a total of 2,097,320 shares of common stock available for issuance under the 2015 Plan.

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

 

 

 

The aggregate pre-tax intrinsic value of options exercised was $0.8 million and $2.7 million for the nine months ended September 30, 2016 and 2015, 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 or September 30, 2016. The total cash received by the Company upon the exercise of options was $0.1 million and $0.3 million during the nine months ended September 30, 2016 and 2015, respectively. During the nine months ended September 30, 2016, the Company issued restricted stock units (“RSUs”) covering 11,771 shares of common stock at a per share weighted average fair value of $16.99.

 

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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 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 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 the first quarter of 2016, in accordance with the “evergreen” provision, the number of shares available for grant under the ESPP increased in the amount of 16,488 shares, resulting in a total of 216,488 shares of common stock reserved for issuance under the ESPP. During the three and nine months ended September 30, 2016, the Company issued less than 0.1 million shares of its common stock to participants under the ESPP. During the three months ended September 30, 2016 and September 30, 2015, the Company recognized less than $0.1 million and zero in stock-based compensation expense related to the ESPP, respectively, and $0.2 million and zero during the nine months ended September 30, 2016 and September 30, 2015, respectively.

Stock-based compensation expense is reflected in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015, as follows:

 

 The amount of unearned stock-based compensation expense currently estimated to be expensed through the year 2020 related to unvested employee stock-based payment awards as of September 30, 2016 is approximately $15.5 million. The weighted average period over which the unearned stock-based compensation expense is expected to be recognized as of September 30, 2016 is approximately 3 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation expense will increase to the extent that the Company grants additional stock-based awards.

The Company estimates the fair value of stock-based compensation expense on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model determines the fair value of stock-based payment awards based on the fair market value of the Company’s common stock on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the fair market value of the Company’s common stock, volatility over the expected term of the awards and actual and projected employee stock option exercise behaviors. The Company has opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option. Due to the Company’s limited operating history and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based payments. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available. The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options. The expected dividend assumption is based on the Company’s history of not paying dividends and its expectation that it will not declare dividends for the foreseeable future.

As stock-based compensation expense recognized in the financial statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. Forfeitures are estimated based on estimated future employee turnover and historical experience.

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The fair value of the options granted to employees or directors during the nine months ended September 30, 2016 and 2015 was estimated as of the grant date using the Black-Scholes model assuming the weighted average assumptions listed in the following table:

 

 

The fair value of the ESPP options granted to employees during the three and nine months ended September 30, 2016 and 2015 was estimated as of the grant date using the Black-Scholes model assuming the weighted average assumptions listed in the following table: 

 

 

The Company did not record a federal, state or foreign income tax benefit for its losses for the three and nine months ended September 30, 2016 and 2015 due to its conclusion that a valuation allowance is required against its net deferred tax assets excluding the deferred tax liability related to its tax deductible goodwill acquired in connection with the XeroGel acquisition.

 

Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods as all potentially dilutive shares consisting of stock options, warrants, RSUs and ESPP shares were antidilutive in those periods.

The following table sets forth the computation of the Company’s net loss per share:

 

The following potentially dilutive securities outstanding have been excluded from the computations of diluted earnings per share because such securities have an antidilutive impact due to losses reported:

 

 

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Operating Leases

As of September 30, 2016, the Company has three leased facilities under operating lease agreements. The Company entered into a 41-month lease in February 2012, effective April 1, 2012, for its corporate headquarters. The Company entered into a 50-month lease on June 30, 2014, effective July 1, 2014, for additional distribution space in a second facility. On February 26, 2015, the Company exercised its right to extend the lease term of its manufacturing and corporate facility for an additional three years through August 2018. On June 30, 2015, the Company entered into amendments to each of these two lease agreements, among other things, to expand the space occupied by the Company at the property at which the Company’s corporate headquarters are located, and to extend the term of each lease agreement through June 2021, with an option to extend for an additional term through June 2024.

In connection with the XeroGel acquisition, the Company assumed a lease agreement for manufacturing facility space in Hayward, California through August 31, 2017. Rental payments on operating leases are charged to expense on a straight-line basis over the period of the lease. The lease agreements require the Company to pay executory costs such, as real estate taxes, insurance and repairs, and include renewal and escalation clauses.

Approximate minimum annual future obligations which include monthly contractual lease payments under operating leases with initial terms in excess of one year, are as follows:

(in thousands)

Total lease expense was approximately $0.2 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively, and $0.5 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

Other Commitment

In June 2016, the Company entered into an Amended and Restated Fiagon NA Distribution Agreement (the “Fiagon Distribution Agreement”) with Fiagon NA Corporation (“Fiagon”) in which the Company was granted exclusive distribution rights in the U.S. and Canada for Fiagon Image Guidance Systems (“Fiagon IGS”) and certain components, parts and related ancillary products i) to hospitals, ii) to ENT physicians in the office, clinic, and surgery centers, and iii) under ENT healthcare system contracts. The terms of the Fiagon Distribution Agreement require the Company to purchase minimum quantities of Fiagon IGS and certain other disposable products through August 9, 2020 in order for the Company to retain exclusive distribution rights.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q. Some of the numbers included herein have been rounded for the convenience of presentation.

Overview

We are a medical technology company focused on delivering superior patient and physician experiences through products designed for the minimally invasive treatment of chronic and recurrent sinusitis in both adult and pediatric patients. Our platform of products provides effective and easy-to-use solutions to simplify everything from diagnosis and patient selection, to complex case revisions and post-operative care. Our three core product lines, XprESS™ Multi-Sinus Dilation Systems, MiniFESS™ Surgical Instruments, and FocESS™ Imaging & Navigation, are designed to enable ear, nose and throat, or ENT, physicians to conveniently and comfortably perform a broad range of procedures in the ENT physician office and simplify operating room based treatment. When used as a stand-alone therapy in the doctor’s office, our balloon sinus dilation products are the only devices proven in a sufficiently powered prospective, multicenter, randomized, controlled trial to be as effective as functional endoscopic sinus surgery, or FESS, the primary surgical treatment for chronic and recurrent sinusitis. Patients treated with our products in this trial in the ENT physician office also experienced faster recovery, less bleeding at discharge, less use of prescription pain medication and fewer post-procedure debridements than patients receiving FESS.

We believe our minimally invasive balloon sinus dilation devices and additional sinus surgery products sold by us have facilitated a shift towards office-based treatment of chronic and recurrent sinusitis patients who are candidates for sinus surgery in the operating room. We believe this shift has been facilitated by our technology and clinical data, as well as procedure economics that are favorable to the healthcare system, patient and provider. Our XprESS family of products is used to treat patients with inflammation of the frontal, ethmoid, sphenoid and maxillary sinuses and is specifically designed for ease-of-use in the ENT physician office setting. Our XprESS family of products includes our XprESS Pro device, our XprESS LoProfile device and our XprESS Ultra device. We derive a significant portion of our revenue from our XprESS family of products. Our research and development efforts are focused primarily on enhancing our XprESS family of products and broadening their indications for use, as well as developing new related products. We consider new products to be any product released within the last 24 months.

In June 2016, we entered into an amended and restated agreement with Fiagon NA Corporation that, subject to certain limited exceptions for third parties that were then distributing Fiagon products, grants us exclusive distribution rights for Fiagon Image Guidance Systems, or Fiagon IGS, and certain components, parts and related ancillary products to ENT physicians in hospitals, physician offices and ambulatory surgery centers, or ASCs, in the United States, certain other U.S. territories and Canada.

In June 2016, we acquired and entered into an exclusive license for the XeroGel™ assets with CogENT Therapeutics, LLC for $11.0 million in cash. We refer to this transaction as the XeroGel acquisition. Under the terms of the agreements, we became the manufacturer and continue to sell XeroGel to hospitals, offices and ASCs. Prior to the transaction, we were the exclusive distributor of XeroGel in the United States. The distribution agreement between the two parties was terminated in connection with the transaction. As a result of the XeroGel acquisition, we began recognizing all XeroGel revenue on a gross basis effective June 29, 2016, the date of the acquisition.

Our direct U.S. sales force engages in sales efforts and promotional activities focused on ENT physicians. As of September 30, 2016, we employed a total of 148 full-time persons in our direct sales organization, representing an increase of 22 from the 126 persons we employed full-time as of September 30, 2015. We have expanded our sales force to include a total of 89 full quota-carrying representatives as of September 30, 2016, an expansion of 10% from our 81 full quota-carrying representatives as of September 30, 2015. As of September 30, 2016, our full quota-carrying representatives sold at an annualized rate of approximately $739,000. We expect to continue to expand our sales force and staffing to further penetrate the sinusitis market.

Revenue per procedure was approximately $1,500 in the third quarter of 2016, flat compared to the third quarter of 2015. We calculate revenue per procedure by dividing our revenue from disposable products, which includes our balloon sinus dilation products, Fiagon disposable products, XeroGel Cyclone, light fibers and surgical procedure packs, by the number of balloon sinus dilation devices sold during the quarter. We believe the number of balloon sinus dilation devices sold during a quarter is a reasonable proxy for the number of balloon procedures performed in the quarter. Since a balloon sinus dilation procedure often results in revenue from the sale of not just balloon devices, but also other ancillary disposable products used in a balloon procedure, we include in the revenue from disposable products, revenue from the ancillary disposable products noted above in addition to balloon devices.

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In the second quarter of 2015, we established a subsidiary in the United Kingdom and started the process of selling our products in certain European countries using a combination of direct sales representatives and a network of independent distributors with experience in selling products into ENT markets in those regions. We intend to continue to increase our presence outside the United States through expansion of our U.K. sales force and addition of distributors.

We invest substantial resources to educate ENT physicians and patients on the proven clinical advantages of stand-alone balloon sinus dilation.

We have a diverse customer base of ENT physicians, hospitals and ASCs, with no single customer accounting for more than 5% of our revenue during the nine months ended September 30, 2016. Our customers are generally reimbursed by certain governmental and private health insurers for procedures using our products pursuant to reimbursement codes specific to the setting of the procedure. Our revenues are dependent upon the future market acceptance and adoption of our existing and new products, appropriate pricing and adequate level of coverage or reimbursement for procedures using such products.

We manufacture and assemble all of our proprietary products, other than XeroGel at our facility in Plymouth, Minnesota with components supplied by external suppliers. XeroGel continues to be manufactured in Hayward, California. We increased the size of our Plymouth facility in February 2016 by approximately 19,700 square feet to a total of approximately 52,000 square feet. As of September 30, 2016, our manufacturing organization included 36 people. We expect the capacity of our current facilities to be able to meet expected demand through the end of 2020.

For the three months ended September 30, 2016, we generated revenue of $17.9 million and had a net loss of $9.5 million compared to revenue of $14.8 million and a net loss of $6.1 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, we generated revenue of $53.5 million and had a net loss of $21.4 million compared to revenue of $43.5 million and a net loss of $13.3 million for the nine months ended September 30, 2015. We expect to continue to incur operating losses through 2017 as we intend to continue to expend resources to expand our organization to support planned sales growth and expansion while also continuing to invest in the development of next-generation products and new products for the ENT market. As of September 30, 2016, we had an accumulated deficit of $143.5 million. Our primary sources of capital to date have been from sales of our products, net proceeds from our February 2015 initial public offering, or IPO, of approximately $81.0 million, after deducting underwriting discounts and commissions and offering expenses, private placements of our convertible preferred securities and amounts borrowed under our credit facility. We operate in one reporting segment.

Components of Our Results of Operations

Revenue

We derive a significant portion of our revenue from the sale of our XprESS family of products to ENT physicians, hospitals and ASCs. We also derive revenue from the sale of Fiagon IGS products for which we are the exclusive distributor in the United States and Canada, additional sinus surgery products and the sale of XeroGel. Our revenue growth has been driven by, and we expect our revenue to continue to increase in the future as a result of, the introduction of new products, increased physician awareness of our products, the clinical efficacy of stand-alone balloon sinus dilation and increasing insurance coverage for balloon sinus dilation procedures. Any reversal in these trends could have a negative impact on our future revenue. In addition, we have expanded our sales and marketing infrastructure to help us drive and support revenue growth and we intend to continue this expansion. Our revenue has fluctuated, and we expect our revenue to continue to fluctuate, from quarter to quarter, as well as within each quarter, due to a variety of factors, including seasonality, new product introductions, competitor product introductions, associated physician evaluations and competitor pricing changes.

When used as a stand-alone balloon sinus dilation procedure in the physician office setting, the practice expense component of the physician’s fee is intended to cover all or a portion of the cost of our products. When used in an operating room in an ASC or hospital, our products are typically utilized as tools used during FESS and are not separately reimbursed by third-party payors.

Seasonality

Our business may be affected by seasonality. In the first quarter, our results can be impacted by adverse weather and by the resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures in which our products are used. In the second quarter, demand may be increased by the seasonal nature of allergies and the resultant onset of sinus-related symptoms. In the third quarter, the number of balloon sinus dilation and FESS procedures nationwide is historically lower than other quarters throughout the year, which we believe is attributable to the summer vacations of ENT physicians and their patients. In the fourth quarter, demand may be increased by the onset of the cold and flu season and related symptoms, as well as the desire of patients to spend the remaining balances in their flexible-spending accounts or because of lower out-of-pocket costs to patients who have met their annual deductibles under their health insurance plans.

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Cost of Goods Sold and Gross Margin

Cost of goods sold for products we manufacture consists primarily of material costs, manufacturing overhead costs and direct labor. A significant portion of our cost of goods sold consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of goods sold for products we manufacture and assemble also includes depreciation expense for production equipment, shipping costs and royalty expense related to our licensing agreement with Acclarent, Inc. that is payable in connection with sales of substantially all of our manufactured products. For those products we sell as a distributor, our cost of goods sold consists primarily of transfer price. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows.

We calculate total gross margin as gross profit divided by total net revenue. Our gross margin has been, and we expect will continue to be, affected by a variety of factors, including product sales mix, geographic mix and prices, new products, the impact of distributor relationships, which generally result in lower gross margins, production volumes, manufacturing costs and product yields and, to a lesser extent, the implementation of cost-reduction strategies. As a result of product mix and distributor relationships, our gross margin may decrease over time. Our gross margin may also decrease as we introduce new products to the market until we improve efficiencies over time.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of compensation for personnel, including base salaries and variable compensation associated with sales results, spending related to marketing, reimbursement and customer service functions, and stock-based compensation expense. Other selling and marketing expenses include training, travel expenses, promotional activities, conferences, trade shows and consulting services. We expect selling and marketing expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support our planned growth in revenue.

Research and Development Expenses

Research and development, or R&D, expenses consist primarily of engineering, product development, clinical studies to develop and support our products, regulatory expenses, consulting services, materials, depreciation and other costs associated with products and technologies in development and next-generation versions of current devices. These expenses include compensation for personnel, including base salaries and bonus compensation, supplies, materials, quality assurance expenses allocated to R&D programs, consulting, related travel expenses and facilities expenses, in each case related to R&D programs. Clinical expenses include clinical trial management and monitoring, payments to clinical investigators, data management and travel expenses and the cost of manufacturing products for clinical trials. We expect R&D expenses to increase over time, as increases in expenses related to developing, enhancing and commercializing new products and technologies will be only partially offset by the timing and extent of expenses relating to clinical studies. We expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts as well as our clinical development activities.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for personnel, including base salaries and bonus compensation, spending related to finance, information technology, human resource functions and stock-based compensation expense. Other general and administrative expenses include consulting expenses, travel expenses, credit card processing fees, professional services fees, audit fees, insurance costs and general corporate expenses, including allocated facilities-related expenses. We expect general and administrative expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support our planned growth in revenue. We also expect to continue to incur legal, accounting, insurance and other professional service fees associated with being a public company, which may increase further when we are no longer able to rely on the “emerging growth company” exemption we are afforded under the Jumpstart Our Business Startups Act of 2012, or JOBS Act.

Other Expense, Net

Other expense, net primarily consists of interest expense payable under our credit facility, interest income and realized foreign currency gains and losses. Prior to our IPO, other expense, net also consisted of fair value adjustment related to our convertible preferred stock warrants, which were accounted for as a liability and marked-to-market at each reporting period. In connection with the IPO, the warrants converted to warrants to purchase shares of our common stock and were no longer treated as a liability. We performed the final revaluation of the preferred stock warrant liability in February 2015 in connection with the completion of the IPO.

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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. The new guidance is effective for annual and interim periods beginning after December 15, 2017. We are in the process of evaluating the impact of this standard on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance, which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. A company should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, a company is required to comply with the applicable disclosures for a change in an accounting principle. The guidance only affects the presentation of debt issuance costs in the balance sheet and has no impact on results of operations. We adopted ASU 2015-03 starting on January 1, 2016 and reclassified debt issuance costs from long-term assets to long-term debt. Debt issuance costs included in long-term debt in the accompanying financial statements were $0.1 million and $0.2 million at September 30, 2016 and December 31, 2015, respectively.

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. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. We do not believe that adoption of ASU 2016-01 will have a significant impact on our 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 is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements.

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 annual periods beginning after December 15, 2017 and for interim periods therein. We are in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which is intended to simplify several 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. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. We are currently evaluating the impact of this guidance on our 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. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; the ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. We are currently evaluating the impact that this standard will have on our 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. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years; the ASU allows for early adoption. We are currently assessing the impact that this standard will have on our consolidated financial statements.

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Results of Operations

 

 

Comparison of the Three and Nine Months ended September 30, 2016 and 2015

Revenue

Revenue increased $3.1 million, or 21%, to $17.9 million during the three months ended September 30, 2016, compared to $14.8 million during the three months ended September 30, 2015. Revenue increased $10.0 million, or 23%, to $53.5 million during the nine months ended September 30, 2016, compared to $43.5 million during the nine months ended September 30, 2015. The growth in revenue for both periods was primarily attributable to sales of new products and an increase in sales of our XprESS family of products through broader account penetration, both in the office and the operating room.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $1.2 million, or 35%, to $4.6 million during the three months ended September 30, 2016, compared to $3.4 million during the three months ended September 30, 2015. Cost of goods sold increased $3.4 million, or 35%, to $13.1 million during the nine months ended September 30, 2016, compared to $9.7 million during the nine months ended September 30, 2015. The increase in cost of goods sold for both periods was primarily attributable to one-time start-up costs related to the XeroGel acquisition. Cost of goods sold also increased due to sales of new products and growth in sales of our XprESS family of products.

Gross margin decreased during the three and nine months ended September 30, 2016, compared to the prior periods due to one- time start-up costs related to the XeroGel acquisition, product mix, continued geographic expansion, as well as the expanded capacity for anticipated future growth.

Selling and Marketing Expenses

Selling and marketing expenses increased $3.1 million, or 25%, to $15.4 million during the three months ended September 30, 2016, compared to $12.3 million during the three months ended September 30, 2015. This increase was primarily attributable to a $2.7 million increase in salaries, benefits, stock-based compensation expense, travel expenses and other employee-related expenses as a result of increased headcount in our sales and marketing organizations and a $0.4 million increase in other selling and marketing expenses.

Selling and marketing expenses increased $9.9 million, or 31%, to $41.9 million during the nine months ended September 30, 2016, compared to $32.0 million during the nine months ended September 30, 2015. This increase was primarily attributable to a $7.8 million increase in salaries, benefits, stock-based compensation expense, travel expenses and other employee-related expenses as a result of increased headcount in our sales and marketing organizations and a $2.1 million increase in other selling and marketing expenses.

Research and Development Expenses

R&D expenses increased $0.7 million, or 47%, to $2.0 million during the three months ended September 30, 2016, compared to $1.4 million during the three months ended September 30, 2015. This increase was primarily due to a $0.4 million increase in compensation and other employee-related expenses related to increased headcount.

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R&D expenses increased $1.8 million, or 46%, to $5.8 million during the nine months ended September 30, 2016, compared to $4.0 million during the nine months ended September 30, 2015. This increase was primarily due to a $1.1 million increase in compensation and other employee-related expenses related to increased headcount.

General and Administrative Expenses

General and administrative expenses increased $1.6 million, or 49%, to $4.8 million during the three months ended September 30, 2016, compared to $3.2 million during the three months ended September 30, 2015. This increase was primarily due to a $0.8 million increase in salaries, stock-based compensation expense, benefits and other employee-related expenses related to increased headcount. Legal and business development expenses were $0.7 million and a $0.1 million increase in other general and administrative expenses account for the remaining increase.

General and administrative expenses increased $3.5 million, or 38%, to $12.6 million during the nine months ended September 30, 2016, compared to $9.1 million during the nine months ended September 30, 2015. This increase was primarily due to a $1.8 million increase in salaries, stock-based compensation expense, benefits and other employee-related expenses related to increased headcount. Legal and business development expenses were $1.2 million and a $0.5 million increase in other general and administrative expenses account for the remaining increase.

Other Expense, Net

Other expense, net, decreased 3% during the three months ended September 30, 2016, compared to the three months ended September 30, 2015. This decrease was primarily due to increased interest income.

Other expense, net, decreased $0.4 million, or 22%, to $1.5 million during the nine months ended September 30, 2016, compared to $1.9 million during the nine months ended September 30, 2015. This decrease was primarily due to the final revaluation of the preferred stock warrant liability in February 2015 in connection with the completion of the IPO.

 

Liquidity and Capital Resources

Overview

As of September 30, 2016, we had cash and cash equivalents of $15.2 million and short-term investments of $24.0 million and an accumulated deficit of $143.5 million, compared to cash and cash equivalents of $28.5 million, short-term investments of $38.2 million and an accumulated deficit of $122.1 million as of December 31, 2015. Our primary sources of capital have been from product sales, net proceeds from our IPO, and before our IPO private placements of our convertible preferred securities, and amounts borrowed under our credit facility. As of September 30, 2016, we had $20.0 million of outstanding borrowings and no availability of unused credit under our credit facility.

 

We believe that our existing cash and cash equivalents, short-term investments and anticipated revenue will be sufficient to meet our anticipated capital requirements and fund our operations into 2018. However, we have based these estimates on assumptions that may prove to be incorrect, and we could spend our available financial resources faster than we anticipated. If our current capital sources are insufficient to satisfy our liquidity requirements, or if we choose to take advantage of new product and market opportunities to expand our business and increase our revenues, we may sell additional equity or debt securities, or refinance, restructure, or enter into a new credit facility.

In March 2016, we filed, and the SEC declared effective, an unallocated, or “universal,” shelf registration statement on Form S-3 which permits us to offer and sell, from time to time, on a continuous or delayed basis in the future, up to $100 million of equity, debt or other types of securities described in the registration statement, or any combination of such securities, in one or more future public offerings, and permits certain selling stockholders to sell up to 3 million shares of our common stock from time to time in one or more offerings.

If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products.

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Cash Flows  

 

 

Net Cash Used in Operating Activities

During the nine months ended September 30, 2016, net cash used in operating activities was $13.3 million, consisting primarily of a net loss of $21.4 million, offset partially by a decrease in net operating assets of $2.2 million and non-cash charges of $5.9 million. The decrease in net operating assets was primarily due to increases in accrued expenses and accounts payable due to the growth in our sales organization partially offset by increases in inventories and accounts receivables. Non-cash charges consisted primarily of stock-based compensation expense, depreciation and amortization, the accretion of the final payment fee on our credit facility, the amortization of premium on investments and deferred rent.

During the nine months ended September 30, 2015, net cash used in operating activities was $7.9 million, consisting primarily of a net loss of $13.3 million, offset by a decrease in net operating assets of $2.0 million and non-cash charges of $3.4 million. The decrease in net operating assets was primarily due to decreases in deferred offering costs due to completion of our IPO and an increase in accrued liabilities due to the growth in our sales organization, offset by increases in accounts receivable and other current assets. Non-cash charges consisted primarily of stock-based compensation expense, depreciation, the change in fair value of convertible preferred stock warrants, amortization of premium on investments and the accretion of the final payment fee on our credit facility.

Net Cash Used in Investing Activities

During the nine months ended September 30, 2016, net cash used in investing activities was $0.3 million, consisting of $11.0 million used for consideration for the XeroGel acquisition, purchases of short-term investments of $32.2 million and the purchase of property and equipment of $3.5 million, partially offset by proceeds from short-term investment maturities of $46.3 million.

During the nine months ended September 30, 2015, net cash used in investing activities was $68.1 million, consisting of purchases of short-term investments of $111.1 million and the purchase of property and equipment of $2.6 million, partially offset by proceeds from short-term investment maturities of $45.6 million.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2016, net cash provided by financing activities was $0.4 million, consisting of proceeds from common stock purchases under our employee stock purchase plan and the exercise of stock options.

During the nine months ended September 30, 2015, net cash provided by financing activities was $81.2 million consisting of net proceeds from the IPO of approximately $81.0 million and the remaining amount was primarily from proceeds from the exercise of stock options.

Credit Facility

We have a credit facility with Oxford Finance LLC under the terms of an amended and restated loan and security agreement, which was amended most recently in May 2015. On March 30, 2015, we entered into an amendment to the credit facility, changing our obligation to deliver consolidated financial statements from monthly to quarterly, so long as we are required to make periodic filings with the Securities and Exchange Commission, or SEC. On May 19, 2015, we entered into an amendment to the credit facility changing our obligations related to foreign subsidiaries. Under the credit facility, we could borrow up to a total of $25.0 million in three tranches at a fixed interest rate of 9.40%. The first tranche of $15.0 million was borrowed in December 2013, a portion of which was used to refinance the $7.5 million previously outstanding under the credit facility. The second tranche of up to $5.0 million was available through December 31, 2014, of which all was borrowed. The third tranche of up to $5.0 million was available at any time through December 31, 2015, subject to certain trailing six-month revenue milestones. Although the specified revenue milestones for the third tranche were achieved, we elected not to borrow the additional funds. The credit facility matures and all amounts borrowed thereunder become due and payable on December 1, 2018. As a result of achieving certain funding and revenue milestones provided for in the credit facility in December 2015, we were permitted to extend the interest-only period of the credit facility through January 2017. Beginning February 2017, we are required to make 23 equal monthly payments of principal and interest in the amount of approximately $1.0 million each.

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In addition to the principal and interest payments under the credit facility, we are required to pay a final payment fee of 7.15% on all amounts outstanding, which is being accrued over the credit facility term and will be due at the earlier of maturity or prepayment. If we repay the amounts borrowed under the credit facility prior to maturity, we will also be required to pay a prepayment fee equal to 0.75% with respect to the principal amount that is prepaid. We may make principal payments during any interest-only periods to reduce, but not repay in full, the outstanding principal balance of the credit facility without incurring any prepayment penalties. However, if we were to repay in full the outstanding balance of the credit facility during the interest-only period, we would be required to pay the final payment fee.

Our obligations under the credit facility are secured by a first priority security interest in substantially all of our assets, other than our intellectual property. We have agreed not to pledge or otherwise encumber our intellectual property assets, except for permitted liens, as such terms are defined in the credit facility and except as otherwise provided for in the credit facility. The credit facility contains no financial covenants, and we were in compliance with its affirmative and restrictive covenants as of September 30, 2016.

As of September 30, 2016, we had $20.0 million of debt outstanding and no availability of unused credit under the credit facility.

Critical Accounting Policies and Estimates

 

There have been no material changes to our critical accounting policies and estimates from the information provided in “Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, other than the new policies and estimates described below, which have become critical accounting policies and estimates for us as a result of the XeroGel acquisition.

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Intangible assets are recorded at their estimated fair value at the date of acquisition. In the year following the period in which identified intangible assets become fully amortized, the fully amortized balances are removed from the gross asset and accumulated amortization amounts. Goodwill is not amortized, but is instead subject to impairment testing. Intangible assets with finite lives are amortized using a straight-line method over their respective useful lives.

 

Goodwill Impairment Policy

 

We chose November 1 as the date to assess our annual goodwill for any impairment in order to closely align with the timing of our annual planning process. On an annual basis, or more frequently upon the occurrence of certain events, we will test for goodwill impairment using a three-step process. The first step of the goodwill impairment test is to perform a qualitative assessment before calculating the fair value of the reporting unit. If based on qualitative factors, it is more likely than not that the fair value of the reporting unit is less than the carrying amount of the reporting unit, then we are required to perform the next step of the goodwill impairment test. The second step is to identify a potential impairment by comparing the calculated fair value of a reporting unit with its carrying amount. The fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in our impairment testing will be consistent with our internal forecasts and operating plans. Our discount rate will be based on our debt and equity balances, adjusted for current market conditions and investor expectations of return on our equity. If the fair value of a reporting unit exceeds its carrying amount, there will be no impairment. If the calculated fair value is less than the carrying value, the third step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount. To the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, a write-down of the reporting unit’s goodwill would be necessary.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special-purpose entities that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Contractual Obligations

The following table sets out, as of September 30, 2016, our contractual obligations due by period:

 

 

In June 2016, we entered into an Amended and Restated Fiagon NA Distribution Agreement (the “Distribution Agreement”) with Fiagon NA Corporation (“Fiagon”) in which we were granted exclusive distribution rights in the U.S. and Canada for Fiagon Image Guidance Systems (“Fiagon IGS”) and certain components, parts and related ancillary products i) to hospitals, ii) to ENT physicians in the office, clinic, and surgery centers, and iii) under ENT healthcare system contracts. The terms of the Distribution Agreement require us to purchase minimum quantities of Fiagon IGS and certain other disposable products through August 9, 2020 in order for the Company to retain exclusive distribution rights.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Interest rate fluctuations have not had a material impact on our results of operations. Our cash and cash equivalents include cash in readily available checking and money market accounts. Our short-term investments include commercial paper, corporate bonds, and foreign assets. Because our cash equivalents and short-term investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant and a 100 basis point movement in market interest rates would not have a significant impact on the total value of our cash and cash equivalents. Additionally, the interest rate on our credit facility is fixed and not subject to changes in market interest rates.

 

Inflation

Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and selling and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much or more than these increased costs.

Credit Risk

As of September 30, 2016, our cash and cash equivalents were maintained with financial institutions in the United States and United Kingdom, and our current deposits at certain of these institutions are likely in excess of insured limits. Our short-term investments are made in accordance with our investment policies, which limit the type and amount of our investments in order to limit our credit risk.

Our accounts receivable primarily relate to revenue from the sale of our XprESS family of products and other products to hospitals, ASCs and physician offices. For the three and nine months ended September 30, 2016, no single customer represented more than 5% of our revenue.

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Foreign Currency Exchange Rate Risk

While our business is primarily conducted in U.S. dollars, our sales in Europe are conducted in U.S. dollars, British pounds and Euros. We believe that our exposure to foreign currency exchange rate risk is not significant and a hypothetical 100 basis point movement in the U.S. dollar would not have a material impact on our results of operations, financial position or cash flows. As our sales in currencies other than the U.S. dollar increase, our exposure to foreign currency fluctuations may increase, and we may choose to hedge our exposure in the future.

 

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2016.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on February 25, 2016, we identified important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q. Other than the four revised or new risk factors below, there has been no material change in our risk factors subsequent to the filing of our Annual Report. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the SEC, also could cause our actual results to differ materially from our anticipated results or other expectations.

 

We have limited prior experience selling our products outside of the United States and Canada and do not know if we will be successful in achieving adoption of our products and revenue growth outside of the United States in a timely manner. A variety of risks associated with international operations could materially adversely affect our business.

 

In the second quarter of 2015, we established a subsidiary in the United Kingdom and started the process of selling our products in certain European countries using a combination of direct sales representatives and a network of independent distributors. International sales potentially subject us to a number of risks, including:

 

We maintain policies, procedures and internal controls designed to promote compliance with the FCPA, OFAC restrictions and other anti-corruption and anti-money laundering laws, as well as export control laws, customs laws, sanctions laws and other laws.  We plan to regularly evaluate these policies and to enhance them as our international business develops and expands.  If we, our business partners, distributors or intermediaries fail to comply with the requirements of the FCPA, OFAC restrictions or similar laws of other countries, or our controls and procedures fail to detect such noncompliance, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil penalties, criminal fines, and other collateral consequences.

 

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Furthermore, on June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” As a result of the referendum, negotiations are expected to commence to determine the future terms of the United Kingdom’s relationship with the European Union, including the terms of trade between the United Kingdom and the European Union. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on the movement of goods and people between the United Kingdom and European Union countries and increased regulatory complexities, which could affect our ability to sell our products in certain European Union countries through our subsidiary in the United Kingdom. Brexit could adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British pound and Euro. In addition, other European countries may seek to conduct referenda with respect to continuing membership with the European Union. We do not know to what extent these changes will impact our business. These possible effects of Brexit, and others that we cannot anticipate, could adversely affect our business, operations and financial results.

 

We recently acquired and entered into an exclusive license for the XeroGel™ assets with CogENT Therapeutics, LLC. We may be unable to successfully integrate this acquisition in a cost-effective and non-disruptive manner. In addition, acquisitions are risky and may harm our business and operating results.

 

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and advances in technologies. Accordingly, we have pursued and may continue to pursue acquisitions of, or joint ventures relating to, complementary businesses, products or technologies instead of developing them ourselves. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions; our ability to compete effectively for acquisition candidates; and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Although we recently completed the XeroGel acquisition described below, we do not know if we will be able to successfully complete any future acquisitions or joint ventures. In June 2016, we acquired and entered into an exclusive license for the XeroGel assets with CogENT Therapeutics, LLC. In connection with the acquisition, we became the manufacturer of XeroGel and will continue to market and sell XeroGel to hospitals, offices and ambulatory surgery centers. There are risks and uncertainties involved in this recent acquisition and any future acquisitions we may complete including:

 

With respect to our recent XeroGel acquisition, management has made certain assumptions including those related to projections of future revenue and the amount of goodwill and intangible assets purchased. While management has made these assumptions in good faith and believes them to be reasonable, the assumptions may turn out to be materially inaccurate, including for reasons beyond our control. If these assumptions are incorrect we may change or modify them, which could have an adverse effect on our financial condition or results of operations.

 

Additionally, we have recorded intangible assets, including goodwill, in connection with the XeroGel acquisition. On an ongoing basis, we will evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have an adverse effect on our results of operations in the period in which the write-off occurs.

 

Also, some acquisitions may require the consent of the lender under our credit facility or any other future agreements and we cannot predict whether the lender would approve such acquisitions or the terms on which the lender would approve any such acquisitions. These and other risks could be heightened if we complete a large acquisition or multiple acquisitions within a relatively short period of time.

 

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If we are unable to achieve and maintain adequate levels of coverage or reimbursement for the procedures using our products, or any future products we may seek to commercialize, their commercial success may be severely hindered.

 

Hospital, physician and other healthcare provider customers, including ambulatory surgery center, or ASC, customers that purchase our products typically bill various third-party payors to cover all or a portion of the costs and fees associated with the procedures in which our products are used and bill patients for any deductibles or co-payments. In the hospital and ASC settings, our products are often used in a hybrid procedure in conjunction with traditional FESS. Because there is often no separate reimbursement for supplies used in surgical procedures, and with respect to FESS, no separate reimbursement for balloon sinus dilation, the additional cost associated with the use of our products in these settings can impact the profit margin of the hospital or surgery center where the hybrid procedure is performed. Some of our target customers may be unwilling to adopt our products in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for balloon sinus dilation procedures in either the office or facility setting could make it difficult for existing customers to continue using or to adopt our products and could create additional pricing pressure for us. Medicare has issued a final rule on the Hospital Outpatient Prospective Payment System (OPPS) for 2017 which includes a reduction of payments for certain outpatient procedures performed in the hospital when FESS is performed on more than two sinuses. The result is to bundle payments for multi-sinus surgery regardless of the number of sinuses being treated. On average we expect most hospitals will experience a reduction in Centers for Medicare and Medicaid Services (CMS) reimbursement depending on the number of sinuses being treated. As a result of this final rule, the portion of our business in which we sell to a hospital may suffer. If we are forced to lower the price we charge for our products, our gross margins will decrease, which will materially adversely affect our business.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for procedures using our products exists among third-party payors. Therefore, coverage and reimbursement for procedures using our products can differ significantly from payor to payor. In addition, payors continually review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage or alter pre-authorization requirements for new or existing products and procedures. Additionally, some third-party payors do not currently cover or reimburse balloon sinus dilation procedures because they have determined insufficient evidence of favorable clinical outcomes is available. We are actively working to avoid or to reverse these non-coverage decisions, as applicable, but cannot provide assurance that we will be successful in these efforts. If we are not successful in reversing existing non-coverage policies, or if third-party payors that currently cover or reimburse balloon sinus dilation procedures reverse or limit their coverage in the future, or if other third-party payors issue similar policies, this could have a material adverse impact on our business.

Further, we believe that future coverage and reimbursement may be subject to increased restrictions and payment reductions, such as additional preauthorization requirements, adoption by private health insurance companies of lower payments related to the 2017 CMS Hospital Outpatient Payment Rule converting Medicare patients undergoing FESS procedures performed in the hospital on more than two sinuses, transitioning hospital outpatient payments for FESS to comprehensive APCs (C-APC) per the 2017 CMS Hospital Outpatient Payment Rule thereby lowering average reimbursement levels for Medicare patients and tightening coverage criteria by commercial and governmental payors in the Unites States. Third-party coverage and reimbursement for procedures using our products or any of our products in development for which we may receive regulatory approval may not be available or adequate in either the United States or international markets, which could have an adverse impact on our business.

 

We recently received a Form 483 from the FDA. This could lead to a warning letter, which could have a material adverse effect on our business.

 

In September 2016, following an inspection of certain documentation relating to our prospective, multicenter study of children with chronic rhinosinusitis treated with the XprESS™ Multi-Sinus Dilation System, the FDA issued a Form 483, List of Inspectional Observations, identifying two observations. The first observation relates to not obtaining FDA and Institutional Review Board (IRB) approval for changes to an investigational plan and the second observation relates to not ensuring prompt compliance with the study protocol by clinical investigators. These observations relate to study deviations which occurred when some physicians decided to treat sinuses outside of the scope of the study protocol due to medical necessity thereby avoiding the need for a follow-on procedure.  Following our receipt of the Form 483, we implemented and completed corrective and preventive actions to fully address the FDA observations, and we provided written responses to the FDA detailing these corrective and preventive actions completed. The outcome of this matter is presently uncertain. We cannot assure you that the FDA will conclude that our corrective and preventive actions are adequate to address the observations. If the FDA is not satisfied, they may issue a warning letter to us, which could have a material adverse effect on our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the quarter ended September 30, 2016, we did not sell any equity securities of ours that were not registered under the Securities Act of 1933, as amended.

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Use of Proceeds

On January 28, 2015, the SEC declared effective our Registration Statement on Form S-1 (File No. 333-201237), as amended, filed in connection with our initial public offering. Pursuant to the Registration Statement, as well as the Registration Statement on Form S-1 (File No. 333-201741) filed on January 28, 2015 to register additional securities, we issued and sold an aggregate of approximately 5.3 million shares of our common stock at a price to the public of $17.00 per share (including approximately 0.7 million shares sold pursuant to an option granted to the underwriters).The offering commenced as of January 28, 2015 and did not terminate before all of the securities registered in the Registration Statements were sold on February 3, 2015. The syndicate of underwriters was led by Merrill Lynch, Pierce, Fenner & Smith Incorporated and Piper Jaffray & Co. as joint book-running managers and William Blair and Canaccord Genuity acted as co-managers. We raised approximately $81.0 million in net proceeds after deducting $6.3 million in underwriting discounts and commissions and $2.7 million in other offering expenses. As of September 30, 2016, we have used approximately $31.1 million of the proceeds from our IPO to fund product development and clinical research expenses, sales, marketing, working capital and general corporate purposes and $11.0 million of such proceeds to pay the XeroGel acquisition purchase price. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and bonuses and to non-employee directors as compensation for board committee service. There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus, dated January 28, 2015, filed with the SEC pursuant to Rule 424(b).

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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ENTELLUS MEDICAL, INC.

Quarterly Report on Form 10-Q

Exhibit Index

 

 

*       Filed herewith

**Furnished herewith

 

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