Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________ 
FORM 10-Q
 __________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission file number 000-28440 
 __________________________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12539996&doc=12
ENDOLOGIX, INC.
(Exact name of registrant as specified in its charter) 
 __________________________________________________  
Delaware
68-0328265
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2 Musick, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
(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  x    No  o
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  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
Accelerated filer
 
x
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
On November 7, 2018, there were 103,453,661 shares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS
 
Item
Description
Page
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 6.
 




Part I. Financial Information
 
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)

September 30,
 
December 31,

2018
 
2017
ASSETS

 

Current assets:

 


Cash and cash equivalents
$
38,271

 
$
57,991

Restricted cash
4,143

 
2,608

Accounts receivable, net allowance for doubtful accounts of $869 and $470, respectively.
22,756

 
32,294

Other receivables
75

 
418

Inventories
42,254

 
45,153

Prepaid expenses and other current assets
2,606

 
4,670

Total current assets
$
110,105

 
$
143,134

Property and equipment, net
16,895

 
19,212

Goodwill
120,872

 
120,927

Intangibles, net
77,312

 
80,403

Deposits and other assets
1,147

 
1,371

Total assets
$
326,331

 
$
365,047



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable
$
11,340

 
$
12,351

Accrued payroll
14,260

 
15,054

Accrued expenses and other current liabilities
17,364

 
16,002

Current portion of debt
18,036


17,202

Revolving line of credit
10,000


21

Total current liabilities
$
71,000

 
$
60,630

Deferred income taxes
201

 
201

Deferred rent
7,761

 
7,724

Derivative liabilities
8,216



Other liabilities
1,920

 
3,877

Contingently issuable common stock
5,000

 
9,300

Debt
189,090

 
208,253

Total liabilities
$
283,188

 
$
289,985

Commitments and contingencies

 

Stockholders’ equity:

 

Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized. No shares issued and outstanding.

 

Common stock, $0.001 par value; 170,000,000 and 135,000,000 shares authorized, respectively. 85,891,011 and 83,855,824 shares issued, respectively. 85,465,426 and 83,643,585 shares outstanding, respectively.
86

 
84

Treasury stock, at cost, 425,585 and 212,239 shares, respectively.
(4,026
)
 
(2,942
)
Additional paid-in capital
618,155

 
594,586

Accumulated deficit
(573,760
)
 
(520,001
)
Accumulated other comprehensive income
2,688

 
3,335

Total stockholders’ equity
$
43,143

 
$
75,062

Total liabilities and stockholders’ equity
$
326,331

 
$
365,047

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

1



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018

2017
 
2018

2017
Revenue
$
34,756


$
45,986

 
$
121,780


$
137,154

Cost of goods sold
12,129


16,879

 
41,223


47,181

Gross profit
22,627


29,107

 
80,557


89,973

Operating expenses:



 



Research and development
5,037


5,277

 
16,780


16,541

Clinical and regulatory affairs
3,208


3,211

 
10,507


9,786

Marketing and sales
17,072


21,536

 
59,913


71,217

General and administrative
10,330


8,332

 
34,721


25,109

Restructuring costs
2,899


98

 
3,132


235

Total operating expenses
38,546


38,454

 
125,053


122,888

Loss from operations
(15,919
)

(9,347
)
 
(44,496
)

(32,915
)
Other income (expense):



 



Interest income
2


8

 
7


80

Interest expense
(7,225
)

(6,021
)
 
(18,895
)

(16,119
)
Other income (expense), net
(113
)

349

 
(433
)

525

Change in fair value of contingent consideration related to acquisition
5,000


800

 
4,300


3,400

Change in fair value of derivative liabilities
8,305




8,305



Loss on debt extinguishment



 
(2,270
)

(6,512
)
Total other income (expense)
5,969


(4,864
)
 
(8,986
)

(18,626
)
Net loss before income tax expense
(9,950
)

(14,211
)
 
(53,482
)

(51,541
)
Income tax expense
(166
)

(62
)
 
(277
)

(338
)
Net loss
$
(10,116
)

$
(14,273
)
 
$
(53,759
)

$
(51,879
)
Other comprehensive income (loss) foreign currency translation
32


232

 
(647
)

1,369

Comprehensive loss
$
(10,084
)

$
(14,041
)
 
$
(54,406
)

$
(50,510
)






 





Basic and diluted net loss per share
$
(0.12
)

$
(0.17
)
 
$
(0.64
)

$
(0.62
)
Shares used in computing basic and diluted net loss per share
85,226


83,496

 
84,487


83,225

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


2



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Nine Months Ended September 30,
 
2018

2017
Cash flows from operating activities:



Net loss
$
(53,759
)

$
(51,879
)
Adjustments to reconcile net loss to net cash used in operating activities:



Bad debt expense
571


(97
)
Depreciation and amortization
5,919


6,933

Stock-based compensation
8,811


8,800

Change in fair value of derivative liabilities
(8,305
)


Change in fair value of contingent consideration related to acquisition
(4,300
)

(3,400
)
Accretion of interest & amortization of deferred financing costs on debt
8,242


7,558

Non-cash foreign exchange (gain) loss
464


(560
)
Loss on debt extinguishment
2,270


6,512

Changes in operating assets and liabilities:





Accounts receivable and other receivables
9,114


2,859

Inventories
2,146


(1,048
)
Prepaid expenses and other current assets
1,610


(237
)
Accounts payable
(1,034
)

(3,447
)
Accrued payroll
(749
)

(3,225
)
Accrued expenses and other liabilities
(60
)

(2,509
)
Net cash used in operating activities
$
(29,060
)

$
(33,740
)
Cash flows from investing activities:





Maturities of marketable securities


21,000

Purchases of property and equipment
(476
)

(876
)
Net cash (used in) provided by investing activities
$
(476
)

$
20,124

Cash flows from financing activities:





Cash paid for debt extinguishment
(1,310
)

(2,515
)
Net proceeds from revolving line of credit
9,979


15,441

Deferred financing costs
(391
)

(6,755
)
Proceeds from sale of common stock under employee stock purchase plan
997


1,681

Proceeds from issuance of at-the-market shares
1,829



Proceeds from issuance of debt


120,000

Repayment of debt


(66,613
)
Minimum tax withholding paid on behalf of employees for restricted stock units and stock options
(389
)


Proceeds from exercise of stock options
892


482

Net cash provided by financing activities
$
11,607


$
61,721

Effect of exchange rate changes on cash and cash equivalents and restricted cash
(256
)

762

 
 
 
 
Net (decrease) increase in cash and cash equivalents and restricted cash
$
(18,185
)
 
$
48,867

Cash, cash equivalents and restricted cash, beginning of period
60,599

 
28,121

Cash, cash equivalents and restricted cash, end of period
$
42,414

 
$
76,988

Cash and cash equivalents, beginning of period
$
57,991

 
$
26,120

Restricted cash, beginning of period
2,608

 
2,001

Cash and cash equivalents, and restricted cash, beginning of period
$
60,599

 
$
28,121

Cash and cash equivalents, end of period
$
38,271

 
$
74,619

Restricted cash, end of period
4,143

 
2,369

Cash and cash equivalents, and restricted cash, end of period
$
42,414

 
$
76,988

Net (decrease) increase in cash, cash equivalents and restricted cash
$
(18,185
)
 
$
48,867

Supplemental disclosure of cash flow information:

 

Cash paid for interest
$
8,845

 
$
7,447

       Cash paid for income taxes
$
184

 
$
672

Non-cash investing and financing activities:

 

       Acquisition of property and equipment included in accounts payable
$
20

 
$
176

Fair value of warrants issued in connection with the Facility Agreement
$
10,406


$
14,704

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

3



ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)
1. Description of Business, Basis of Presentation, and Operating Segment
(a) Description of Business
Endologix®, Inc. (the “Company”) is a Delaware corporation with corporate headquarters in Irvine, California and production facilities located in Irvine, California and Santa Rosa, California. The Company develops, manufactures, markets, and sells innovative medical devices for the treatment of aortic disorders. The Company’s products are intended for the treatment of abdominal aortic aneurysms (“AAA”). The Company’s AAA products are built on two platforms: (i) traditional minimally-invasive endovascular repair (“EVAR”) and (ii) endovascular sealing (“EVAS”), the Company’s innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens. The Company’s current EVAR products include the Ovation® Abdominal Stent Graft System (“Ovation”), Endologix AFX® Endovascular AAA System (“AFX”), the VELA® Proximal Endograft System (“VELA”) and the Endologix IntuiTrak® Endovascular AAA System (“IntuiTrak”). The Company’s current EVAS product is the Nellix Endovascular Aneurysm Sealing System (“Nellix EVAS System”). The Company derives all of its reported revenue from sales of its EVAR and EVAS platforms (including extensions and accessories) to hospitals in the United States and Europe and to third-party distributors for resale outside of the United States.
(b) Basis of Presentation
The accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). These financial statements include the financial position, results of operations, and cash flows of the Company, including its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation. For the three and nine months ended September 30, 2018 and 2017, there were no related party transactions.
The interim financial data as of September 30, 2018 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 normal and recurring adjustments necessary for a fair presentation of the Company’s financial results for the three and nine months ended September 30, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 13, 2018.
(c) Operating Segment
The Company has one operating and reporting segment that is focused exclusively on the development, manufacture, marketing and sale of EVAR and EVAS products for the treatment of aortic disorders. For the three and nine months ended September 30, 2018, all of the Company’s revenue and related expenses were solely attributable to these activities. Substantially all of the Company’s long-lived assets are located in the United States.

2. Use of Estimates and Summary of Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company’s management evaluates its estimates, including those related to (i) collectibility of customer accounts; (ii) whether the cost of inventories can be recovered; (iii) the value of goodwill and intangible assets; (iv) realization of tax assets and estimates of tax liabilities; (v) likelihood of payment and value of contingent liabilities; and (vi) potential outcome of litigation. Such estimates are based on management’s judgment which takes into account historical experience and various assumptions. Nonetheless, actual results may differ from management’s estimates.
For a complete summary of the Company’s significant accounting policies, please refer to Note 2, “Use of Estimates and Summary of Significant Accounting Policies”, in Part II, Item 8, of the Company’s 2017 Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 13, 2018. For an updated significant discussion of the Company’s accounting policy surrounding revenue recognition as a result of the implementation of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, please refer to Note 7 of the Notes to the Condensed Consolidated

4

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Financial Statements. There have been no other material changes to the Company’s significant accounting policies during the three months ended September 30, 2018.


5

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
 
September 30,
2018
 
December 31,
2017
Production equipment, molds, and office furniture
$
12,051

 
$
12,118

Computer hardware and software
8,270

 
8,115

Leasehold improvements
15,535

 
15,499

Construction in progress (software and related implementation, production equipment, and leasehold improvements)
1,063

 
743

Property and equipment, at cost
$
36,919

 
$
36,475

Accumulated depreciation
(20,024
)
 
(17,263
)
Property and equipment, net
$
16,895

 
$
19,212

Depreciation expense for property and equipment for the three months ended September 30, 2018 and 2017 was $0.9 million and $1.2 million, respectively. For the nine months ended September 30, 2018 and 2017, depreciation expense for property and equipment was $2.8 million and $3.9 million, respectively.

(b) Inventories
Inventories consisted of the following:
 
September 30,
2018
 
December 31,
2017
Raw materials
$
9,886

 
$
12,226

Work-in-process
5,991

 
7,736

Finished goods
26,377

 
25,191

Total Inventories
$
42,254

 
$
45,153


6

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(c) Goodwill and Intangible Assets
The following table presents goodwill, indefinite lived intangible assets, finite lived intangible assets and related accumulated amortization: 

September 30,
2018

December 31,
2017
Goodwill
$
120,872


$
120,927







Intangible assets:





Indefinite lived intangibles





Trademarks and trade names
$
2,708


$
2,708

In-process research and development
11,200

 
11,200

 
 
 
 
Finite lived intangibles





Developed technology
$
67,600


$
67,600

Accumulated amortization
(9,696
)

(7,167
)
Developed technology, net
$
57,904


$
60,433







Customer relationships
$
7,500


$
7,500

Accumulated amortization
(2,000
)

(1,438
)
 Customer relationships, net
$
5,500


$
6,062







Intangible assets (excluding goodwill), net
$
77,312


$
80,403

The change in the carrying amount of goodwill for the nine months ended September 30, 2018 is as follows (in thousands):
Balance at December 31, 2017
120,927

Foreign currency translation adjustment
(55
)
Balance at September 30, 2018
$
120,872

Amortization expense for intangible assets for the three months ended September 30, 2018 and 2017 was $1.1 million and $1.1 million, respectively. For the nine months ended September 30, 2018 and 2017, amortization expense for intangible assets was $3.1 million and $3.0 million, respectively.
Estimated amortization expense for the five succeeding years and thereafter is as follows:
Remainder of 2018
$
1,030

2019
4,032

2020
4,041

2021
4,577

2022
5,701

2023 & Thereafter
44,023

Total
$
63,404





7

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(d) Fair Value Measurements
The following fair value hierarchy table presents information about each major category of the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

 Fair value measurement at reporting date using:
 
Quoted prices in
active markets for
identical assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total
At September 30, 2018











Cash and cash equivalents
$
38,271


$


$


$
38,271

Restricted cash
$
4,143


$


$


$
4,143

Contingently issuable common stock
$


$


$
5,000


$
5,000

Derivative liabilities
$


$


$
8,216


$
8,216

At December 31, 2017











Cash and cash equivalents
$
57,991


$


$


$
57,991

Restricted cash
$
2,608


$


$


$
2,608

Contingently issuable common stock
$


$


$
9,300


$
9,300


There were no re-measurements to fair value during the nine months ended September 30, 2018 of financial assets and liabilities that are not measured at fair value on a recurring basis. There were no transfers between Level 1, Level 2 or Level 3 securities during the nine months ended September 30, 2018.
(e) Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The Company measures the fair value of its 2.25% Convertible Senior Notes due 2018 (the “2.25% Senior Notes”) and 3.25% Convertible Senior Notes due 2020 (the “3.25% Senior Notes”) carried at amortized cost quarterly for disclosure purposes. The estimated fair value of the 2.25% Senior Notes and the 3.25% Senior Notes (collectively, the “Senior Notes”) is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar securities. Based on the market prices, the fair value of the Senior Notes was $77.1 million as of September 30, 2018 and $131.2 million as of December 31, 2017.
Due to short-term nature, the Company believes that the carrying value of its revolving line of credit approximated its fair value at September 30, 2018.
The Company measures the fair value of its Term Loan with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”) (see Note 6 of the Notes to the Condensed Consolidated Financial Statements) carried at amortized cost quarterly for disclosure purposes. The estimated fair value of the Term Loan is determined by Level 3 inputs and is based primarily on unobservable inputs that are not corroborated by market data. The fair value of the Company’s Term Loan was $147.3 million as of September 30, 2018 and $101.9 million as of December 31, 2017.
















8

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



4. Stock-Based Compensation

The Company classifies stock-based compensation expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, based on the department to which the recipient belongs. Stock-based compensation expense included in cost of goods sold and operating expenses during the three and nine months ended September 30, 2018 and 2017, was as follows:

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2018

2017
 
2018

2017
Cost of goods sold
$
111


$
169

 
$
614


$
642

Operating expenses:





 





Research and development
146


328

 
841


911

Clinical and regulatory affairs
(49
)

107

 
383


527

Marketing and sales
685


874

 
2,505


3,215

General and administrative
632


1,135

 
4,468


3,506

Total operating expenses
$
1,414


$
2,444

 
$
8,197


$
8,159

Total
$
1,525


$
2,613

 
$
8,811


$
8,801


5. Net Loss Per Share
Net loss per share was calculated by dividing net loss by the weighted average number of common shares outstanding for the three months ended September 30, 2018 and 2017.

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2018

2017
 
2018

2017
Net loss
$
(10,116
)

$
(14,273
)
 
$
(53,759
)

$
(51,879
)
Shares used in computing basic and diluted net loss per share
85,226


83,496

 
84,487


83,225

Basic and diluted net loss per share
$
(0.12
)

$
(0.17
)
 
$
(0.64
)

$
(0.62
)

The following outstanding Company securities, using the treasury stock method, were excluded from the above calculations of net loss per share because their impact would have been anti-dilutive:

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2018

2017
 
2018

2017
Common stock options
80


338

 
181


543

Restricted stock awards
120


117

 
121


119

Restricted stock units
148


98

 
344


205

  Total
348


553

 
646


867


Conversion of Senior Notes
As discussed in Note 6 of the Notes to the Condensed Consolidated Financial Statements, in December 2013, the Company issued $86.3 million in aggregate principal amount of the 2.25% Senior Notes in an underwritten public offering. In November 2015, the Company also issued $125.0 million in aggregate principal amount of the 3.25% Senior Notes in an underwritten public offering. Upon any conversion, the Senior Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, the Company presumed that the Senior Notes will be settled in common stock with the resulting potential common

9

Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the Senior Notes is excluded from the calculation of diluted loss per share because the impact of these securities would be anti-dilutive.

Deerfield Warrants
On April 3, 2017, the Company entered into a Facility Agreement (the “Facility Agreement”) with Deerfield, pursuant to which Deerfield agreed to loan to the Company up to $120.0 million, subject to the terms and conditions set forth in the Facility Agreement (the “Term Loan”). Pursuant to the terms of the Facility Agreement, the Company issued warrants to Deerfield to purchase an aggregate of 6,470,000 shares of common stock of the Company at an exercise price of $9.23 per share (the “Deerfield Warrants”). On August 9, 2018, the Company entered into an Amended and Restated Facility Agreement (the “Amended Facility Agreement”) with Deerfield, pursuant to which Deerfield and the Company cancelled and extinguished the $40.5 million principal amount 3.25% Senior Notes held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Amended Facility Agreement (as a last-out waterfall tranche under the Amended Facility Agreement). Pursuant to the terms of the Amended Facility Agreement, the Company issued warrants to Deerfield to purchase an aggregate of 8,750,001 shares of common stock of the Company at an exercise price of $4.71 per share (the “New Deerfield Warrants”). The number of shares of common stock of the Company into which the Deerfield Warrants and the New Deerfield Warrants (collectively the “Warrants”) are exercisable and the exercise prices of the Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company. Refer to Note 6 of the Notes to the Condensed Consolidated Financial Statements for further discussion.
The potential dilutive effect of these securities is shown in the chart below:

Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,

2018

2017
 
2018

2017
Conversion of the Notes
8,317


11,939

 
8,317


11,939

Deerfield Warrants
6,470


6,470

 
6,470


6,470

New Deerfield Warrants
8,750




8,750



The effect of the contingently issuable common stock is excluded from the calculation of basic net loss per share until all necessary conditions for issuance have been satisfied. Refer to Note 9 of the Notes to the Condensed Consolidated Financial Statements for further discussion.

6. Credit Facilities
2.25% Convertible Senior Notes
On December 10, 2013, the Company issued $86.3 million in aggregate principal amount of 2.25% Senior Notes. The 2.25% Senior Notes mature on December 15, 2018 unless earlier repurchased by the Company or converted. The Company received net proceeds of approximately $82.6 million from the sale of the 2.25% Senior Notes, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Interest is payable on the 2.25% Senior Notes on June 15 and December 15 of each year, beginning June 15, 2016.
The 2.25% Senior Notes are governed by the terms of a base indenture (the “Base Indenture”), as supplemented by the first supplemental indenture relating to the 2.25% Senior Notes (the “First Supplemental Indenture,” and together with the Base Indenture, the “Indenture”), between the Company and Wells Fargo Bank, National Association (the “Trustee”), each of which were entered into on December 10, 2013.
The 2.25% Senior Notes are senior unsecured obligations and are: (a) senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2.25% Senior Notes; (b) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; (c) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (d) structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The Company could not redeem the 2.25% Senior Notes prior to December 15, 2016. On or after December 15, 2016, the Company may redeem for cash all or any portion of the 2.25% Senior Notes, at its option, but only if the closing sale price of the

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds 130% of the conversion price on each applicable trading day. The redemption price will equal 100% of the principal amount of the 2.25% Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2.25% Senior Notes.
Holders may convert their 2.25% Senior Notes at any time prior to the close of business on the business day immediately preceding September 15, 2018 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the 2.25% Senior Notes in effect on each applicable trading day; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the 2.25% Senior Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (iii) if the Company calls all or any portion of the notes for redemption, at any time prior to the close of business on the second scheduled trading day prior to the redemption date; or (iv) upon the occurrence of specified corporate events. On or after September 15, 2018 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their 2.25% Senior Notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company will, at its election, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
The initial conversion rate of the 2.25% Senior Notes will be 41.6051 shares of the Company’s common stock for each $1,000 principal amount of 2.25% Senior Notes, which represents an initial conversion price of approximately $24.04 per share. Following certain corporate transactions that occur on or prior to the stated maturity date or the Company’s delivery of a notice of redemption, the Company will increase the conversion rate for a holder that elects to convert its 2.25% Senior Notes in connection with such a corporate transaction.
If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their 2.25% Senior Notes at a fundamental change purchase price equal to 100% of the principal amount of the 2.25% Senior Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The 2.25% Senior Notes Indenture contains customary terms and covenants and events of default with respect to the 2.25% Senior Notes. If an event of default (as defined in the Indenture) occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 2.25% Senior Notes may declare the principal amount of the 2.25% Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the Indenture) occurs with respect to the Company, the principal amount of the 2.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
The Company was not required to separate the conversion option in the 2.25% Senior Notes under ASC 815, “Derivatives and Hedging”, and has the ability to settle the 2.25% Senior Notes in cash, common stock or a combination of cash and common stock, at its option. In accordance with cash conversion guidance contained in ASC 470-20, “Debt with Conversion and Other Options”, the Company accounted for the 2.25% Senior Notes by allocating the issuance proceeds between the liability and the equity component. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s nonconvertible debt borrowing rate. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the 2.25% Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was $66.9 million resulting in a $19.3 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as debt discount, to be subsequently accreted to interest expense over the term of the 2.25% Senior Notes. Underwriting discounts and commissions and offering expenses totaled $3.7 million and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $2.9 million attributable to the indebtedness was recorded as deferred financing costs as a reduction of the 2.25% Senior Convertible Notes, to be subsequently amortized as interest expense over the term of the 2.25% Senior Notes, and $0.8 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity.
On April 3, 2017, the Company entered into the Facility Agreement with Deerfield, pursuant to which Deerfield agreed to loan to the Company up to $120 million, subject to the terms and conditions set forth in the Facility Agreement. The Company used

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



a portion of the proceeds from the Term Loan to repurchase $68 million aggregate principal amount of outstanding 2.25% Senior Notes, plus the accrued but unpaid interest thereon, from the holders thereof in privately negotiated transactions. Refer to the section entitled “Deerfield Facility Agreement” below for further discussion. The embedded conversion option of the 2.25% Senior Notes, which was originally recorded in additional paid-in capital, was reduced by $2.2 million. Additionally, $3.2 million related to the reduction of outstanding principal related to the 2.25% Senior Notes was charged to loss on debt extinguishment on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
As of September 30, 2018, the Company had outstanding borrowings of $18.1 million, and deferred financing costs of $34 thousand, related to the 2.25% Senior Notes. There are no principal payments due during the term. Annual interest expense on these notes will range from $1.1 million to $1.5 million through maturity.
Capped Call Transactions
On December 10, 2013, in connection with the pricing of the 2.25% Senior Notes and the exercise in full of their overallotment option by the underwriters, the Company entered into privately-negotiated capped call transactions (the “Capped Call Transactions”) with Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Capped Call Transactions initial conversion rate and number of options substantially corresponds to each $1,000 principal amount of 2.25% Senior Notes. The Company used approximately $7.4 million of the net proceeds from the 2.25% Senior Notes offering to pay for the cost of the Capped Call Transactions.
The Capped Call Transactions are separate transactions entered into by the Company with Bank of America, N.A., are not part of the terms of the 2.25% Senior Notes and will not change the holders’ rights under the 2.25% Senior Notes. The Capped Call Transactions have anti-dilution adjustments substantially similar to those applicable to the 2.25% Senior Notes. The Capped Call Transactions are derivative instruments that are recorded within stockholders’ equity because they meet an exemption from mark-to-market derivative accounting.
The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset potential cash payments that the Company is required to make in excess of the principal amount upon conversion of the 2.25% Senior Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the $24.04 conversion price of the 2.25% Senior Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the initial cap price of $29.02, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions.
The Company will not be required to make any cash payments to Bank of America, N.A. or any of its affiliates upon the exercise of the options that are a part of the Capped Call Transactions, but will be entitled to receive from Bank of America, N.A. (or an affiliate thereof) a number of shares of the Company’s common stock and/or an amount of cash generally based on the amount by which the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions during the relevant valuation period under the Capped Call Transactions. However, if the market price of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions during such valuation period under the Capped Call Transactions, the number of shares of common stock and/or the amount of cash the Company expects to receive upon exercise of the Capped Call Transactions will be capped based on the amount by which the cap price exceeds the strike price of the Capped Call Transactions.
For any conversions of 2.25% Senior Notes prior to the close of business on the 55th scheduled trading day immediately preceding the stated maturity date of the 2.25% Senior Notes, including without limitation upon an acquisition of the Company or similar business combination, a corresponding portion of the Capped Call Transactions will be terminated. Upon such termination, the portion of the Capped Call Transactions being terminated will be settled at fair value (subject to certain limitations), as determined by Bank of America, N.A., in its capacity as calculation agent under the Capped Call Transactions, which the Company expects to receive from Bank of America, N.A., and no payments will be due Bank of America, N.A. The capped call expires on December 13, 2018.
In connection with the Company’s repurchase of approximately $68 million aggregate principal amount of outstanding 2.25% Senior Notes in April 2017, the Company and Bank of America, N.A. unwound the portion of the Capped Call Transactions relating to the repurchased 2.25% Senior Notes. These Capped Call Transactions were originally classified in stockholders’ equity and continued to meet the criteria for classification thereof while outstanding, and therefore were not subsequently measured at fair value. The Company did not pay or receive any compensation related to the unwind of the Capped Call Transactions. Therefore, the

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Company accounted for the unwind of the Capped Call Transactions by removing these options at their carrying value in additional paid-in capital and recording an offsetting entry to additional paid-in capital. As a result, the Company did not recognize any gain or loss, and the unwind had no net impact on additional paid-in capital.
3.25% Convertible Senior Notes due 2020
On November 2, 2015, the Company issued $125.0 million aggregate principal amount of the “3.25% Senior Notes. The 3.25% Senior Notes are governed by the Base Indenture, as amended and supplemented by the second supplemental indenture relating to the 3.25% Senior Notes (the “Second Supplemental Indenture,” and together with the Base Indenture, the “3.25% Senior Notes Indenture”), dated as of November 2, 2015, by and between the Company and the Trustee.
The 3.25% Senior Notes are senior unsecured obligations and are: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 3.25% Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, including the 2.25% Senior Notes; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The 3.25% Senior Notes accrue interest at a rate of 3.25% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2016. The 3.25% Senior Notes mature on November 1, 2020, unless earlier purchased, redeemed or converted into shares of common stock in accordance with the terms of the 3.25% Senior Notes Indenture.
The Company may not redeem the 3.25% Senior Notes prior to November 1, 2018. On or after November 1, 2018, the Company may redeem for cash all or any portion of the 3.25% Senior Notes, at its option, but only if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds 130% of the conversion price on each applicable trading day. The redemption date can be no sooner than 30 trading days from the date on which notice of redemption is provided to the holders, during which time, up until two trading days prior to the redemption, the holders may elect to convert all or a portion of the 3.25% Senior Notes into shares of the Company’s common stock. The redemption price will equal 100% of the principal amount of the 3.25% Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 3.25% Senior Notes.
The 3.25% Senior Notes are convertible at the option of the holders: (i) in the calendar quarter following any quarter in which, for at least 20 out of the 30 consecutive trading days (whether or not consecutive) ending on the last day of the quarter, the closing price of the Company’s common stock is more than 130% of the then-current conversion price of the 3.25% Senior Notes; (ii) in the five business days following any five day period in which the trading price per $1,000 note was less than 98% of the product of the closing sale price of the Company’s common stock and the current conversion rate; (iii) in the event that the Company has provided notice of redemption, but no later than two trading days prior to the Company’s proposed redemption date; or (iv) upon the occurrence of specified corporate events. On or after August 1, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their 3.25% Senior Notes for conversion at any time, regardless of the foregoing circumstances.
The initial conversion rate of the 3.25% Senior Notes is 89.4314 shares of the Company’s common stock per $1,000 principal amount of the 3.25% Senior Notes, which is equivalent to an initial conversion price of approximately $11.18 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events. Upon conversion, the Company will at its election pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
If a fundamental change (as defined in the 3.25% Senior Notes Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their 3.25% Senior Notes at a fundamental change purchase price equal to 100% of the principal amount of the 3.25% Senior Notes to be purchased, plus accrued and unpaid interest.
The 3.25% Senior Notes Indenture contains customary terms and covenants and events of default with respect to the 3.25% Senior Notes. If an event of default (as defined in the 3.25% Senior Notes Indenture) occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 3.25% Senior Notes may declare the principal amount of the 3.25% Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the 3.25% Senior Notes Indenture) occurs with respect to us, the principal amount of the 3.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Upon issuance and through December 31, 2015, the Company was not required to separate the conversion option from the 3.25% Senior Notes under ASC 815, “Derivatives and Hedging”. However, because the Company has the ability to settle the 3.25% Senior Notes in cash, common stock or a combination of cash and common stock, the Company applied the cash conversion guidance contained in ASC 470-20, “Debt With Conversion and other Options”, and accounted for the 3.25% Senior Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion option. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s borrowing rate for nonconvertible loan products of similar duration. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the 3.25% Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was $97.8 million resulting in a $27.2 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as a debt discount, to be subsequently accreted to interest expense over the term of the 3.25% Senior Notes. Underwriting discounts and commissions and offering expenses totaled $3.7 million and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $2.9 million attributable to the indebtedness was recorded as deferred financing costs as a reduction of the 3.25% Senior Convertible Notes, to be subsequently amortized as interest expense over the term of the 3.25% Senior Notes, and $0.8 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity.
On August 9, 2018, in connection with entering into the Amended Facility Agreement, Deerfield and the Company have cancelled and extinguished the $40.5 million principal amount 3.25% Senior Notes held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Amended Facility Agreement. Refer to the section entitled “Amended Facility Agreement” below for further discussion.
As of September 30, 2018, the Company had outstanding borrowings of $75.8 million, and deferred financing costs of $0.9 million, related to the 3.25% Senior Notes. There are no principal payments due during the term. Annual interest expense on these 3.25% Senior Notes will range from $6.4 million to $8.7 million through maturity.
MidCap Credit Facility
On July 29, 2016, the Company entered into a credit and security agreement with MidCap Financial Trust (“MidCap”), as agent for the lenders party thereto and as a lender, whereby the Company could borrow up to the lesser of $50.0 million or its applicable borrowing base of asset-based revolving loans (the “MidCap Credit Facility”). All amounts owing under the MidCap Credit Facility accrued interest at a rate equal to the LIBOR Rate plus four and one tenth percent (4.10%). For purposes of the MidCap Credit Facility, LIBOR Rate meant a per annum rate of interest equal to the greater of (a) one half of one percent (0.50%) and (b) the rate determined by MidCap by dividing (i) the Base LIBOR Rate, meaning the base London interbank offer rate for the applicable interest period, by (ii) the sum of one minus the daily average during such interest period of the aggregate maximum reserve requirement then imposed under Regulation D of the Board of Governors of the Federal Reserve System for “Eurocurrency Liabilities” (as defined therein).
The MidCap Credit Facility was secured by substantially all of the Company’s assets, excluding its intellectual property (“Collateral”), and placed customary limitations on indebtedness, liens, distributions, acquisitions, investments, and other activities of the Company in a manner designed to protect the Collateral.
Deferred financing costs directly related to the MidCap Credit Facility such as legal, origination, and professional services fees totaled $0.9 million, which was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the MidCap Credit Facility. The MidCap Credit Facility also contains a lockbox arrangement clause requiring the Company to maintain a lockbox bank account in favor of the MidCap Credit Facility; Company cash receipts remitted to the lockbox bank account are swept on a regular basis to reduce outstanding borrowings related to the MidCap Credit Facility.
In conjunction with the Company’s termination of the Company’s prior credit facility with Bank of America and concurrent entry into a credit and security agreement with MidCap in July 2016, the Company entered into a corporate credit card agreement whereby the Company is required to maintain a $2.0 million deposit in favor of the credit card issuer. The deposit account related to these credit cards will be presented as restricted cash on the Company’s Condensed Consolidated Balance Sheet.
On April 3, 2017, the Company replaced the MidCap Credit Facility with a new revolving line of credit with Deerfield ELGX Revolver, LLC. As a result, the Company wrote off approximately $0.8 million in deferred financing costs and was required to pay a $2.5 million termination fee to Midcap; the foregoing were charged to loss on debt extinguishment on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Deerfield Facility Agreement
On April 3, 2017 (“Agreement Date”), the Company entered into the Facility Agreement with Deerfield, pursuant to which Deerfield agreed to loan to the Company up to $120.0 million under the Term Loan, subject to the terms and conditions set forth in the Facility Agreement. The Company drew the entire principal amount of the Term Loan on the Agreement Date. The Company agreed to pay Deerfield a yield enhancement fee equal to 2.25% of the principal amount of the funds disbursed on the Agreement Date. The Company also agreed to reimburse Deerfield for all reasonable out-of-pocket expenses incurred by Deerfield in connection with the negotiation and documentation of the Facility Agreement up to a capped amount. Accordingly, deferred financing costs of $5.1 million were recorded on the Company’s Condensed Consolidated Balance Sheet as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan. Concurrently with entering into the Facility Agreement, the Company entered into a Guaranty and Security Agreement with Deerfield (the “Security Agreement”), pursuant to which, as security for the repayment of the Company’s obligations under the Facility Agreement, the Company granted to Deerfield a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Facility Agreement.
Any amounts drawn under the Facility Agreement accrued interest at a rate of 6.87% per annum, payable quarterly in arrears beginning on July 1, 2017 and on the first business day of each calendar quarter thereafter and on the Maturity Date, unless repaid earlier. The Company was required under the Facility Agreement to pay Deerfield on each of April 2, 2021, April 2, 2022 and April 2, 2023 (the “Maturity Date”), an amortization payment equal to $40 million (or, if on the Maturity Date, the remaining outstanding principal amount of the Term Loan).
Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Facility Agreement, such acquirer could assume the outstanding principal amount under the Facility Agreement without penalty. If such acquirer did not satisfy the conditions set forth in the Facility Agreement, Deerfield could, at its option, require the Company to repay the outstanding principal balance under the Facility Agreement plus, depending on the timing of the change of control transaction, the Company could also have been required to pay a make-whole premium and will be required to pay a change of control fee.
At any time on or after the fourth anniversary of the Agreement Date, the Company had the right to prepay any amounts owed under the Facility Agreement without premium or penalty, unless such prepayment occurred in connection with a change of control of the Company, in which case the Company would be required to pay Deerfield a change of control fee unless such change of control occurred beyond a certain period after the Maturity Date. At any time prior to the fourth anniversary of the Agreement Date, any prepayment made by the Company would have been subject to a make-whole premium and, if such prepayment had occurred in connection with a change of control of the Company, a change of control fee.
Any amounts drawn under the Facility Agreement would become immediately due and payable upon customary events of default, as defined in the Facility Agreement, or the consummation of certain change of control transactions, as described above.
The Facility Agreement contained various representations and warranties, events of default, and affirmative and negative covenants, customary for financings of this type, including reporting requirements, requirements that the Company maintain timely reporting with the SEC and restrictions on the ability of the Company and its subsidiaries to incur additional liens on their assets, incur additional indebtedness and acquire and dispose of assets outside the ordinary course of business. This Facility Agreement was superseded in its entirety by the Amended Facility Agreement (discussed below in this Note) in August 2018.
Warrants
In connection with the execution of the Facility Agreement, the Company issued to Deerfield the Deerfield Warrants. The Deerfield Warrants may be exercised to purchase an aggregate of 6,470,000 shares of common stock of the Company at an exercise price of $9.23 per share. The number of shares of common stock of the Company into which the Deerfield Warrants are exercisable and the exercise price of the Deerfield Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company.
The Deerfield Warrants expire on the seventh anniversary of the Agreement Date. Subject to certain exceptions, the Deerfield Warrants contain limitations such that the Company may not issue shares of common stock of the Company to Deerfield upon the exercise of the Deerfield Warrants if such issuance would result in Deerfield beneficially owning in excess of 4.985% of the total number of shares of common stock of the Company then issued and outstanding.
The holders of the Deerfield Warrants may exercise the Deerfield Warrants for cash, on a cashless basis or through a reduction of an amount of principal outstanding under the Term Loan. In connection with certain major transactions, the holders may have the option to convert the Deerfield Warrants, in whole or in part, into the right to receive the transaction consideration

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



payable upon consummation of such major transaction in respect of a number of shares of common stock of the Company equal to the Black-Scholes value of the Deerfield Warrants, as defined therein, and in the case of other major transactions, the holders may have the right to exercise the Deerfield Warrants, in whole or in part, for a number of shares of common stock of the Company equal to the Black-Scholes value of the Deerfield Warrants.
The Company measured the initial fair value of the 6,470,000 shares underlying the Deerfield Warrants at $14.3 million, net of issuance costs of $0.4 million, and recorded the amount in additional paid-in-capital and as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan.
Registration Rights Agreement
In connection with the Term Loan and the issuance of the Warrants, the Company entered into a Registration Rights Agreement with Deerfield (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file a registration statement on Form S-3 (or if Form S-3 is not then available, such other form of registration statement as is then available) with the Commission on or prior to the 30th day following the Agreement Date, to register for resale the shares of common stock of the Company issuable upon the exercise of the Warrants. The aforementioned registration statement was filed on Form S-3 on May 2, 2017.
Credit and Security Agreement
On the Agreement Date, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Deerfield ELGX Revolver, LLC (“Deerfield Revolver”) pursuant to which the Company could borrow up to the lesser of $50 million or its applicable borrowing base from time to time prior to March 31, 2020 (the “Revolver”). Any outstanding principal under the Revolver will accrue interest at a rate equal to 3-month LIBOR (with a 1% floor) plus 4.60%, payable monthly in arrears on the first business day of the immediately succeeding calendar month and on the maturity date. The Company is subject to other fees in addition to interest on the outstanding principal amount under the Revolver, including in connection with an early termination of the Revolver.
As described above, the Revolver replaced the Company’s $50.0 million asset-based revolving line of credit with MidCap Financial Trust. As a result, the Company recorded $1.2 million in deferred financing costs related to the Revolver and presented these costs in other assets, to be subsequently amortized as interest expense over the term of the Revolver, on the Company’s Condensed Consolidated Balance Sheets. The Company’s obligations under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Term Loan.
As of December 31, 2017, the Company was not in compliance with the required minimum net revenue threshold set forth in the Credit Agreement. On January 5, 2018, the Company delivered a notice of termination to Deerfield for the Revolver under the Credit Agreement. The termination of the Revolver was effective on January 12, 2018 (the “Termination Date”) and required the Company to pay $1.3 million in termination fees. Additionally, the Company wrote off $1.0 million in unamortized deferred financing costs as of the Termination Date. The total of $2.3 million was charged to loss on debt extinguishment on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Credit Agreement
On August 9, 2018 (the “New Agreement Date”), the Company entered into a Credit Agreement (the “New Credit Agreement”) with Deerfield Revolver, pursuant to which the Company may borrow up to the lesser of $50 million or its applicable borrowing base from time to time prior to April 2, 2022 (the “ABL Facility”). The borrowing base consists of eligible accounts, eligible inventory and eligible equipment. On the New Agreement Date, availability under the ABL Facility was $24.0 million. Any outstanding principal under the ABL Facility will accrue interest at a rate equal to LIBOR (with a 1% floor) plus 5.50% payable in cash. Interest is payable in cash, monthly in arrears on the first business day of the immediately succeeding calendar month and on the maturity date. The interest rate will accrue on a minimum amount of $9,750,000, whether or not such amount is drawn (which amount in excess of the revolver usage accruing interest will not be subject to the unused line fee). The Company is subject to other fees in addition to interest on the outstanding principal amount under the ABL Facility, including a commitment fee of $500,000 (payable $200,000 upon closing, $200,000 on the first anniversary of the closing and $100,000 on the second anniversary of the closing), a $1,000,000 fee upon the expiration of the ABL Facility, and an early commitment termination or reduction fee of 2.5% in the first year, 1.5% in the second year, 0.5% in the third year and 0% thereafter. The Company recorded $0.6 million in deferred financing costs, including the commitment fee, related to the ABL Facility and presented these costs as a deferred asset, to be subsequently amortized as interest expense over the term of the ABL Facility, on the Company’s Condensed Consolidated Balance

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Sheets. The New Credit Agreement has a $22.5 million minimum global liquidity requirement, net revenue tests, fixed charge coverage, capital expenditure limitations and operating expense tests. The New Credit Agreement also contains various representations and warranties, events of default, and affirmative and negative covenants, customary for financings of this type, including reporting requirements, requirements that the Company maintain timely reporting with the SEC and restrictions on the ability of the Company and its subsidiaries to incur additional liens on their assets, incur additional indebtedness and acquire and dispose of assets outside the ordinary course of business. The Company’s obligations under the New Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted to Deerfield pursuant to the Company’s Amended Facility Agreement (as described below).
As of September 30, 2018, the Company had $10.0 million in outstanding borrowings and and $0.6 million in deferred financing costs relating to the ABL Facility. The remaining borrowings available was $3.5 million.

Amended Facility Agreement
Also on the New Agreement Date, the Company entered into the Amended Facility Agreement with Deerfield, in order to, among other things, allow for the Company’s entry into the New Credit Agreement and the transactions contemplated therein. The Amended Facility Agreement amends and restates in its entirety the Company’s prior Facility Agreement with Deerfield.

In connection with entering into the Amended Facility Agreement, Deerfield and the Company have cancelled and extinguished the $40.5 million principal amount 3.25% Senior Note held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Amended Facility Agreement (as a last-out waterfall tranche under the Amended Facility Agreement). Such amounts are being amortized $20.25 million on April 2, 2022 and $20.25 million on April 2, 2023.
Accordingly, the amount outstanding under the Amended Facility Agreement has been increased to a total of $160.5 million.
Any outstanding principal under the Amended Facility Agreement will accrue interest at a rate equal to 5.00% payable in cash and 4.75% payable in kind. The Amended Facility Agreement contains the same operating covenants applicable to the New Credit Agreement.

The Company may issue up to a maximum of 2,526,800 shares of the Company’s common stock to Deerfield pursuant to the Amended Facility Agreement in lieu of paying cash to satisfy a portion of its obligation to pay interest owed to Deerfield. Each share of the Company’s common stock issued to Deerfield in respect of an obligation to pay interest will be valued at 96% of the lesser of the (i) trailing ten (10) day volume weighted average price per share ending on the last trading date prior to issuance and (ii) the last closing bid price of the Company’s common stock on the last trading date prior to issuance.
The Company’s obligations under the Amended Facility Agreement are secured by a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted to Deerfield pursuant to the New Credit Agreement.
The Amended Facility Agreement contains various representations and warranties, events of default, and affirmative and negative covenants substantially similar to those contained in the New Credit Agreement.

Pursuant to the Amended Facility Agreement, Deerfield has the right, but not the obligation, to convert a portion of the outstanding principal amount of the loan into shares of the Company’s common stock at 96% of the trailing three (3) day volume weighted average price per share on the date of conversion into a maximum of 14,300,000 shares of the Company’s common stock. The first $60 million of the principal amount of the loan (or exercise price of the Warrants elected to be paid through a reduction in principal, as described below) converted into the Company’s common stock will be credited first against principal and payable in kind interest payments due in 2021 and then against principal and payable in kind interest payments due in 2022. Any additional amounts will be split between principal and payment in kind interest payments due in 2022 and 2023.

The Company also agreed to pay Deerfield a $6.1 million fee upon the termination of the Amended Facility Agreement and to reimburse Deerfield for all reasonable out-of-pocket expenses incurred by Deerfield in connection with the negotiation and documentation of the New Credit Agreement and the Amended Facility Agreement.
The Company evaluated the August 9, 2018 transaction to determine whether it represented an extinguishment of previously issued debt instruments. The Company noted in the analysis that the cancellation of 3.25% Senior Notes and the issuance of the last-out waterfall tranche of term loans resulted in the removal of a conversion feature. The Company concluded that the conversion

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



option was not substantive, and the removal of this feature did not trigger extinguishment accounting. Thus, the 3.25% Senior Notes were treated as non-convertible instruments for purposes of the analysis. The restructuring of the outstanding instruments were negotiated concurrently and in contemplation of each other, and required that the Company assess the impact of the modifications, replacement instruments, and warrants on the entire portfolio of term debt instruments (the Credit Agreement was assessed separately). Under this approach, the Company determined that the lender did not provide a concession in connection with the transactions completed on August 9, 2018. Pursuant to the guidance in ASU 470-50, “Debt - Modifications and Extinguishments”, the Company determined that exchange of instruments, the modifications of terms, the issuance of warrants, and removal of the conversion feature resulted in changes to the debt portfolio that were not substantial.
As of the New Agreement Date, the new carrying amount of the Term Loan under the Amended Facility Agreement was $113.1 million, representing a discount of $47.4 million from par of $160.5 million. The discount was determined based on the fees and consideration paid to Deerfield in connection with the restructuring, the previously deferred but unamortized costs of the original debt, and the unamortized discounts on the original debt.
Under modification accounting, fees and consideration paid to the lender in connection with the restructuring should be reflected as additional debt discount and accreted as an adjustment to interest expense over the remaining term of the modified debt portfolio using the effective interest method. The New Deerfield Warrants (discussed below in this Note) issued to Deerfield were treated as consideration paid to the lender and its associated fair value was treated as additional debt discount. Likewise, the bifurcated derivative for the share settlement provision in the Amended Facility Agreement outlined in the disclosures above was also reflected as a discount. The original discount and deferred fees from the existing debt will continue to be accreted to interest expense throughout the life of the Term Loan via the effective interest method.
As of September 30, 2018, the Company had a carrying amount of $114.2 million, inclusive of deferred financing costs of $4.4 million, related to the Term Loan. As of September 30, 2018, annual interest expense on the Term Loan will range from $4.2 million to $31.1 million from the New Agreement Date through maturity.
New Warrants
In connection with the execution of the Amended Facility Agreement, the Company issued to Deerfield the New Deerfield Warrants to purchase an aggregate of 8,750,001 shares of common stock of the Company at an exercise price equal to $4.71 per share. The number of shares of common stock of the Company into which the New Deerfield Warrants are exercisable and the exercise price of the New Deerfield Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company.

The New Deerfield Warrants are exercisable commencing on February 9, 2019, and expire on the seventh anniversary of the New Agreement Date. The holders of the New Deerfield Warrants may exercise the New Deerfield Warrants for cash, on a cashless basis, or by reduction of the principal owed to Deerfield pursuant to the Amended Facility Agreement.

The Company measured the initial fair value of the 8,750,001 shares underlying the New Deerfield Warrants at $10.3 million, net of issuance costs of $0.1 million, and recorded the amount in additional paid-in-capital and as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan.
Derivative Liability
In accordance with ASC 815, “Derivatives and Hedging”, and ASC 470, “Debt”, the Company assessed whether any provisions within the Amended Facility Agreement constitute embedded derivatives requiring bifurcation from the host instrument, as well as assessing the fair values of any such features. The Company determined that the provision allowing the holders to convert a portion of the outstanding principal of the Term Loan into shares of the Company’s common stock at a discount effectively provided the holders with an embedded put option derivative meeting the definition of an “embedded derivative” pursuant to ASC 815. Consequently, the embedded derivative was bifurcated and accounted for separately. The Amended Facility Agreement retained a provision that, upon a change of control of the company as defined in the agreement, Deerfield may declare the outstanding principal of the loans to be immediately due and payable in full, together with any accrued and unpaid interest, a “Change of Control” fee, and a specified make-whole amount (prior to April 2, 2021). This feature remained substantively the same as outlined under the old agreement. The Company concluded that this provision continues to meet the definition of a derivative and requires bifurcation and separate accounting pursuant to ASC 815. As of the New Agreement Date, the Company measured the fair value of

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



the above embedded derivatives (the “Term Loan Derivative Liabilities”) at $16.9 million and recorded the amount in derivative liabilities in the Condensed Consolidated Balance Sheet.
For the three and nine months ended September 30, 2018, the Company recorded income of $8.3 million as a fair value adjustment of the Term Loan Derivative Liabilities. The primary factor causing the change in the fair value of the derivative liabilities the decrease in the Company’s stock price from the New Agreement Date. Adjustments to the fair value of the derivative liabilities are recognized within other income (expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

The value of the Term Loan Derivative Liabilities were primarily estimated using a “with” and “without” approach utilizing observable and unobservable inputs causing this to be a Level 3 measurement. In the “with” scenario, the value of the Term Loan was estimated using the full economic terms, including the share settlement and change of control features, in a stock price lattice framework. In the “without” scenario, the value of the Term Loan was estimated excluding the share settlement and change of control features using a backward inducting discounted cash flow analysis. The difference between the values estimated in the “with” and “without” scenarios represents the value of the Term Loan Derivative Liabilities. Changes in the value of the Term Loan Derivative Liabilities were driven by changes in the Company's stock price, expected volatility, credit spreads, and market yields.

7. Revenue
(a) Summary

The Company measures revenue based on consideration specified in a contract with a customer: hospitals and distributors. The Company excludes any amounts related to taxes assessed by governmental authorities from this revenue measurement and reduces revenue by any sales incentives offered by the Company to its customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control of products to customers. Shipping and handling costs billed to customers are reported within revenue, with the corresponding costs within costs of goods sold. In addition, any shipping and handling costs related to outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenues.


(b) Contracts with Customers

The Company recognizes revenue when all of the following criteria are met:

A contract has been identified with the customer;
The performance obligations have been identified;
The transaction price has been determined and allocated to respective performance obligations; and
The performance obligations have been satisfied.

Respective performance obligations are satisfied at a point in time for sales made to both hospitals and distributors. Payment terms with customers range between 30 and 180 days which reflects days from the date the Company satisfies the performance obligations.

For implant-based sales, the Company recognizes revenue when the AAA products are utilized in a procedure or implanted in a patient.

For shipment-based sales, the Company recognizes revenue when control over a product has transferred to the customer, which is typically at the time of shipment, without a right of return.

The Company provides certain sales incentives to customers for meeting certain purchase thresholds and accordingly, the transaction price is reduced by the Company’s best estimate of this variable consideration. The Company estimates this variable consideration through the most likely amount method.





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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(c) Revenue Disaggregation

The Company disaggregated revenue in accordance with the new revenue recognition standard to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. These economic factors are primarily attributable to different geographic regions and the timing of transfer of control of products to customers. Accordingly, sales in which control of the product has passed to the customer at the time of procedure or implant into a patient or at the time of shipment have been bifurcated as “Implant-based” and “Shipment-based” revenue, respectively. The table below includes a reconciliation of disaggregated revenue with the Company’s reportable segment:


Three Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,

Nine Months Ended
September 30,
 
2018
 
2017
 
2018

2017
 
Implant-based

Shipment-based

Total
 
Implant-based

Shipment-based

Total
 
Implant-based

Shipment-based

Total

Implant-based

Shipment-based

Total
United States
$
25,194


$
505


$
25,699


$
29,949


$
928


$
30,877

 
$
82,480


$
2,580


$
85,060


$
91,934


$
1,738


$
93,672

International
4,876


4,181


9,057


6,092


9,017


15,109

 
16,268


20,452


36,720


16,804


26,678


43,482

Total Revenue
$
30,070


$
4,686


$
34,756


$
36,041


$
9,945


$
45,986

 
$
98,748


$
23,032


$
121,780


$
108,738


$
28,416


$
137,154

(d) Transitional Disclosures

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU ”) No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective for the Company on January 1, 2018. The new revenue standard permits the use of either the full retrospective or modified retrospective transition method; these methods may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company adopted the new revenue standard in the first quarter of 2018 utilizing the modified retrospective adoption method. The new revenue standard has been applied to all contracts at the date of initial application. The Company did not record a cumulative adjustment to the opening balance of retained earnings for the Company’s first quarter of 2018 financial statements.     

8. Commitments and Contingencies
(a) Leases
The Company leases its administrative, research, and manufacturing facilities located in Irvine, California, and Santa Rosa, California and an administrative office located in Rosmalen, The Netherlands. These facility lease agreements require the Company to pay operating costs, including property taxes, insurance and maintenance. In addition, the Company has certain equipment under long-term agreements that are accounted for as operating leases.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Future minimum payments by year under non-cancelable leases with initial terms in excess of one year were as follows as of September 30, 2018:
Remainder of 2018
$
933

2019
3,800

2020
3,803

2021
3,817

2022
3,865

2023 and thereafter
18,021

Total
$
34,239


Facilities rent expense for the three months ended September 30, 2018 and 2017 was $0.9 million and $0.6 million, respectively. For the nine months ended September 30, 2018 and 2017 facilities rent expense was $2.6 million and $2.5 million, respectively.
(b) Employment Agreements and Retention Plan
The Company has employment agreements with certain of its executive officers under which payment and benefits would become payable in the event of termination by the Company for any reason other than cause, death or disability or termination by the employee for good reason (collectively, an “Involuntary Termination”) prior to, upon or following a change in control of the Company. The severance payment will generally be in a range of six to twenty-four months of the employee’s then current salary for an Involuntary Termination prior to a change in control of the Company, and will generally be in a range of eighteen to twenty-four months of the employee’s then current salary for an Involuntary Termination upon or following a change in control of the Company. In addition, the outstanding unvested equity awards held by certain executive officers will become fully vested upon or following a change in control of the Company.
(c) Legal Matters
The Company is from time to time involved in various claims and legal proceedings of a nature it believes is normal and incidental to a medical device business. These matters may include product liability, intellectual property, employment, and other general claims. Such cases and claims may raise complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. The Company accrues for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.
LifePort Sciences LLC v. Endologix, Inc.
On December 28, 2012, LifePort Sciences, LLC (“LifePort”) filed a complaint against the Company in the U.S. District Court, District of Delaware, alleging that certain of the Company’s products infringe U.S. Patent Nos. 5,489,295, 5,676,696, 5,993,481, 6,117,167, 6,302,906, and 8,192,482, which were alleged to be owned by LifePort. On March 17, 2016, the Company entered into a Settlement and Patent License Agreement with LifePort (the “Settlement Agreement”) whereby LifePort granted the Company license rights to patents in exchange for a settlement of $4.7 million. The Settlement Agreement resolved this litigation and fully and finally released the Company and LifePort from any claims arising out of or in connection with the litigation or the subject patents. The Settlement Agreement also contained a covenant not to sue for other patents owned by LifePort. However, since the subject patents were all expired and the Company was not currently using and has no plans to use the other patents owned by LifePort in products that could reach technological feasibility during the covenant not to sue period, there is no alternative future use and the full amount was recorded as settlement costs in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.
Steven M. Ortiz v. Endologix, Inc.
On September 9, 2016, former employee Steven M. Ortiz filed a class action lawsuit against the Company in Orange County Superior Court, claiming the Company’s failure to pay all overtime wages owing; failure to provide meal periods and failure to pay meal period premiums; failure to pay all wages owed at time of termination seeking waiting time penalties under Labor Code section 203; failure to provide accurate wage statements; violations of Business and Professions Code section 17200

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



and alleging claims for penalties under the Private Attorneys General Act of 2004. While the Company contested the allegations asserted in the litigation, a mediation was held on February 24, 2017 at which time the parties agreed to settle the case for $750,000. The court gave final approval to the settlement agreement and the $750,000 in settlement funds that were deposited with the Class Administrator have been distributed. On July 16, 2018, the court issued an order closing the case.
Stockholder Securities Litigation
On January 3, 2017 and January 9, 2017, two stockholders purporting to represent a class of persons who purchased the Company’s securities between August 2, 2016 and November 16, 2016, filed lawsuits against the Company and certain of its officers in the United States District Court for the Central District of California. The lawsuits allege that the Company made materially false and misleading statements and failed to disclose material adverse facts about its business, operational and financial performance, in violation of federal securities laws, relating to U.S. Food and Drug Administration Premarket Approval for the Company’s Nellix EVAS System. On May 26, 2017, the plaintiffs filed an amended complaint extending the class period to include persons who purchased the Company’s securities between May 5, 2016 and May 18, 2017 and adding certain factual assertions and allegations regarding the Nellix EVAS System. The plaintiffs sought unspecified monetary damages on behalf of the alleged class, interest, and attorney’s fees and costs of litigation. The first lawsuit, Nguyen v. Endologix, Inc. et al., Case No. 2:17-cv-0017 AB (PLAx) (C.D. Cal.), was consolidated with the second lawsuit, Ahmed v. Endologix, Inc. et al, Case No. 8:17-cv-00061 AB (PLAx) (C.D. Cal.), and lead Nguyen plaintiff filed a consolidated First Amended Complaint. On December 5, 2017, the District Court granted Endologix’s motion to dismiss lead plaintiff’s First Amended Complaint, with leave to amend. On January 9, 2018, lead plaintiff filed a Second Amended Complaint and on March 12, 2018, the Company filed its Motion to Dismiss lead plaintiff’s Second Amended Complaint with prejudice. On September 6, 2018, the District Court dismissed the Second Amended Complaint with prejudice and, on October 5, 2018, lead plaintiff filed a notice of appeal. The Company believes these lawsuits are without merit and continues to defend itself vigorously.
Stockholder Derivative Litigation
As of June 11, 2017, four shareholders have filed derivative lawsuits seeking unspecified monetary damages on behalf of Endologix, the nominal plaintiff, based on allegations substantially similar to those alleged by lead plaintiff in Nguyen. Those actions consist of: Sindlinger v. McDermott et al., Case No. BC662280 (Los Angeles Superior Court); Abraham v. McDermott et al., Case No. 30-2018-00968971-CU-BT-CSC (Orange County Superior Court); and Green v. McDermott et al., Case No. 8:17-cv-01155-AB (PLAx), which has been consolidated with Cocco v. McDermott et al., Case No. 8:17-cv-01183-AB (PLAx) (C.D. Cal.). The Company believes these lawsuits are without merit and continues to defend itself vigorously.

SEC Investigation
On July 31, 2017, the Company learned that the SEC issued a Formal Order of Investigation to investigate, among other things, events surrounding the Nellix EVAS System and the prospect of its Food and Drug Administration (the “FDA”) pre-market approval. The Company has completed its production of materials responsive to the SEC’s subpoenas, but cannot predict its outcome or the timing of the investigation’s conclusion.

9. Contingently Issuable Common Stock
On October 27, 2010, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Nepal Acquisition Corporation, a wholly-owned subsidiary of the Company (“Merger Sub”), Nellix, Inc. (“Nellix”), certain of Nellix’s stockholders named therein and Essex Woodlands Health Ventures, Inc., as representative of the former Nellix stockholders. On December 10, 2010 (the “Nellix Closing Date”), the Company completed the merger (the “Merger”) of Merger Sub with and into Nellix pursuant to the terms of the Merger Agreement. The purchase price consisted of 3.2 million shares of the Company’s common stock, issuable to the former Nellix stockholders as of the Nellix Closing Date, then representing a value of $19.4 million. Under the agreement, additional payments, solely in the form of shares of the Company’s common stock (the “Contingent Payment”), could be made upon the achievement of a revenue milestone and a regulatory approval milestone (collectively, the “Nellix Milestones”).
Under the Merger Agreement, the ultimate value of each Contingent Payment would be determined on the date that each Nellix Milestone is achieved. The number of issuable shares would be established using an applicable per share price, which is subject to a ceiling and/or floor, resulting at the closing of the Merger in a potential maximum of 10.2 million shares issuable upon the achievement of the Nellix Milestones. As of the Closing Date, the aggregate fair value of the cash Contingent Payment was estimated to be $28.2 million.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)




The Merger Agreement provides that, in addition to the shares of common stock of the Company (the “Common Stock”) issued to the former Nellix stockholders at the closing of the Merger, if the Company receives approval from the FDA to sell the Nellix Product in the United States (the “PMA Milestone”), the Company will issue additional shares of the Common Stock to the former stockholders of Nellix. The dollar value of the shares of the Common Stock to be issued upon achievement of the PMA Milestone will be equal to $15.0 million (less the dollar value of certain cash payments and other deductions). The price per share of the shares of the Common Stock to be issued upon achievement of the PMA Milestone is subject to a stock price floor of $4.50 per share, but not subject to a stock price ceiling.
As of September 30, 2018 the Company’s stock price last closed at $1.91 per share. Thus, had the PMA Milestone been achieved on September 30, 2018 the Contingent Payment would have comprised 3.3 million shares (based on the 30-day average closing stock price ending 5 days prior to the announcement, subjected to the stock price floor of $4.50), representing a value of $6.4 million.
The value of the Contingent Payment is derived using a discounted income approach model, with a range of probabilities and assumptions related to the timing and likelihood of achievement of the PMA Milestone (which include Level 3 inputs - see Note 3(e) and the Company’s stock price (Level 1 input) as of the balance sheet date). These varying probabilities and assumptions and changes in the Company’s stock price have required fair value adjustments of the Contingent Payment in periods subsequent to the Nellix Closing Date.
The Contingent Payment fair value will continue to be evaluated on a quarterly basis until milestone achievement occurs, or until the expiration of the “earn-out period,” as defined within the Nellix purchase agreement. Adjustments to the fair value of the Contingent Payment are recognized within other income (expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
Fair Value of Contingently Issuable Common Stock
December 31, 2017
$
9,300

Fair Value Adjustment of Contingent Payment for the nine months ended September 30, 2018
(4,300
)
September 30, 2018
$
5,000


10. Income Tax Expense
The Company applied an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods. The Company recorded a provision for income taxes of $0.2 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded a provision for income taxes of $0.3 million and $0.3 million, respectively. The Company’s ETR was (1.7)% and (0.4)% for the three months ended September 30, 2018, and 2017, respectively. For the nine months ended September 30, 2018 and 2017, the Company’s ETR was (0.5)% and (0.7)%, respectively. The Company’s ETR for the three and nine months ended September 30, 2018 differs from the U.S. federal statutory tax rate of 21% primarily as a result of nondeductible expenses (including the Nellix Contingent Payment), state income taxes, foreign income taxes, and the impact of a full valuation allowance on its deferred tax assets.
The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all deferred tax assets. If/when the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period(s) such determination is made.
On December 22, 2017, the President of the United States signed into law reforms of the US tax code (the “Tax Reform Act”). The legislation significantly changes US tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.  The Company recorded provisional amounts as of December 31, 2017 related to the Tax Reform Act under guidance set forth in Staff Accounting Bulletin No. 118 (“SAB 118”). These amounts have not been adjusted as of September 30, 2018, and the Company will continue to monitor any changes to the provisional amounts during the measurement period or until

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Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



the accounting is complete. However, the Company does not anticipate any material impact to the financial statement due to the full valuation allowance.

11. Restructuring Charges
In the nine months ended September 30, 2018, the Company recorded $3.1 million in restructuring costs within operating expenses related to focused reductions of its workforce. The Company began substantially formulating plans around this workforce reduction during the first quarter of 2016 in conjunction with its merger of TriVascular. The targeted reductions and other restructuring activities were initiated to provide efficiencies and realign resources as well as to allow for continued investment in strategic areas and drive growth.
In August 2018, the Company continued its restructuring activities including restructuring certain aspects of its business and operations to re-prioritize its sales and marketing efforts, rationalize its international presence and related expenses, streamline its workforce and take other measures to increase efficiencies, decrease its cash consumption and decrease its cost to serve, while refocusing its business on strong execution of its core strategies. The Company has recently determined to streamline and restructure certain of its operations and implement certain management changes. These plans have resulted in significant changes in the composition of the senior management team.
As of September 30, 2018, the Company estimates that it will incur a total of $15.8 million in restructuring charges upon the completion of the plan, of which $15.7 million has already been incurred since the first quarter of 2016.
The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed plans. The following table reflects the movement of activity of the restructuring reserve for the nine months ended September 30, 2018:

One-time Termination Benefits
Accrual balance as of December 31, 2017
$
1,008

Restructuring charges
3,132

Utilization
(2,319
)
Accrual balance as of September 30, 2018
$
1,821

The accrual balance as of September 30, 2018 is classified within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet.

12. At-The-Market Sales Agreement
On May 31, 2018, the Company filed a shelf registration statement to offer up to $100 million of its securities and entered into an “at-the-market” program pursuant to a Sales Agreement with Stifel, Nicolaus & Company (“Stifel”), through which it may, from time to time, issue and sell shares of common stock having an aggregate offering value of up to $50 million. The registration statement was declared effective by the SEC on August 3, 2018. The Company believes that the “at-the-market” program will provide additional liquidity. During the three months ended September 30, 2018, the Company sold 758,201 shares of common stock through the “at-the-market” program, for total proceeds of $1.8 million, net of fees and commissions.
13. Subsequent Events
FDA Notice

On October 5, 2018, the Company announced that it received notice that the U.S. Food and Drug Administration (“FDA”) has classified a field safety notice (“Safety Notice”) that the Company had previously issued on July 18, 2018 as a Class I recall.

The Safety Notice pertained to the AFX® Endovascular AAA System. It provided updated information on comparative AFX Type III endoleak rates, patient-tailored surveillance recommendations, and recommendations for intervening through an AFX device or re-intervening on an AFX device. No product was removed from the field as part of this recall.

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Table of Contents
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



The July 2018 Safety Notice followed several earlier communications. Safety Notices from us issued in late 2016 and early 2017 requested that all remaining AFX Strata devices be returned from the field and emphasized that we had not manufactured AFX Strata grafts since 2014. On September 28, 2017, the FDA issued a letter to HCPs to raise awareness of an increased occurrence of Type III endoleaks after endovascular aneurysm repair (“EVAR”). On June 19, 2018, the FDA issued an updated letter indicating the increased risk for Type III endoleak appeared to be greater in the AFX with Strata device when compared with other endovascular graft systems. The AFX Strata device was last sold in 2016 and the product was removed from global inventory in the first half of 2017.

Common Stock Offering

On October 24, 2018, the Company entered into an underwriting agreement with BTIG, LLC (the “Underwriting Agreement”) relating to the underwritten offering of 17,653,809 shares of the Company’s common stock, par value $0.001 per share (the “Offering”). BTIG, LLC agreed to purchase the shares pursuant to the Underwriting Agreement at a price of $1.1329 per share. The total net proceeds to the Company from the Offering were approximately $20.0 million, before deducting offering expenses payable by the Company. The Offering was closed on October 29, 2018. Under the terms of the Underwriting Agreement, the Company has granted BTIG, LLC an option, exercisable for 30 days, to purchase up to an additional 2,648,071 shares of common stock.

The Underwriting Agreement contains customary representations, warranties, covenants and agreements by the Company, indemnification obligations of the Company and BTIG, LLC, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties. All of the Company’s directors and executive officers and their affiliated entities have agreed not to sell or transfer any shares of the Company’s common stock for 90 days, and the Company has agreed not to sell or transfer any shares of the Company’s common stock for 90 days, in each case, after October 24, 2018 without first obtaining the written consent of BTIG, LLC, subject to certain exceptions as described in the prospectus supplement.


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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward looking statements are intended to qualify for the safe harbor established by the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the use of forward-looking terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,”, “projects,” “should” or “will” or the negative of these terms or other comparable terminology, or by discussions of strategies, opportunities, plans or intentions. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements largely on our current expectations based on information currently available to us and projections about future events and trends affecting the financial condition of our business. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:

continued market acceptance, use and endorsement of our products;
quality control problems with our products;
consolidation in the health care industry;
the success of our clinical trials relating to products under development;
our ability to grow and maintain strong relationships with certain key physicians;
continued growth in the number of patients qualifying for treatment of abdominal aortic aneurysms (“AAA”) through our products;
our ability to effectively compete with the products offered by our competitors;
the level and availability of third party payor reimbursement for our products;     
our ability to effectively develop new or complementary products and technologies;
our ability to manufacture our endovascular systems to meet demand;
our ability to grow product revenues;
changes to our international operations including currency exchange rate fluctuations;
our ability to effectively manage our business and keep pace with our anticipated growth;
our ability to develop and retain a direct sales force in the United States and select European countries;
the nature of and any changes to domestic and foreign legislative, regulatory and other legal requirements that apply to us, our products, our suppliers and our competitors;     
the timing of and our ability to obtain and maintain any required regulatory clearances and approvals;
our ability to protect our intellectual property rights and proprietary technologies;
our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;
product liability claims;
pending and future litigation;
reputational damage to our products caused by the use, misuse or off-label use of our products or government or voluntary recalls of our products;
our utilization of single source suppliers for specialized components of our product lines;
our ability to attract, retain, and motivate qualified personnel;
our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
our ability to maintain adequate liquidity to fund our operational needs and research and developments expenses;
our ability to identify and manage risks; and
general macroeconomic and world-wide business conditions.

Our actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 13, 2018, and in this Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2018, including but not limited to those factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Consolidated

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Financial Statements” and “Notes to Consolidated Financial Statements.” All subsequent written and oral forward-looking statements attributable to us or by persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

Our forward-looking statements speak only as of the date each such statement is made. We expressly disclaim any intention or obligation to update or revise any financial projections or any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules and regulations of the SEC and The NASDAQ Stock Market, LLC.

Overview
Our Business
We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our products are intended for the minimally invasive endovascular treatment of AAA. Our AAA products are built on one of two platforms:
Traditional minimally-invasive endovascular aneurysm repair (“EVAR”); and
Endovascular aneurysm sealing (“EVAS”), our innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens.
Our current EVAR products include the AFX® Endovascular AAA System (“AFX System”), the VELA® Proximal Endograft (“VELA”), and the Ovation® Abdominal Stent Graft System (“Ovation System”). Our current EVAS product is the Nellix® Endovascular Aneurysm Sealing System (“Nellix EVAS System”). We sell our EVAR platforms (including extensions and accessories) directly to hospitals in the United States, Canada, New Zealand, South Korea and Europe, and our EVAS platform directly to hospitals in New Zealand and Europe. We sell our EVAR and EVAS platforms (including extensions and accessories) through third-party distributors and agents in Asia, Europe, South America and in other parts of the world. Such sales of our EVAR and EVAS platforms provide the sole source of our reported revenue.
See Item 1. of our Annual Report on Form 10-K for the year ended December 31, 2017, entitled “Business,” for a discussion of:
Market Overview and Opportunity
Our Products
Product Developments and Clinical Trials
Manufacturing and Supply
Marketing and Sales
Competition
When used in this report, “we,” “our,” “us” or “Endologix,” refer to Endologix, Inc. and our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. Endologix®, AFX®, Duraply®, VELA®, IntuiTrak®, ActiveSeal®, Nellix®, Ovation®, Ovation Prime®, Ovation Alto®, and CustomSeal® are registered trademarks of Endologix, Inc. or its subsidiaries.
We have obtained CE Mark approval for the Nellix EVAS System, and it is commercially available in the European Union and certain other countries. In the United States, the Nellix EVAS System is approved as an investigational device only. Ovation Alto, our next generation Ovation System device, is approved as an investigational device only, and is not currently approved in any market.
Highlights of Our Product Development Initiatives, Clinical Trials and Regulatory Approvals
Nellix EVAS System
Our Nellix EVAS System is designed to seal the aneurysm and provide blood flow to the legs through two blood flow lumens. The Nellix EVAS System consists of (i) bilateral covered stents with endobags, (ii) a biocompatible polymer injected into the endobags to seal the aneurysm and (iii) a delivery system and associated accessories. The Nellix EVAS System is intended to seal the entire aneurysm sac effectively excluding the aneurysm and reducing the likelihood of future aneurysm rupture. We have the following trials in process to build independent and collective clinical and economic evidence of clinical safety and effectiveness:

EVAS FORWARD Investigational Device Exemption (IDE) - We conducted this pivotal clinical trial to evaluate the safety and effectiveness of the Nellix EVAS System. This study is a prospective single arm registry which enrolled 179 patients at 29 centers in the United States and Europe. In November 2014, we completed enrollment in the study, and we

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submitted the one year results to the FDA in March 2016. In May 2016, we announced the results of the one year clinical data from the EVAS FORWARD IDE study that demonstrate that the Nellix EVAS System met the study primary endpoints for major adverse events at 30 days (safety) and treatment success at one year (effectiveness). Two-year imaging revealed a signal of migration, leading to a field safety notification issued in October 2016 and a dedicated root cause analysis, resulting in refinements to the Instructions for Use (“IFU”). Following the implementation of the refined IFU, the Nellix EVAS system is applicable to treat an estimated 40% of AAA patients with a traditional aneurysm.

Subsequently, the two-year results from the trial were published in the Journal of Vascular Surgery in March 2018. This data was previously announced in June 2017 at the Society of Vascular Surgery Vascular Annual Meeting (“VAM”). Key highlights from the Nellix U.S. IDE trial two-year clinical data are included below:

Freedom from all endoleaks (95%), rupture (99%), all-cause mortality (94%), and cardiovascular mortality (99%), among all patients.
Highest freedom of type II endoleaks, of 97%, ever reported at two years, among all patients.
When applying the refined IFUs for Nellix, patients at the two-year follow-up demonstrated 96% freedom from Type IA endoleak, migration >10mm, and sac growth.

EVAS2 IDE - In May 2017, we announced the decision to seek FDA approval of the Nellix EVAS System by conducting a confirmatory clinical study with the refined IFU and the Company’s next generation Nellix device design, or the Gen2 Nellix EVAS System. The Gen2 Nellix EVAS System incorporates design improvements to enhance ease of use and offers physicians more sizes to treat more patients with AAA. In October 2017, we announced our receipt of IDE approval from the FDA to commence a confirmatory clinical study to evaluate the safety and effectiveness of the Gen2 Nellix EVAS System for the endovascular treatment of infrarenal AAA. The EVAS2 IDE Multicenter Safety and Effectiveness Confirmatory Study (“EVAS2”) will prospectively evaluate the refined IFU and the Nellix Gen2 EVAS System. The study is approved to enroll up to 90 primary patients, with one-year follow-up data required for the pre-market approval (“PMA”) application. We commenced EVAS2 patient enrollment in March 2018.

EVAS FORWARD Global Registry - This registry is designed to provide real world clinical results to demonstrate the effectiveness and applicability of the Nellix EVAS System. The first phase of the registry included 300 patients enrolled in up to 30 international centers. The first patient in the registry was treated in October 2013, and in September 2014, we announced completion of patient enrollment in the EVAS FORWARD Global Registry. In November 2016, we announced positive two-year results on 300 patients from the EVAS FORWARD Global Registry at the annual VEITH meeting. The following outcomes were presented at the meeting:

37% of patients having complex anatomies;
98% freedom from any persistent endoleaks at latest follow-up;
No secondary interventions for Type II endoleaks;
97% freedom from aneurysm-related mortality; and
99% freedom from cardiovascular mortality

In 2017, we commenced the EVAS FORWARD Global Registry 2, a post market evaluation of the Nellix Gen2 EVAS System, our second generation device design.

ASCEND Registry - In April 2016, we announced the first data presentation with one-year outcomes from the ASCEND Registry (Aneurysm Study for Complex AAA: Evaluation of Nellix Durability), a physician-initiated registry of the Nellix EVAS System used with aortic branch stent grafts for the treatment of patients with complex AAAs. The results of the study were formally published in the peer-reviewed Journal of Endovascular Therapy in December 2017.
Refined IFU - In September 2017, we announced CE Mark approval for the Nellix EVAS System with the refined IFU. The Nellix EVAS System is being studied in the U.S. under an IDE. Following a thorough review of supporting clinical data, the Company’s Notified Body in the European Union, together with an independent clinical reviewer, determined that the Nellix EVAS System, with the refined IFU, met the applicable safety and clinical performance requirements. As a result of these evaluations, the Notified Body granted a CE Mark for the Nellix EVAS System with the refined IFU.
In April 2018, we announced the results of a study, which was presented by Marc Schermerhorn, M.D., Chief of Vascular Surgery at Beth Israel Deaconess Medical Center, at the Late-Breaking Aortic Trials Session during the Charing Cross 40th International Symposium. This retrospective, propensity-weighted study compared long-term survival for the Nellix® EndoVascular Aneurysm Sealing (EVAS) System with traditional endovascular aneurysm repair (EVAR). The study reported significantly higher three-year survival for EVAS patients as compared to EVAR patients. Those patients with larger aneurysms

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(greater than 5.5 cm in diameter) treated with EVAS had half the mortality at three years as compared to those treated with traditional EVAR systems. The retrospective study included 333 EVAS patients from the original Nellix US IDE Trial and 15,431 patients from the Society for Vascular Surgery Vascular Quality Initiative, all of whom were treated between 2014 and 2016. The patients were propensity weighted for abdominal aortic aneurysm (AAA) size, patient demographics, and cardiovascular risk factors. The primary outcome was overall survival, with a secondary analysis of overall survival stratified by aneurysm size.
AFX System
The AFX System consists of (i) a cobalt chromium alloy stent covered by expanded polytetrafluoroethylene (commonly referred to as “ePTFE”) graft material and (ii) accompanying delivery systems. Once fixed in its proper position within the abdominal aortic bifurcation, the AFX System provides a conduit for blood flow, thereby relieving pressure within the weakened or “aneurysmal” section of the vessel wall, which greatly reduces the potential for the AAA to rupture. In February 2014, we launched a new proximal extension in the United States, VELA, designed to be used in conjunction with our AFX bifurcated device. VELA features a circumferential graft line marker and controlled delivery system that enable predictable deployment and final positional adjustments. We began a commercial introduction of VELA in Europe in January 2015.
In September 2014, we announced a new clinical study called Looking at EVAR Outcomes by Primary Analysis of Randomized Data (“LEOPARD”). This study was designed to compare outcomes of the AFX System versus other commercially available EVAR devices. We designed the LEOPARD study to randomize and enroll up to 600 patients at 60 leading centers throughout the United States and commenced enrollment in the first quarter of 2015. The centers were a mix of our current and new customers, with each investigator selecting one competitive device to randomize against AFX. The LEOPARD study is being led by an independent steering committee of leading physicians who are involved with the study and responsible for presenting the results over the five-year follow-up period.
Positive interim results from LEOPARD were announced in March 2018 at the Society of Clinical Vascular Surgery annual meeting. Based upon the patients that have completed their one-year follow-up, freedom from Aneurysm Related Complications (“ARC”) with AFX/AFX2 is 90.9%, compared to 87.8% with other devices. These preliminary results demonstrate similar outcomes between the endografts under investigation. In addition, there have been no reported Type III endoleaks for any of the devices in the study. AFX/AFX2, however, remains the only device that preserves the patient’s aortic bifurcation. Based upon the anticipated number of additional patients required to prove superiority, we stopped further randomization in the LEOPARD study and plan to continue to follow enrolled patients for the planned five years.
In December 2015, we announced that the AFX Endovascular AAA System for the treatment of AAA received Shonin approval from the Japanese Ministry of Health, Labor and Welfare (“MHLW”).
In February 2016, we announced the completion of the first United States commercial implant of AFX2, which reduces procedure steps for the delivery and deployment of the bifurcated endograft. AFX2 also facilitates peripheral EVAR, or PEVAR, by providing the lowest profile contralateral access through a 7F introducer. These improvements bring together our ActiveSeal® technology, DuraPly® PTFE graft material and VELA Proximal Endograft, into an integrated new EVAR system.
In December 2016, we received notice from our Notified Body in the European Union that the CE Mark for AFX and AFX2 would be suspended due to reports of Type III endoleaks with AFX with Strata graft material (“AFX Strata”), a prior generation of the AFX device. We had, for our current generation of AFX products, implemented device and graft material improvements and updated IFUs resulting in a substantial reduction in reported Type III endoleaks. We provided documentation of the foregoing reduction in Type III endoleaks to our Notified Body. In January 2017, we received notice from our Notified Body that the CE Mark for AFX and AFX2 had been re-instated, effective immediately.
Additionally, in December 2016, we placed a temporary hold on shipments of AFX and AFX2 to complete an investigation of quality concerns with some sizes of these devices. Subsequently, we removed the temporary hold and resumed shipments of all sizes of AFX and the smaller diameter sizes of AFX2 and initiated a voluntary recall of (i) the small remaining quantity of original AFX Strata, and (ii) the larger diameter sizes of AFX2. In January 2017, we removed the temporary hold and resumed shipments of the remaining larger diameter sizes of AFX2.
In July 2018, Endologix sent a voluntary safety notice (“Safety Notice”) to healthcare professional (HCP) users of the AFX® Endovascular AAA System to provide updated information on comparative AFX Type III endoleak rates, patient-tailored surveillance recommendations, and recommendations for intervening through an AFX device or re-intervening on an AFX device. No product was removed from the field as part of that safety update action.

In October 2018, the U.S. Food and Drug Administration (the “FDA”) classified the July 2018 safety notice as a Class I recall.  The FDA defines a Class I recall as including a firm’s correction of a marketed product in circumstances where there is a reasonable probability that use of or exposure to the device would cause serious adverse health consequences or death. 

The clinical conditions resulting in this Class 1 recall classification (Type III endoleaks) are principally related to AFX with Strata material.  The AFX with Strata material was replaced by AFX incorporating the DuraPly material in both AFX and AFX2

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devices. Strata was last manufactured in 2014, last sold in 2016, and removed from global inventories in the first half of 2017. There is no AFX with Strata product remaining in any commercial market.

No product return is required under this recall, and no further action by HCP’s is required in addition to the Safety Notice. The guidance provided in the July 2018 safety notice remains current.
Ovation System
The Ovation System consists of (i) a radiopaque nitinol suprarenal stent with integral anchors, (ii) a low-permeability polytetrafluoroethylene (“PTFE”), aortic body graft that contains a network of inflatable rings filled with a liquid polymer that solidifies during the deployment procedure, (iii) nitinol iliac limb stents encapsulated with PTFE, and (iv) accompanying ultra-low profile delivery systems, auto injector and fill polymer kit. The Ovation System creates a custom seal that conforms to anatomical irregularities and the ultra-low profile system navigates tortuous anatomies.
In May 2011, we initiated a three-year European Post Market Registry to enroll 500 patients across 30 European centers. Enrollment ended in December 2013. In January 2017, we announced positive three-year results from the Ovation EU Post Market Registry. The data was presented at the 2017 LINC meeting and showed that the Ovation System has the broadest range of patient applicability on Instructions for Use of all commercially available infrarenal endovascular AAA devices. The resulting outcomes included:
99% freedom from aneurysm-related mortality;
99% freedom from migration, rupture, and conversion;
97% freedom from Type I/III endoleak; and
Excellent freedom from secondary intervention for occlusion (97%), Type I endoleak (97%) and Type II endoleak (95%).

In October 2014, we initiated the LIFE Study to illustrate the potential advantages of a fast track protocol including PEVAR, no general anesthesia, no time in ICU and a one night stay in the hospital with the Ovation System. In May 2016, we announced the completion of enrollment of 250 patients at 34 sites participating in the LIFE Study. In September 2016, we announced the results of the one-month clinical data from the LIFE Study that demonstrate that the Ovation System met the study primary endpoint for major adverse events at 30 days. The following are highlights of the presentation, with outcomes covering one-month follow-up:

Low major adverse event (MAE) rate of 0.4%;
No ruptures, conversion, or secondary interventions;
99% and 100% freedom from type I and type III endoleaks, respectively;
Fast-Track completed in 216 (87%) patients, with positive results compared to non-Fast-Track patients;
Procedure time of 84 minutes vs. 110 minutes;
General anesthesia use 0% vs. 18%;
ICU stay 0% vs. 32%; and
Mean hospital stay 1.2 days vs. 1.9 days.

In August 2015, we enrolled the first subject in the LUCY Study, a multi-center post-market registry designed to explore the clinical benefits associated with EVAR using the Ovation Abdominal Stent Graft Platform in female patients with AAA, as compared to males. It was the first prospective study evaluating EVAR in females, a population that has historically been underrepresented in EVAR clinical trials. We announced completion of enrollment of 225 patients in the LUCY study in February 2017. The 30-day LUCY data showed that, in women, the ultra-low profile (14F) Ovation System device resulted in:
 
At least 28% greater EVAR eligibility for women with AAA;
1.3% major adverse events, the lowest rate reported for EVAR, compared to other contemporary, prospective, post-market registries;
No deaths;
No proximal endoleaks;
No limb occlusion;
Low readmission rate of 3.9%; and
100% procedural success.

In June 2018 at the VAM, the 1-year results of the LUCY Study were announced in the late-breaking clinical trial session. High technical success was reported in both the female and male arms of the study. In addition, the 1-year outcomes of freedom from conversion, rupture, AAA-related mortality and device-related reintervention were similar between the two arms.


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In February 2015, the FDA approved the next generation Ovation iX Iliac Stent Graft for the Ovation System, and in July 2015, the FDA approved the Ovation iX Abdominal Stent Graft System. In September 2015, the first patients were treated with the Ovation iX Abdominal Stent Graft System in Europe, and in August 2015, we initiated the launch of the Ovation iX System in the United States.
In November 2016, we announced at VEITH that the five-year results from the Ovation Global Pivotal Trial were positive and showed the following outcomes:

Broad patient applicability, with 40% of the patients treated outside the labeled indications of other EVAR devices;
Stable aortic neck diameters with an average expansion of 0.1%, compared to 25% as reported with other EVAR devices;
97% freedom from secondary interventions related to type I endoleak; and
No migration or conversions.

In August 2016, we announced that the first two patients were treated with the Ovation Alto® Abdominal Stent Graft System, which is the newest device in the Ovation System platform of abdominal stent graft systems. Ovation Alto is an investigational device, currently not approved in any market. It expands EVAR to include the treatment of patients with complex AAAs, specifically patients with very short or otherwise complex aortic neck anatomy. This is achieved by the conformable O-rings with CustomSeal® polymer that have been repositioned near the top of the endograft, providing seal just below the renal arteries. In November 2016, we received IDE approval from the FDA to conduct a clinical study with the Ovation Alto® Abdominal Stent Graft System in the United States.
In March 2017, we announced the enrollment of the first patients in the Expanding Patient Applicability with Polymer Sealing Ovation Alto Stent Graft (“ELEVATE”) IDE clinical study, our pivotal clinical trial to evaluate the safety and effectiveness of Ovation Alto for the repair of infrarenal AAAs. The ELEVATE IDE clinical trial is approved to enroll 75 patients at up to 16 centers in the United States. In February 2018, we announced the final patient enrollment in the ELEVATE IDE clinical study.
In March 2018, we announced the first results from ENCORE, a pooled, global analysis of six prospective clinical trials and registries studying polymer endovascular aneurysm repair (Polymer EVAR) using Ovation® Abdominal Stent Graft Systems. ENCORE is a pooled retrospective analysis of the six prospective clinical trial and registries and encompasses 1,296 patients, 160 centers and 339 investigators in the U.S., Europe and Latin America. Median patient follow-up across all ENCORE registries and trials was 883 days (range 30 days to five years). At five years, the ENCORE analysis included the following results for Ovation based on the available data:

99% freedom from AAA-related mortality;
99% freedom from conversion;
99% freedom from rupture;
98% freedom from reintervention for Type 1a endoleak; and
93% freedom from all device-related reintervention.
Characteristics of Our Revenue and Expenses
Revenue
We derive revenue from sales of our EVAR and EVAS products (including extensions and accessories) through two channels: implant-based sales and shipment-based sales.
For implant-based sales, usually with hospitals, we recognize revenue when the AAA products are utilized in a procedure or implanted in a patient.
For shipment-based sales, usually with distributors, we recognize revenue when control over a product has transferred to the customer, which is typically at the time of shipment, without a right of return.
Cost of Goods Sold
Cost of goods sold includes compensation (including stock-based compensation) and benefits of production personnel and production support personnel. Cost of goods sold also includes depreciation expense for production equipment, amortization of developed technology, production materials and supplies expense, allocated facilities-related expenses and certain direct costs such as shipping.
Research and Development
Research and development expenses consist of compensation (including stock-based compensation) and benefits for research and development personnel, materials and supplies, research and development consultants, outsourced and licensed research and development costs and allocated facilities-related costs. Our research and development activities primarily relate to the development and testing of new devices and methods to treat aortic disorders.

31



Clinical and Regulatory
Clinical and regulatory expenses consist of compensation (including stock-based compensation) and benefits for clinical and regulatory personnel, regulatory and clinical payments related to studies, regulatory costs related to registration and approval activities and allocated facilities-related costs. Our clinical and regulatory activities primarily relate to obtaining regulatory approval for the commercialization of our devices.
Marketing and Sales
Marketing and sales expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, clinical specialists, internal sales support functions and marketing personnel. It also includes costs attributable to marketing our products to our customers and prospective customers.
General and Administrative
General and administrative expenses primarily include compensation (including stock-based compensation) and benefits for personnel that support our general operations such as information technology, executive management, financial accounting, and human resources. General and administrative expenses also include bad debt expense, patent and legal fees, financial audit fees, insurance, recruiting fees, other professional services, and allocated facilities-related expenses.


32



Results of Operations
Operations Overview - Three and Nine Months Ended September 30, 2018 versus 2017
The following table presents our results of continuing operations and the related percentage of the period’s revenue (in thousands):

Three Months Ended September 30,
 
Nine Months Ended September 30,

2018

2017
 
2018

2017
Revenue
$
34,756


100.0%

$
45,986


100.0%
 
$
121,780


100.0%

$
137,154


100.0%
Cost of goods sold
12,129


34.9%

16,879


36.7%
 
41,223


33.9%

47,181


34.4%
Gross profit
22,627


65.1%

29,107


63.3%
 
80,557


66.1%

89,973


65.6%
Operating expenses:









 









Research and development
5,037


14.5%

5,277


11.5%
 
16,780


13.8%

16,541


12.1%
Clinical and regulatory affairs
3,208


9.2%

3,211


7.0%
 
10,507


8.6%

9,786


7.1%
Marketing and sales
17,072


49.1%

21,536


46.8%
 
59,913


49.2%

71,217


51.9%
General and administrative
10,330


29.7%

8,332


18.1%
 
34,721


28.5%

25,109


18.3%
Restructuring costs
2,899


8.3%

98


0.2%
 
3,132


2.6%

235


0.2%
Total operating expenses
38,546


110.9%

38,454


83.6%
 
125,053


102.7%

122,888


89.6%
Loss from operations
(15,919
)

(45.8)%

(9,347
)

(20.3)%
 
(44,496
)

(36.5)%

(32,915
)

(24.0)%
Total other income (expense)
5,969


17.2%

(4,864
)

(10.6)%
 
(8,986
)

(7.4)%

(18,626
)

(13.6)%
Net loss before income tax expense
(9,950
)

(28.6)%

(14,211
)

(30.9)%
 
(53,482
)

(43.9)%

(51,541
)

(37.6)%
Income tax expense
(166
)

(0.5)%

(62
)

(0.1)%
 
(277
)

(0.2)%

(338
)

(0.2)%
Net loss
$
(10,116
)

(29.1)%

$
(14,273
)

(31.0)%
 
$
(53,759
)

(44.1)%

$
(51,879
)

(37.8)%
Comparison of the Three Months Ended September 30, 2018 versus 2017         `        
Revenue

Three Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Revenue
$
34,756


$
45,986


$
(11,230
)

(24.4)%

US Sales. Net sales totaled $25.7 million in the three months ended September 30, 2018, a 16.8% decrease from 30.9 million in net sales in the three months ended September 30, 2017, driven by restructuring of US Sales team and the continued impact of Field Safety Notices on AFX and Ovation system.
International Sales. Net sales of products in our international regions totaled $9.1 million in the three months ended September 30, 2018, a 40.1% decrease from $15.1 million in net sales of products in our international regions in the three months ended September 30, 2017. The decrease was primarily driven by restructuring of European Sales team.

33



Cost of Goods Sold, Gross Profit, and Gross Margin

Three Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Cost of goods sold
$
12,129


$
16,879


$
(4,750
)

(28.1
)%
Gross profit
22,627


29,107


(6,480
)

(22.3
)%
Gross margin percentage (gross profit as a percent of revenue)
65.1
%

63.3
%




Gross margin percentage for the three months ended September 30, 2018 increased to 65.1% from 63.3% for the three months ended September 30, 2017. The decrease in cost of goods sold was attributable to lower revenue and more favorable geographic mix in the three months ended September 30, 2018 compared to prior year period.
Operating Expenses

Three Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Research and development
$
5,037


$
5,277


$
(240
)

(4.5)%
Clinical and regulatory affairs
3,208


3,211


(3
)

(0.1)%
Marketing and sales
17,072


21,536


(4,464
)

(20.7)%
General and administrative
10,330


8,332


1,998


24.0%
Restructuring costs
2,899


98


2,801


>100%
Research and Development. The $0.2 million decrease in research and development expenses for the three months ended September 30, 2018, as compared to the prior year period, was attributable to lower headcount driven by restructuring and timing of project spending.
Clinical and Regulatory Affairs. The clinical and regulatory affairs expenses for the three months ended September 30, 2018, as compared to the prior year period, did not materially change.
Marketing and Sales. The $4.5 million decrease in marketing and sales expenses for the three months ended September 30, 2018, as compared to the prior year period, was attributable to lower headcount driven by restructuring and decrease in commission expense.
General and Administrative. The $2.0 million increase in general and administrative expenses for the three months ended September 30, 2018, as compared to the prior year period was primarily attributable to ongoing litigation expenses and expenses associated with modification of the Deerfield Facility Agreement.
Restructuring Costs. The $2.8 million increase in restructuring costs for the three months ended September 30, 2018, as compared to the prior year period, was attributable to the continuation of our restructuring activities initiated to provide efficiencies and realign resources to allow for continued investment in strategic areas and drive growth.
Other income (expense), net

Three Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Other income (expense), net
$
5,969


$
(4,864
)

$
10,833


>100%
Other Income (Expense), Net. Other income of $6.0 million for the three months ended September 30, 2018 consists primarily of a favorable change in fair value of derivative liabilities of $8.3 million and fair value of contingent consideration related to the Nellix acquisition of $5.0 million, partially offset by the interest expense of $7.2 million. Other expense of $4.9 million for the three months ended September 30, 2017 consists primarily of interest expense of $6.0 million and a favorable change in fair value of contingent consideration related to the Nellix acquisition of $0.8 million.


34



Provision for Income Taxes

Three Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Income tax expense
$
(166
)

$
(62
)

$
(104
)

>100%
Our income tax expense was $0.2 million and our effective tax rate was (1.7)% for the three months ended September 30, 2018 due to our tax positions in various jurisdictions. During the three months ended September 30, 2018 and 2017, we had operating legal entities in the U.S., Canada, Italy, New Zealand, Poland, Singapore and the Netherlands (including registered sales branches in certain countries in Europe).
Comparison of the Nine Months Ended September 30, 2018 versus 2017
Revenue

Nine Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Revenue
$
121,780


$
137,154


$
(15,374
)

(11.2)%

US Sales. Net sales totaled $85.1 million in the nine months ended September 30, 2018, a 9.2% decrease from $93.7 million in net sales in the nine months ended September 30, 2017, driven by restructuring of US Sales team and continue impact of Field Safety Notices on AFX and Ovation system.
International Sales. Net sales of products in our international regions totaled $36.7 million in the nine months ended September 30, 2018, a 15.6% decrease from $43.5 million in net sales of products in our international regions in the nine months ended September 30, 2017, driven by restructuring of European Sales team and the continued decline in Nellix sales reflecting the narrowed IFU.
Cost of Goods Sold, Gross Profit, and Gross Margin

Nine Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Cost of goods sold
$
41,223


$
47,181


$
(5,958
)

(12.6)%
Gross profit
$
80,557


$
89,973


$
(9,416
)

(10.5)%
Gross margin percentage (gross profit as a percent of revenue)
66.1
%

65.6
%




Gross margin percentage for the nine months ended September 30, 2018 increased to 66.1% from 65.6% for the nine months ended September 30, 2017. The decrease in cost of goods sold was attributable to lower revenue and more favorable geographic mix in the nine months ended September 30, 2018 compared to prior year period.
Operating Expenses

Nine Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Research and development
$
16,780


$
16,541


$
239


1.4%
Clinical and regulatory affairs
$
10,507


$
9,786


$
721


7.4%
Marketing and sales
$
59,913


$
71,217


$
(11,304
)

(15.9)%
General and administrative
$
34,721


$
25,109


$
9,612


38.3%
Restructuring costs
$
3,132


$
235


$
2,897


>100%
Research and Development. The $0.2 million increase in research and development expenses for the nine months ended September 30, 2018, as compared to the prior year period, was attributable to the timing of project spending.

35



Clinical and Regulatory Affairs. The $0.7 million increase in clinical and regulatory affairs expenses for the nine months ended September 30, 2018, as compared to the prior year period, was driven by investments in the EVAS2 IDE trial and higher regulatory outside service spend.
Marketing and Sales. The $11.3 million decrease in marketing and sales expenses for the nine months ended September 30, 2018, as compared to the prior year period, was attributable to lower headcount driven by restructuring and decrease in commission expense.
General and Administrative. The $9.6 million increase in general and administrative expenses for the nine months ended September 30, 2018, as compared to the prior year period, was primarily attributable to increase in the costs related to the transition of our Chief Executive Officer, ongoing litigation expenses, and expenses associated with modification of the Deerfield Facility Agreement.
Restructuring Costs. The $2.9 million increase in restructuring costs for the nine months ended September 30, 2018, as compared to the prior year period, was attributable to the continuation of our restructuring activities initiated to provide efficiencies and realign resources to allow for continued investment in strategic areas and drive growth.
Other income (expense), net

Nine Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Other income (expense), net
$
(8,986
)

$
(18,626
)

$
9,640


(51.8)%
Other Income (Expense), Net. Other expense of $9.0 million for the nine months ended September 30, 2018 consists primarily of interest expense of $18.9 million and, $2.3 million related to debt extinguishment, partially offset by a favorable change in fair value of derivative liabilities of $8.3 million and a favorable change in fair value of contingent consideration related to the Nellix acquisition of $4.3 million. Other expense of $18.6 million for the nine months ended September 30, 2017 consists mainly of loss on debt extinguishment of $6.5 million, interest expense of $16.1 million and a favorable change in fair value of contingent consideration related to the Nellix acquisition of $3.4 million. 
Provision for Income Taxes

Nine Months Ended September 30,





2018

2017

Variance

Percent Change

(in thousands)




Income tax expense
$
(277
)

$
(338
)

$
61


(18.0)%
Our income tax expense was $0.3 million and our effective tax rate was (0.5)% for the nine months ended September 30, 2018 due to our tax positions in various jurisdictions. During the nine months ended September 30, 2018 and 2017, we had operating legal entities in the U.S., Canada, Italy, New Zealand, Poland, Singapore and the Netherlands (including registered sales branches in certain countries in Europe).



36



Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of September 30, 2018, December 31, 2017, and September 30, 2017:

September 30, 2018

December 31, 2017

September 30, 2017

(in thousands, except financial metrics data)
Cash, cash equivalents and restricted cash
$
42,414


$
60,599


$
76,988

Marketable securities
$


$


$

Accounts receivable, net
$
22,756


$
32,294


$
33,979

Total current assets
$
110,105


$
143,134


$
157,876

Total current liabilities
$
71,000


$
60,630


$
54,474

Working capital surplus (a)
$
39,105


$
82,504


$
103,402

Current ratio (b)
1.6


2.4


2.9

Days sales outstanding (“DSO”) (c)
60


68


68

Inventory turnover (d)
1.1


1.4


1.6

(a) total current assets minus total current liabilities as of the corresponding balance sheet date.
(b) total current assets divided by total current liabilities as of the corresponding balance sheet date.
(c) net accounts receivable at period end divided by revenue for the current period multiplied by the number of days in the period.
(d) cost of goods sold divided by the average inventory balance for the corresponding period.
Operating Activities
In the nine months ended September 30, 2018, cash used in operating activities was $29.1 million. This was primarily the result of a net loss of $53.8 million, non-cash operating expenses of $13.7 million, and changes in operating assets and liabilities of $11.0 million. In the nine months ended September 30, 2017, our operating activities used $33.7 million in cash. This was primarily the result of a net loss of $51.9 million, non-cash operating expenses of $25.7 million, and changes in operating assets and liabilities of $7.6 million.
During the nine months ended September 30, 2018 and 2017, our cash collections from customers totaled $132.6 million and $140.5 million, respectively, representing 108.9% and 102.5% of reported revenue for the same periods.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2018 was $0.5 million, as compared to cash provided by investing activities of $20.1 million in the prior year period. For the nine months ended September 30, 2018, cash used in investing activities consisted of $0.5 million used for machinery and equipment purchases. For the nine months ended September 30, 2017, cash provided by investing activities consisted of $21.0 million in maturities of marketable securities; offset by $0.9 million used for machinery and equipment purchases.
Financing Activities
Cash provided by financing activities was $11.6 million for the nine months ended September 30, 2018, as compared to cash provided by financing activities of $61.7 million in the prior year period. For the nine months ended September 30, 2018, cash provided by financing activities consisted of (i) net proceeds of $10.0 million from revolving line of credit, (ii) proceeds of $1.8 million from issuance of at-the-market shares, (iii) proceeds of $0.9 million from the exercise of stock options, and (iv) proceeds of $1.0 million from sale of common stock under employee stock purchase plan, offset by (i)