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 March 31, 2019
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=12890604&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 every Interactive Data File required to be submitted 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 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


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
ELGX
The Nasdaq Stock Market, LLC
On May 6, 2019, there were 16,787,032 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 MARCH 31, 2019

TABLE OF CONTENTS
 
Item
Description
Page
 
 
 
 
Item 1.
 
 
 
 
 

 
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)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,696

 
$
23,531

Restricted cash
1,200

 
1,200

Accounts receivable, net of allowance for doubtful accounts of $669 and $802, respectively
25,991

 
20,651

Other receivables
337

 
329

Inventories
30,202

 
30,399

Prepaid expenses and other current assets
2,535

 
2,821

Total current assets
$
69,961

 
$
78,931

Property and equipment, net
15,236

 
16,033

Goodwill
120,815

 
120,848

Other intangible assets, net
75,302

 
76,163

Deposits and other assets
2,392

 
1,095

Operating lease right-of-use assets
5,787



Total assets
$
289,493

 
$
293,070

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,923

 
$
10,986

Accrued payroll
13,173

 
14,627

Accrued expenses and other current liabilities
16,057

 
13,314

Total current liabilities
$
44,153

 
$
38,927

Deferred income taxes
150

 
150

Deferred rent


8,065

Operating lease liabilities
11,976



Derivative liabilities
6,035

 
4,012

Other liabilities
2,317

 
1,992

Contingently issuable common stock
2,000

 
2,200

Debt
203,482

 
198,078

Total liabilities
$
270,113

 
$
253,424

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 170,000,000 shares authorized, respectively, 10,390,524 and 10,387,926 shares issued, respectively, and 10,347,806 and 10,345,367 shares outstanding, respectively
10

 
10

Treasury stock, at cost, 42,718 and 42,559 shares, respectively
(4,027
)
 
(4,026
)
Additional paid-in capital
643,150

 
640,789

Accumulated deficit
(621,743
)
 
(599,715
)
Accumulated other comprehensive income
1,990

 
2,588

Total stockholders’ equity
$
19,380

 
$
39,646

Total liabilities and stockholders’ equity
$
289,493

 
$
293,070

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 March 31,
 
2019
 
2018
Revenue
$
35,606

 
$
42,284

Cost of goods sold
12,407

 
13,958

Gross profit
23,199

 
28,326

Operating expenses:
 
 
 
Research and development
4,787

 
5,499

Clinical and regulatory affairs
3,785

 
3,571

Marketing and sales
16,786

 
21,725

General and administrative
9,416

 
10,369

Restructuring costs
419

 
233

Total operating expenses
35,193

 
41,397

Loss from operations
(11,994
)
 
(13,071
)
Other income (expense):
 
 
 
Interest expense
(8,490
)
 
(5,807
)
Other income (expense), net
318

 
366

Change in fair value of contingent consideration related to acquisition
200

 
1,100

Change in fair value of derivative liabilities
(2,023
)
 

Loss on debt extinguishment

 
(2,270
)
Total other expense, net
(9,995
)

(6,611
)
Net loss before income taxes
(21,989
)
 
(19,682
)
Income tax expense
(39
)
 
(85
)
Net loss
$
(22,028
)
 
$
(19,767
)
 
 
 
 
Comprehensive loss, net of taxes:
 
 
 
Net loss
(22,028
)
 
(19,767
)
Other comprehensive loss foreign currency translation
(598
)
 
(127
)
Comprehensive loss
$
(22,626
)
 
$
(19,894
)
 
 
 
 
Basic and diluted net loss per share
$
(2.12
)
 
$
(2.36
)
Shares used in computing basic and diluted net loss per share
10,374

 
8,371

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)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(22,028
)
 
$
(19,767
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Bad debt expense
(126
)
 
152

Depreciation and amortization
1,735

 
1,992

Stock-based compensation
2,361

 
3,021

Change in fair value of derivative liabilities
2,023

 

Change in fair value of contingent consideration related to acquisition
(200
)
 
(1,100
)
Accretion of interest and amortization of deferred financing costs
3,554

 
2,622

Payable in kind interest expense on term loan facility
1,943

 

Non-cash foreign exchange (gain) loss
(400
)
 
(326
)
Loss on debt extinguishment

 
2,270

Non-cash lease expense
53



Changes in operating assets and liabilities:
 
 
 
Accounts receivable and other receivables
(5,253
)
 
3,081

Inventories
112

 
(784
)
Prepaid expenses and other current assets
(2,367
)
 
275

Accounts payable
5,378

 
391

Accrued payroll
(1,438
)
 
(585
)
Accrued expenses and other liabilities
995

 
(1,116
)
Net cash used in operating activities
(13,658
)
 
(9,874
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(107
)
 
(200
)
Net cash (used in) provided by investing activities
(107
)
 
(200
)
Cash flows from financing activities:
 
 
 
Cash paid for debt extinguishment

 
(1,310
)
Net (payments) proceeds from revolving line of credit

 
(21
)
Minimum tax withholding paid on behalf of employees for stock-based compensation
(2
)
 

Proceeds from exercise of stock options

 
706

Net cash provided by financing activities
(2
)
 
(625
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(68
)
 
187

Net (decrease) increase in cash, cash equivalents and restricted cash
(13,835
)
 
(10,512
)
Cash, cash equivalents and restricted cash, beginning of period
24,731

 
60,599

Total cash, cash equivalents and restricted cash, end of period
$
10,896

 
$
50,087

Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
$
9,696

 
$
48,020

Restricted cash
1,200

 
2,067

Total cash, cash equivalents and restricted cash
$
10,896

 
$
50,087

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,065

 
$
2,107

       Cash paid for income taxes
88

 
134

Cash paid for amounts included in the measurement of operating lease liabilities
$
849


$

Non-cash investing and financing activities:

 

       Acquisition of property and equipment included in accounts payable
$
59

 
$
147

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

3



ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

Three Months Ended March 31, 2019














 
 Common Stock

Additional
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’
Equity
 
Issued Shares

Par Value





Balance at December 31, 2018
10,388


$
10


$
640,789


$
(599,715
)

$
(4,026
)

$
2,588


$
39,646

Treasury stock purchased








(1
)



(1
)
Stock-based compensation expense




1,512








1,512

Issuance of restricted stock
3













Restricted stock expense




849








849

Net loss






(22,028
)





(22,028
)
Other comprehensive income










(598
)

(598
)
Balance at March 31, 2019
10,391


$
10


$
643,150


$
(621,743
)

$
(4,027
)

$
1,990


$
19,380




Three Months Ended March 31, 2018














 
 Common Stock

Additional
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’
Equity
 
Issued Shares

Par Value





Balance at December 31, 2017
8,386


$
8


$
594,662


$
(520,001
)

$
(2,942
)

$
3,335


$
75,062

Exercise of common stock options
265




705








705

Stock-based compensation expense




2,143








2,143

Issuance of restricted stock
88













Restricted stock expense




905








905

Non-employee restricted stock expense




(27
)







(27
)
Net loss






(19,767
)





(19,767
)
Other comprehensive income










(127
)

(127
)
Balance at March 31, 2018
8,739


$
8


$
598,388


$
(539,768
)

$
(2,942
)

$
3,208


$
58,894




4



ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share and per unit data, 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 located 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 minimally-invasive endovascular treatment of abdominal aortic aneurysms (“AAA”). The Company’s AAA products are built on one of two platforms: (i) traditional minimally-invasive endovascular aneurysm repair (“EVAR”); or (ii) endovascular aneurysm sealing (“EVAS”), the Company’s innovative solution for sealing the aneurysm sac while maintaining blood flow. The Company’s current EVAR products include the AFX® Endovascular AAA System, the VELA® Proximal Endograft and the Ovation® Abdominal Stent Graft System. The Company’s current EVAS product is the Nellix® Endovascular Aneurysm Sealing System (the “Nellix EVAS System”). The Company derives all of its reported revenue from sales of its EVAR and EVAS products (including extensions and accessories) to hospitals and third party distributors.
(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 United States Securities and Exchange Commission (“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 months ended March 31, 2019 and 2018, there were no related party transactions.
The interim financial data as of March 31, 2019 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 months ended March 31, 2019. Certain information and 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, 2018, filed with the SEC on April 1, 2019.
(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 months ended March 31, 2019, 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.
(d) Reverse Stock Split
At a special meeting of stockholders held on February 22, 2019, the Company’s stockholders approved a proposal to amend the Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio not less than 1-for-5 and not greater than 1-for-10 (inclusive), with the exact ratio to be set as a whole number within that range at the discretion of the board of directors before February 22, 2020 without further approval or authorization of our stockholders. On February 26, 2019, the Company’s board of directors approved the reverse stock split at a ratio of 1-for-10. On March 5, 2019, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation, as Amended (the “Certificate of Amendment”), with the Secretary of State of the State of Delaware to effect the reverse stock split. Unless stated otherwise, all share and per share amounts in this Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2019 have been retroactively adjusted to reflect the reverse stock split.

2. Use of Estimates and Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make

5

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



estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management evaluates its estimates on an ongoing basis, 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 the value of contingent liabilities; and (vi) the 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.
(b) Summary of Significant Accounting Policies
For a complete summary of the Company’s significant accounting policies, please refer to Note 2, “Summary of Significant Accounting Policies,” in Part II, Item 8, of the Company’s 2018 Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019. Except as discussed below, there have been no other material changes to the Company’s significant accounting policies during the three months ended March 31, 2019.

3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
 
March 31,
2019
 
December 31,
2018
Production equipment, molds and office furniture
$
11,451

 
$
11,854

Computer hardware and software
8,252

 
8,235

Leasehold improvements
15,535

 
15,535

Construction in progress (software and related implementation, production equipment and leasehold improvements)
963

 
993

Property and equipment, at cost
36,201

 
36,617

Accumulated depreciation
(20,965
)
 
(20,584
)
Property and equipment, net
$
15,236

 
$
16,033

Depreciation expense for property and equipment for the three months ended March 31, 2019 and 2018 was $0.9 million and $1.0 million, respectively.
(b) Inventories
Inventories consisted of the following:
 
March 31,
2019
 
December 31,
2018
Raw materials
$
4,924

 
$
4,636

Work-in-process
7,501

 
6,401

Finished goods
17,777

 
19,362

Total Inventories
$
30,202

 
$
30,399






6

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



(c) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the three months ended March 31, 2019 was as follows:
Balance at December 31, 2018
$
120,848

Foreign currency translation adjustment
(33
)
Balance at March 31, 2019
$
120,815

Other intangible assets consisted of the following: 
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
$
2,708

 
N/A

 
$
2,708

 
$
2,708

 
N/A
 
$
2,708

In-process research and development
$
11,200

 
N/A

 
11,200

 
11,200

 
N/A
 
11,200

Total indefinite-lived intangible assets
13,908

 
 
 
13,908

 
13,908

 
 
 
13,908

Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Developed technology
67,600

 
(11,331
)
 
56,269

 
67,600

 
(10,657
)
 
56,943

Customer relationships
7,500

 
(2,375
)
 
5,125

 
7,500

 
(2,188
)
 
5,312

Total finite-lived intangible assets
75,100

 
(13,706
)
 
61,394

 
75,100

 
(12,845
)
 
62,255

Other intangible assets, net
$
89,008

 
$
(13,706
)
 
$
75,302

 
$
89,008

 
$
(12,845
)
 
$
76,163

Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 was $0.9 million and $1.0 million, respectively.
Estimated amortization expense for the 5 succeeding years and thereafter is as follows:
Remainder of 2019
$
2,584

2020
3,684

2021
4,283

2022
5,628

2023
7,781

Thereafter
37,434

Total
$
61,394

(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 March 31, 2019 and December 31, 2018:

 
March 31, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingently issuable common stock
(a)
$

 
$

 
$
2,000

 
$
2,000

 
$

 
$

 
$
2,200

 
$
2,200

Derivative liabilities
(b)

 

 
6,035

 
6,035

 

 

 
4,012

 
4,012

Total financial liabilities
 
$

 
$

 
$
8,035

 
$
8,035

 
$

 
$

 
$
6,212

 
$
6,212

(a)     Included in other liabilities in the Condensed Consolidated Balance Sheets. See Note 9 for additional details.

7

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



(b)     See Note 6 for additional details.
Changes in the fair value of the Company’s Level 3 liabilities were as follows:
 
Contingently issuable common stock
(a)
 
Derivative liabilities
(b)
Balance at December 31, 2018
$
2,200

 
$
4,012

Additions

 

Fair value adjustment
(200
)
 
2,023

Balance at March 31, 2019
$
2,000

 
$
6,035

(a)     See Note 9 for additional details.
(b)     See Note 6 for additional details.
There were no transfers of financial assets or liabilities into or out of Level 3 during the three months ended March 31, 2019.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The table below summarizes the carrying and fair values of the Company’s long-term debt:
 
March 31, 2019
 
December 31, 2018
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Term loan facility
$
114,701

 
$
127,477

 
$
117,880

 
$
116,916

Convertible senior notes
84,500

 
57,916

 
75,917

 
50,489

Other debt
4,281

 
1,280

 
4,281

 
1,221

 
$
203,482

 
$
186,673

 
$
198,078

 
$
168,626

The fair values of the Company’s term loan facility and other debt are determined using Level 3 inputs, while the fair value of the Company’s convertible senior notes is determined using Level 2 inputs. See Note 6 for further details. The carrying value of the Company’s Revolving loan facility approximates fair value.
4. Stock-Based Compensation
The table below summarizes the impact of recording stock-based compensation expense in the Condensed Consolidated Statements of Operations and Comprehensive Loss during the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Cost of goods sold
$
227

 
$
236

Operating expenses:


 


Research and development
332

 
333

Clinical and regulatory affairs
186

 
176

Marketing and sales
709

 
1,114

General and administrative
907

 
1,162

Total operating expenses
2,134

 
2,785

Total
$
2,361

 
$
3,021


8

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



5. Net Loss Per Share
Because of the net losses in the three months ended March 31, 2019 and 2018, the following outstanding Company securities, using the treasury stock method, were excluded from the calculations of net loss per share because the effect would have been anti-dilutive:
 
Three Months Ended March 31,
 
2019
 
2018
Common stock options

 
2,699

Restricted stock awards
2,690

 
1,181

Restricted stock units
6,578

 
3,074

  Total
9,268

 
6,954

For purposes of calculating the maximum dilutive impact, it is presumed that the convertible senior notes and Deerfield Warrants (as defined and described in further detail in Note 6) will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the convertible senior notes and Deerfield Warrants is excluded from the calculation of diluted loss per share because the impact of these securities would be anti-dilutive.
The potential dilutive effect of these securities is shown in the table below:
 
Three Months Ended March 31,
 
2019
 
2018
Convertible senior notes
755,695

 
1,193,938

2017 Deerfield Warrants
647,001

 
647,001

2018 Deerfield Warrants
875,001

 

The effect of the contingently issuable common stock (see Note 9) is excluded from the calculation of basic net loss per share until all necessary conditions for issuance have been satisfied.
6. Credit Facilities
Long-term debt consisted of the following:
 
March 31,
2019
 
December 31,
2018
Term loan facility
$
163,584

 
$
161,622

Revolving loan facility

 

Convertible senior notes
84,500

 
84,500

Other debt
4,281

 
4,281

Debt discounts and deferred financing costs
(48,883
)
 
(52,325
)
Long-term debt, including current portion
203,482

 
198,078

Less current portion

 

Long-term debt
$
203,482

 
$
198,078

Deerfield Facility Agreement, as Amended
On April 3, 2017 (the “Agreement Date”), the Company entered into a facility agreement with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to $120.0 million (the “Term Loan”), subject to the terms and conditions set forth in the facility agreement (the “Facility

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



Agreement”). The Company drew the entire principal amount of the Term Loan on the Agreement Date. Deferred financing costs of $5.1 million were recorded on the Company’s Condensed Consolidated Balance Sheets as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan.
On August 9, 2018 (the “New Agreement Date”), the Company entered into an amended and restated facility agreement (the “Amended Facility Agreement”) with Deerfield, pursuant to which Deerfield and the Company canceled and extinguished the $40.5 million principal amount of 3.25% Convertible Senior Notes due 2020 (the “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). 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 (as defined in the “Deerfield Revolver” section below) and the transactions contemplated therein. The Amended Facility Agreement amends and restates in its entirety the Company’s Facility Agreement with Deerfield.
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 252,680 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 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.
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 3-day volume weighted average price per share on the date of conversion into a maximum of 1,430,001 shares of the Company’s common stock. The first $60.0 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 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 each 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 New 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 the New Agreement Date. Pursuant to the guidance in ASU 470-50, “Debt - Modifications and Extinguishments,” the Company determined that the 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 value 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.

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



Under modification accounting, fees and consideration paid to the lender in connection with the restructuring should be reflected as an 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 Warrants issued to Deerfield (see “Deerfield Warrants” section below) were treated as consideration paid to the lender and their associated fair values were treated as an 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 March 31, 2019, the Company had a carrying amount of $122.2 million, inclusive of deferred financing costs of $4.0 million and interest paid in kind of $3.1 million, related to the Term Loan. As of March 31, 2019, annual interest expense on the Term Loan will range from $4.2 million to $31.0 million from the New Agreement Date through maturity.
Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Amended Facility Agreement, such acquirer may assume the outstanding principal amount under the Amended Facility Agreement without penalty. If such acquirer does not satisfy the conditions set forth in the Amended Facility Agreement, Deerfield may, 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 may be required to pay a make-whole premium and will be required to pay a change of control fee.
At any time on or after April 2, 2021 (the “First Amortization Date”), the Company has the right to prepay any amounts owed under the Amended Facility Agreement without premium or penalty, unless such prepayment occurs in connection with a change of control of the Company, in which case the Company must pay Deerfield a change of control fee unless such change of control occurs beyond a certain period after the maturity date. At any time prior to the First Amortization Date, any prepayment made by the Company will be subject to a make-whole premium and, if such prepayment occurs in connection with a change of control of the Company, a change of control fee.
Any amounts drawn under the Amended Facility Agreement may become immediately due and payable upon customary events of default, as defined in the Amended Facility Agreement, or the consummation of certain change of control transactions, as described above.
Deerfield Warrants
In connection with the execution of the Facility Agreement and the Amended Facility Agreement, the Company issued warrants to Deerfield (the “2017 Deerfield Warrants” and the “2018 Deerfield Warrants,” respectively; collectively, the “Warrants”) as summarized below:
 
Number of shares of common stock
 
Exercise price
2017 Deerfield Warrants
647,001

 
$
92.30

2018 Deerfield Warrants
875,001

 
$
47.10

The number of shares of common stock of the Company into which the Warrants are exercisable and the exercise price 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.
The 2017 Deerfield Warrants expire on the 7th anniversary of the Agreement Date. Subject to certain exceptions, the 2017 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 2017 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 2017 Deerfield Warrants may exercise the 2017 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 2017 Deerfield Warrants, in whole or in part, into the right to receive the transaction consideration 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 2017 Deerfield Warrants, as defined therein, and in the case of

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



other major transactions, the holders may have the right to exercise the 2017 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 2017 Deerfield Warrants.
The Company measured the initial fair value of the shares underlying the 2017 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.
The 2018 Deerfield Warrants are exercisable commencing on February 9, 2019, and expire on the 7th anniversary of the New Agreement Date. The holders of the 2018 Deerfield Warrants may exercise the 2018 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 shares underlying the 2018 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 Liabilities
In accordance with Accounting Standards Codification (“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, and assessed 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, 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 prior to the First Amortization Date). This feature remained substantively the same as outlined under the previous Facility 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 the above embedded derivatives at $16.4 million and recorded the amount in derivative liabilities in the Condensed Consolidated Balance Sheet.
For the three months ended March 31, 2019, the Company recorded expense of $2.0 million as a fair value adjustment of the derivative liabilities. The primary factor causing the change in the fair value of the derivative liabilities was 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), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Deerfield Revolver
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 $50.0 million or its applicable borrowing base (the “Previous Revolver”). The Company recorded $1.2 million in deferred financing costs related to the Previous Revolver and presented these costs as a deferred asset and amortized as interest expense over the term of the Previous Revolver on the Company’s Condensed Consolidated Balance Sheets.
Effective January 12, 2018, the Company terminated its Credit Agreement with Deerfield Revolver and paid $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 Condensed Consolidated Statements of Operations and Comprehensive Loss.
On 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 $50.0 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 the London Interbank Offered Rate (“LIBOR”) (with a 1% floor) plus 5.50% payable in cash. The interest rate will accrue on a minimum amount of $9.75 million, whether or not such amount is drawn (which amount in excess of the revolver usage accruing interest will not be subject to the

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



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 $0.5 million ($0.2 million payable upon closing, $0.2 million payable on the 1st anniversary of the closing and $0.1 million payable on the 2nd anniversary of the closing), a $1.0 million fee upon the expiration of the ABL Facility, and an early commitment termination or reduction fee of 2.5% in the 1st year, 1.5% in the 2nd year, 0.5% in the 3rd 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 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. No event of default with respect the Company’s financial covenants had been declared as of March 31, 2019. 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 above).
As of March 31, 2019, the Company had no outstanding borrowings and $0.6 million in deferred financing costs relating to the ABL Facility. Assuming the Credit Amendment (as defined in Note 12 below) had been effective as of March 31, 2019, the remaining borrowings available would have been $22.1 million.
3.25% Convertible Senior Notes due 2020
On November 2, 2015, the Company issued $125.0 million aggregate principal amount of 3.25% Senior Notes in an underwritten public offering. The 3.25% Senior Notes are governed by a base indenture (“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 (as defined therein).
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. 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.
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 2 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 until, 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

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



Notes; (ii) in the 5 business days following any 5-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 2 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 8.9431 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 $111.82 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 the Company, the principal amount of the 3.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
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 components 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, 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.
As of March 31, 2019, the Company had outstanding borrowings of $77.7 million, and deferred financing costs of $0.7 million, related to the 3.25% Senior Notes. There were no principal payments due during the term. Annual interest expense on these 3.25% Senior Notes will range from $6.4 million to $7.2 million through maturity.
The value of the derivative liabilities was estimated using a “with” and “without” approach utilizing Level 3 inputs. In the “with” scenario, the value of the Senior Notes were estimated in a binomial lattice model that considered all terms of the Senior Notes, including the conversion features, with a range of probabilities and assumptions related to the timing and likelihood of the conversion features being exercised by either the Company or the holders of the Senior Notes. In the “without” scenario the value of the Senior Notes absent the conversion options was estimated. The difference between the values

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



estimated in the “with” and “without” scenarios represents the value of the derivative liabilities. Changes in the value of the derivative liabilities were driven by changes in the Company’s stock price, expected volatility, credit spreads and market yields.
Japan Lifeline Co., Ltd. Subordinated Promissory Note
On November 20, 2018, the Company issued a subordinated promissory note to Japan Lifeline Co., Ltd. (“JLL”), the
Company’s Japanese distributor, pursuant to which the Company converted a $4.3 million refund payable to a note payable (the “JLL Note”). The amount owing under the JLL Note accrues interest at a rate of 2.5% per annum and, subject to the terms of the subordination agreement among the Company, JLL and certain Deerfield entities entered into on November 20, 2018, would become due and payable on the earlier of: (i) December 31, 2023; or (ii) the date the JLL Note is declared due and payable by JLL upon the occurrence of certain events of default.
Principal Maturities of Long-term Debt
The aggregate principal maturities of long-term debt as of March 31, 2019 are as follows:
 
Term loan facility
 
Convertible senior notes
 
Other debt
 
Total
Year ending December 31,
 
 
 
 
 
 
 
2019
$

 
$

 
$

 
$

2020

 
84,500

 

 
84,500

2021
40,768

 

 

 
40,768

2022
61,408

 

 

 
61,408

2023
61,408

 

 
4,281

 
65,689

 
$
163,584

 
$
84,500

 
$
4,281

 
$
252,365

7. Revenue Disaggregation
The Company disaggregated revenue in accordance with the new revenue 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 March 31,
 
Three Months Ended March 31,
 
2019
 
2018
 
Implant-based
 
Shipment-based
 
Total
 
Implant-based
 
Shipment-based
 
Total
United States
$
22,463

 
$
323

 
$
22,786

 
$
28,870

 
$
505

 
$
29,375

International
3,807

 
9,013

 
12,820

 
5,542

 
7,367

 
12,909

Total Revenue
$
26,270

 
$
9,336

 
$
35,606

 
$
34,412

 
$
7,872

 
$
42,284

8. Commitments and Contingencies
(a) Leases
The Company determines whether an arrangement is a lease at inception. The Company leases facilities located in Irvine, California and Santa Rosa, California and an office located in Rosmalen, the Netherlands. These facility lease agreements require the Company to pay variable operating costs, including property taxes, insurance and maintenance based on costs incurred or actual usage. The Company’s facility leases do not contain any residual value guarantees. In addition, the Company has certain equipment and automobiles under long-term agreements that were not material for the three months ended March 31, 2019.

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



All facility leases are accounted for as operating leases. A right-of-use asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company's facility leases generally do not provide an implicit rate.
The Company’s facility leases have remaining lease terms ranging from less than 1 year to 10 years, some of which include options to extend the lease term for up to five years.
For the three months ended March 31, 2019, components of facility lease costs consist of $0.9 million in operating lease expense and $0.2 million in variable lease costs.
Maturities of facility lease liabilities by fiscal year for our operating leases are as follows as of March 31, 2019:
Remainder of 2019
$
2,568

2020
3,524

2021
3,692

2022
3,800

2023
2,889

2024 and thereafter
15,132

Total lease payments
$
31,605

Less: Imputed Interest
(17,965
)
Present value of operating lease liabilities
$
13,640

As of March 31, 2019, the current portion of the Company’s operating lease liabilities was $1.7 million and is classified within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.
As of March 31, 2019, the weighted-average remaining lease term was 8.4 years and weighted-average discount rate was 22.2%.
Disclosures related to periods prior to adopting the new lease guidance
Future minimum payments by year under non-cancelable leases with initial terms in excess of 1 year were as follows as of December 31, 2018:
2019
$
3,807

2020
$
3,791

2021
$
3,819

2022
$
3,871

2023
$
2,889

2024 and thereafter
$
15,132

Total lease payments
$
33,309

Facilities rent expense in the years ended December 31, 2018, 2017 and 2016 was $3.4 million, $3.4 million and $3.3 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 6 to 18 months of the employee’s then current salary for

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



an Involuntary Termination prior to a change in control of the Company, and will generally be in a range of 18 to 24 months of the employee’s then current salary for an Involuntary Termination 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.
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 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 “District Court”). 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 United States Food and Drug Administration (the “FDA”) pre-market 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, and on March 15, 2019, lead plaintiff filed its opening brief with the appellate court. In April 2019, we filed our response brief to plaintiff’s appeal. The Company anticipates that the Appellate Court’s hearing on this matter will occur in the fourth quarter of 2019 or early part of 2020. 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.


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



SEC Investigation
In July 2017, we 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 FDA pre-market approval. On February 5, 2019, we received notification that the SEC staff had concluded its investigation and did not intend to recommend an enforcement action.
(d) Product Withdrawal
Voluntary Recall of the Nellix EVAS System
On January 4, 2019, the Company announced that in order to ensure optimal outcomes for patients, the Nellix EVAS System will, for the foreseeable future, only be available for use at approved centers in a clinical investigation setting with prescreened patients that adhere to the current indications outside of the United States. All cases will be pre-screened by a physician panel and supported by the Company’s clinical specialists to ensure adherence to protocol and use in accordance with current product indications. Compassionate use requests will be reviewed in accordance with the process established by the Company and associated national competent authorities. The existing inventory has been voluntarily recalled.
In January 2019, the Company announced that the CE Mark for the Nellix EVAS System had been suspended by its Notified Body following a voluntary recall and field safety notification issued by the Company on January 4, 2019. Suspension of the CE Mark means that the Company may not affix the CE Mark and sell the Nellix EVAS System in the European Union (“EU”) during the term of the suspension.

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, 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 its acquisition of Nellix. The purchase price consisted of shares of the Company’s common stock issuable as of the Nellix Closing Date. Additional payments, solely in the form of shares of the Company’s common stock will 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 the contingently issuable common stock 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 approximately 1,020,000 shares issuable upon the achievement of the Nellix Milestones. As of the Closing Date, the fair value of the contingently issuable common stock was estimated to be $28.2 million.
The Merger Agreement provides that, in addition to the shares of common stock of the Company issued to the former Nellix stockholders at the Nellix Closing Date, if the Company receives approval from the FDA to sell one of Nellix’s products in the United States (the “PMA Milestone”), the Company will issue additional shares of its common stock to the former stockholders of Nellix. The dollar value of the shares of the Company’s 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 Company’s common stock to be issued upon achievement of the PMA Milestone is subject to a stock price floor of $45.00 per share but not subject to a stock price ceiling.
The value of the contingently issuable common stock 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 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 contingently issuable common stock in periods subsequent to the Nellix Closing Date.
The fair value of the contingently issuable common stock 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 Merger Agreement. Adjustments to the fair value of the contingently issuable common stock are recognized within other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. See the “Fair Value Measurements” section of

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



Note 3 for further details. As of March 31, 2019, the fair value of the contingently issuable common stock was presented in non-current liabilities.
At March 31, 2019 the Company’s stock price closed at $6.61 per share. Thus, had the PMA Milestone been achieved on March 31, 2019 the contingently issuable common stock would have comprised approximately 333,149 shares (based on the 30-day average closing stock price ending 5 days prior to the announcement, subjected to the stock price floor of $45.00 per share), representing a value of $2.2 million.
10. Income Taxes
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 $39 thousand and $85 thousand for the three months ended March 31, 2019 and 2018, respectively. The Company’s ETR was (0.2)% and (0.4)% for the three months ended March 31, 2019, and 2018, respectively. The Company’s ETR for the three months ended March 31, 2019 differs from the U.S. federal statutory tax rate of 21% primarily as a result of nondeductible expenses (including the Nellix contingently issuable common stock), 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 the domestic and foreign deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the domestic and foreign deferred tax assets, the Company maintained a valuation allowance of $135.2 million against a substantial portion of its deferred tax assets as of March 31, 2019. If and 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.
11. Restructuring Charges
In the three months ended March 31, 2019 and 2018, the Company recorded $0.4 million and $0.2 million, respectively, 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 Technologies, Inc. The targeted reductions and other restructuring activities were initiated to provide efficiencies and re-align resources as well as to allow for continued investment in strategic areas and drive growth.
In March 2019, the Company continued its restructuring activities including: restructuring certain aspects of its business and operations to re-prioritize its sales and marketing efforts; rationalizing its international presence and related expenses; streamlining its workforce and taking other measures to increase efficiencies; decreasing its cash consumption and decreasing its cost to serve; and refocusing its business on strong execution of its core strategies. The Company 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 March 31, 2019, the Company estimates that it will incur a total of $16.3 million in restructuring charges upon the completion of the plan, of which $16.3 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 three months ended March 31, 2019:

One-time termination benefits
Accrual balance as of December 31, 2018
$
562

Restructuring charges
419

Utilization
(281
)
Accrual balance as of March 31, 2019
$
700


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



The accrual balance as of March 31, 2019 is classified within accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheet.

12. Subsequent Events
Equity Financing

On March 31, 2019, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with select institutional investors and certain other parties (“Investors”), whereby the Company agreed to issue and sell to the Investors, and the Investors agreed to purchase, an aggregate of 7,889,552 shares (the “Equity Shares”) of the Company’s common stock (the “Common Stock”) at a price per share of $6.61 (the “Equity Offering Price”), for an aggregate cash purchase price of approximately $52.15 million (the “Financing”). For any Investor whose purchase of the Equity Shares would result in its beneficially owning in excess of 19.99% of the shares (the excess shares, the “Blocked Shares”) of the Common Stock outstanding immediately after giving effect to the issuance, in lieu of issuing the Blocked Shares which such Investor would have received, the Company will issue to such Investor a pre-paid warrant to purchase shares of Common Stock equal to the number of Blocked Shares that would have been received (the “Pre-Paid Warrants”) for the Equity Offering Price per share. Each Pre-Paid Warrant will be exercisable upon issuance, provided that such exercise does not result in the issuance of Blocked Shares, and will expire ten years from the date of issuance. 
On April 3, 2019, the Company closed the transactions contemplated by the Purchase Agreement. The Company received gross proceeds of approximately $52.15 million pursuant to the Purchase Agreement.
Convertible Note Exchange
On March 31, 2019, the Company and two investors holding $73.4 million of the principal amount of the Company’s 3.25% Convertible Senior Notes due 2020 (the “Holders”) entered into an Exchange Agreement (the “Exchange Agreement”) providing for the exchange of the Holders’ existing notes (the “Existing Notes”) for new5.00% Voluntary Convertible Senior Notes due 2024 (the “New Voluntary Notes”) and new 5.00% Mandatory Convertible Senior Notes due 2024 (the “New Mandatory Notes”, and together with the New Voluntary Notes, the “New Notes”). The exchanging Holders will receive $900 principal amount of New Notes for every $1000 principal amount of Existing Notes plus accrued interest exchanged pursuant to the Exchange Agreement (the “Exchange”). The Company will issue $25.0 million of principal amount of the New Mandatory Notes and $42.02 million of principal amount of the New Voluntary Notes to the Holders. The New Notes are being issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a)(2) of the Securities Act.

On April 3, 2019, the Company closed the transactions contemplated by the Exchange Agreement. The Company exchanged an aggregate principal amount of approximately $73.355 million of principal amount of Existing Notes plus accrued but unpaid interest for an aggregate of $67.02 million of principal of New Notes pursuant to the Exchange Agreement.

The New Voluntary Notes and New Mandatory Notes are governed by separate Indentures (respectively, the “New Voluntary Notes Indenture” and “New Mandatory Notes Indenture”, and collectively, the “Indentures”), each dated as of the closing of the Exchange (the “Closing Date”), by and between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The New Notes will accrue interest at a rate of 5.00% per year, payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2019. The New Notes will mature on the anniversary of the Closing Date in 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the Indenture. The Indentures governing the New Notes will contain customary terms and covenants and events of default.

The New Voluntary Notes will be convertible at the option of each Holder into shares of common stock at any time on or after July 1, 2020, but prior to the close of business on the business day immediately preceding January 1, 2024, provided that, except if the Company undergoes a fundamental change (as defined in the New Voluntary Notes Indenture) and for certain other customary circumstances of conversion, each Holder may not convert more than 30% the initial aggregate principal amount of his or her outstanding New Voluntary Notes per calendar quarter (a “Voluntary Conversion”). Thereafter, until the close of business on the business day immediately preceding the maturity date, the New Voluntary Notes will be convertible at the option of the holder at any time regardless of the conditions described in this paragraph. The initial conversion rate of the New Voluntary Notes in a Voluntary Conversion is 0.12103 shares of the Company’s common stock per $1.00 principal amount of

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



the New Notes, which is equivalent to an initial conversion price per share equal to 125% of the Equity Offering Price (the “Voluntary Conversion Price”). The conversion rate is subject to adjustment upon the occurrence of certain specified events. Except if the Company undergoes a fundamental change (as defined in the New Voluntary Notes Indenture) and for certain other customary circumstances of conversion, in no event prior to the close of business on the business day immediately preceding January 1, 2024 may the New Voluntary Notes be converted in a calendar quarter unless the closing sale price of the Company’s common stock for at least twenty (20) trading days during the period of thirty (30) consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 110% of the Equity Offering (subject to adjustment upon the occurrence of certain specified events) (the “Voluntary Conversion Threshold”).

The New Mandatory Notes provide for the mandatory conversion (a “Mandatory Conversion”) of $1,666,666 of the aggregate principal amount each calendar month for fifteen (15) consecutive months beginning on the calendar month beginning with May 1, 2019, if and only if at the end of the prior calendar month the trailing average volume weighted average price (“VWAP”) of the last five (5) trading days of the prior calendar month is greater than 100% of the Equity Offering Price (the “Mandatory Conversion Trigger”). In the event of a Mandatory Conversion, $1,666,666 of the New Mandatory Notes would mandatorily convert at a conversion rate of 0.15129 shares of the Company’s common stock per $1.00 principal amount of the New Notes, which is equivalent to a price per share equal to the Equity Offering Price. The New Mandatory Notes will be convertible at the option of each Holder into shares of common stock at the Voluntary Conversion Price at any time prior to the close of business on the business day immediately preceding January 1, 2024, provided that, except if the Company undergoes a fundamental change (as defined in the New Mandatory Notes Indenture) and for certain other customary circumstances of conversion, each Holder may not convert more than 30% of the initial aggregate principal amount of his or her outstanding New Mandatory Note per calendar quarter, and provided further, that (i) voluntary conversions may be effected only if the Voluntary Conversion Threshold has been achieved and (ii) a voluntary conversion may not take place in the same calendar quarter as a Mandatory Conversion. Thereafter, until the close of business on the business day immediately preceding the maturity date, the New Mandatory Notes will be convertible at the option of the holder at any time regardless of the conditions described in this paragraph.

The Indentures provide that in no event may a Holder convert, whether in a Voluntarily Conversion or a Mandatory Conversion or otherwise, into shares of common stock if such conversion would result in the Holder beneficially owning more than 9.5% of the Company’s outstanding common stock.

Second Amendment to Facility Agreement

On March 31, 2019, the Company amended the Amended Facility Agreement by entering into a Second Amendment to Amended and Restated Facility Agreement and First Amendment to Amended and Restated Guaranty and Security Agreement (the “Facility Amendment”) with Deerfield, dated August 9, 2018, as amended by that certain First Amendment to Amended and Restated Facility Agreement, dated November 20, 2018. The Facility Amendment provides for, among other things, the reduction in the global excess liquidity covenant from $22.5 million to $17.5 million and the reduction of the minimum net revenue financial covenants. In addition, the percentage of the $120.0 million of first out waterfall loans (the “First Out Waterfall Loans”) due on April 2, 2021 decreased from 33.33% to 16.67% of the First Out Waterfall Loans outstanding on such date, while the percentage of the remainder of the First Out Waterfall Loans due on April 2, 2022 remained at 50% of the First Out Waterfall Loans outstanding on such date.

The Amended Facility Agreement provides for the exchange of the existing notes representing the First Out Waterfall Loans for amended notes (the “First Out Waterfall Notes”) that provide that in the event that, in any calendar month beginning April 1, 2019 and ending June 30 2020 (the “Mandatory Conversion Period”), if (A)(i) the arithmetic mean of the volume weighted average prices of the Company’s common stock (the “VWAP”) on the five (5) consecutive trading days ending on the 15th calendar day (or, if not a trading day, the first trading day thereafter) (the “Mandatory Conversion Measurement Date”) and (ii) the closing price for the Company’s common stock on the Mandatory Conversion Measurement Date, both exceed $6.625 (as may be adjusted to reflect certain events) (the “Fixed Conversion Price”) and (B)(i) the VWAP on the five (5) consecutive trading days ending on (and including) the third (3rd) trading day immediately prior to the Mandatory Conversion Measurement Date (the “Initial Mandatory Conversion Measurement Date”) and (ii) the closing price for the Company’s common stock on the Initial Mandatory Conversion Measurement Date both exceed the Fixed Conversion Price, Deerfield shall be obligated to convert $1,666,666 of the principal amount of the loan into shares of common stock at the Fixed Conversion Price, up to a maximum aggregate amount of $25.0 million over the Mandatory Conversion Period.

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



Deerfield also has the option to convert up to an additional $50.0 million of the Company’s outstanding debt (the “Voluntary Conversion Amount”) at the greater of the Fixed Conversion Price and 85% of the arithmetic average of the volume weighted average price of the Company’s common stock on each of the fifteen (15) consecutive trading days prior to the conversion date (the “15 Day VWAP”). The Company has the option to require conversion of the Voluntary Conversion Amount (less the amount of prior voluntary conversions) if the Company’s 15 Day VWAP is greater than 175% of the Fixed Conversion Price. The First Amendment Waterfall Notes also provide that in no event may Deerfield convert any note amounts, whether voluntarily or mandatorily, into shares of common stock if such conversion would result in Deerfield beneficially owning more that 4.985% of the Company’s outstanding common stock. The First Out Waterfall Notes also revises Deerfield’s existing right to convert a portion of the outstanding principal amount of the first-out waterfall loan into a maximum of 1,430,000 shares of the Company’s common stock from the current conversion price of 96% of the arithmetic average of the volume weighted average price of the Company’s common stock on each of the three (3) consecutive trading days prior to the conversion date (the “96% VWAP Price”) to the greater of (i) $6.625 (subject to certain adjustments) or (ii) the 96% VWAP Price. 

Further, the Facility Amendment also provides, upon the effectiveness, for an increase of $5,000,000 in the amounts payable to the holders of the First Out Waterfall Notes as a fee upon termination (or reduction, or required reduction of the outstanding amounts under the First Out Waterfall Notes to less than $10,000,000) under the Amended Facility Agreement and to reimburse Deerfield for all expenses incurred by Deerfield in connection with the negotiation and documentation of the Facility Amendment. Also, the existing right of the Company to satisfy interest payments on the First Out Waterfall Loans with up to 250,000 shares of its common stock has been removed.

The Facility Amendment is conditioned upon completion of the Financing with gross proceeds to the Company of at least $40.0 million and the closing of the transactions contemplated by the Exchange Agreement, amongst other conditions.

In connection with entry into the Facility Amendment, the Company is amending the Warrants (the “Warrant Amendment”) in order to reduce the exercise price of the Warrants to the Equity Offering Price. All other material terms and conditions of the Warrants remain the same. 

On April 3, 2019, the Company closed the transactions contemplated by the Exchange Agreement and the terms of the Facility Amendment became effective. The Company has issued the Warrants and the First Out Waterfall Notes contemplated by the Facility Amendment.

Second Amendment to Credit Agreement

On March 31, 2019, the Company amended the New Credit Agreement by entering into a Second Amendment to Credit Agreement and First Amendment to Guaranty and Security Agreement (the “Credit Amendment”) with Deerfield, dated August 9, 2018, as amended by that certain First Amendment to Credit Agreement, dated November 20, 2018 (as so amended, the “Credit Agreement”). The Credit Amendment includes conforming revisions to reflect the changes in the Facility Amendment. In addition, the Credit Amendment extends the maturity date of the New Credit Agreement to the earlier or (i) April 2, 2023 or (ii) the date the loans pursuant to the Facility Agreement have been repaid in full.



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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, 2018, filed with the U.S. Securities and Exchange Commission (“SEC”) on April 1, 2019, and in this Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2019, including but not limited to those factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Consolidated

23


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 abdominal aortic aneurysms (“AAA”). Our AAA products are built on one of two platforms:
Traditional minimally-invasive endovascular aneurysm repair (“EVAR”); or
Endovascular aneurysm sealing (“EVAS”), our innovative solution for sealing the aneurysm sac while maintaining blood flow.
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 products through a direct sales force in the United States and internationally through a combination of direct sales and a network of third party distributors and agents.
See Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018, 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.
The Nellix EVAS System and Ovation Alto® Abdominal Stent Graft System (the “Ovation Alto”), our next generation Ovation System device, are approved as investigational devices only and are not currently approved for commercial purposes 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 submitted the one year results to the United States Food and Drug Administration (“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

24



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 United States IDE trial two-year clinical data are included below:
Freedom from all endoleaks (95.1%), rupture (99.4%) and all-cause mortality (93.8%) among all patients.
Highest freedom of type II endoleaks, of 96.6%, ever reported at two years, among all patients.
When applying the refined IFUs for Nellix, patients at the two-year follow-up demonstrated 95.9% 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 (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 105 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 Symposium on Vascular and Endovascular Issues (the “VEITH Symposium”). The following outcomes were presented at the VEITH Symposium:
37% of patients having complex anatomies;
98.1% freedom from any persistent endoleaks at latest follow-up;
No secondary interventions for Type II endoleaks;
97.4% freedom from aneurysm-related mortality; and
98.5% 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, 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.
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 United States under an IDE. Following a thorough review of supporting clinical data, our Notified Body, together with an independent clinical reviewer, determined that the Nellix EVAS System, with the refined IFU, met the applicable safety and clinical performance requirements.

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 EVAS System with traditional EVAR. The study reported significantly higher three-year survival for EVAS patients as compared to EVAR patients. Those patients with larger aneurysms (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 AAA size, patient demographics, and

25



cardiovascular risk factors. The primary outcome was overall survival, with a secondary analysis of overall survival stratified by aneurysm size.
In January 2019, we announced that in order to ensure optimal outcomes for patients, the Nellix EVAS System will, for the foreseeable future, only be available for use at approved centers in a clinical investigation setting with pre-screened patients that adhere to the current indications outside of the United States. All cases will be pre-screened by a physician panel to ensure adherence to protocol and use in accordance with current product indications. Compassionate use requests will be reviewed in accordance with the process established by us and associated national competent authorities. The existing inventory has been voluntarily recalled.
In January 2019, we announced that the CE Mark for the Nellix EVAS System had been suspended by our Notified Body following a voluntary recall and field safety notification issued by us on January 4, 2019. Suspension of the CE Mark means that we may not affix the CE Mark and sell the Nellix EVAS System in the European Union (“EU”) during the term of the suspension.
AFX System and VELA
The AFX System, which is comprised of AFX and AFX2 (discussed in further detail below), 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 on 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 at least 400 patients at up to 80 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 the AFX System. The LEOPARD study is being led by an independent steering committee of leading physicians who are responsible for presenting the results over the 5-year follow-up period.
Positive results from LEOPARD were presented at the VEITH Symposium in November 2018. Based on those who completed follow-up, the one-year freedom from Aneurysm Related Complications (“ARC”) shows that overall the AFX System has a similar performance to other devices. Analysis of individual clinical outcomes suggests that different EVAR approaches may have advantages in different patient populations. The AFX System 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 the 455 enrolled patients for the planned 5 years.
In December 2015, we announced that the AFX 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, into an integrated new EVAR system.
In December 2016, we received notice from our Notified Body in the EU 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. For our current generation of AFX products, we had 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.

26



In July 2018, Endologix sent a voluntary safety notice (“Safety Notice”) to healthcare professional (“HCP”) users of the AFX 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 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 I 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 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 HCPs 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 has a ultra-low profile delivery system allowing for percutaneous access.
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 3-year results from the Ovation EU Post Market Registry. The data was presented at the 2017 Leipzig Interventional Course (“LINC”) meeting and showed that the Ovation System has the broadest range of patient applicability on IFU 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 February 2018, the results of the one-month clinical data from the LIFE Study were published in the Journal of Endovascular Therapy that demonstrate that the Ovation System met the study primary endpoint for major adverse events at 30 days. The following are highlights of the publication, with outcomes covering one-month follow-up:
Low major adverse event rate of 0.4%;
No ruptures, conversion, or secondary interventions;
No type III endoleaks and low Type I endoleaks (0.4%);
Fast-Track completed in 216 patients (87%), 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 System in female patients with AAA, as compared to males. This 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;

27



1.3% major adverse events;
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. Despite having more complex anatomy at the time of the index procedure women continue to demonstrate similar outcomes to men through one year. The 1-year outcomes of freedom from conversion, rupture, AAA-related mortality and device-related reintervention were similar between the two arms.
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 the VEITH Symposium that the 5-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 0.1mm, compared to 5.3mm as reported with other EVAR devices;
96.6% 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, 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 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 April 2018, at Charing Cross Annual Symposium, the first results from ENCORE, a pooled, global analysis of 6 prospective clinical trials and registries studying polymer endovascular aneurysm repair (“Polymer EVAR”) using Ovation System were presented. ENCORE is a pooled retrospective analysis of the 6 prospective clinical trials and registries and encompasses 1,296 patients, 160 centers and 339 investigators in the United States, Europe and Latin America. Median patient follow-up across all ENCORE trials and registries was 1,034 days (range 30 days to 5 years) at the time of analysis. At 5 years, the ENCORE analysis included the following results for the Ovation System 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 Ia endoleak; and
93% freedom from all device-related reintervention.
In February 2019, we announced that the Ovation System for the treatment of AAA received Shonin approval from the MHLW.


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Characteristics of Our Revenue and Expenses
Revenue
Revenue is derived from sales of our EVAR and EVAS products (including extensions and accessories) to hospitals upon completion of each AAA repair procedure, or from sales to distributors upon title transfer (which is typically at shipment), provided our other revenue recognition criteria have been met.
Cost of Goods Sold
Cost of goods sold primarily consists of 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 primarily 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.
Clinical and Regulatory
Clinical and regulatory expenses primarily 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 consist of 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, the federal medical device excise tax and allocated facilities-related expenses.

29



Results of Operations
Operations Overview - Three Months Ended March 31, 2019 versus 2018
The following table presents our results of continuing operations and the related percentage of the period’s revenue (in thousands, except percentages):

Three Months Ended March 31,

2019
 
2018
Revenue
$
35,606

 
100.0
 %
 
$
42,284

 
100.0
 %
Cost of goods sold
12,407

 
34.8
 %
 
13,958

 
33.0
 %
Gross profit
23,199

 
65.2
 %
 
28,326

 
67.0
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
4,787

 
13.4
 %
 
5,499

 
13.0
 %
Clinical and regulatory affairs
3,785

 
10.6
 %
 
3,571

 
8.4
 %
Marketing and sales
16,786

 
47.1
 %
 
21,725

 
51.4
 %
General and administrative
9,416

 
26.4
 %
 
10,369

 
24.5
 %
Restructuring costs
419

 
1.2
 %
 
233

 
0.6
 %
Total operating expenses
35,193

 
98.8
 %
 
41,397

 
97.9
 %
Loss from operations
(11,994
)
 
(33.7
)%
 
(13,071
)
 
(30.9
)%
Total other expense, net
(9,995
)
 
(28.1
)%
 
(6,611
)
 
(15.6
)%
Net loss before income taxes
(21,989
)
 
(61.8
)%
 
(19,682
)
 
(46.5
)%
Income tax expense
(39
)
 
(0.1
)%
 
(85
)
 
(0.2
)%
Net loss
$
(22,028
)
 
(61.9
)%
 
$
(19,767
)
 
(46.7
)%
Comparison of the Three Months Ended March 31, 2019 versus 2018         `        
Revenue

Three Months Ended March 31,
 
 
 
 

2019
 
2018
 
Variance
 
Percent Change

(in thousands)
 

 

Revenue
$
35,606

 
$
42,284

 
$
(6,678
)
 
(15.8
)%
United States Sales. Net sales totaled $22.8 million in the three months ended March 31, 2019, a 22.4% decrease from 29.4 million in net sales in the three months ended March 31, 2018, 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 $12.8 million in the three months ended March 31, 2019, a 0.7% decrease from $12.9 million in net sales of products in our international regions in the three months ended March 31, 2018. The decrease was primarily driven by restructuring of European Sales team.
Cost of Goods Sold, Gross Profit, and Gross Margin

Three Months Ended March 31,
 
 
 
 

2019
 
2018
 
Variance
 
Percent Change

(in thousands)
 

 

Cost of goods sold
$
12,407

 
$
13,958

 
$
(1,551
)
 
(11.1
)%
Gross profit
23,199

 
28,326

 
(5,127
)
 
(18.1
)%
Gross margin percentage (gross profit as a percent of revenue)
65.2
%
 
67.0
%
 

 


30



Gross margin percentage for the three months ended March 31, 2019 decreased to 65.2% from 67.0% for the three months ended March 31, 2018. The decrease in gross profit margin was attributable to lower revenue and unfavorable geographic mix in the three months ended March 31, 2019 compared to prior year period.
Operating Expenses

Three Months Ended March 31,
 
 
 
 

2019
 
2018
 
Variance
 
Percent Change

(in thousands)
 

 

Research and development
$
4,787

 
$
5,499

 
$
(712
)
 
(12.9
)%
Clinical and regulatory affairs
3,785

 
3,571

 
214

 
6.0
 %
Marketing and sales
16,786

 
21,725

 
(4,939
)
 
(22.7
)%
General and administrative
9,416

 
10,369

 
(953
)
 
(9.2
)%
Restructuring costs
419

 
233

 
186

 
79.8
 %
Research and Development. The $0.7 million decrease in research and development expenses for the three months ended March 31, 2019, 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 March 31, 2019, as compared to the prior year period, did not materially change.
Marketing and Sales. The $4.9 million decrease in marketing and sales expenses for the three months ended March 31, 2019, as compared to the prior year period, was attributable to lower headcount driven by restructuring in both the U.S. and Europe.
General and Administrative. The $1.0 million decrease in general and administrative expenses for the three months ended March 31, 2019, as compared to the prior year period was primarily attributable to lower litigation expenses.
Restructuring Costs. The $0.2 million increase in restructuring costs for the three months ended March 31, 2019, 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 Expense, Net

Three Months Ended March 31,
 
 
 
 

2019
 
2018
 
Variance
 
Percent Change

(in thousands)
 

 

Other expense, net
$
(9,995
)

$
(6,611
)
 
$
(3,384
)
 
51.2%
Other Income (Expense), Net. Other income of $10.0 million for the three months ended March 31, 2019 consists primarily of interest expense of $8.5 million, unfavorable change in fair value of derivative liabilities of $2.0 million, partially offset by favorable fair value of contingent consideration related to the Nellix acquisition of $0.2 million and FX gain of $0.4 million. Other expense of $6.6 million for the three months ended March 31, 2018 consists primarily of interest expense of $5.8 million, $2.3 million related to debt extinguishment and favorable change in fair value of contingent consideration related to the Nellix acquisition of $1.1 million.
Provision for Income Taxes

Three Months Ended March 31,
 
 
 
 

2019
 
2018
 
Variance
 
Percent Change

(in thousands)
 

 

Income tax expense
$
(39
)
 
$
(85
)
 
$
46

 
(54.1)%

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Our income tax expense was $39 thousand and our effective tax rate was (0.2)% for the three months ended March 31, 2019 due to our tax positions in various jurisdictions. During the three months ended March 31, 2019 and 2018, 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).
Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of March 31, 2019, December 31, 2018 and March 31, 2018:
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
(in thousands, except financial metrics data)
Cash, cash equivalents and restricted cash
$
10,896

 
$
24,731

 
$
50,087

Accounts receivable, net
$
25,991

 
$
20,651

 
$
29,241

Total current assets
$
69,961

 
$
78,931

 
$
128,694

Total current liabilities
$
44,153

 
$
38,927

 
$
60,569

Working capital surplus
$
25,808

 
$
40,004

 
$
68,125

Current ratio
1.6

 
2.0

 
2.1

Days sales outstanding (“DSO”)
65

 
55

 
62

Inventory turnover
1.7

 
1.7

 
1.2

Operating Activities
In the three months ended March 31, 2019, cash used in operating activities was $13.7 million. This was primarily the result of a net loss of $22.0 million, non-cash operating expenses of $10.9 million, and changes in operating assets and liabilities of $2.6 million. In the three months ended March 31, 2018, our operating activities used $9.9 million in cash. This was primarily the result of a net loss of $19.8 million, non-cash operating expenses of $6.4 million, loss on debt extinguishment of $2.3 million, and changes in operating assets and liabilities of $1.3 million.
During the three months ended March 31, 2019 and 2018, our cash collections from customers totaled $30.6 million and $45.8 million, respectively, representing 86.0% and 108.2% of reported revenue for the same periods.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2019 was $0.1 million, as compared to cash provided by investing activities of $0.2 million in the prior year period. For the three months ended March 31, 2019, cash used in investing activities consisted of $0.1 million used for machinery and equipment purchases. For the three months ended March 31, 2018, cash used in investing activities consisted of $0.2 million used for machinery and equipment purchases.
Financing Activities
Cash provided by financing activities was $2.0 thousand for the three months ended March 31, 2019, as compared to cash provided by financing activities of $0.6 million in the prior year period. For the three months ended March 31, 2018, cash used in financing activities consisted of $1.3 million paid for debt extinguishment, partially offset by proceeds of $0.7 million from the exercise of stock options.
Credit Arrangements
See Note 6 of the Notes to the Condensed Consolidated Financial Statements for a discussion of our credit arrangements.
Future Capital Requirements
We believe that the future growth of our business will depend upon our ability to successfully develop new technologies for the treatment of aortic disorders and successfully bring these technologies to market. We expect to incur significant expenditures in completing product development and clinical trials for our products.

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The timing and amount of our future capital requirements will depend on many factors, including:
the need for working capital to support our sales growth;
the need for additional capital to fund future development programs;
the need for additional capital to fund strategic acquisitions;
our requirements for additional facility space or manufacturing capacity;
our requirements for additional information technology infrastructure and systems; and
adverse outcomes from potential litigation and the cost to defend such litigation.
We believe that our world-wide cash resources are adequate to operate our business. We presently have several operating subsidiaries outside of the United States. As of March 31, 2019, these subsidiaries held an aggregate of $4.1 million in foreign bank accounts to fund their local operations. These balances related to undistributed earnings, are deemed by management to be permanently reinvested in the corresponding countries in which our subsidiaries operate. Management has no present or planned intention to repatriate foreign earnings into the United States and may have to repatriate any foreign earnings to meet those needs, we would then need to accrue, and ultimately pay, incremental income tax expenses on such “deemed dividend,” unless we then have sufficient net operating losses to offset this potential tax liability.
If we require additional financing in the future, it may not be available on commercially reasonable terms, or at all. Even if we are able to obtain financing, it may cause substantial dilution (in the case of an equity financing), or may contain burdensome restrictions on the operation of our business (in the case of debt financing). If we are not able to obtain required financing, we may need to curtail our operations and/or our planned product development.
Contractual Obligations
Contractual obligation payments by year with initial terms in excess of 1 year were as follows as of March 31, 2019 (in thousands):
 
 
 
Payments due by period
 
Total
 
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Long-term debt obligations
$
288,602

 
$
200

 
$
84,600

 
$
45,404

 
$
72,743

 
$
85,655

 
$

Interest on debt obligations
36,438

 
9,131

 
11,637

 
8,128

 
5,504

 
2,038

 

Operating lease obligations
32,346

 
2,832

 
3,788

 
3,821

 
3,884

 
2,889

 
15,132

Total
$
357,386

 
$
12,163

 
$
100,025

 
$
57,353

 
$
82,131

 
$
90,582

 
$
15,132

Long-term debt obligations includes interest payable in kind on our term loan facility and a $6.1 million exit fee under our credit facility agreement with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”). See Note 6 of the Notes to the Condensed Consolidated Financial Statements for a discussion of long-term debt obligations and Note 8 of the Notes to the Condensed Consolidated Financial Statements for a discussion of operating lease obligations.
Off-Balance Sheet Arrangements
Other than the operating leases described above, we do not have any off-balance sheet arrangements as of March 31, 2019.
Critical Accounting Policies and Estimates
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management evaluates its estimates on an ongoing basis, including those related to: (i) the collectibility of customer accounts; (ii) whether the cost of inventories can be recovered; (iii) the value of goodwill and intangible assets; (iv) the realization of tax assets and estimates of tax liabilities; (v) the likelihood of payment and the value of contingent liabilities; and (vi) the 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.

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See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a discussion of our critical accounting policies and estimates. There have been no other material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.” The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. In July 2018, the FASB made targeted improvements to ASU No. 2016-02, including providing an additional and optional modified retrospective transition method. Under this method, an entity initially applies the standard at the adoption date, including the election of certain transition reliefs and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Effective January 1, 2019, we adopted this new accounting standard using the modified retrospective approach with no restatement of prior periods or cumulative adjustment to retained earnings. We elected certain practical expedients permitted under the transition guidance, including the election to carry forward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. Upon adoption of the new lease accounting standard we recognized an operating lease right-of-use asset of $5.8 million and a corresponding operating lease liability of $13.7 million, respectively as of January 1, 2019. The operating lease liability was determined based on the present value of the remaining minimum rental payments and the operating lease asset was determined based on the value of the lease liability, adjusted for the deferred rent balances of $7.9 million. The adoption of the new lease accounting standard did not have an impact on our consolidated statements of operations and comprehensive loss and consolidated statements of cash flows. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for further discussion.
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which provides the option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The Company adopted this standard on January 1, 2019 with no impact on the consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-based Payment Accounting,” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The guidance is intended to align the accounting for such payments to non-employees with the existing requirements for share-based payments granted to employees. This guidance is effective for annual periods beginning after December 15, 2018 and is to be adopted through a cumulative-effect adjustment to retained earnings as of January 1, 2019 for then outstanding share-based payments to non-employees. The Company adopted this accounting update as of January 1, 2019, which did not result in any change to its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which amends fair value disclosure requirements. ASU No. 2018-13 removes disclosure requirements on the transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU No. 2018-13 clarifies the measurement uncertainty disclosure and adds disclosure requirements for Level 3 unrealized gains and losses and significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019. Entities are permitted to early-adopt any removed or modified disclosures upon issuance and delay adoption of the additional disclosures until the effective date. We early-adopted ASU No. 2018-13 in the year ended December 31, 2018 as it pertains to removed and modified disclosures, which did not result in any change to our consolidated financial statements. We are currently assessing the impact that adoption of the additional disclosures will have on our consolidated financial statements.









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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not believe that we currently have material exposure to interest rate or foreign currency transaction risks.
Interest rate risk. We are exposed to market risk for changes in interest rates applicable to our credit facility agreement with Deerfield. Any outstanding principal under the credit facility will accrue interest at a rate equal to LIBOR (with a 1% floor) plus 5.50%, payable in cash. The interest rate will accrue on a minimum amount of $9.75 million, whether or not such amount is drawn. As of March 31, 2019, we had no amounts outstanding under our credit facility
The remainder of our debt, which is comprised of a term loan facility, convertible senior notes and other note payable, bear fixed interest, and therefore, would not be subject to interest rate risk. For a complete summary of our debt, see Note 6 of the Notes to the Condensed Consolidated Financial Statements.
Foreign currency transaction risk. While a majority of our business is denominated in the United States dollar, a portion of our revenue and expenses are denominated in foreign currencies. Fluctuations in the rate of exchange between the United States dollar and the Euro or the British Pound Sterling may affect our results of operations and the period-to-period comparisons of our operating results. Foreign currency transaction gains and losses are caused by transactions denominated in a currency other than our or our respective subsidiaries’ functional currency and must be remeasured at each balance sheet date or upon settlement. Realized and unrealized foreign exchange gains and losses resulted in approximately $0.4 million of gains during the three months ended March 31, 2019, primarily related to intercompany payables and receivables associated with our European operations. We expect to continue to limit our exposure through future settlements.
Item 4.
CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls
will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information 

Item 1.
LEGAL PROCEEDINGS
Refer to Note 8 of the Notes to the Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
We are from time to time involved in various other legal proceedings, most of which are routine litigation in the normal course of our business. We believe that the resolution of the legal proceedings in which we are involved will not have a material adverse effect on our financial position or results of operations.

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Item 1A.RISK FACTORS
Before deciding to invest in our company, or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this Quarterly Report on Form 10-Q and other reports we have filed with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also affect our business operations. If any of these risks are realized, our business, financial condition, or results of operations could be seriously harmed and, in that event, the market price for our common stock could decline and you may lose all or part of your investment.
These risk factors should be considered in connection with evaluating the forward-looking statements contained in the Quarterly Report on Form 10-Q. These factors could cause actual results and conditions to differ materially from those projected in our forward-looking statements.
Risks Related to Our Business
All of our revenue is generated from a limited number of products, and any decline in the sales of these products, including as a result of negative perceptions regarding our financial stability, or any material departure in expected revenues from our products as against forecasts, will negatively impact our business.
We have focused heavily on the development and commercialization of a limited number of products for the treatment of AAA. If we are unable to continue to achieve and maintain market acceptance of these products and do not achieve sustained positive cash flow from operations, we will be constrained in our ability to fund development and commercialization of improvements and other product lines. In addition, if we are unable to market our products as a result of a manufacturing or quality problem or failure to maintain regulatory approvals, we would lose our only source of revenue and our business would be negatively affected. For example, we recently engaged in a voluntary commercial withdrawal of our Nellix EVAS System, which resulted in the removal of 2019 Nellix-related revenue from our financial forecasts. We currently anticipate that the Nellix EVAS System will only be available at approved centers in a clinical investigation setting with all cases pre-screened by a physician panel to ensure adherence to protocol and use in accordance with current product indications.
We may not succeed in commercializing our products for several reasons, including:
physicians and hospitals may continue relying on (or revert back to) open surgical repair, or use the other approved EVAR devices available for patients;
our direct sales force may not be large enough, or effective enough in its efforts, to train and educate physicians and hospitals about the benefits of our products so as to drive adoption and continued use of our products;
coverage and reimbursement for our products may not be sufficient for customers to choose our devices when in need of an EVAR device;
challenges in the manufacturing, validation and testing of our products may require us to take actions that delay or otherwise hinder new product introductions or that impact currently available products;
new technologies, or improved products by competitors, may limit or reduce adoption and use of our products;
clinical results associated with our products may not be deemed sufficient by us or applicable regulatory authorities to support the approval or commercial use of such products, or may not be sufficiently robust to drive widespread adoption or use;
adverse regulatory or other governmental statements, findings or reports regarding our products, specifically, our EVAR or EVAS technology and products, may adversely affect the regulatory status and market for our products generally; and
negative publicity about, or actual or perceived problems with our products or with EVAR or EVAS devices and technologies generally, could discourage physician and hospital adoption or use of our products.
If we are unable to educate physicians and hospitals about the advantages of our products, do not achieve significantly greater market acceptance of our products, do not obtain or maintain required regulatory approvals for our products, are subjected to adverse regulatory actions, do not regain momentum in our sales activities, or fail to significantly grow our market share, we will not be able to grow our revenue and our business and financial condition will be adversely affected.
Furthermore, sales of our products may be adversely impacted by negative perceptions regarding our financial stability relative to that of our competitors and our ability to sustain our business operations on a long-term basis. While we have recently consummated an equity financing and restructuring of our unsecured convertible indebtedness and secured term loan

36



indebtedness, that has improved our balance sheet and near-term liquidity, negative perceptions of our stability may continue to affect our business. In addition, we will need to raise substantial additional capital in the future. If we are unable to access substantial additional capital or restructure our indebtedness in the future in a timely manner and upon terms reasonably favorable to us, negative perceptions as to our financial stability and prospects may become more pronounced. Further, our technical, human and other resources and capabilities, as well as our revenues and market share, are considerably smaller than those of our principal competitors. Negative perceptions of our overall financial stability, and resources and market share limitations, may cause our customers, suppliers and strategic partners, as well as independent distributors and third party payors, to question our ability to continue to sell our products, provide customer service, support our commercial organization and fulfill our strategic objectives. These concerns may arise from a number of factors, including our recent and projected financial results, our recent and projected cash positions, recent changes in and volatility of our stock price, perceptions about the dilutive impact of our financing transactions, our current level of indebtedness and debt service costs, the competitive environment in our industry, and uncertainties regarding the regulatory environment. Any such concerns, whether actual or perceived, could cause customers to delay the purchase of our products or purchase our competitors’ products.
If we fail to develop and retain our direct sales force, our business could suffer.
We have a direct sales force in the United States and in certain European countries. As we launch new products and increase our marketing efforts with respect to existing products, we will need to retain and develop our direct sales personnel to build upon their experience with our products and their relationships with customers. There is significant competition for sales personnel with experience in relevant medical device sales, and departure of high-performing sales personnel can lead to loss of revenue. If we are unable to attract, motivate and develop qualified sales personnel and thereby grow our sales force, we may not be able to maintain or increase our revenue. Further, if we are unable to retain the high-performing members of our sales force, we may suffer loss of revenues that may not be recoverable in the near-term or at all. Also, if our sales personnel are not sufficiently trained or qualified to successfully market and sell our products in our targeted markets and accounts, our sales results and financial condition will be adversely affected.
We are in a highly competitive market segment, which is subject to rapid technological change. If our competitors are better able to develop and market products that are safer, more effective, less costly, easier to use, or otherwise more attractive than the products that we may develop, our business will be adversely impacted.
Our industry is highly competitive and subject to rapid technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products for use in the treatment of AAA. We face competition from both established and development stage companies. Many of the companies developing or marketing competing products enjoy several advantages over us, including:
greater financial and human resources for product development, sales and marketing and patent litigation;
greater name recognition;
long established relationships with physicians, customers, and third party payors;
additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives;