Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________ 
FORM 10-Q
 __________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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=13189282&doc=14
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  
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 13(a) of the Exchange 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 November 4, 2019, there were 17,942,070 shares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS
 
Item
Description
Page
 
 
 
 
Item 1.
 
 
 
 
 

 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 6.
 


Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the Company and/or the current reporting period.





Part I. Financial Information
 
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
46,587

 
$
23,531

Restricted cash
1,200

 
1,200

Accounts receivable, net of allowance for doubtful accounts of $1,315 and $802, respectively
21,658

 
20,651

Other receivables
229

 
329

Inventories
30,877

 
30,399

Prepaid expenses and other current assets
2,058

 
2,821

Total current assets
$
102,609

 
$
78,931

Property and equipment, net
13,691

 
16,033

Goodwill
120,770

 
120,848

Other intangible assets, net
73,494

 
76,163

Deposits and other assets
1,293

 
1,095

Operating lease right-of-use assets
5,660



Total assets
$
317,517

 
$
293,070

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,779

 
$
10,986

Accrued payroll
18,732

 
14,627

Accrued expenses and other current liabilities
15,791

 
13,314

Total current liabilities
$
46,302

 
$
38,927

Deferred income taxes
150

 
150

Deferred rent


8,065

Operating lease liabilities
11,640



Derivative liabilities
9,112

 
4,012

Other liabilities
2,235

 
1,992

Contingently issuable common stock
1,300

 
2,200

Debt
176,993

 
198,078

Total liabilities
$
247,732

 
$
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, 17,942,961 and 10,387,926 shares issued, respectively, and 17,881,146 and 10,345,367 shares outstanding, respectively
18

 
10

Treasury stock, at cost, 61,815 and 42,559 shares, respectively
(4,154
)
 
(4,026
)
Additional paid-in capital
728,094

 
640,789

Accumulated deficit
(656,642
)
 
(599,715
)
Accumulated other comprehensive income
2,469

 
2,588

Total stockholders’ equity
$
69,785

 
$
39,646

Total liabilities and stockholders’ equity
$
317,517

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
35,775


$
34,756

 
$
107,619

 
$
121,780

Cost of goods sold
12,701


12,129

 
38,362

 
41,223

Gross profit
23,074


22,627

 
69,257

 
80,557

Operating expenses:



 
 
 
 
Research and development
4,645


5,037

 
13,787

 
16,780

Clinical and regulatory affairs
3,632


3,208

 
11,064

 
10,507

Marketing and sales
16,080


17,072

 
48,786

 
59,913

General and administrative
9,547


10,330

 
27,892

 
34,721

Restructuring costs


2,899

 
419

 
3,132

Total operating expenses
33,904


38,546

 
101,948

 
125,053

Loss from operations
(10,830
)

(15,919
)
 
(32,691
)
 
(44,496
)
Other income (expense):



 
 
 
 
Interest expense
(8,527
)

(7,223
)
 
(25,874
)
 
(18,888
)
Other income (expense), net
(380
)

(113
)
 
(541
)
 
(433
)
Change in fair value of contingent consideration related to acquisition
1,000


5,000

 
900

 
4,300

Change in fair value of derivative liabilities
10,691


8,305

 
9,540

 
8,305

Loss on debt extinguishment



 
(11,756
)
 
(2,270
)
Total other income (expense), net
2,784


5,969

 
(27,731
)

(8,986
)
Net loss before income taxes
(8,046
)

(9,950
)
 
(60,422
)
 
(53,482
)
Income tax benefit (expense)
281


(166
)
 
3,495

 
(277
)
Net loss
$
(7,765
)

$
(10,116
)
 
$
(56,927
)
 
$
(53,759
)
 
 
 
 
 
 
 
 
Comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Net loss
(7,765
)

(10,116
)
 
(56,927
)
 
(53,759
)
Other comprehensive income (loss) foreign currency translation
(109
)

32

 
(119
)
 
(647
)
Comprehensive loss
$
(7,874
)

$
(10,084
)
 
$
(57,046
)
 
$
(54,406
)
 





 
 
 
 
Basic and diluted net loss per share
$
(0.40
)

$
(1.19
)
 
$
(3.57
)
 
$
(6.37
)
Shares used in computing basic and diluted net loss per share
19,244


8,523

 
15,953

 
8,445

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


2



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(56,927
)
 
$
(53,759
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Deferred income taxes
(3,678
)


Bad debt expense
537

 
571

Depreciation and amortization
5,264

 
5,919

Stock-based compensation
8,294

 
8,811

Change in fair value of derivative liabilities
(9,540
)
 
(8,305
)
Change in fair value of contingent consideration related to acquisition
(900
)
 
(4,300
)
Accretion of interest and amortization of deferred financing costs
10,495

 
8,242

Payable in kind interest expense on term loan facility
5,941

 

Non-cash foreign exchange loss
548

 
464

Loss on debt extinguishment
11,756

 
2,270

Non-cash lease expense
179



Changes in operating assets and liabilities:
 
 
 
Accounts receivable and other receivables
(1,560
)
 
9,114

Inventories
(768
)
 
2,146

Prepaid expenses and other current assets
812

 
1,610

Accounts payable
886

 
(1,034
)
Accrued payroll
4,157

 
(749
)
Accrued expenses and other liabilities
41

 
(60
)
Net cash used in operating activities
(24,463
)
 
(29,060
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(337
)
 
(476
)
Net cash used in investing activities
(337
)
 
(476
)
Cash flows from financing activities:
 
 
 
Cash paid for debt extinguishment

 
(1,310
)
Deferred financing costs
(3,977
)

(391
)
Net proceeds from revolving line of credit

 
9,979

Proceeds from sale of common stock under employee stock purchase plan
209


997

Proceeds from the sale of at-the-market shares


1,829

Minimum tax withholding paid on behalf of employees for stock-based compensation
(128
)
 
(389
)
Proceeds from exercise of stock options

 
892

Proceeds from common stock offering and pre-paid warrants, net of expenses paid
51,985



Net cash provided by financing activities
$
48,089


$
11,607

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(233
)
 
(256
)
Net increase (decrease) in cash, cash equivalents and restricted cash
23,056

 
(18,185
)
Cash, cash equivalents and restricted cash, beginning of period
24,731

 
60,599

Total cash, cash equivalents and restricted cash, end of period
$
47,787

 
$
42,414

Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:

 
 
Cash and cash equivalents
$
46,587

 
$
38,271

Restricted cash
1,200

 
4,143

Total cash, cash equivalents and restricted cash
$
47,787

 
$
42,414



3



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
6,487

 
$
8,845

       Cash paid for income taxes
182

 
184

Cash paid for amounts included in the measurement of operating lease liabilities
$
2,554

 
$

Non-cash investing and financing activities:

 

       Acquisition of property and equipment included in accounts payable
$
37

 
$
20

Fair value of embedded derivative issued
$
20,447

 
$
15,655

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

 
$
10,406

Conversion of debt to equity
$
3,289

 
$

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


4



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

Nine Months Ended September 30, 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

Employee stock purchase plan
42




207








207

Treasury stock purchased
13








(93
)



(93
)
Stock-based compensation expense




1,355








1,355

Issuance of restricted stock
35













Prepaid warrants




9,700








9,700

Issuance of common stock
6,422


6


42,279








42,285

Shares issued upon conversion of debt
506


1


1,876








1,877

Restricted stock expense




1,168








1,168

Deerfield warrants




4,854








4,854

Debt issuance cost allocated to equity




(762
)







(762
)
Equity conversion option




18,651








18,651

Net loss






(27,134
)





(27,134
)
Other comprehensive income










588


588

Balance at June 30, 2019
17,409


$
17


$
722,478


$
(648,877
)

$
(4,120
)

$
2,578


$
72,076

Stock compensation expense




1,879








1,879

Shares issued upon conversion of debt
512


1


1,480








1,481

Issuance of restricted stock
16













Treasury shares purchased
6








(34
)



(34
)
Restricted stock expense




1,531








1,531

Equity conversion option




726








726

Net loss






(7,765
)





(7,765
)
Other comprehensive gain










(109
)

(109
)
Balance at September 30, 2019
17,943


18


728,094


(656,642
)

(4,154
)

2,469


69,785








5



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

Nine Months Ended September 30, 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
26




705








705

Stock-based compensation expense




2,143








2,143

Issuance of restricted stock
9













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
8,421


$
8


$
598,388


$
(539,768
)

$
(2,942
)

$
3,208


$
58,894

Exercise of common stock options
17




659








659

Employee stock purchase plan
28




999








999

Treasury stock purchased
21








(763
)



(763
)
Stock-based compensation expense




3,227








3,227

Issuance of restricted stock
26













Restricted stock expense




989








989

Non-employee restricted stock expense




49








49

Net loss






(23,876
)





(23,876
)
Other comprehensive income










(552
)

(552
)
Balance at June 30, 2018
8,513


$
8


$
604,311


$
(563,644
)

$
(3,705
)

$
2,656


$
39,626

Exercise of common stock options, net of shares withheld to cover exercise price
1




220







$

220

Stock compensation expense (incl. ESPP exp)




1,301







$

1,301

Treasury stock purchased








(321
)



(321
)
Issuance of common stock
75


1


1,828







$

1,829

Restricted stock expense




224







$

224

Debt issuance costs allocated to equity




(58
)






$

(58
)
Deerfield warrants




10,406







$

10,406

Net income (loss)






(10,116
)




$

(10,116
)
Other comprehensive gain (loss)










32

$

32

Balance at September 30, 2018
8,589


$
9


$
618,232


$
(573,760
)

$
(4,026
)

$
2,688


$
43,143




6



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 and nine months ended September 30, 2019 and 2018, there were no related party transactions.
The interim financial data as of September 30, 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 and nine months ended September 30, 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, as amended by Amendment No. 1 to Form 10-K on Form 10-K/A, filed with the SEC on April 30, 2019 (the “Annual Report”).
(c) Operating Segment
The Company has one operating and reporting segment that is focused exclusively on the development, manufacture, marketing and sale of EVAR and EVAS products for the treatment of aortic disorders. For the three and nine months ended September 30, 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, 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 September 30, 2019 have been retroactively adjusted to reflect the reverse stock split.




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)



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
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 Annual Report. Except as discussed below, there have been no other material changes to the Company’s significant accounting policies during the nine months ended September 30, 2019.

3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
 
September 30,
2019
 
December 31,
2018
Production equipment, molds and office furniture
$
11,302

 
$
11,854

Computer hardware and software
7,899

 
8,235

Leasehold improvements
15,594

 
15,535

Construction in progress (software and related implementation, production equipment and leasehold improvements)
789

 
993

Property and equipment, at cost
35,584

 
36,617

Accumulated depreciation
(21,893
)
 
(20,584
)
Property and equipment, net
$
13,691

 
$
16,033

Depreciation expense for property and equipment for the three months ended September 30, 2019 and 2018 was $0.8 million and $0.9 million, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense for property and equipment was $2.6 million and $2.8 million, respectively.
(b) Inventories
Inventories consisted of the following:
 
September 30,
2019
 
December 31,
2018
Raw materials
$
5,884

 
$
4,636

Work-in-process
5,192

 
6,401

Finished goods
19,801

 
19,362

Total Inventories
$
30,877

 
$
30,399



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)



(c) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the nine months ended September 30, 2019 was as follows:
Balance at December 31, 2018
$
120,848

Foreign currency translation adjustment
(78
)
Balance at September 30, 2019
$
120,770

Other intangible assets consisted of the following: 
 
September 30, 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

 
(12,764
)
 
54,836

 
67,600

 
(10,657
)
 
56,943

Customer relationships
7,500

 
(2,750
)
 
4,750

 
7,500

 
(2,188
)
 
5,312

Total finite-lived intangible assets
75,100

 
(15,514
)
 
59,586

 
75,100

 
(12,845
)
 
62,255

Other intangible assets, net
$
89,008

 
$
(15,514
)
 
$
73,494

 
$
89,008

 
$
(12,845
)
 
$
76,163

Amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 was $0.9 million and $1.1 million, respectively. For the nine months ended September 30, 2019 and 2018, amortization expense for intangible assets was $2.7 million and $3.1 million, respectively.
Estimated amortization expense for the 5 succeeding years and thereafter is as follows:
Remainder of 2019
$
890

2020
3,472

2021
3,867

2022
4,714

2023
5,622

2024
7,176

Thereafter
33,845

Total
$
59,586










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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)



(d) Fair Value Measurements
The following fair value hierarchy table presents information about each major category of the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

 
September 30, 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)
$

 
$

 
$
1,300

 
$
1,300

 
$

 
$

 
$
2,200

 
$
2,200

Derivative liabilities
(b)
$

 
$

 
9,112

 
9,112

 

 

 
4,012

 
4,012

Total financial liabilities
 
$

 
$

 
$
10,412

 
$
10,412

 
$

 
$

 
$
6,212

 
$
6,212

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

Retirement due to debt extinguishment


(5,907
)
Additions

 
20,547

Fair value adjustment
(900
)
 
(9,540
)
Balance at September 30, 2019
$
1,300

 
$
9,112

(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 nine months ended September 30, 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:
 
September 30, 2019
 
December 31, 2018
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Term loan facility
$
136,803

 
$
136,886

 
$
117,880

 
$
116,916

Convertible notes
35,909

 
49,318

 
75,917

 
50,489

Other debt
4,281

 
1,352

 
4,281

 
1,221

 
$
176,993

 
$
187,556

 
$
198,078

 
$
168,626

The fair values of the Company’s long-term debt are determined using Level 3 inputs. The fair values of the Company’s long-term debt are determined using Level 3 inputs, with the exception of the 3.25% Senior Notes, which are determined using Level 2 inputs. See Note 6 for further details. The carrying value of the Company’s Revolving loan facility approximates fair value.



10

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)




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 and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Cost of goods sold
$
234


$
111

 
$
640

 
$
614

Operating expenses:





 


 


Research and development
393


146

 
1,056

 
841

Clinical and regulatory affairs
216


(49
)
 
589

 
383

Marketing and sales
1,116


685

 
2,510

 
2,505

General and administrative
1,451


632

 
3,499

 
4,468

Total operating expenses
3,176


1,414

 
7,654

 
8,197

Total
$
3,410


$
1,525

 
$
8,294

 
$
8,811

5. Net Loss Per Share
Because of the net losses in the three and nine months ended September 30, 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 September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Common stock options


80,143

 

 
180,940

Restricted stock awards
3,531


119,545

 
3,540

 
121,321

Restricted stock units
116,066


148,436

 
62,486

 
343,894

Warrants
1,522,002




1,522,002



  Total
1,641,599


348,124


1,588,028


646,155

For purposes of calculating the maximum dilutive impact, it is presumed that the convertible notes will be settled in common stock and all conversion features within the term loan facility will be exercised 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 term loan facility 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:
 
Nine Months Ended September 30,
 
2019
 
2018
Convertible notes
7,706,786

 
8,317,000

Conversion features under term loan facility
11,241,321

 

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.

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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)



6. Credit Facilities
Long-term debt consisted of the following:
 
September 30,
2019
 
December 31,
2018
Term loan facility
$
165,845

 
$
161,622

Revolving loan facility

 

Convertible notes
73,164

 
84,500

Other debt
4,281

 
4,281

Debt discounts and deferred financing costs
(66,297
)
 
(52,325
)
Long-term debt, including current portion
176,993

 
198,078

Less current portion

 

Long-term debt
$
176,993

 
$
198,078

Deerfield Facility Agreement, as Amended
On April 3, 2017 (the “Original 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 “Original Facility Agreement”). The Company drew the entire principal amount of the Term Loan on the Original Agreement Date.
On August 9, 2018 (the “Restated Agreement Date”), the Company entered into an amended and restated facility agreement (the “Restated 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 Restated Facility Agreement (as a last-out waterfall tranche under the Restated Facility Agreement). The Company entered into the Restated Facility Agreement with Deerfield to, among other things, allow for the Company’s entry into the Restated Credit Agreement (as defined in the “Deerfield Revolver” section below) and the transactions contemplated therein. The Restated Facility Agreement amended and restated in its entirety the Company’s Original Facility Agreement with Deerfield.
On November 18, 2018, the Company and Deerfield amended the Restated Facility Agreement pursuant to that certain First Amendment to Amended and Restated Facility Agreement, dated November 20, 2018 (the “First Facility Amendment”), which amendment permitted the Company to incur debt pursuant to its subordinated promissory note (the “JLL Note”) with Japan Lifeline Co., Ltd. (“JLL”), subject to certain conditions.

On March 31, 2019, the Company and Deerfield entered into a Second Amendment to Amended and Restated Facility Agreement (the “Second Facility Amendment” and collectively with the Restated Facility Agreement and First Facility Amendment, the “Deerfield Facility Agreements”). On April 3, 2019, the terms of the Second Facility Amendment became effective.

The Second Facility Amendment provides for, among other things, the reduction in the Company’s global excess liquidity covenant from $22.5 million to $17.5 million and the reduction of the Company’s 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 Deerfield Facility Agreements provide 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

12

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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)



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 (each, a “Deerfield Mandatory Conversion”), up to a maximum aggregate amount of $25.0 million over the Mandatory Conversion Period.
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 VWAP 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 (each of the foregoing conversions, a “Deerfield Voluntary Conversion”). The First Out 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 1,430,001 shares of the Company’s common stock from the current conversion price of 96% of the arithmetic average of the VWAP 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 (a “Deerfield Elective Conversion”).
Further, the Second Facility Amendment also provided for an increase of $5.0 million, from $6.1 million to $11.1 million, in the amounts payable to Deerfield 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) of the Deerfield Facility Agreements and to reimburse Deerfield for all expenses incurred by Deerfield in connection with the negotiation and documentation of the Second Facility Amendment.

The terms of the Second Facility Amendment became effective on April 3, 2019 upon satisfaction of certain conditions precedent, including consummation of the purchase and sale of an aggregate of 7,889,552 shares of the Company’s common stock (the “Equity Shares”) to select institutional investors and certain other parties (“Investors”) at a price per share of $6.61 (the “Equity Offering Price”), for an aggregate cash purchase price of approximately $52.15 million. The Company has issued the Deerfield Warrants and the First Out Waterfall Notes contemplated by the Second Facility Amendment.
The Company evaluated the accounting for Second Facility Amendment transaction and determined it represented an extinguishment of the previously issued First Out Waterfall Loans under the Restated Facility Agreement, primarily due to the addition and significance of the conversion features as described above. During the nine months ended September 30, 2019, the Company recorded a loss on debt extinguishment of $29.3 million, which includes the change in fair value of the Deerfield Warrants of $4.8 million, offset by the removal of $5.9 million of derivative liabilities associated with the debt prior to the transaction.
Any outstanding principal under the Deerfield Facility Agreements will accrue interest at a rate equal to 5.00% payable in cash and 4.75% payable in kind. The Deerfield Facility Agreements contain the same operating covenants applicable to First Credit Amendment. The Company’s prior right to satisfy interest payments on the First Out Waterfall Loans with up to 250,000 shares of its common stock was eliminated in connection with entry into the Second Facility Amendment.
The Company’s obligations under the Deerfield Facility Agreements 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 Restated Credit Agreement.
During the three months ended September 30, 2019, the Company did not convert any principal amounts. During the nine months ended September 30, 2019, the Company converted $1.7 million of principal, or $1.3 million carrying value, of the First Out Waterfall Notes into 251,571 shares of common stock pursuant to Deerfield Mandatory Conversions.
As of September 30, 2019, the Company had a carrying amount of $136.8 million, inclusive of deferred financing costs of $2.8 million, related to the Term Loan. As of September 30, 2019, annual interest expense on the Term Loan will range from $4.5 million to $29.6 million from the effectiveness of the second Facility Amendment date through maturity.

13

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)



Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Deerfield Facility Agreements, such acquirer may assume the outstanding principal amount under the Deerfield Facility Agreements without penalty. If such acquirer does not satisfy the conditions set forth in the Deerfield Facility Agreements, 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 Deerfield Facility Agreements 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 Deerfield Facility Agreements may become immediately due and payable upon customary events of default, as defined in the Deerfield Facility Agreements, or the consummation of certain change of control transactions, as described above.
Deerfield Warrants
In connection with the execution of the Original Facility Agreement and the Restated Facility Agreement, the Company issued warrants to Deerfield (the “Original 2017 Deerfield Warrants” and the “Original 2018 Deerfield Warrants,” respectively). In connection with entry into the Second Facility Amendment, the Company amended the Original 2017 Deerfield Warrants and the Original 2018 Deerfield Warrants in order to reduce the exercise price (as amended, the “2017 Deerfield Warrants” and the “2018 Deerfield Warrants”; collectively, the “Deerfield Warrants”) as summarized below:
 
Number of shares of common stock
 
Previous Exercise Price
 
Amended Exercise price
2017 Deerfield Warrants
647,001

 
$
92.30

 
$
6.61

2018 Deerfield Warrants
875,001

 
$
47.10

 
$
6.61

All other material terms and conditions of the Deerfield Warrants remain the same.
The number of shares of common stock of the Company into which the Deerfield Warrants are exercisable and the exercise price of the Deerfield Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company.
The 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 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 2018 Deerfield Warrants expire on the 7th anniversary of the Restated 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 Restated Facility Agreement.

14

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)



As a result of the amendment to the Deerfield Warrants in connection with entry into the Second Facility Amendment, the change in fair value in the 2017 and 2018 Deerfield Warrants was $2.1 million and $2.7 million, respectively. The foregoing was charged to loss on debt extinguishment.

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 Second Facility Amendment constitute embedded derivatives requiring bifurcation from the host instrument, and assessed the fair values of any such features. The Company determined that the Deerfield Voluntary Conversion, when converted at 85% of 15 Day VWAP, 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 Second Facility Amendment 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 Restated Facility Agreement. The Company concluded that this provision meets the definition of a derivative and requires bifurcation and separate accounting pursuant to ASC 815. As of April 3, 2019, the Company measured the fair value of the above embedded derivatives at $20.4 million and recorded the amount in derivative liabilities in the Condensed Consolidated Balance Sheet.

For the three and nine months ended September 30, 2019, the Company recorded income of $10.7 million and $9.5 million, respectively, as a fair value adjustment of the derivative liabilities. 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 Restated Agreement Date, the Company entered into a Credit Agreement (the “Restated 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”).
On November 18, 2018, the Company and Deerfield amended the Restated Credit Agreement pursuant to that certain First Amendment to Amended and Restated Credit Agreement, dated November 20, 2018 (“First Credit Amendment”), which amendment permitted the Company to incur debt pursuant to the JLL Note, subject to certain conditions.

On March 31, 2019, the Company entered into a Second Amendment to Credit Agreement and First Amendment to Guaranty and Security Agreement (the “Second Credit Amendment” and collectively with the Restated Credit Agreement and First Credit Amendment, the “Deerfield Credit Agreements”). The Second Credit Amendment includes conforming revisions to reflect the changes in the Second Facility Amendment. In addition, the Second Credit Amendment extends the maturity date of the Deerfield Credit Agreements to the earlier of (i) April 2, 2023 or (ii) the date the loans pursuant to the Deerfield Facility Agreements have been repaid in full.
The borrowing base consists of eligible accounts, eligible inventory and eligible equipment. On the Restated 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

15

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)



of the revolver usage accruing interest will not be subject to the unused line fee). The Company is subject to other fees in addition to interest on the outstanding principal amount under the ABL Facility, including a commitment fee of $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. In conjunction with entering in the Second Credit Amendment, the Company recorded as additional $0.4 million in deferred financing costs.
The Deerfield Credit Agreements has a $17.5 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 September 30, 2019. The Deerfield Credit Agreements 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 Deerfield Credit Agreements 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 Deerfield Facility Agreements (as described above).
As of September 30, 2019, the Company had no outstanding borrowings and $0.8 million in deferred financing costs relating to the ABL Facility. The remaining borrowings available was $18.9 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,

16

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)



the closing price of the Company’s common stock is more than 130% of the then-current conversion price of the 3.25% Senior Notes; (ii) in the 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, 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.
On August 9, 2018, the Company entered into the Restated Facility Agreement with Deerfield, pursuant to which Deerfield and the Company canceled and extinguished the $40.5 million principal amount of the 3.25% Senior Notes held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Restated Facility Agreement (as a last-out waterfall tranche under the Restated Facility Agreement).
On March 31, 2019, the Company and two investors holding $73.4 million of the principal amount of the 3.25% Senior Notes entered into an Exchange Agreement (the “Exchange Agreement”) providing for the exchange of the holders’ 3.25% Senior Notes for new 5.00% Voluntary Convertible Senior Notes due 2024 (the “5.00% Voluntary Notes”) and new 5.00% Mandatory Convertible Senior Notes due 2024 (the “5.00% Mandatory Notes”, and together with the 5.00% Voluntary Notes, the “5.00% Notes”) which was completed on April 3, 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)



The Company evaluated the accounting for the Exchange Agreement transaction and determined it represented an extinguishment of the previously issued 3.25% Senior Notes, primarily due to the addition and significance of the conversion features as described above. During the nine months ended September 30, 2019, the Company recorded a gain on debt extinguishment of $17.5 million relating to the exchange of debt instruments. Additionally, the embedded conversion option of the 3.25% Senior Notes, which was originally recorded in additional paid-in capital, was reduced by $16.9 million.
As of September 30, 2019, the Company had outstanding borrowings of $10.5 million, and deferred financing costs of $0.1 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 $0.7 million to $0.8 million through maturity.
5.00% Convertible Senior Notes due 2024
On April 3, 2019, the Company completed the transactions contemplated by the Exchange Agreement (the “Exchange”), issuing $25.0 million of principal amount of the 5.00% Mandatory Notes and $42.0 million of principal amount of the 5.00% Voluntary Notes to the holders. The exchanging holders received $900 principal amount of 5.00% Notes for every $1000 principal amount of 3.25% Senior Notes plus accrued interest.
The 5.00% Voluntary Notes and 5.00% Mandatory Notes are governed by separate Indentures (respectively, the “5.00% Voluntary Notes Indenture” and “5.00% Mandatory Notes Indenture”, and collectively, the “Indentures”), each dated April 3, 2019, by and between the Company and Wilmington Trust, National Association, as trustee. The 5.00% 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. Such interest amount shall be paid, at the Company’s option, either in cash or, if certain terms are met in accordance with the Indentures, shares of common stock or paid in kind. The 5.00% Notes mature on April 3, 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the Indentures. The Indentures governing the 5.00% Notes contain customary terms and covenants and events of default.
The 5.00% Voluntary Notes are 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 5.00% 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 5.00% Voluntary Notes per calendar quarter (a “5.00% Voluntary Conversion”). Thereafter, until the close of business on the business day immediately preceding the maturity date, the 5.00% 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 5.00% Voluntary Notes in a 5.00% Voluntary Conversion is 0.12103 shares of the Company’s common stock per $1.00 principal amount of the 5.00% Notes, which is equivalent to an initial conversion price per share equal to $8.2624 (the “5.00% 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 5.00% 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 5.00% 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 7.271 (subject to adjustment upon the occurrence of certain specified events) (the “5.00% Voluntary Conversion Threshold”).
The 5.00% Mandatory Notes provide for the mandatory conversion (a “5.00% 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 April 3, 2019, if and only if at the end of the prior calendar month the trailing average VWAP of the last five (5) trading days of the prior calendar month is greater than $6.61. In the event of a 5.00% Mandatory Conversion, $1,666,666 of the 5.00% 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 5.00% Notes, which is equivalent to a price per share equal to $6.61. The 5.00% Mandatory Notes will be convertible at the option of each holder into shares of common stock at the 5.00% 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 5.00% 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 5.00% Voluntary Conversion Threshold has been achieved and (ii) a voluntary conversion may not take place in the same calendar quarter as a 5.00% Mandatory Conversion. Thereafter, until the close of business on the business day

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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)



immediately preceding the maturity date, the 5.00% 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 5.00% Mandatory Conversion or otherwise, into shares of common stock if such conversion would result in the holder beneficially owning more that 9.5% of the Company’s outstanding common stock.
Upon issuance, the Company was not required to separate the conversion options from the 5.00% Notes under ASC 815, “Derivatives and Hedging”. However, because the Company has the ability to settle the 5.00% 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 5.00% Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion options. 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 5.00% 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 $67.2 million resulting in a $41.2 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 5.00% Notes. Debt issuance costs totaled $1.2 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, $0.5 million attributable to the indebtedness was recorded as deferred financing costs, to be subsequently amortized as interest expense over the term of the 5.00% Notes, and $0.7 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity.
During the three months ended September 30, 2019, the Company converted $3.3 million of principal, or carrying value of $1.3 million, of the 5.00% Mandatory Notes, together with $51 thousand of accrued and unpaid interest into 512,087 shares of common stock pursuant to 5.00% Mandatory Conversions. During the nine months ended September 30, 2019, the Company converted $5.0 million of principal, or carrying value of $2.0 million, of the 5.00% Mandatory Notes, together with $67 thousand of accrued and unpaid interest into 766,652 shares of common stock pursuant to 5.00% Mandatory Conversions.
As of September 30, 2019, the Company had a carrying amount of $25.5 million, inclusive of deferred financing costs of $0.4 million, related to the 5.00% Notes. Annual interest expense on these 5.0% Notes will range from $4.4 million to $14.7 million through maturity.
Japan Lifeline Co., Ltd. Subordinated Promissory Note
On November 20, 2018, the Company issued the JLL Note to JLL, the Company’s Japanese distributor, pursuant to which the Company converted a $4.3 million refund payable to a note payable. 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.

















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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)



Principal Maturities of Long-term Debt
The aggregate principal maturities of long-term debt as of September 30, 2019 are as follows:
 
Term loan facility
 
Convertible notes
 
Other debt
 
Total
Year ending December 31,
 
 
 
 
 
 
 
2019
$

 
$

 
$

 
$

2020

 
11,145

 

 
11,145

2021
20,595

 

 

 
20,595

2022
72,625

 

 

 
72,625

2023
72,625

 

 
4,281

 
76,906

2024


62,019




62,019

 
$
165,845

 
$
73,164

 
$
4,281

 
$
243,290

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 tables below includes a reconciliation of disaggregated revenue with the Company’s reportable segment:
 
Three Months Ended September 30,
 
2019

2018
 
Implant-based

Shipment-based

Total

Implant-based

Shipment-based

Total
United States
$
23,457


$
661


$
24,118


$
25,194


$
505


$
25,699

International
$
3,114


$
8,543


$
11,657


$
4,876


$
4,181


$
9,057

Total Revenue
$
26,571


$
9,204


$
35,775


$
30,070


$
4,686


$
34,756

 
Nine Months Ended September 30,
 
2019

2018
 
Implant-based

Shipment-based

Total

Implant-based

Shipment-based

Total
United States
$
69,425


$
1,490


$
70,915


$
82,480


$
2,580


$
85,060

International
$
10,159


$
26,545


$
36,704


16,268


20,452


36,720

Total Revenue
$
79,584


$
28,035


$
107,619


$
98,748


$
23,032


$
121,780

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 and nine months ended September 30, 2019.
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

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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)



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 September 30, 2019, components of facility lease costs consist of $0.9 million in operating lease expense and $0.2 million in variable lease costs. For the nine months ended September 30, 2019, components of facility lease costs consist of $2.6 million in operating lease expense and $0.7 million in variable lease costs.
Maturities of facility lease liabilities by fiscal year for our operating leases are as follows as of September 30, 2019:
Remainder of 2019
$
845

2020
3,523

2021
3,692

2022
3,800

2023
2,889

2024
2,794

2025 and thereafter
12,338

Total lease payments
$
29,881

Less: Imputed Interest
(16,504
)
Present value of operating lease liabilities
$
13,377

As of September 30, 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 September 30, 2019, the weighted-average remaining lease term was 8.0 years and weighted-average discount rate was 22.1%.
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
$
2,794

2025 and thereafter
$
12,338

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.
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.) (“Nguyen”), 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 Appellate Court has indicated that the hearing on this matter will occur in January 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.
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 pre-screened patients that adhere to the current indications outside of the United States. All cases will be pre-screened by a

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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)



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.
In June 2019, the Company announced that the CE Mark for the Nellix EVAS System had been been reinstated by its Notified Body, which reinstatement was accompanied by certain limitations on clinical use of Nellix. The reinstatement followed an assessment of clinical evidence.
(e) Concentrations of Risk and Major Customer 
For the three and nine months ended September 30, 2019, there was one customer that represented 10% or more of consolidated revenue. For the three and nine months ended September 30, 2018, there was no single customer that represented 10% or more of consolidated revenue. As of September 30, 2019, there was one customer that represented 10% or more of consolidated accounts receivable. As of December 31, 2018, there was no single customer that represented 10% or more of consolidated accounts receivable.

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 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 September 30, 2019, the fair value of the contingently issuable common stock was presented in non-current liabilities.
At September 30, 2019 the Company’s stock price closed at $3.97 per share. Thus, had the PMA Milestone been achieved on September 30, 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 $1.3 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 benefit for income taxes of $0.3 million and provision for income taxes of $0.2 million for the three months ended September 30, 2019 and 2018, respectively. The Company recorded a benefit for income taxes of $3.5 million and provision for income taxes of $0.3 million for the nine months ended September 30, 2019 and 2018, respectively. The Company’s ETR was (3.5)% and 1.7% for the three months ended September 30, 2019, and 2018, respectively. The Company’s ETR was (5.8)% and 0.5% for the nine months ended September 30, 2019, and 2018, respectively. The Company’s ETR for the three and nine months ended September 30, 2019